AFAR- MOCK BOARD 5.

According to the Civil Code of the Philippines, if

1. How much is the total realized gross profit in the partnership agreement does not specify how
20x2? income is to be allocated to the partners, profits
and losses should be allocated
equally.
in proportion to the weighted average balance of
capital invested during the period.
equitably so that partners are compensated for the
time and effort expended on behalf of the
partnership.
in accordance with their capital contributions, but
an industrial partner does not share in the loss

6.
84,000
82,200
76,500
77,400

2. If in subsequent periods the franchisee’s ability 160,000.

to pay significantly deteriorates and the 240,000.
collectability of the consideration in the franchise 80,000.
agreement becomes significantly uncertain, 60,000.
the entity discontinues recognizing further
revenues from the franchise contract. 7. On the cash settlement between the joint
the entity assesses any existing receivable or operators,
contract asset from the franchise contract for
impairment.
the entity shall discontinue its existing accounting
policy on revenue recognition and shifts to either
the installment sales method or the cost recovery
method of revenue recognition.
a and b
A pays B ₱368
3. These are assets that have not been pledged as B pays A ₱368
security for liabilities. A pays B ₱428
Assets pledged to fully secured creditors B pays A ₱428
Assets pledged to partially secured creditors
Free assets 8. IFRS 11, Joint Arrangement, provides that a joint
Deficiency Assets operator shall recognize the following, in relation
to its interest in a joint operation, except
4. What is the investment income to be reported A. Its expenses, including its share of any expenses
by Entity A for the year ended December 31, 2020? incurred jointly.
B. Its liabilities, including its share of any liabilities
incurred jointly.
C. Its interest as an investment using the equity
method.
D. Its assets, including its share of any assets held
jointly.

9. How much is the profit (loss) of the joint

operation?

A. 603,000
B. 606,000
C. 594,000
D. 597,000
200,000 •Second, AB and AC each are to receive 5% of the
(200,000) remaining income over ₱150,000.
180,000 •The balance of income is to be allocated equally
(180,000 among the three partners.
The partnership’s 2003 net income was ₱250,000
10. before any allocations to partners. What amount
should be allocated to AA?
101,000
108,000
103,000
110,000

15. The AAA and BBB partnership agreement

160,000
provides for AAA to receive a 20% bonus on profits
432,000
before the bonus. Remaining profits and losses are
592,000
divided between AAA and BBB in the ratio of 2:3,
642,000
respectively. Which partner has a greater
advantage when the partnership has a profit or
11. Under the “cost-to-cost” method, the
when it has a loss?
percentage of completion may be computed as
Profit -AAA , Loss-BBB
Total costs incurred to date multiplied by the
Profit -AAA , Loss-AAA
Estimated total costs to complete
Profit -BBB , Loss-AAA
Total costs incurred to date divided by the
Profit -BBB , Loss-BBB
Estimated total costs to complete
Total costs incurred to date multiplied by the total
16. Which of the following statements is correct?
costs to complete
Total costs incurred to date divided by the sum of
Total costs incurred to date and Estimated costs to
complete

12.

A pays C ₱78,000.
A receives ₱78,000 from C.
A and B pays C a total of ₱78,000.
40,000. A pays B ₱78,000.
15,000.
30,000. 17. How much is the gain or loss on repossession?
25,000.

13. The estimated recovery of partially secured

creditors is equal to
the realizable value of the assets pledged minus
the excess amount multiplied by the estimated
recovery percentage.
the realizable value of the assets pledged plus the
excess amount multiplied by the estimated
recovery percentage.
their claims multiplied by the estimated recovery
percentage.
4,800
any of these
5,700
6,450
14. The partnership agreement of AA, AB & AC
2,900
provides for the year-end allocation of net income
18. On January 1, 20x1, DEF Co. paid ₱7,500 for the
in the following order:
freight insurance of consigned goods shipped to a
•First, AA is to receive 10% of net income up to
consignee, and ₱10,500 for the freight. In addition,
₱100,000 and 20% over ₱100,000.
DEF Co. advanced ₱7,500 as part of the commission regardless of whether those entities have a legal
that will be due when the consignee sells the personality.,
goods. The consigned goods costs DEF ₱75,000 and separate vehicle
will be sold for a total amount of ₱120,000. What is special purpose entity.
the total amount of inventory should DEF report special purpose vehicle
for the consigned goods? public utility vehicle
75,000
93,000 24. It is the termination of the business operations
100,500 of the winding up of affairs.
145,500 Dissolution
Liquidation
19. Incorporation
Division

25.

Increased by ₱12,000
Increased by ₱8,000
Decreased by ₱12,000 8,000,000
Decreased by ₱32,000 6,000,000
4,000,000
20. In a perpetual inventory system, a transaction 0
that requires two journal entries (or one compound
entry) is needed when 26. RR and RJ agreed to form a partnership. RR
A. Raw materials are purchased on account contributed equipment with carrying amount of
B. Goods are sold for either cash or on account. ₱200,000 and fair value of ₱140,000, while RJ
C. Goods are finished and transferred out of Work contributed cash of ₱400,000. The partners agreed
in Process Inventory. to have a profit-sharing ratio of 2:1, respectively.
D. Overhead is applied to Work in Process The initial credits to the partners’ capital accounts
Inventory shall reflect this fact. Under the bonus method,
how much is the balance of the capital account of
21. Dean, Inc. owns 100% of Roy Corporation, a RJ immediately after the partnership formation?
consolidated subsidiary, and 80% of Wall, Inc., an 180,000
unconsolidated subsidiary at 12/31. On the same 400,000
date, Dean has receivables of P200,000 from Roy 270,000
and P175,000 from Wall. In its 12/31 consolidated 140,000
balance sheet, Dean should report accounts
receivable from investees at 27. A, B and C are partners, sharing in partnership
175,000 profits in the ratio of 2:3:4. A, the managing
360,000 partner, is entitled to an annual salary of ₱120,000
35,000 and a 10% bonus on profit after deducting the
304,000 salary but before deducting the bonus. The
partnership earned profit of ₱840,000 before salary
22. The estimated recovery of partially secured and bonus. How much is the share of A?
creditors is equal to 321,600
the realizable value of the assets pledged minus 336,000
the excess amount multiplied by the estimated 294,000
recovery percentage. 284,501
the realizable value of the assets pledged plus the
excess amount multiplied by the estimated 28. It is an entity that participates in a joint
recovery percentage. arrangement, regardless of whether that entity has
their claims multiplied by the estimated recovery joint control of the arrangement.
percentage. A. Partner.
any of these B. Party to a joint arrangement.
23. According to PFRS 11, it is a separately C. Joint operator.
identifiable financial structure, including separate D. Joint venturer.
legal entities or entities recognized by statute,
29. The ABC Partnership reports net income of rights to the assets, and obligations for the
P60,000. If partners A, B, and C have income ratio liabilities, relating to the arrangement.
of 50%, 30%, and 20%, respectively. What is the A. Joint control.
share of Partner C from the income of the B. Joint undertaking.
partnership, if he was given a capital ratio of 25%? C. Joint operation.
A. 30,000 D. Joint venture.
B. 12,000
C. 18,000 35. Read Co. and Learn Co. are national distributors
D. 15,000 of textbooks. Read and Learn enters into a contract
to acquire a warehouse in a particular region. Each
30. party will use the warehouse to store its own
inventories. The parties agree to share in the costs
of acquiring and maintaining the warehouse. The
arrangement between Read and Learn is most
likely a
80,000 joint operation
48,000 jointly controlled asset
30,000 joint venture
52,000 none of these

31. What is the billing rate based on cost? 36. If a new partner acquires partnership interest
directly from the partners rather than from the
partnership,
no entry is required.
the existing partnership is liquidated.
the partnership assets should not be revalued
20% because this type of transaction does not result to
25% partnership dissolution.
120% the existing partners’ capital accounts are reduced
125% and the new partner’s capital account is increased.

32. On January 1,2011, Brendan, Inc. reports net 37. Mr. A and Ms. B formed a partnership and
assets of P760,000 although (equipment with a agreed to divide the initial capital equally even
four-year life) having a book value of P440,000 is though Mr. A contributed ₱100,000 and Ms. B
worth P500,000 and unrecorded patent is valued at contributed ₱100,000 in identifiable assets. The
P45,000. Brandon Corporation pays P692,000 on partners agreed that the difference in the amount
that date for an 80 percent ownership in Brendan. of contribution and the amount of credit to the
If the patent is to be written-off over a 10-year partner’s capital shall be treated as compensation
period, at what amount should it be reported on for the expertise that the partner will be bringing
consolidated statements at December 31, 2012? to the partnership. How much is the correct
36,000 valuation of A’s capital immediately after the
40,500 partnership formation?
32,400 140,000
28,800 92,000
100,000
33. 108,000

38. In 20x1, ABC Co. enters into a construction

contract with a customer. At contract inception,
ABC Co. estimates a total contract cost of
₱3,304,000. The estimated cost to complete on
50,000 December 31, 20x1 is ₱1,435,000. The transaction
22,500 price in the contract is ₱4,200,000. Progress billings
30,000 during the year amount to ₱245,000, ₱210,000 of
0 which is collected. The actual costs incurred in 20x1
34. It is a joint arrangement whereby the parties are ₱2,065,000. ABC Co.’s performance obligation
that have joint control of the arrangement have in the contract is satisfied at a point in time, i.e.,
when the construction is completed and control
over the promised good is transferred to the D. Joint venture.
customer. How much is the revenue recognized in
20x1? 44. The Carly Company owns 75% of The Halley
2,478,000 Company. The following figures are from their
2,065,000 separate financial statements:Carly: Trade
413,000 receivables P1,040,000, including P30,000 due
0 from Halley. Halley: Trade receivables P215,000,
including P40,000 due from Carly. What figure
39. If the partnership agreement does not specify should appear for trade receivables in Carly's
how income is to be allocated, profits and loss consolidated statement of financial position?
should be allocated 1,215,000
equally. 1,225,000
in proportion to the weighted average of capital 1,2255,00
invested during the period. 1,185,000
equitably so that partners are compensated for the
time and effort expended on behalf of the 45. What is the investment loss to be reported by
partnership. Entity B for the year-ended December 31, 2021?
in accordance with their capital contributions.

40. It refers to the termination of business

operations whereby an entity’s assets are disposed
of in order to settle all of the claims on the entity’s
assets.
solidification
aquatation
dissolution
liquidation

41. Partners AAA and AAB had the following profit-

sharing percentages and capital balances: AAA
A. (200,000)
(40%) ₱1,800,000 and AAB (60%) ₱3,000,000. AAC
B. (196,000)
was admitted to the partnership when he invested
C. (204,000)
₱900,000 cash for a 20% interest in the
D. (202,000)
partnership. The partnership’s net assets are fairly
valued on AAC’s admission date. The partners used
46. Where a joint venture is a partnership
the bonus method to record AAC’s admission. How
A. It should be accounted for by the venturer using
much is the capital balance of AAA after the
the equity method.
admission of AAC?
B. It should be accounted for using full
1,824,000
consolidation accounting.
1,776,000
C. It should be accounted for the venturer as a
1,728,000
partnership and the line item added into the
1,704,000
group’s financial statements.
D. It should be accounted for by the venture using
42. In job-order costing payroll, taxes paid by the
partnership accounting separately to the financial
employee for factory employees are commonly
accounts of the venture and any profit on sale of
accounted for as:
the output from the joint venture reported in the
A. Direct labor cost
income statement of the individual venturers.
B. Manufacturing overhead cost
C. Indirect labor cost
47. Partners AAA and AAB had the following profit-
D. Administrative cost
sharing percentages and capital balances: AAA
(40%) ₱1,800,000 and AAB (60%) ₱3,000,000. AAC
43. It is the contractually agreed sharing of control
was admitted to the partnership when he
of an arrangement, which exists only when
purchased half of AAA’s capital interest for
decisions about the relevant activities require the
₱1,200,000. How much is AAA’s capital balance
unanimous consent of the parties sharing control.
after the admission of AAC?
A. Joint control.
600,000
B. Joint undertaking.
900,000
C. Joint operation.
750,000
1,200,000 836,400

48. It refers to the implementation of a business 53. A and B formed a partnership. Although A and B
plan to restructure or rehabilitate a corporation contributed equal amounts of cash, it was agreed
with the hopes of increasing company value. In that the initial credit to A’s capital account should
most cases, it involves changing the entity’s capital be greater than that of B. If the bonus method is
structure. used, which of the following statements is correct?
Transformation A capital bonus is given to B.
Mutation The initial capital of the partnership is equal to the
Reorganization sum of A and B’s contributions.
Translation Partner B’s account is not affected by the
agreement.
49. At contract inception, PFRS 15 requires an Goodwill must be recorded
entity to determine how the performance
obligations identified in the contract will be 54. What is the amount of sales revenue to be
satisfied. According to PFRS 15, how does an entity reported by Entity A concerning its interest with
satisfy a performance obligation in a long-term Entity C?
construction contract?
over time
at a point in time
any time
either over time or at a point in time

50. A and B agreed to form a partnership. A shall

contribute ₱80,000 cash while B shall contribute
₱200,000 cash. However due to the expertise that
A will be bringing to the partnership, the partners
agreed that they should initially have equal
interests in the partnership capital. After recording
the partners’ contributions, A’s capital account
should have a balance of
40,000.
80,000.
140,000.
200,000

51. When R retired from the partnership of R, J, A. 2,300,000

and S, the final settlement of R's interest exceeded B. 2,100,000
R's capital balance. Under the bonus method, the C. 3,000,000
excess D. 2,500,000
was recorded as goodwill.
was recorded as an expense. 55. According to IFRS 11, Joint Arrangement, what
reduced the capital balances of J and S. is the method of accounting for investment in joint
had no effect on the capital balances of J and S. venture?
A. Proportionate consolidation method.
52. On January 1, 20x1, A and B decided to B. Cost method.
liquidate their partnership. As of this date, their C. Equity method.
capital balances were ₱492,000 and ₱984,000, D. Fair value method.
respectively. The partners share in profits and
losses on a 60:40 ratio. Before liquidation, the 56. On April 30, 20x1, X, Y and Z formed a
partnership had ₱98,400 cash and ₱147,600 partnership by combining their separate business
liabilities. The partnership incurred loss of proprietorships. X contributed cash of ₱50,000. Y
₱590,400 on the sale of non-cash assets. A is contributed property with a ₱36,000 carrying
solvent but B is insolvent. How much was the net amount, a ₱40,000 original cost, and ₱90,000 fair
proceeds from the sale of non-cash assets? value. The partnership accepted responsibility for
934,800 the ₱35,000 mortgage attached to the property. Z
2,115,600 contributed equipment with a ₱30,000 carrying
1,820,400 amount, a ₱75,000 original cost, and ₱40,000 fair
value. The partnership agreement specifies that
profits and losses are to be shared equally but is
silent regarding capital contributions. Which
partner has the smallest April 30, 20x1 capital
account balance?
X
Z A’s share is ₱124,000 greater than B’s share.
Y B’s share is ₱76,000 less than A’s share
All capital account balances are equal A’s share is ₱48,000 greater than B’s share.
A and B have equal shares.
57. R and J formed a partnership. Although R and J
contributed equal amounts of cash, it was agreed 61. Total free assets in the statement of affairs can
that the initial credit to R’s capital account should be computed as
be greater than that of J. If the bonus method is the sum of (a) excess of realizable value of assets
used, which of the following statements is correct? pledged to fully secured creditors over the
R capital bonus is given to J. expected net settlement amount of the fully
The initial capital of the partnership is equal to the secured liabilities and (b) total realizable value of
sum of R and J’s contributions. assets not pledged as collateral security
Partner J’s account is not affected by the Total assets measured at realizable value less the
agreement. sum of (a) unsecured creditors with priority, (b)
Goodwill must be recorded. fully secured creditors, and (c) realizable value of
asset pledged to partially secured creditors.
58. realizable value of total assets less unsecured
liabilities with priority
all of these

62. When Mill retired from the partnership of Mill,

Yale, and Lear, the final settlement of Mill's interest
exceeded Mill's capital balance. Under the bonus
480,000 method, the excess
496,000 was recorded as goodwill.
512,000 reduced the capital balances of Yale and Lear.
520,000 reduced the capital balances of Yale and Mill.
had no effect on the capital balances of Yale and
59. In 20x1, ABC Co. enters into a construction Lear.
contract with a customer. At contract inception,
ABC Co. estimates a total contract cost of 63. In May 2020, it was determined that it is
₱3,304,000. The estimated cost to complete on necessary to complete the work in process of Wild
December 31, 20x1 is ₱1,435,000. The transaction West Corporation. To complete the work in
price in the contract is ₱4,200,000. Progress billings process, P10,000 book value of raw materials and
during the year amount to ₱245,000, ₱210,000 of supplies and P10,000 conversion cost will be
which is collected. The actual costs incurred in 20x1 required. When completed, these goods will
are ₱2,065,000. ABC Co.’s performance obligation probably sell for approximately P50,000. The raw
in the contract is satisfied over time. However, the materials, which have a book value of P40,000,
outcome of the performance obligation cannot be have an estimated total realizable value of P20,000.
measured reasonably but contract costs incurred What is the estimated amount that will become
are recoverable. How much is the revenue available for unsecured creditors as a result of the
recognized in 20x1? realization of the work in process?
2,478,000 A. 50,000
2,065,000 B. 35,000
413,000 C. 30,000
0 D. 0

60. 64. How much is the gross profit recognized by ABC

in 20x2?
0
25,000
15,000
10,000

65. A, B and C are partners, sharing in partnership

profits in the ratio of 2:3:4. A, the managing
partner, is entitled to an annual salary of ₱80,000
and a 10% bonus on profit after deducting the
salary but before deducting the bonus. The
partnership earned profit of ₱560,000 before salary
and bonus. How much is the share of A?
214,400
196,000 A. 5,400,000
224,000 B. 3,000,000
189,667 C. 3,600,000
D. 5,000,000
66. “Assets realized” is placed on which side of a
statement of realization and liquidation? 70. Partnership capital and drawings accounts are
credit side, measured at realizable value. similar to the corporate
credit side, measured at actual net proceeds from paid in capital, retained earnings, and dividends
sale accounts.
debit side, measured at book value retained earnings account.
no side paid in capital and retained earnings accounts.
preferred and common stock accounts.
67. According to the Civil Code of the Philippines, if
the partnership agreement does not specify how 71. On January 1, 20x1, A and B decided to
income is to be allocated to the partners, profits liquidate their partnership. As of this date, their
and losses should be allocated capital balances were ₱492,000 and ₱984,000,
equally. respectively. The partners share in profits and
in proportion to the weighted average balance of losses on a 60:40 ratio. Before liquidation, the
capital invested during the period. partnership had ₱98,400 cash and ₱147,600
equitably so that partners are compensated for the liabilities. The partnership incurred loss of
time and effort expended on behalf of the ₱590,400 on the sale of non-cash assets. A is
partnership. solvent but B is insolvent. How much did A receive
in accordance with their capital contributions, but from the settlement of his capital balance?
an industrial partner does not share in the loss.. 747,840
137,760
68. It is an arrangement of which two or more 991,380
partied have joint control. 0
A. Joint arrangement.
B. Joint undertaking. 72. AB and CD are partners in ABCD Co. Their
C. Joint operation. partnership agreement states that AB is entitled to
D. Joint venture. an annual salary of ₱100,000 and a bonus of 10% of
profit after salary but before bonus. The remainder
69. What is the amount of total assets to be is shared in the ratio of 7:2. CD’s share in
reported by Entity A concerning its interest with partnership profit for the year was ₱296,000. How
Entity C? much was the partnership profit before AB’s salary
and bonus?
1,580,000
1,672,342
1,751,348
1,420,000
73. Liabilities in the statement of affairs are for ₱1,200,000. If the book value method was used
classified into to record AAC’s admission, how much would be the
Unsecured liabilities with priority capital balance of AAA after AAC’s admission?
Fully secured creditors. 1,080,000 .
Partially secured creditors 1,320,000
Unsecured liabilities without priority 1,440,000
All of these 1,680,000

74. How much is the profit recognized in 20x2? 79.

321,800
283,200
231,800
280,200

84,000 80. Which of the following transactions or events

82,200 does not affect the total assets of a partnership?
76,500 An old partner retires and his capital balance is
77,400 settled by the partnership at a lower amount.
An incoming partner purchases interest from an
75. ABC Co. uses the installment sales method. ABC existing partner.
Co. sells a good costing ₱20,000 for an installment A partnership is dissolved and its assets and
sale price of ₱32,000. ABC Co. accepts old liabilities are revalued to fair value.
merchandise as down payment and gives the A new partner is admitted in a partnership when he
customer a trade-in value of ₱8,000 for this invested noncash asset to the partnership.
merchandise. The fair value of the old merchandise
is ₱8,000. Subsequent cash collections during the 81. The partnership agreement of A, B and C
period amount to ₱12,000. How much is the stipulates the following: • A, the
realized gross profit recognized in the year of sale? managing partner, shall receive a bonus of 10% of
7,500 profit • Each partner shall receive a
11,932 6% interest on average capital investments.
12,666 •Any remaining profit or loss shall be shared
13,334 equally. The average
capital investments of the partners during the year
76. It is a party to a joint operation that has joint were ₱240,000 for A, ₱150,000 for B, and ₱90,000
control of that joint operation. for C. The partnership earned profit of ₱300,000
A. Joint controller. during the period. How much was C’s share?
B. Joint undertaker. 71,400
C. Joint operator. 89,400
D. Joint venturer. 85,800
124,800
77. It is a party to a joint venture that has joint
control of that joint venture. 82. Pero Corporation owns a 70% interest in Sweet
A. Joint controller. Corporation, acquired several years ago at book
B. Joint undertaker. value. On December 31, 2011, Sweet mailed a
C. Joint operator. check for P10,000 to Pero in part payment of a
D. Joint venturer. P20.000 account with Pero. Pero had not received
the check when its books were closed on
78. Partners AAA and AAB had the following profit- December 31. Pero Corporation had accounts
sharing percentages and capital balances: AAA receivable of P150,000 (including the P20,000 from
(40%) ₱1,800,000 and AAB (60%) ₱3,000,000. AAC Sweet) and Sweet had accounts receivable at
was admitted to the partnership when he P220,000 at year- end. In the consolidated balance
purchased 20% of AAA’s and AAB’s capital interests sheet of Pero Corporation and Subsidiary at
December 31, 2011 accounts receivable will be
shown in the amount of:
370,000
360,000
350,000
304,000

83. A, B and C are partners, sharing in partnership

profits in the ratio of 2:3:4. A, the managing
a debit to mortgage for ₱40,000.
partner, is entitled to an annual salary of ₱80,000
a ₱78,000 credit to cash.
and a 10% bonus on profit after deducting the
a ₱78,000 debit to C’s capital account.
salary but before deducting the bonus. The
a ₱78,000 debit to A’s capital account
partnership earned profit of ₱560,000 before salary
and bonus. How much is the share of A?
87.
the entity discontinues recognizing further
revenues from the franchise contract.
the entity assesses any existing receivable or
contract asset from the franchise contract for
impairment.
the entity shall discontinue its existing accounting
policy on revenue recognition and shifts to either
the installment sales method or the cost recovery
method of revenue recognition.
a and b

84. Which of the following statements is correct? A receives ₱48.

B pays ₱72.
C pays ₱32.
a and c

88. ABC Co. uses the installment sales method. ABC

Co. sells a good costing ₱10,000 for an installment
sale price of ₱16,000. ABC Co. accepts old
merchandise as down payment and gives the
customer a trade-in value of ₱4,000 for this
A pays C ₱78,000. merchandise. The fair value of the old merchandise
A receives ₱78,000 from C. is ₱6,000. Subsequent cash collections during the
A and B pays C a total of ₱78,000. period amount to ₱6,000. How much is the realized
A pays B ₱78,000. gross profit recognized in the year of sale?
5,444
85. When allocating a partnership loss to the 5,966
partners, which of the following is provided first? 5,333
Bonuses to partners 6,667
Salaries
Interest on the capital contribution of an industrial 89. Transactions between and among the partners
partner are
All of these Recorded in the partnership books
Not recorded in the partnership books
86. The simple journal entries to record the Either a or b
partners’ contributions include Neither a nor b

90.

56,000 decrease
16,000 increase
15,000 decrease 94. Debits to Cost of Goods Sold, typically
9,000 increase represent the
A. Transfer of completed items to finished Goods
91. What is the balance of Investment in Entity C to inventory
be reported by Entity A on December 31, 2021? B. Costs of items sold.
C. Selling price of items sold.
D. The cost of goods manufactured.

95. On January 1, 20x1, A and B decided to

liquidate their partnership. As of this date, their
capital balances were ₱492,000 and ₱984,000,
respectively. The partners share in profits and
losses on a 60:40 ratio. Before liquidation, the
partnership had ₱98,400 cash and ₱147,600
liabilities. The partnership incurred loss of
₱590,400 on the sale of non-cash assets. A is
solvent but B is insolvent. How much was the
carrying amount of the non-cash assets?
A. 3,000,000 1,746,600
B. 2,940,000 1,672,800
C. 3,020,000 1,525,200
D. 3,120,000 1,131,600

92. A and B’s partnership agreement provides the 96. At December 31, 2012, Grey, Inc. owned 90% of
following: • Annual salaries of ₱96,000 for A and Winn Corp., a consolidated subsidiary, and 20% of
₱60,000 for B. ; •10% bonus to A, based on profit Carr Corp., an investee over which Grey cannot
after salaries and bonus.; •P/L ratio of 60:40. The exercise significant influence. On the same date,
partnership earned profit of ₱200,000 before Grey had receivables of P300,000 from Winn and
salaries and bonus. How much was B’s share? P200,000 from Carr. In its December 31, 2012
124,000 consolidated balance sheet, Grey should report
96,000 accounts receivable from affiliates of:
112,000 175,000
76,000 340,000
35,000
93. What is the amount of sales revenue to be 200,000
reported by Entity B concerning its interest with
Entity C? 97. The asset contributions of the partners to the
partnership, and any related liabilities assumed by
the partnership, are initially recorded in the
partnership books at
historical cost.
fair value.
carrying amount.
any of these

98. Which of the following statements is incorrect?

No bonus is allocated to any partners when the
partnership has incurred loss during the period.
Mr. R and Ms. S. formed a partnership. Mr. R
contributed P500,000 cash, while. Ms. S will
contribute her services. Mr. R is an industrial
partner, while Ms. S is a capitalist partner
No gain or loss is recognized in the partnership’s
books when a new partner is admitted through
direct investment into the partnership.
A. 2,000,000 If a new partner acquires partnership interest
B. 1,200,000 directly from the partners rather than from the
C. 1,600,000 partnership, the existing partners’ capital accounts
D. 1,400,000
are reduced and the new partner’s capital account 2. The GAM for NGAs aims to update all of the
following except
is increased.
a. standards, policies, guidelines and
procedures in accounting for government
99. What is the amount of total liabilities to be funds and property
reported by Entity B concerning its interest with b. coding structure and accounts
Entity C? c. accounting books, registries, records,
forms, reports and financial statements
d. rules and regulations regarding the filing
and payment of taxes by government
employees

3. Which of the following is one of the

Fundamental Principles for Revenue under the
GAM for NGAs?
a. No payment of any nature shall be received
by a collecting officer without immediately
issuing an official receipt in
acknowledgement thereof. The receipt may
be in the form of postage, internal revenue
or documentary stamps and the like,
officially numbered receipts, subject to
proper custody, accountability, and audit.
b. Temporary receipts may be issued to
acknowledge the receipt of public funds;
provided that, an official receipt is issued
within a short period of time as may be
prescribed by the COA.
c. Money in the hands of the Collecting Officer
may be utilized for the purpose of cashing
private checks, upon proper endorsement
A. 1,800,000 and identification of the payee or endorsee.
B. 2,200,000 Checks drawn in favor of the government in
payment of any such indebtedness shall
C. 2,800,000 likewise be accepted by the officer
D. 2,400,000 concerned.
d. All of these
100.
4. Which of the following is not one of the
Fundamental Principles for Disbursement of
Public Funds under the GAM for NGAs?
a. No money shall be paid out of any public
treasury or depository except in pursuance
of an appropriation law or other specific
statutory authority.
b. Government funds or property shall be
spent or used solely for public purposes.
c. Trust funds shall be available and may be
spent only for the specific purpose for
which the trust was created or the funds
received.
RR ₱0; RS ₱28,800; RT ₱41,200.
d. Fiscal responsibility shall, to the greatest
RR ₱0; RS ₱30,000; RT ₱40,000. extent, be assumed solely by the Head of
RR ₱35,000; RS ₱21,000; RT ₱14,000. the government agency.
RR ₱45,000; RS ₱27,000; RT ₱18,000
5. Which of the following statements is incorrect
regarding the GAM for NGAs?
a. The COA shall keep the general accounts of
ACCOUNTING FOR GOVERNMENT
the Government and, for such period as
may be provided by law, preserve the
1. What is the legal basis of the COA in
vouchers and other supporting papers
promulgating the GAM for NGAs?
pertaining thereto, pursuant to Section 2,
a. Revised Penal Code, Art. 217 par. (1), Article IX-D of the 1987 Philippine
b. State Audit Code of the Philippines, P.D. Constitution.
No. 1445, Sec. 109 b. The financial reporting system of the
c. Article IX-D, Section 2 par. (2) of the 1987 Philippine government consists of
Constitution of the Republic of the accounting system on accrual basis and
Philippines budget reporting system on budget basis
d. R.A. 9298 under the statutory responsibility of the
NGAs, Bureau of the Treasury (BTr),
 Department of Budget and Management b. Generally accepted principles and practices
(DBM), and the COA. of accounting as well as of sound
c. The objectives of general purpose financial management and fiscal administration shall
statements (GPFSs) are to provide be observed and shall be presumed to have
information about the financial position, higher authority in cases where these
financial performance, and cash flows of an principles conflict with the law.
entity that is useful to a wide range of users c. Trust funds shall be available and may be
in making and evaluating decisions about spent only for the specific purpose for
the allocation of resources. Specifically, the which the trust was created or the funds
objectives of general purpose financial received.
reporting in the public sector are to provide d. All disbursements or dispositions of
information useful for decision-making, and government funds or property shall
to demonstrate the accountability of the invariably bear the approval of the COA.
entity for the resources entrusted to it.
d. The DBM accounts for the cash, public debt 10. During the period, Entity A, a government
and related transactions of the NG. entity, withheld ₱100,000 taxes from its
payments to employees and suppliers. On
6. Entity A, a government entity, has an unused September 14 of the current year, Entity A
NCA of ₱50,000 at the end of the current year. remitted the taxes withheld to the BIR through
The entry to record the reversion of unused Tax Remittance Advice. The entry to record the
NCA is remittance includes
a. Subsidy from National a. Cash-Tax Remittance 100,000
Government 50,000 Advice 100,000
Cash-Modified 50,000 Due to BIR
Disbursement b. Subsidy from National 100,000
System (MDS), Government 100,000
Regular Cash-Tax
b. Accumulated 50,000 Remittance Advice
Surplus/(Deficit) c. a and b
50,000
Cash-Treasury/Agency
Deposit,
d. None of these.
Regular
c. Subsidy from National 50,000
Government 50,000 11. Which of the following principles is not in
Cash-Collecting accordance with the Basic Government
Officers Accounting and Budget Reporting Principles
under the GAM for NGAs?
d. No journal entry.
a. modified accrual basis of accounting in
accordance with the PPSAS
7. Which of the following is not one of the b. budget basis for presentation of budget
registries maintained by a government entity? information in the financial statements
a. Registries of Journals and Ledgers (FSs) in accordance with PPSAS 24
b. Registry of Appropriations and Allotments c. RCA prescribed by COA
c. Registries of Allotments, Obligations and d. financial statements based on both
Disbursements accounting and budgetary records
d. Registries of Budget, Utilization and e. fund cluster accounting
Disbursements
12. The “Cash – Treasury/Agency Deposit, Regular”
e. All of these are maintained by a government
account is used in which of the following
entity transactions?
8. This accounting concept is necessary so that
a. Collections from customers are made
users can use information in the financial through direct deposit in the entity’s
statements in noting differences and account maintained with a Government
similarities between those information Servicing Bank (GSB).
presented and information from other sources b. Taxes withheld are remitted to the BIR.
that the user may have. c. A disbursement authority in the form of
a. Financial statement analysis and ratios Cash Disbursement Ceiling is received.
b. Understandability d. Collections of revenue are remitted to the
c. Comparability BTr.
d. Feedback value or confirmatory value
13. The NGAs are responsible for
a. promulgating accounting and auditing rules
9. Which of the following statements is correct and regulations.
regarding the Fundamental Principles for b. implementing the national budget with the
Disbursement of Public Funds under P.D. No. goal of attaining the nation’s socio-
1445? economic objectives.
a. No money shall be paid out of any public c. receiving and keeping national funds and
treasury or depository except through the managing and controlling the
issuance of Modified Disbursement System disbursements thereof.
Checks.
 d. directly implementing the projects of, and 22. Under responsibility accounting, a cost is
performing the functions delegated by, the considered controllable at a given level of
government. managerial responsibility if
a. the manager has the power to incur it
14. The receipt of a disbursement authority in the within a given period of time.
form of Non-Cash Availment Authority (NCAA) b. the cost is non-recurring, can be measured
is debited to which of the following accounts? with sufficient reliability and is not
a. Cash-Constructive Income Remittance immaterial
b. Cash-Modified Disbursement System c. the cost is a fixed cost, such that its
(MDS), Regular incurrence is reasonably certain.
d. all of these.
c. Accounts Payable
d. Subsidy from National Government 23. No journal entry is made for a disbursement
under this mode of disbursement.
15. Which of the following events or transactions a. LDDAP-ADA
requires recording in the books of accounts of a
b. CPC
government entity?
a. Appropriation c. eMDS
b. Allotment d. None of these
c. Disbursement Authority 24. Entity A, a government entity, had the following
d. Incurrence of Obligation transactions during the period:
e. None of these  Received Notice of Cash Allocation (NCA)
amounting to ₱430,000.
16. No journal entry is made for the receipt of this  Earned total revenue of ₱40,000 from
type of disbursement authority. billings and collections of unbilled income.
a. NCA  Incurred total expenses of ₱240,000.
b. NCAA  Remitted total taxes withheld of ₱37,000 to
c. CDC the BIR through Tax Remittance Advice
(TRA).
d. None of these.
 The “Cash-Modified Disbursement System
(MDS), Regular” has an unused balance of
17. The basis of accounting required by the GAM
₱52,000 at the end of the period.
for NGAs is
a. Budget basis
How much is the surplus (deficit) for the
b. Modified accrual basis
period?
c. Cash basis
d. Accrual basis a. 230,000
b. 215,000
18. The President’s explanation of the country’s c. (200,000)
fiscal policy and budget priorities is contained d. 178,000
in a document called the
a. National Expenditure Program
b. President’s Budget Message
c. President’s Fiscal Policy and Priorities
e. Solution:
d. Budget of Expenditures and Sources of
Financing f. Revenue
19. After the incurrence of obligations, the next
step in the budget cycle is 40,000
a. Allotment
b. Disbursement
c. Appropriation g. Expenses
d. Disbursement authority

20. It is the expenditure authority derived from (240,000)

appropriation laws, government ordinances,
and other decisions related to the anticipated
revenue or receipts for the budgetary period.
h. Surplus (Deficit)
from operations
a. Notice of Cash Allocation
b. Allotment
c. Approved Budget

(200,000
d. General Appropriations Bill
i.
21. After the budget call, budget hearings are made

)
whereby agencies defend their proposed
programs and expenditures for the upcoming j.
year before the
a. COA
b. DBM
c. Congress
d. BTr
 k. Subsidy from 26. Which of the following transactions is not
recorded through a credit to the “Cash-Modified
NG (NCA) Disbursement
account?
System (MDS), Regular”

430,000
a. Reversion of unused NCA at the end of the
period.
b. Payment of accounts payable wherein the

Subsidy from
tax portion is withheld.
l. c. Granting of cash advance for payroll.
d. Constructive remittance of taxes withheld

NG (TRA)
to the BIR.

27. Which of the following statements best

37,000
differentiates the government accounting
process from the accounting process of a
business entity?

m. Unused NCA a. The government accounting process

involves numerous complicated steps or
procedures that are beyond the

(52,000) understanding of a mere JPIA member, but

not for a CPA.
b. The government accounting process

n. Net Financial involves procedures that are not generally

acceptable for business entities.
c. The government accounting process is
Assistance/Subsi similar to that of a business entity, except
that it incorporates budgetary controls,

dy 415,000
such as recording in the budget registries
and preparing periodic budget
accountability reports.

o. Surplus (Deficit) d. Unlike for the accounting process of

business entities which ends in the
preparation of general purpose financial

for the period statements, the government accounting

process ends with the audit by the COA.

215,000 28. This report, required of government entities,

shows the names of creditors, the amounts
owed to them, and the number of days these
obligations are outstanding. This report is
submitted to the COA and DBM within 30 days
after the end of the year.
a. List of Not Yet Due and Demandable
Obligations
b. Aging of Due and Demandable Obligations
c. Percentage of Obligations Report
d. Report on Allotments, Obligations and
Disbursements

29. Under this approach to budgeting, several

parties participate in the budget preparation,
25. The entry to record the granting of cash starting from the lowest levels of the
advance for payroll fund is government up to the highest levels.
a. Salaries and Wages, Regular xxx a. Bottoms-up budgeting
Personal Economic Relief xxx
Allowance (PERA) xxx b. Zero-based budgeting
Due to BIR xxx c. Incremental budgeting
Due to GSIS xxx d. Bottom-up budgeting
Due to Pag-IBIG xxx
Due to PhilHealth xxx 30. A government entity recognizes revenue from
Due to Officers and exchange or non-exchange transactions. In
Employees which of the following transactions does a
b. Advances for Payroll xx government entity need not recognize revenue?
Cash-Modified x a. Exchange of goods or services of dissimilar
Disbursement xxx
nature and value.
System (MDS), Regular
b. Receipt of an unconditional grant from a
c. Due to Officers and Employees xx
Advances for Payroll x xxx foreign government.
c. Receipt of equipment as donation from a
d. Cash-Collecting Officers xx
Advances for Payroll x xxx good-hearted, private individual.
 d. Receipt of a pledge. 38. Entity A, a government entity, bills ₱200,000
for Communications Network Fees. Which of
31. A government entity remitting collections to the the following is the correct entry for the billing?
BTr will debit this account to record the a. Cash-Collecting Officers 200,000
remittance. Communications 200,000
a. Cash-Treasury/Agency Deposit, Regular Network Fees
b. Cash – Collecting Officers b. Cash-Modified 200,000
Disbursement System 200,000
c. Cash-Modified Disbursement System (MDS), Regular
(MDS), Regular Communications
d. Subsidy from National Government Network Fees
c. Accounts receivable 200,000
32. According to P.D. 1445, government entities Subsidy from 200,000
shall acknowledge receipts of revenue National Government
a. through temporary receipts; provided a a. Accounts receivable 200,000
prior approval by COA is obtained. Communications 200,000
b. through the issuance of properly endorsed Network Fees
checks.
39. A government entity will report surplus in its
c. through duplicate copies which shall not be
statement of financial performance in which of
the exact copies of the original. the following instances?
d. through pre-numbered official receipts. a. The revenue and expense summary account
is credited when closing to the accumulated
33. It refers to a fund which is available for any surplus (deficit) account.
purpose other than those which other funds
have been designated to
b. The total debits in the statement of
financial performance columns in the
a. General fund
worksheet exceed the total credits.
b. Major fund c. The total debits in the statement of
c. Regular fund financial position columns in the worksheet
d. All-purpose fund exceed the total credits.
d. All of these.
34. These refer to transactions in which one entity
receives assets or services, or has liabilities 40. The best estimate for a loss is ₱100,000.
extinguished, and directly gives approximately However, the entity deliberately overstated the
equal value to another entity in exchange. loss to ₱120,000. Which of the following
a. Exchange transactions qualitative characteristics is violated?
b. Non-exchange transactions a. Prudence
c. Non-reciprocal transactions b. Reliability
c. a and b
d. External events other than transfers d. Nothing is violated
35. This refers to charges for the use of cash or 41. During the period, Entity A, a government
cash equivalents, or amounts due to the entity. entity approved a ₱400,000 payroll and granted
a. Financial expenses the Disbursing Officer a cash advance of
b. Personnel services ₱280,000, net of withholding taxes and
c. Interest income contributions to GSIS, PhilHealth and Pag-
d. Capital outlays IBIG. The pro-forma entry to record the
liquidation of the payroll fund is
36. A government entity records a transaction by a. Salaries and Wages, Regular xxx
debiting an account with a Revised Chart of Personal Economic Relief xxx
Account (RCA) Code that starts with “1” and Allowance (PERA) xxx
crediting an account with an RCA Code that Due to BIR xxx
starts with “4.” This transaction is most likely a Due to GSIS xxx
Due to Pag-IBIG xxx
a. constructive remittance of taxes withheld to
Due to PhilHealth xxx
the BIR through TRA.
Due to Officers and
b. remittance of collection to the National Employees
Treasury. b. Advances for Payroll xx
c. payment of accounts payable. Cash-Modified x
d. receipt of inter-agency fund transfer. Disbursement xxx
System (MDS), Regular
37. Which of the following government agencies will c. Due to Officers and Employees xx
most likely be able to obtain a disbursement Advances for Payroll x xxx
authority in the form of Cash Disbursement d. Cash-Collecting Officers xx
Ceiling (CDC)? Advances for Payroll x xxx
a. DA
b. NIA 42. Which of the following modes of disbursements
c. DOLE would result to the recognition of a loan
payable in books of the BTr?
d. DENR
a. NCAA
b. CDC
 c. ADA d. Cash-Tax Remittance Advice
d. AWAN
47. All of the above involves the physical transfer of
43. The receipt of an inter-agency fund transfer is cash except
recorded as a. Remittance of taxes through the Tax
Remittance Advice
a. Cash-Collecting Officers xxx b. Remittance of collections of revenue to the
Subsidy from National xxx National Treasury
Government c. Remittance of employee contributions to
b. Cash-Modified Disbursement xxx GSIS, Pag-IBIG and PhilHealth
System (MDS), Regular xxx
Due to (Central Office,
d. Remittance of excess cash advance by an
Regional Office, officer
Operating Units or Other
Funds) 48. Entity A, a government entity, has withheld a
c. Cash-Collecting Officers xxx total of ₱800,000 from the salary payments to
Due to (Central Office, xxx its employees representing contributions to the
Regional Office, GSIS, Pag-IBIG and PhilHealth. The pro-forma
Operating Units or Other entry to record the remittance of the
Funds) contributions to the GSIS, Pag-IBIG or
d. Cash-Modified Disbursement xxx PhilHealth is
System (MDS), Regular xxx a. Due to GSIS/ Pag-IBIG/ xxx
Accumulated Surplus PhilHealth xxx
(Deficit) Cash-Tax Remittance
Advice
44. Arrange the following accounts in the sequence b. Due to GSIS/ Pag-IBIG/ xxx
they appear in the trial balance. PhilHealth xxx
Cash-Collecting
I. Permit Fees Officers
II. Allowance for Impairment-Accounts c. Due to GSIS/ Pag-IBIG/ xxx
Receivable PhilHealth
III. Due to BIR Cash-Modified xxx
IV. Salaries and Wages-Regular Disbursement
V. Advances for Payroll System (MDS), Regular
d. No journal entry.
a. II, V, III, I and IV
b. II, III, V, I and IV
49. The budget preparation in the Philippines
c. V, II, III, I and IV
a. starts with the Budget Call from the BTr.
d. II, V, I, III and IV
b. uses a “zero-bottoms-up” approach.
c. ends with the issuance of the “Bicam
45. The entry to close the “Cash-Treasury/Agency
Version” by the Bicameral Committee.
Deposit, Regular” account at the end of the
period is d. uses a non-incremental approach.
a. Accumulated xxx
Surplus/(Deficit) 50. Choose the correct statement.
xxx Type of tax
Cash-Treasury/Agency a. Income tax  Purchase or sale o
Deposit, b. Value added tax  Earning of taxable
Regular c. Customs duty  Undertaking of a t
d. Property tax  Passage of the tim
b. Subsidy from National xxx
Government
xxx
Cash-Treasury/Agency 51. Entity A acquires equipment from a supplier,
Deposit, on account. A lender settles the account of
Regular Entity A by directly paying the supplier the
proceeds of a loan payable that is recorded in
c. Cash-Collecting Officers xxx
the BTr’s books. This mode of disbursement is
Cash-Treasury/Agency xxx called
Deposit, a. Cash Disbursement Ceiling (CDC)
Regular b. Advice to Debit Account (ADA)
d. None of these. The account c. Non-Cash Availment Authority (NCAA)
is not closed.
d. Notice of Transfer of Allocation (NTA)

46. This account is debited when government 52. Under this type of disbursement authority,
entities remit collections to the National disbursements are made out of the entity’s own
Treasury. bank account rather than through the Treasury
a. Cash-Modified Disbursement System Single Account.
(MDS), Regular a. Disbursement through Advice to Debit
b. Cash-Collecting Officers Account (ADA)
c. Cash-Treasury/Agency Deposit, Regular b. Disbursement through Cash Disbursement
Ceiling (CDC)
 c. Disbursement through electronic Modified d. ₱10,000
Disbursement System (eMDS)
d. Disbursement through Non-Cash Availment 56. Entity A, a government entity, receives its
Authority (NCAA) Notice of Cash Allocation amounting to
₱5,000,000 for the year. The journal entry to
53. The entry to record the receipt of a disbursement record this event is
authority in the form of Cash Disbursement a. Cash-Modified 5,000,000
Disbursement System
Ceiling (CDC) is
(MDS), Regular 5,000,000
a. Cash-Constructive Income Remittance Subsidy from
xxx National Government
Subsidy from National Government b. Cash-Collecting 5,000,000
xxx Officers 5,000,000
b. Accounts Payable Subsidy from
xxx National Government
Subsidy from National Government c. Cash-Tax Remittance 5,000,000
xxx Advice 5,000,000
c. Accounts Payable Due to the
xxx National Government
Cash-Modified Disbursement System d. No journal entry.
(MDS), Regular xxx
d. Cash-Modified Disbursement System 57. Entity A, a government entity, receives notice of
(MDS), Regular xxx its ₱10M appropriation for the year. The journal
Subsidy from National Government entry to record this event is
xxx a. Cash-Modified 10,000,000
Disbursement
54. An entity accrues salaries and wages after System (MDS), 10,000,000
approval of payroll. The entry is Regular
Subsidy from
a. Salaries and Wages, Regular xxx National
Personal Economic Relief xxx Government
Allowance (PERA) b. Cash-Collecting 10,000,000
Cash-Modified xxx Officers 10,000,000
Disbursement System (MDS), Subsidy from
Regular National
b. Salaries and Wages, Regular xxx Government
Personal Economic Relief xxx c. Cash-Tax 10,000,000
Allowance (PERA) xxx Remittance Advice 10,000,000
Advances to Officers and Due to the
Employees National
c. Salaries and Wages, Regular xxx Government
Personal Economic Relief xxx d. No journal entry.
Allowance (PERA) xxx
Due to BIR xxx 58. Entity A, a government entity, receives its ₱9M
Due to SSS xxx allotment. The journal entry to record this
Due to Pag-IBIG xxx event is
Due to PhilHealth xxx a. Cash-Modified 9,000,000
Due to Officers and Disbursement System
Employees (MDS), Regular 9,000,000
d. Salaries and Wages, Regular xxx Subsidy from
Personal Economic Relief xxx National Government
Allowance (PERA) xxx b. Cash-Collecting 9,000,000
Due to BIR xxx Officers 9,000,000
Due to GSIS xxx Subsidy from
Due to Pag-IBIG xxx National Government
Due to PhilHealth xxx c. Cash-Tax Remittance 9,000,000
Due to Officers and Advice 9,000,000
Employees Due to the
National Government
55. Entity A, a government entity, grants a ₱10,000 d. No journal entry.
cash advance for the travelling expenses of an
employee. The employee liquidates ₱8,000 of 59. The journal entry to record the collection of
the cash advance and remits the excess cash unbilled tax revenue (e.g., Travel Tax) through
advance of ₱2,000. After recording the grant of direct deposit in Authorized Agent Banks is
cash advance and the liquidation thereof but a. Accounts Receivable xxx
before adjustment for the collection of the Travel Tax xxx
excess cash advance, how much is the recorded
b. Cash-Modified
expense in the books of accounts? Disbursement System xxx
a. ₱0 (MDS), Regular xxx
b. ₱2,000 Travel Tax
c. ₱8,000 c. Cash-Collecting Officers xxx
Travel Tax xxx
 d. Cash-Treasury/Agency xxx b. Accounts Payable xxx
Deposit, Regular xxx Cash – Modified
Travel Tax Disbursement xxx
System (MDS), Regular
60. Which of the following reflects a Non-Cash c. Accounts Payable xxx
Availment Authority (NCAA) mode of Subsidy from National xxx
disbursement? Government
a. Accounts Payable xxx d. None of these.
Cash-Constructive
Income xxx
Remittance

Sir Sales
COMPETENCY APPRAISAL
PFRS 10: CONSOLIDATED FINANCIAL STATEMENTS

Problem 1:
Sony Company a wholly owned subsidiary of Phillip Corporation. The following are excerpts from the 2018 condensed
income statements of the two companies:

Phillip Corp. Sony Corp.

Sales to Sony 500,000
Sales to others 2,000,000 1,500,000
Cost of Goods sold from Phillip (400,000)
Cost of Goods sold from others (1,750,000) (950,000)
Gross Profit 750,000 150,000

The Sales of Phillip to Sony are made on the same terms as those made to others.

Required:
1. Prepare the consolidated income statement of Philip and Subsidiary for 2018.
2. How much is the consolidated Sales.
3. How much is the consolidated Cost of Goods Sold.
4. How much is the consolidated Gross Profit.

CONSO SALES CONSO COGS

GROSS PROFIT:

Conso Sales - 3,500,000 GP – P = 750,000

Conso COGS - 2,630,000 GP – S = 150,000
870,000 UGP = (30,000)
RGP = -
870,000

Problem 2:

Steeple Corp. is a 90% subsidiary of Peake Corp. acquired by Peake at book value on January 1, 2014. Separate income
statements for Peake and Steeple for 2014 and 2015 are as follows:

Sales – P 2,500,000
Sales – S 1,500,000 COGS – P 1,750,000
Less: Intercompany Sales (500,000) COGS – S (400k + 950k) 1,350,000
Conso Sales 3,500,000 Less: Intercompany Sales (500,000)
Add: UGP end. 30,000
Less: RGP beg., Inv. -
Conso COGS 2,630,000
Peake Steeple
2014 2015 2014 2015
Sales 1,000,000 1,200,000 500,000 700,000
Cost of Sales (600,000) (720,000) (250,000) (350,000)
Other Expenses (200,000) (250,000) (100,000) (200,000)
Net Income (Own Operations) 200,000 230,000 150,000 150,000
Intercompany sales were P80,000 during 2014 and P120,000 during 2015. 20% of the 2014 intercompany sales were still
unsold at the end of 2014 and 30% of the intercompany sales in 2015 were still unsold at the end of 2015.

Part A. Assume that all intercompany sales are from Steeple to Peake, determine:

1. Consolidated Cost of Sales

2. Minority Interest Income
3. Consolidated Net Income for 2014 attributable to the owners of the Parent

Part B. Assume that all intercompany sales are from Peake to Steeple, determine:
1. Consolidated Cost of Sales
2. Minority Interest Income
3. Consolidated Net Income for 2014 attributable to the owners of the Parent

Part A – UPSTREAM (50% = 500,000 – 250,000 / 500,000)

2014 2015
B - DOWNSTREAM (40% = 1,000,000 – 6,000 / 1,000,000)
COGS - P 600,000 720,000
2014 2015
COGS – S 250,000 350,000
COGS - P 600,000 720,000
UGP (80k x 20% x 50%) 8,000 18,000
COGS – S 250,000 350,000
RGP - (8,000)
UGP (80k x 20% x 50%) 6,400 14,400
Intercompany Sales (80,000) (120,000)
RGP - 6,400
Conso - COGS 778,000 960,000
Intercompany Sales (80,000) (120,000)
Conso - COGS 776,400 958,000
Part A
2014 2015
P (90%) S (10%) 230,000 150,000
Net Income 200,000 150,000 - -
Less: Amortization FV & PV - - - -
Less: Dividends - -
Int. Inv.
R.G.P 8,000
U.G.P 8,000 (18,000)
Int. PPE
U. Gain
Add: Dep
U. Loss
Less: Dep
Net Income 200,000 142,000 230,000 140,000
CI.NI 127,800 CI 90% - NCI 126,000 CI 90% - NCI
P.NI 327,800 10% 356,000 10%
14,200 14,000

Part B
2014 2015
P (90%) S (10%) 230,000 150,000
Net Income 200,000 150,000 - -
Less: Amortization FV & PV - - - -
Less: Dividends - -
Int. Inv.
R.G.P 6,400
U.G.P (6,400) (14,400)
Int. PPE
U. Gain
Add: Dep
U. Loss
Less: Dep Problem 3:
Net Income 193,600 150,000 222,000 Saul is 90%
CI.NI 135,000 NCI 135,000 NCI owned
P.NI 328,600 15,000 357,000 15,000
subsidiary of
Paul Corporation, acquired at book value several years ago. Comparative separate company income statements for these
affiliated corporations are as follows:

Paul Corp Saul Corp

Sales 1,500,000 700,000
Dividend Income 108,000
Gain on Building 30,000
Cost of Sales 1,000,000 400,000
 Operating Expenses 300,000 150,000
Net Income 338,000 150,000

On January 5, 2016 Paul sold a building with a 10-year remaining useful life to Saul as a gain of
P30,000. Saul Paid dividends of P120,000 during 2016.
Required:
1. The Non-controlling interest in net income for 2016:
2. The profit attributable to Equity holders of Parent CNI attributable to controlling
interest for 2016:
3. The Consolidated/group Net income for 2016 should be:

P S
Net Income 338,000 150,000
Less:
Amortization
Less: Dividends (108,000) 0
Int. Inv.
R.G.P
U.G.P
Int. PPE
U. Gain (30,000)
Add: Dep 30,000
U. Loss
Less: Dep
Net Income 203,000 150,000
CI.NI 135,000 10% - NCI
P.NI 338,000 15,000

Problem 4:

On January 1, 2017, ABC Company a 90% owned subsidiary of XYZ Company transferred
equipment to its parent in exchange for P75,000 cash. At the date of transfer, the subsidiary
record carried the equipment at cost of P106,000 less accumulated depreciation of P45,000.
The equipment has an estimated remaining life of 7 years. The subsidiary reported net income
for 2017 and 2018 of P132,000 and P197,000, respectively. The parent company reported income
of P220,000 (including dividend income of P45,000) and P295,000 (including dividend income
of P45,000) for 2017 and 2018, respectively.
Required:
1. Calculate XYZ company’s investment income from ABC Company in 2017 and in
2018.
2. Determine the Non-Controlling interest in the net income of the subsidiary for 2017
and for 2018.
3. Show the consolidated net income for 2017 and 2018. Allocate each to controlling
and non-controlling interest

1. 45,000 – both
2. 18,000

2017 2018
P S P S
Net Income 220,000 132,000 295,000 197,000
Less: (45,000)
Amortization
Less: Dividends (45,000)
Int. Inv.
R.G.P
U.G.P
Int. PPE
U. Gain (14,000)
Add: Dep 2,000 2,000
U. Loss
Less: Dep
Net Income 175,000 120,000 250,000 199,000
CI.NI 108,000 10% - NCI 178,100 10% NCI
P.NI 283,000 12,000 429,1000 19,900
Problem 5:

C Corporation acquired 90% of the outstanding P10 par value voting common stock of F, Inc.
on January 1, 2018 in exchange for 25,000 shares of its P10 par value voting common stock. The
fair value of the share is P30. On December 31, 2018, the companies had condensed Financial
Statements as follows:

Income and Retained Earnings Statement: C. Corp. F. Inc.

Net Sales 3,800,000 1,500,000
Dividends from F 36,000
Gain on sale of warehouse 30,000
Cost of Goods sold (2,360,000) (870,000)
Operating expenses (including depreciation) (1,100,000) (440,000)
Net Income 406,000 190,000
Retained earnings, January 1, 2018 440,000 156,000
Dividends paid (40,000)
Retained earnings, December 31, 2018 846,000 306,000

Balance Sheet:
Cash 566,00 150,000
0
Accounts receivable (net) 860,00 350,000
0
Inventories 1,060,00 410,000
0
PPE 1,320,00 680,000
0
Accumulated Depreciation (370,000 (210,000)
)
Investment in F (at cost) 750,00
0
Total Assets 4,186,00 1,380,000
0
Accounts payable and accrued expenses 1,340,00 594,000
0
Common stock (P10 par) 1,700,00 400,000
0
300,00
Additional paid in capital 0 80,000
Retained earnings 846,00 306,000
0
Total liabilities and Stockholders’ Equity 4,186,00 1,380,000
0

Additional Information:
• There were no changes in the common stock and additional paid-in capital accounts during 2018 except the one
necessitated by C’s acquisition of F.
• At the acquisition date, the fair value of F’s machinery exceeded its book value by P54,000. The excess cost will
be amortized over the estimated average remaining life of six years. The fair values of all of F’s other assets and liabilities
were equal to their book values. Any goodwill resulting from the acquisition will not be amortized.
• On July 1, 2018, C sold a warehouse facility to F for P129,000 cash. At the date of sale, C’s book values were
P33,000 for the land and P66,000 for the undepreciated cost of the building. Based on a real estate appraisal, F allocated
P43,000 of the purchase price to land and P86,000 to building. F is depreciating the building over its estimated 5 year
remaining useful life by the straight line method with no salvage value.
• During 2018, C Purchased merchandise from F at an aggregate invoice price of P180,000, which included a 100%
markup on F’s cost. At December 31, 2018, C owed F P86,000 on these purchases, and P36,000 of this merchandise
remained in C’s inventory.
Required:
1. Prepare the Consolidated Financial Statement of C Corporation and Subsidiary Inc. and for the year ended
December 31, 2018.
2. How much is goodwill or bargain purchase gain.
3. How much is the Net Income allocated to minority interest in the subsidiary book.
4. How much is the Total Net income of the parent in the subsidiary book.
5. How much is the total net income of the parent.
6. How much is the consolidated cash.
7. How much is the consolidated accounts receivable.
8. How much is the consolidated inventories.
9. How much is the consolidated PPE.
10. How much is the consolidated assets.
11. How much is the consolidated Accounts Payable.
12. How much is the Common stock.
13. How much is the Additional Paid In capital.
14. How much is the Retained Earnings of the Controlling interest.
15. How much is the Retained Earnings of the Non-Controlling interest.
16. How much is the total Liabilities and Equity.

Cons. Trans (25K shares × 750,000

30)
NCI 69,000 (690,000 ×
10%)
Less:
Common Stock 400,000
APIC 80,000
R.E Beg. 156,000
Amortization 54,000 (690,000)
129,000 - asset

P S
Net Income 406,000 190,000
Less: (9,000)
Amortization
Less: Dividends (36,000)
=40K × CI 90% Land Bldg. Total
Int. Inv. Proceeds 43,000 86,000 129,000
R.G.P C. Amort 33,000 66,000 99,000
U.G.P (18,000) 10,000 20,000 30,000
=36K × 50% ÷5
Int. PPE 4,000
U. Gain (30,000) × 6/12
Add: Dep 2,000 =2,000
U. Loss
Less: Dep
Net Income 342,000 163,000
CI. P 146,700 10%
NI - P 488,700 16,300

CONSO CASH
Cash - P 566,000
Cash - S 150,000
Less: D/IC of
B.C
Conso Cash 716,000

CONSO A/R
P 860,000
S 350,000
Less: Int. (86,000)
Sales CONSO Inv.
Conso A/R 1,12400 P 1,060,000
S 410,000
U.G.P (18,000)
CONSO PPE R.G.P -
P 950,000 Conso Inv. 1,452,000
S 470,000
Amort 54,000
Amort (9,000)
U. Gain (30,000)
Dep 2,000
Conso PPE 1,437,000
 Sir Earl
Corporate Liquidation

STOP THE GOING CONCERN

1. the company is undergoing liquidation.
2. the company is under liquidation

LIQUIDATE: assets convert into cash

1. Statement of Affairs
 A = L + E (estate equity)
 Like a balance sheet; assets ‘net realizable value’; liability ‘maturity’
 Capable in paying liabilities

2. Statement of Realization & Liquidation

 A progress report
  Actual amount

Fully - Collateral, more than enough to pay liability

SECURED
Partially -not more than enough
Liability
With priority – legally required to pay
UNSECURED
Without priority

Fully Secured – assets pledge to fully secured creditors

Partially Secured – asset pledge to partially secured creditors
Free Assets – assets that is not use as collateral
Percentage of recovery = Net Free Assets / Total unsecured liability without priority

1. Mastermind Corporation is undergoing liquidation and has the following statement of financial position
as of January 1, 2022:

Assets Liabilities and Shareholders’ Equity

Cash P114,200 Salaries payable P50,000
Receivables, net 340,800 Accounts payable 108,500
Inventory 80,000 Bonds payable 400,000
Prepaid expenses 2,500 Loan payable 220,000
PPE 345,000 Note payable 80,000
Goodwill 55,000 Ordinary shares 120,000
Deficit (41,000)
Total Assets P937,500 Total LSHE P937,500

The bonds payable is secured by the PPE having book value of P345,000 and a realizable value of
P360,000. Of the accounts payable, P60,000 is secured by 25% of the receivables which is 80%
collectible. The balance in the book value of the receivables which has a realizable value of P235,000
is used to secure the bank loan payable. The inventory has a realizable value of P53,000. In addition to
the recorded liabilities are accrued interest on bonds payable amounting to P4,000, trustees’ expenses
of P9,500 and taxes of P4,000.

What is the percentage of recovery? (use two decimal places)

How much will fully secured creditors receive?
How much is the payment to partially secured creditors?
What is the estimated deficiency?

NRV Gain/Loss
Cash 114,200 114,200
AR 340,800 68,160 (37,640)
235,000
MI 80,000 53,000 (27,000)
Prepaid Exp. 2,500 0 (2,500)
PPE 345,000 360,000 15,000
Goodwill 55,000 0 (55,000)
937,500 830,360 (107,140) Loss on realization

LIABILITY
Bonds Payable 404,000 – 360,000 NRV = 44,000 PSL
Accounts Payable 60,000– 68,160 = 8,160 FSL
Loan Payable 220,000 – 235,000 = 15,000 FSL

NFA TVL
1. Excess of APFSC 23,160 1. 44,000 Excess of PSL
2. FA 167,200 2. 128,500 ULw/oP
TFA 190,000 172,500
3. LWP (63,500)
NFA 128,860 45,640 – Estimated deficiency
 126,800/172,500 = 73.54% percentage of recovery

1. FSL 280,000 100% 280,000

2. LWP 63,500 100% 63,500
3. PSL 360,000 100% 360,000
44,000 73.54% 32,357.6
392,357.6
4. Lw/oP 128,500 73.54% 94,498.9
830,356.5

2. The following data are provided by Martin Corporation which is undergoing liquidation:

 Total liabilities amount to P692,000. 35% is fully secured by assets amounting to P270,000 with a
market value of P250,000. 40% is partially secured by assets amounting to P300,000 with a market
value of P225,000, and the remaining balance is unsecured.
 Total assets amount to P890,000 and has a total fair market value of P695,000.
 Unpaid income taxes amount to P35,000.
 Additional salaries payable and administrative expenses totaled P28,000

What is the percentage of recovery?

What is the amount paid to partially secured creditors?
What is the amount paid to all creditors?

NFA TVL
1. Excess of APFSC 7,800 1. 51,800 Excess of PSL
2. FA 220,000 2. 173,000 ULw/oP
TFA 227,800 224,800
3. LWP (63,000)
NFA 164,800 60,000 – Estimated deficiency

164,800/224,800 = 73.31% percentage of recovery

1. FSL 242,200 100% 242,200

2. LWP 63,000 100% 63,000
3. PSL 276,800 100% 225,000
44,000 73.31% 37975
262,975
4. Lw/oP 173,000 73.31% 126,826
695,001

692,500 x 35%
242,200 250,000 FSL
276,800 225,000 PSL
173,000 220,000
692,000 695,000

Net Loss = 195,000 + 35,000 + 28,000 = 258,000

Loss on Realization = 890,000 – 695,000 = 195,000

3. A review of the assets and liabilities of Strand Corporation in bankruptcy on November 30,2022
discloses the following:
 A mortgage payable of P77,000 is secured by building valued at P14,000 more than its book
value of P68,000
 Notes payable of P39,000 is secured by furniture and equipment with book value of P46,000
that is estimated to be 4/5 realizable.
 Assets other than those referred to have estimated value of P25,000, an amount that is P6,000
above its book value.
 Liabilities other than those referred to total P31,000 which exclude claims with priority of P8,000

Which of the following statements is true?

a. Actual recovery percentage is 66.27%
b. Total free assets is P22,000
c. Estimated deficiency is P11,200
 d. Payment to partially secured creditors is P36,800

NFA TVL
1. Excess of APFSC 3,000 1. 2,200 Excess of PSL
2. FA 25,000 2. 31,000 ULw/oP
TFA 30,000 33,200
3. LWP (8,000)
NFA 22,000 11,200 – Estimated deficiency

22,000/11,200 = 66% percentage of recovery

4. On October 31, 2022, Green Corporation’s trustee prepares a statement of affairs with the following
information:

 P77,000 cash will be received by the unsecured creditors whose claims total P140,000
 Mr. Army, a maintenance staff of the company, has a claim of P2,625
 Green issued to Sage Company a 1-year note of P17,500 on January 1, 2022. Nothing has
been pledged to this note.
 Nordic Company holds a note of P26,250 on which interest pf P787.50 is accrued. Equipment
with book value of P24,500 has been pledged to this note. Market value of the equipment is
P28,875.
 Hunter received a 10% note of P21,000 from Green on February 1, 2022, pledged with
equipment with a fair market value of P17,500.

How much will the following receive?

a. Army - 2,625
b. Sage - 9,625 (17,800 x 55%)
c. Nordic - 27,037.5 (26,250 + 787.50)
d. Hunter - 20,291.25
o 22,575 – 17,500 = 5,075 x 55% = 2,791.25

5. The following information were provided by Hibiscus Corporation undergoing liquidation:

Assets Liabilities and Equity

Cash 61,400 Accounts payable 670,000
Accounts receivable (excluding 250,000 Salaries payable 3,400
AFDA of P20,000)
Inventory 420,000 Notes payable 160,000
Prepaid expenses 40,000 Accrued interest – note 5,000
Investments 180,000 Mortgage payable 400,000
Land and Building, net 470,000 Ordinary Shares 800,000
Machinery and Equipment, net 220,000 Share premium 80,000
Goodwill 200,000 Deficit (297,000)
Total Assets 1,821,400 Total Liabilities and Equity 1,821,000

Additional information:
a. 15% of the accounts receivables is estimated to be uncollectible
b. The inventory is estimated to be sold for P340,000 excluding selling costs of P50,000
c. The investments, with realizable value of P110,000, have been pledged as security for the notes
d. the machinery and equipment have a realizable value of P53,900
e. The mortgage payable is secured with the land and building with a realizable value of P500,000
f. Unpaid taxes payable amount to P16,400
g. Accrued interest on the mortgage total P10,000
h. Trustee fees and other liquidating costs are estimated to be P60,000
i. Patents previously written off have a realizable value of P10,000

Requirement:

a. Total free assets

b. Net free assets
c. Estimated deficiency to unsecured creditors
d. Estimated percentage of recovery
e. Estimated payment to: fully secured creditors, partially secured, unsecured creditors
f. Estimated payment to all creditors
 g. Estimated net gain or loss on asset realization
h. Estimated net loss
i.

NRV Gain/Loss
Cash 62,400 0
Accounts receivable 212,300 (17,500)
M Inventory 290,000 (130,000)
Prepaid expenses 0 (40,000)
Investments 110,000 (70,000)
Land and Building, net 500,000 30,000
Machinery and Equipment, net 53,900 (166,100)
Goodwill 0 (200,00)
P 10,000 10,000
1,237,800 583,600

Note Payable = 165,000 – 55,000 PSL

Mortgage = 410,000 – 90,000 FSL
NFA TVL
1. Excess of APFSC 90,000 1. 55,000 Excess of PSL
2. FA 627,800 2. 670,000 ULw/oP
TFA 717,800 725,000
3. LWP (79,800)
NFA 638,000 87,000 – Estimated deficiency

683,000/725,000 = 88% percentage of recovery

1. FSL 410,000 100% 410,000

2. LWP 79,800 100% 79,800
3. PSL 110,000 100%
158,400
55,000 88%
Lw/oP 670,000 88% 589,600
1,237,800 payment to
all Cr.

6. Optimum Corporation is in bankruptcy and is being liquidated. The trustee has converted all assets into
P120,000 cash and has prepared the following list of approved claims:

Property taxes payable 4,000

Trustee’s fees 10,000
Accounts payable 30,000
Wages payable 6,000
Customer’s deposit 2,000
Mortgage payable (secured by property
sold for P80,000) 60,000
Note payable to bank (secured by all accounts
receivable of P40,000 of which P30,000 was
collected and P10,000 were written off) 40,000

How much will the bank receive on the note payable?

NFA TVL
1. Excess of APFSC 20,000 1. 10,000 Excess of PSL
2. FA 10,000 2. 30,000 ULw/oP
TFA 30,000 40,000
3. LWP (22,000)
NFA 8,000 32,000 – Estimated deficiency

8,000/40,000 = 20% percentage of recovery

7. The following data were taken from the statement of affairs for Florida Company:

Assets pledged to fully secured liabilities (fair value, 75,000) 90,000

 Assets pledged to partially secured liabilities (fair value, 52,000) 74,000
Free assets (fair value, 40,000) 70,000
Unsecured liabilities with priority 7,000
Fully secured liabilities 30,000
Partially secured liabilities 60,000
Unsecured liabilities without priority 112,000

What is the estimated deficiency to unsecured creditors?

What is the estimated recovery per peso of unsecured claims?

NFA TVL
1. Excess of APFSC 45,000 1. 8,000 Excess of PSL
2. FA 40,000 2. 112,000 ULw/oP
TFA 85,000 120,000
3. LWP (7,000)
NFA 78,000 42,000 – Estimated deficiency

78,000/120,000 = 65% percentage of recovery

8. The following data were taken from the statement of realization and liquidation of Pistachio Corporation for
the quarter ended June 30, 2022:

Assets to be realized 515,625

Supplementary credits 796,875
Liabilities to be liquidated 843,750
Supplementary charges 731,250
Liabilities liquidated 562,500
Assets acquired 562,500
Assets realized 656,250
Liabilities assumed 281,250
Assets not realized 234,375

The ending capital balances of capital stock and retained earnings are P648,750 and P178,500, respectively.
A net loss of P226,500 was recorded for the period.

How much is the ending balance of cash?

Assets to be realized 515,625 565,250 Assets realized

Assets acquired 562,500 234,375 Assets not realized
Liabilities to liquidated 562,500 843,750 Liabilities to be liquidated
Liabilities not liquidated 667,125 281,250 Liabilities assumed
Supplementary Changes 731,250 796,875 SC
Gain - 226,500 Loss
3,039,000 3,039,000

A = L + E
234,375 = 667,125 + 827,250
1,260,000 + 234,375 = 1,494,375

9. Twins Corporation is underdoing liquidation. On February 1, 2022, the following data were available:

Cash 112,000
Accounts receivable 80,000
Merchandise inventory 160,000
Investment 26,400
Land 100,000
Building 60,000
Machinery and equipment 48,000
Accounts payable 288,000
Notes payable 244,000
Loan payable 180,000
Salaries payable 40,000
Taxes payable 8,000
Estate deficit (173,600)
During the six-month period ending July 31,2022, the trustee sold the investment for P26,000, realized
P84,000 for the accounts receivable, sold the merchandise for P152,000, and paid off P26,000 of the bank
loan and all liabilities with priority as well as administration expenses amounting to P7,440.

Required:
a. Net loss or loss on realization
b. Cash balance on July 31, 2022

ATBR 474,400 262,000 A/R

AA 208,000
LL 74,000 760,000
LNL 686,000
LA
SD 7,440 SC
11,840 Loss
Gain -
1,241,840 1,241,840

(400) (100+60+48) 208,000 = 686,000 + (185,440)

4,000 208,000 - 500,560 = 292,560 cash bal.
(8,000)
4,400 loss on realization
+7,440
11,840 net loss

10. Mountain Company enters into bankruptcy proceedings on April 30, 2022. Its balance sheet on that date
shows:

Cash 25,000 Accounts payable 70,000

Inventory 60,000 Loan payable 150,000
Equipment 100,000 Stockholders’ equity (35,000)
Total 185,000 Total 185,000

None of the liabilities are secured. The following transactions occurred between April 30 and August 31:
 Merchandise inventory with a book value of P45,000 were sold for P30,000.
 Equipment with a book value of P40,000 was sold for P25,000
 Salaries and administrative expenses of P10,000 were accrued
 An initial payment of 30 cents per peso of indebtedness was paid to creditors

Required:
What is the loss on realization?
What is the net loss?
What is the ending balance of cash?

MA’AM PELILIA
GOVERNMENT ACCOUNTING

Definition of Government Accounting

"Government accounting encompasses the processes of analyzing, recording, classifying,
summarizing and communicating all transactions involving the receipt and disposition of government
funds and property, and interpreting the results thereof." (State Audit Code of the Philippines, P.D.
No. 1445, Sec. 109)
Government Accounting vs. Business Accounting
Compared to the accounting for business entities, government accounting places greater emphasis
on the following:
 Sources and utilization of government funds; and
 Responsibility, accountability and liability of entities entrusted with government funds and
properties.
Responsibility, Accountability and Liability over Government Funds and Property
 Government resources must be utilized efficiently and effectively in accordance with the law.
 The head of a government agency is directly responsible in implementing this policy.
 All other personnel entrusted with the custody of government resources are responsible to the
head of the government agency, are accountable for the safeguarding thereof, and are liable
for any losses.
Accounting responsibility
The following offices are charged with government accounting responsibility:
1. Commission on Audit (COA)
2. Department of Budget and Management (DBM)
3. Bureau of Treasury (BTr)
4. Government agencies

Commission On Audit (COA)

Responsibilities of COA
 Promulgate accounting and auditing rules
 Keep the general accounts
• Submit financial reports
Bureau of Treasury (BTT)
Responsibility of DBM
 Cash custody and control of disbursements.
Government Agencies
Responsibility of government agencies
 Maintain accounting books and budget registries which are reconciled with the cash records of
the BTr and the budget records of the COA and DBM.
The GAM for NGAS
The Government Accounting Manual for National Government Agencies (GAM for NGAS) is
promulgated by the COA under the authority conferred to it by the Philippine Constitution.
 The GAM for NGAS was promulgated primarily to harmonize the government accounting
standards with the International Public Sector Accounting Standards
(IPSAS). The IPSASS are based on the IFRSS.

Objectives of the GAM for NGAS

To update the following:
 Standards, policies, guidelines and procedures in accounting for government funds and
property;
 Coding structure and accounts; and
  Accounting books, registries, records, forms, reports and financial statements.
Basic Accounting and Budget reporting Principles
 Compliance with PPSAS and relevant laws,rules and regulations
 Accrual basis of accounting
 Budget basis for presentation of budget information in the financial statements
 Revised Chart of Accounts
 Double entry bookkeeping
 Financial statements based on accounting and budgetary records.
 Fund cluster accounting

Fund Clusters
Code Fund Clusters
01 Regular Agency Fund
02 Foreign Assisted Project Funds
03 Special Account Locally Funded/Domestic Grants Funds

04 Special Account Foreign Funded/Foreign Grants Funds

05 Internally Generated Funds

06 Business Related Funds
07 Trust Receipts
Qualitative Characteristics
 Understandability
 Relevance
 Materiality
 Timeliness
 Reliability
 Faithful representation
 Substance over form
 Neutrality
 Prudence
 Completeness
 Comparability
Components of General Purpose Financial Statements
1. Statement of Financial Position;
2. Statement of Financial Performance;
3. Statement of Changes in Net Assets/Equity;
4. Statement of Cash Flows;
5. Statement of Comparison of Budget and Actual Amounts; and
6. Notes to the Financial Statements

The National Budget

 The national budget (government budget) is the government's estimate of the sources and
uses of government funds within a fiscal year. This forms the basis for expenditures and is the
government's key instrument for promoting its socio- economic objectives.
The Budget Cycle
1. Budget Preparation
2. Budget Legislation
3. Budget Execution
4. Budget Accountability
Budget Preparation
 Bottom-up approach
 Zero-based budgeting
1. Budget Call
2. Budget Hearings
3. Presentation to the Office of the President
Department of Budget and Management (DBM)
Responsibility of DBM
 Implementation of the national budget
Budget Legislation
4. House Deliberations
5. Senate Deliberations
6. Bicameral Deliberations
7. President's Enactment
The Approved Budget
The approved budget consists of the following:
1. New General Appropriations
2. Continuing Appropriations
3. Supplemental Appropriations
4. Automatic Appropriations
5. Unprogrammed Funds
6. Retained Income/Funds
7. Revolving Funds
8. Trust Receipts
Appropriation
Appropriation - is the authorization made by a legislative body to allocate funds for purposes
specified by the legislative or similar authority
1. New General Appropriations-annual authorizations for incurring obligations, as listed in the GAA
2. Continuing Appropriations-authorizations to support the incurrence of obligations beyond the
budget year (e.g., multi-year construction projects).
3. Supplemental Appropriations- additional appropriations to augment the original appropriations
which proved to be insufficient.
4. Automatic Appropriations-authorizations programmed annually which do not require p action by
Congress.
5. Unprogrammed Funds - standby appropriations which may be availed only upon the occurrence of
certain instances.
6. Retained Income/Funds-collections which the agencies can use directly in their operations,
7. Revolving Funds-receipts from business-type activities of agencies which are authorized to be
constituted as such. These are self-liquidating and all obligations and expenditures incurred by virtue
of said business-type activity shall be charged against the fund.
8. Trust Receipts-receipts by a government agency acting as agent.
Budget Execution
8. Release Guidelines and BEDS
Major recipients of budget:
a. NGAS
b. LGUS
c. GOCCS
9. Allotment
10.Incurrence of Obligations
11.Disbursement Authority
Allotment
Allotment-is an authorization issued by the DBM to government agencies to incur obligations for
specified amounts contained in a legislative appropriation in the form of budget release documents. It
is also referred to as Obligational Authority.
Disbursement Authority
1. Notice of Cash Allocation (NCA)- authority issued by the DBM to central, regional and
provincial offices and operating units to cover their cash requirements. The NCA specifies the
maximum amount of cash that can be withdrawn from a government servicing bank in a certain
period.
2 Notice of Transfer of Allocation-authority issued by an agency's Central Office to its regional
and operating units to cover the latter's cash requirements,
3. Non-Cash Availment Authority- authority issued by the DBM to agencies to cover the
liquidation of their actual obligations incurred against available allotments for availment of proceeds
from loans/grants through supplier's credit/constructive cash.
4. Cash Disbursement Ceiling-authority issued by the
1. Appropriation - authorization by a legislative body to allocate funds for
specified purposes
2. Allotment - authorization to agencies to incur obligation (i.e,
obligational authority)
3. Obligation - amount contracted by an authorized officer for which the
government is held liable.
4. Disbursement - actual amount paid out of the budgeted amount.

Budget Accountability

12.Budget Accountability Reports

13.Performance Reviews

14.Audit

Responsibility Accounting
  Responsibility accounting is a system of providing cost and revenue information over which a manager
has direct control of.
 It requires the identification of responsibility centers and the distinction between controllable and non-
controllable costs.

Books of Accounts and Registries

1.Journals
a. General Journal

b. Cash Receipts Journal

c. Cash Disbursements Journal

d. Check Disbursements Journal

2. Ledgers

a.General Ledgers

b. Subsidiary Ledgers

3. Registries

a. Registries of Revenue and Other Receipts (RROR)

b. Registry of Appropriations and Allotments (RAPAL)

c. Registries of Allotments, Obligations and Disbursements (RAOD)

d. Registries of Budget Utilization and Disbursements (RBUD)

Object of Expenditures

1. Personnel Services (PS) - pertain to all types of employee benefits.

2. Maintenance and Other Operating Expenses (MOOE) - pertain to various operating expenses other
than employee benefits and financial expenses.

3. Financial Expenses (FE) - pertain to finance costs.

4. Capital Outlays (CO) - pertain to capitalizable expenditures.

Basic Recordings

Transaction Registries and Other Journal and Ledger

Records
a.Appropriation RAPAL None
b. Allotment RAPAL and Appropriate RAODs None
c. Incurrence of Obligation ORS and Appropriate RAODs None
d. NCA RANCA Cash-MDS from regular xx
Subsidy from NG xx
e. Disbursement - updating of ORS and Expense/Asset xx
appropriate RAODs Payable xx

Payable xx
Cash-MDS Regular xx
f. Tax Remittance Advice (TRA is - updating of ORS and Cash-TRA xx
used for remittance of taxes appropriate RAODs Subsidy from NG xx
withheld)
Due to BIR xx
Cash-TRA xx

g. Billings , Collection and RROR , RCD , CRR eg (not Accounts Receivable xx

Remittances illustrated) Cash – CO xx

Cash – CO xx
Accounts Receivable xx

Cash Treasury Agency xx

Deposit Regular xx
Cash – CO xx

h. Reversion of Unused NCA RANCA Subsidy from NG xx

Cash MDS regular xx
Disbursements

 constitute all payments in cash, in whatever manner, i.e., cash, check or cashless payment.
 shall be supported by Disbursement Vouchers (including Petty Cash Vouchers) or Payroll.
Disbursement Authority
a. Notice of Cash Allocation (NCA)
b. Notice of Transfer of Allocation (NTA)
c. Tax Remittance Advice (TRA) d. Non-Cash Availment Authority (NCAA)
e. Cash Disbursement Ceiling (CDC)
Notice of Cash Allocation (NCA)
The NCA is an authority issued by the DBM to central, regional and provincial offices and operating units to
cover their cash requirements. The NCA specifies the maximum amount of cash that can be withdrawn from a
government servicing bank in a certain period.
Tax Remittance Advice (TRA)
The TRA is used to recognize: (1) in the books of national government agencies, the constructive remittance
to BIR and BOC of taxes and customs duties withheld, and the constructive receipt of NCA for those taxes and
customs duties; (2) in the books of the BIR and BOC, the constructive receipt of tax revenue and customs
duties; and (3the books of the BTr, the construct the taxes and custom.
Non-Cash Availment Authority (NCAA)
The NCAA is the authority issued by the DBM to agencies to cover the liquidation of their actual obligations
incurred against available allotments for availment of proceeds from loans/grants through supplier's
credit/constructive cash.
Cash Disbursement Ceiling (CDC)
The CDC is the disbursement authority issued by the DBM to agencies with foreign operations allowing them
to use the income collected by their Foreign Service Posts to cover their operating requirements.
Basic Requirements & Certifications for Disbursements
Budget Officer-certifies the availability of allotment.
Chief Accountant - certifies the availability of funds and the completeness of the supporting documents.
Head of the Requesting Unit - certifies the necessity and legality of disbursements.
Head of Agency-approves all Disbursement Vouchers (DVS) and Payroll.

Modes of Disbursements
• Check
• Cash
• Cashless payments:
-Advice to Debit Account (ADA) -Electronic Modified Disbursement System (eMDS)
-Cashless Purchase Card System (Credit Card)
-Non-Cash Availment Authority DOVE ACCTO & ACCTO FOR (NCAA)
-Tax Remittance Advice (TRA)

Disbursement through check

 MDS CHECK

Asset/Expense/Liability Account

Cash Modified Disbursement xxx

System (MDS), Regular xxx

Commercial Check

Asset/Expense/Liability Account

Cash in Bank-Local xxx

Currency, Currency Account xxx

Disbursement through Cash

Advances for/to … (Appropriate Account) xxx

Cash – Modified Disbursement

System (MDS), Regular
To record the grant of cash advances

Expenses (Appropriate Account) xxx

Advances for/to … (Appropriate Account)
To record the liquidation of cash advances

Disbursement through Advice to Debit Account (ADA)

Accounts Payable
Cash – Modified Disbursement
System (MDS), Regular
To recognize payment of payable to suppliers/contractors
Through AD

Disbursements through electronic Modified Disbursement System (eMDS)

The eMDS is like the ADA except that disbursements are made directly from the accounts of the BTr that are
maintained with the Land Bank of the Philippines (LBP). Agencies subscribed under LBP's eMDS can make
online disbursements for selected transactions.

Disbursements through Cashless Purchase Card (CPC) System

Disbursements under the CPC System are made through the use of an electronic card (Le., credit card).
 Office Supplies Inventory
Accounts Payable
To recognize purchase of office supplies through CPC

Accounts Payable
Cash – Modified Disbursement
System (MDS), Regular
To recognize settlement of CPC billing statement

Disbursement through Non – Cash Availment Authority

Books of Entity A Books of BTr

Communication Equipment 1M
Accounts Payable 1M
To recognize receipt of PPE procured through
Direct payment scheme

Accounts Payable 1M Subsidy to NGA’s

Subsidy from National Gov’t. 1M Loans Payable Foreign
To recognize of NCAA and payment of payable To recognize the replenishment
Made to AGSB negotiated MDS
Payments on account

Disbursements through Tax Remittance Advice (TRA)

Books of Entity A

Cash Tax Remittance Advice 10,000

Subsidy from National Gov’t. 10,000
To recognize the constructive receipt of
NCA for TRA

Due to BIR
Cash Tax Remittance Advice
To recognize constructive remittance of taxes withheld to the
BIR through TRA

Books of BIR Books of BTr

Cash – TRA 10,000 Subsidy to NGA’s 10,000

Income Tax 10,000 Cash – TRA 10,000
To recognize constructive receipt of To recognize constructive receipt
Taxes remitted by National Gov’t. Of remittances of taxes by NGA
Agencies (NGA’s) through TRA Through TRA

Disallowances

Disallowances refer to expenditures made by an agency that are subsequently invalidated or disallowed by
the COA because they are found to be irregular, unnecessary, excessive, extravagant or unconscionable.
Disallowances are recorded in the books of accounts only when they become final and executory.

salaries and bonus.; •P/L ratio of 60:40. The partnership

D. 1,131,600 1 earned profit of ₱200,000 before salaries and bonus.
0. A and B’s partnership agreement provides the How much was B’s share?
following: •Annual salaries of ₱96,000 for A and A. 124,000
₱60,000 for B. ; •10% bonus to A, based on profit after B. 96,000
C. 112,000 B. $10,000
D. 76,000 C. $50,000
D. $100,000
11. Under the “cost-to-cost” method, the percentage of
completion may be computed as Jones and Smith formed a partnership with each
A. Total costs incurred to date multiplied by the partner contributing the following items: Assume that
Estimated total costs to complete for tax purposes Jones and Smith agree to share equally
B. Total costs incurred to date divided by the Estimated in the liabilities assumed by the Jones and Smith
total costs to complete partnership.
C. Total costs incurred to date multiplied by the total 5. Refer to the above information. What is each
costs to complete partner's tax basis in the Jones and Smith partnership?
D. Total costs incurred to date divided by the sum of
Total costs incurred to date and Estimated costs to
complete

11. How much is the profit recognized in 20x2?

A. Option A
B. Option B
C. Option C
D. Option D

A. 84,000 5. Refer to the above information. What is the balance

B. 82,200 in each partner's capital account for financial
C. 76,500 accounting purposes?
D. 77,400 6.

1. A partnership is a(n): I. accounting entity. II. taxable

entity.
A. I only
B. II only A. Option A
C. Neither I nor II B. Option B
D. Both I and II C. Option C
D. Option D
2. A partner's tax basis in a partnership is comprised of
which of the following items? I. The partner's tax basis 7. Griffin and Rhodes formed a partnership on January
of assets contributed to the partnership. II. The amount 1, 2009. Griffin contributed cash of $120,000 and
of the partner's liabilities assumed by the other Rhodes contributed land with a fair value of $160,000.
partners. III. The partner's share of other partners' The partnership assumed the mortgage on the land
liabilities assumed by the partnership. which amounted to $40,000 on January 1. Rhodes
originally paid $90,000 for the land. On July 31, 2009,
the partnership sold the land for $190,000. Assuming
Griffin and Rhodes share profits and losses equally, how
A. I plus II minus III much of the gain from sale of land should be credited to
B. I plus II plus III Griffin for financial accounting purposes?
C. I minus II plus III A. $0
D. I minus II minus III B. $15,000
C. $35,000
4. In the ABC partnership (to which Daniel seeks D. $45,000
admittance), the capital balances of Albert, Bert, and
Connell, who share income in the ratio of 5:3:2 are: 3. 7. Which of the following accounts could be found in
Based on the preceding information, if no goodwill or the general ledger of a partnership?
bonus is recorded, how much should Daniel invest for a
20 percent interest?
A. $400,000
B. $200,000
C. $300,000 8.
D. $250,000 A. Option A
B. Option B
C. Option C
D. Option D
4. Based on the preceding information, what amount of
goodwill will be recorded if Daniel invests $450,000 for
a one-third interest?
A. $0
9. Which of the following accounts could be found in 23. When a new partner is admitted into a partnership
the PQ partnership's general ledger? I. Due from P II. P, and the new partner receives a capital credit greater
Drawing III. Loan Payable to Q than the tangible assets contributed, which of the
A. B I, III following explains the difference? I. The old partners'
C. II, III goodwill is being recognized. II. The new partner's
D. I, II, and III goodwill is being recognized.
A. I only
16. Refer to the above information. Which statement B. II only
below is correct if a new partner receives a bonus upon C. Either I or II
contributing assets into the partnership? D. Both I and II
A. B < A and D = C - A
B. C B > A and D = C + A 24. When a new partner is admitted into a partnership
C. A = B and A = D + C and the capital of the old partners decreases, which of
D. B > A and C = D + A the following explains the reason for the decrease? I.
Undervalued liabilities were written up to their fair
17. Refer to the above information. Which statement values. II. Undervalued assets were written up to their
below is correct if the old partners receive a bonus upon fair values.
the contribution of assets into the partnership by a new A. I only
partner? B. II only
A. B < A and D = C - A C. Both I and II
B. B + A and D > C + A D. Neither I nor II
C. B < A and D = C + A
D. B > A and D = C + A 25. When a partner retires from a partnership and the
retiring partner is paid more than the capital balance in
18. Refer to the above information. Which statement her account, which of the following explains the
below is correct if goodwill of the old partners is difference?
recognized upon the contribution of assets into the I. The retiring partner is receiving a bonus from the
partnership by a new partner? other partners.
A. B = A and D < C + A II. The retiring partner's goodwill is being recognized.
B. B = A and D > C + A A. I only
C. B < A and D = C + A B. II only
D. B > A and D < C + A C. Either I or II
D. Neither I nor II
19. Refer to the above information. Which statement
below is correct if a new partner purchases an interest 26. When the old partners receive a bonus upon
in capital directly from the old partners? admission of a new partner into a partnership, the
A. C < D bonus is allocated to: I. all the partners in their profit
B. C = D and loss sharing ratio. II. the existing partners in their
C. C = D and B = A profit and loss sharing ratio.
D. C < D and B = A A. I only
B. II only
21. When a partnership is formed, noncash assets C. Either I or II
contributed by partners should be recorded: I. at their D. Neither I nor II
respective book values for income tax purposes. II. at
their respective fair values for financial accounting 27. When a new partner is admitted into a partnership
purposes. and the old partners' goodwill is recognized, the
A. I only goodwill is allocated to: I. all the partners in their profit-
B. II only and-loss-sharing ratio. II. the old partners in their profit
C. Both I and II and loss sharing ratio.
D. Neither I nor II A. I only
B. II only
22. When a new partner is admitted into a partnership C. Either I or II
and the new partner receives a capital credit less than D. Neither I nor II
the tangible assets contributed, which of the following
explains the difference? I. The new partner's goodwill In the RST partnership, Ron's capital is $80,000, Stella's
has been recognized. II. The old partners received a is $75,000, and Tiffany's is $50,000. They share income
bonus from the new partner. in a 3:2:1 ratio, respectively. Tiffany is retiring from the
A. I only partnership. Each of the following questions is
B. II only independent of the others.
C. Either I or II
D. Neither I nor II 28. Refer to the above information. Tiffany is paid
$60,000, and no goodwill is recorded. In the journal
entry to record Tiffany's withdrawal:
A. Tiffany, Capital will be credited for $60,000.
B. Ron, Capital will be debited for $5,000.
C. Stella, Capital will be debited for $4,000.
D. Cash will be debited for $60,000.

29. Refer to the above information. Tiffany is paid

$60,000, and no goodwill is recorded. What is the Ron's
A. Option A
capital balance after Tiffany withdraws from the
B. Option B
partnership?
C. Option C
A. $74,000
D. Option D
B. $71,000
C. $75,000
35. Refer to the information provided above. David
D. $86,000
directly purchases a one-fifth interest by paying Allen
$34,000 and Daniel $10,000. The land account is
30. Refer to the above information. Tiffany is paid
increased before David is admitted. By what amount is
$56,000, and all implied goodwill is recorded. What is
the land account increased?
the total amount of goodwill recorded?
A. $40,000
A. $0
B. $10,000
B. $6,000
C. $36,000
C. $30,000
D. $20,000
D. $36,000
36. Refer to the information provided above. David
In the AD partnership, Allen's capital is $140,000 and
directly purchases a one-fifth interest by paying Allen
Daniel's is $40,000 and they share income in a 3:1 ratio,
$34,000 and Daniel $10,000. The land account is
respectively. They decide to admit David to the
increased before David is admitted. What are the capital
partnership. Each of the following questions is
balances of Allen and Daniel after David is admitted into
independent of the others.
the partnership?
31. Refer to the information provided above. What
amount will David have to invest to give him one-fifth
percent interest in the capital of the partnership if no
goodwill or bonus is recorded?
A. $60,000
B. $36,000 A. Option A
C. $50,000 B. Option B
D. $45,000 C. Option C
D. Option D
32. Refer to the information provided above. Assume
that David invests $50,000 for a onefourth interest. 37. Refer to the information provided above. David
Goodwill is to be recorded. The journal to record David's invests $40,000 for a one-fifth interest in the total
admission into the partnership will include: capital of $220,000. The journal to record David's
A. a credit to cash for $50,000. admission into the partnership will include:
B. a debit to goodwill for $7,500. A. a credit to Cash for $40,000.
C. a credit to David, Capital for $60,000. B. a debit to Allen, Capital for $3,000.
D. a credit to David, Capital for $50,000. C. a credit to David, Capital for $40,000.
D. a credit to Daniel, Capital for $1,000.
33. Refer to the information provided above. Allen and
Daniel agree that some of the inventory is obsolete. The 38. Refer to the information provided above. David
inventory account is decreased before David is invests $40,000 for a one-fifth interest in the total
admitted. David invests $40,000 for a one-fifth interest. capital of $220,000. What are the capital balances of
What is the amount of inventory written down? Allen and Daniel after David is admitted into the
A. $4,000 partnership?
B. $20,000
C. $15,000
D. $10,000
34. Refer to the information provided above. Allen and
Daniel agree that some of the inventory is obsolete. The
inventory account is decreased before David is
A. Option A
admitted. David invests $40,000 for a one-fifth interest.
B. Option B
What are the capital balances of Allen and Daniel after
C. Option C
David is admitted into the partnership?
D. Option D
39. Refer to the information provided above. David during 2008. During 2008, Shue withdrew $240,000 as
invests $50,000 for a one-fifth interest. What amount of withdrawals and contributed equipment valued at
goodwill will be recorded? $50,000 to the partnership. What was the net income of
A. $20,000 the Financial Brokers Partnership for 2008?
B. $4,000 A. $633,334
C. $40,000 B. $466,666
D. $15,000 C. $300,000
D. $190,000
40. Which of the following observations is true of an S
corporation? 46. Transferable interest of a partner includes all of the
A. It elects to be taxed in the same manner as a following except:
corporation. A. the partner's share of the profits and losses of the
B. It does not have the burden of double taxation of partnership.
corporate income. B. the right to receive distributions.
C. Its shareholders have personal liability for the C. the right to receive any liquidating distribution.
corporation's obligations. D. the authority to transact any of the partnership's
D. Its primary income source should be passive business operations.
investments.
LO1 1. When the bankruptcy court grants an order for
41. A limited liability company (LLC): I. is governed by relief
the laws of the state in which it is formed. II. provides a. creditors may not seek payment for their claims
liability protection to its investors. III. does not offer directly from the debtor corporation.
pass-through taxation benefits of partnerships. b. the reorganization plan was accepted by creditors
A. Both I and III. having at least one-half of the total number of claims
B. III and the claims represent at least two-thirds of the total
C. Both I and II amount owed.
D. I, II, and II c. the bankruptcy court confirms that the reorganization
plan is fair and equitable to creditors.
42. If A is the total capital of a partnership before the d. the court discharges the debtor except for those
admission of a new partner, B is the total capital of the claims provided for in the reorganization plan.
partnership after the admission of the new partner, C is
the amount of the new partner's investment, and D is LO1 2. Which of the following must approve a Chapter
the amount of capital credited to the new partner, then 11 plan?
there is: a. The organization’s management.
A. goodwill to the new partner if B > (A + C) and D < C. b. The assigned trustee.
B. goodwill to the old partners if B = A + C and D > C. c. The entity’s stockholders.
C. a bonus to the new partner if B = A + C and D > C. d. The court and the creditors.
D. neither bonus nor goodwill if B > (A + C) and D > C.
LO1 3. When the accounting equation of a corporation
43. The terms of a partnership agreement provide that computes a negative ownership position, because
one of the partners is to receive a salary allowance of liabilities are greater than assets, the firm is
$30,000, plus a bonus of 20 percent of income after a. a distressed corporation.
deduction of the bonus and the salary allowance. If b. a bankrupt corporation.
income is $150,000, the bonus should be: c. insolvent in the equity sense.
A. $18,000 d. insolvent in the bankruptcy sense.
B. $20,000
C. $24,000 LO1 4. A bankruptcy petition filed by a firm’s creditors is
D. $30,000 a. a Chapter 7 petition.
b. a petition for liquidation.
44. The partnership of X and Y shares profits and losses c. an involuntary petition.
in the ratio of 60 percent to X and 40 percent to Y. For d. a voluntary petition.
the year 2008, partnership net income was double X's
withdrawals. Assume X's beginning capital balance was
$80,000, and ending capital balance (after closing) was
$140,000. Partnership net income for the year was: A.
$120,000.
B. $300,000.
C. $500,000.
D. $600,000.
45. Shue, a partner in the Financial Brokers Partnership,
has a 30 percent share in partnership profits and losses.
Shue's capital account had a net decrease of $100,000
Transactions between and among the partners are*
1/1

Recorded in the partnership books

Not recorded in the partnership books
Either a or b
Neither a nor b

ABC Co. established a branch in Lipa City. On December 31, 2009, the reciprocal
accounts are balances. On December 31, 2010, the home office account has an
unadjusted balance of P100,000. The following reconciling items are discovered
by the home ABC Co;
i. Lipa Branch collected the receivables of Ibaan branch worth P20,000 but failed
to inform the home office.
ii. The home office paid Lipa’s payables worth P10,000 but failed to inform the
branch.
iii. Inventory worth P30,000 intended to be delivered to San Jose Branch was
delivered to Lipa branch which was retained by the latter.
iv. Inventory worth P40,000 intended to be delivered to Lipa branch was delivered
to Ibaan branch which was retained by the latter.
v. The branch received credit memo from home office amounting to P10,000
which was credited twice by the branch.
vi. The branch’s net loss amounting to P20,000 was debited by the Home office to
investment in branch.
If the home office receives debit memo from the branch, the home office shall
record it in its separate statement of financial position by
*
2/2

a. Increasing the investment in branch account

b. Decreasing the investment in branch account
c. Debiting the investment in branch account
d. Disclosure

*
2/2
B
A
C
D

The Carly Company owns 75% of The Halley Company. The following figures are
from their separate financial statements:Carly: Trade receivables P1,040,000,
including P30,000 due from Halley. Halley: Trade receivables P215,000, including
P40,000 due from Carly. What figure should appear for trade receivables in Carly's
consolidated statement of financial position?*
1/1

1,215,000
1,225,000
1,2255,00
1,185,000

*
2/2

A
D
C
B

1. Which of the following principles is not in accordance with the Basic

Government Accounting and Budget Reporting Principles under the GAM for
NGAs?
*
1/1

e. fund cluster accounting

a. modified accrual basis of accounting in accordance with the PPSAS
b. budget basis for presentation of budget information in the financial statements (FSs) in accordance with
PPSAS 24
c. RCA prescribed by COA
d. financial statements based on both accounting and budgetary records

If a partner is insolvent, his personal properties shall first be distribute*

0/1

A. to partnership creditors.
B. to the partners by way of additional contributions when the assets of the partnership were insufficient to
settle all obligations.
C. to partnership and separate creditors in the ratio of their loan exposures.
D. to separate creditors.

1. Which of the following is not one of the registries maintained by a

government entity?
*
1/1

a. Registries of Journals and Ledgers

e. All of these are maintained by a government entity
d. Registries of Budget, Utilization and Disbursements
b. Registry of Appropriations and Allotments
c. Registries of Allotments, Obligations and Disbursements

On January 15, 20x5, Bella Vista Company enters into a contract to build custom
equipment for ABC Carpet Company. The contract specified a delivery date of
March 1. The equipment was not delivered until March 31. The contract required
full payment of P75,000 30 days after delivery. His contract should be:
*
1/1

a. recorded on January 15, 20x5.

c. recorded on March 31, 20x5.
b. recorded on March 1, 20x5.
d. recorded on April 30, 20x5.

1. Under this approach to budgeting, several parties participate in the budget

preparation, starting from the lowest levels of the government up to the highest
levels.
*
1/1

a. Bottoms-up budgeting
b. Zero-based budgeting
c. Incremental budgeting
d. Bottom-up budgeting

*
2/2
D
B
C
A

A partner who contributes his work, labor or industry to the common fund of the
partnership is called
*
1/1

A. limited partner.
B. capitalist partner.
C. industrial partner.
D. managing partner.

1. The NGAs are responsible for

*
1/1

b. implementing the national budget with the goal of attaining the nation’s socio-economic objectives.
c. receiving and keeping national funds and managing and controlling the disbursements thereof.
d. directly implementing the projects of, and performing the functions delegated by, the government.
a. promulgating accounting and auditing rules and regulations.

After the incurrence of obligations, the next step in the budget cycle is
*
1/1

c. Appropriation
b. Disbursement
d. Disbursement authority
a. Allotment

A 1:3:2 ratio is the same as

*
1/1

B. 1/6; 1/2; 1/3.

C. 20%; 50%; 30%.
D. 1/10; 3/10; 2/10.
A. 1/10; 3/10; 2/10.

1. No journal entry is made for the receipt of this type of disbursement

authority.
*
1/1

b. NCAA
a. NCA
d. None of these.
c. CDC

The estimated recovery of partially secured creditors is equal to*

1/1

the realizable value of the assets pledged minus the excess amount multiplied by the estimated recovery
percentage.
the realizable value of the assets pledged plus the excess amount multiplied by the estimated recovery
percentage.
their claims multiplied by the estimated recovery percentage.
any of these

As of December 31, the books of AME Partnership showed capital balances of: A –
P40,000; M – P25,000; and E – P5,000. The partners’ profit and loss ratio was
3:2:1, respectively. The partners decided to dissolve and liquidate. They sold all
the non-cash assets for P37,000 cash. After settlement of all liabilities amounting
to P12,000, they still have P28,000 cash left.
The loss on realization of the non-cash assets was
*
1/1

A. 40,000.
B. 42,000.
C. 44,000.
D. 45,000.

A liquidation differs from a dissolution; in a liquidation

*
1/1

A. assets may be revalued.

B. the business will not continue.
C. there may be an adjustment of partners' capital accounts.
D. gains and losses are distributed according to the partnership agreement.

If a new partner acquires partnership interest directly from the partners rather
than from the partnership,*
1/1

no entry is required.
the existing partnership is liquidated.
the partnership assets should not be revalued because this type of transaction does not result to partnership
dissolution.
the existing partners’ capital accounts are reduced and the new partner’s capital account is increased.

1. A government entity records a transaction by debiting an account with a

Revised Chart of Account (RCA) Code that starts with “1” and crediting an
account with an RCA Code that starts with “4.” This transaction is most likely a
*
1/1
b. remittance of collection to the National Treasury.
a. constructive remittance of taxes withheld to the BIR through TRA.
d. receipt of inter-agency fund transfer.
c. payment of accounts payable.

In May 2020, it was determined that it is necessary to complete the work in

process of Wild West Corporation. To complete the work in process, P10,000 book
value of raw materials and supplies and P10,000 conversion cost will be required.
When completed, these goods will probably sell for approximately P50,000. The
raw materials, which have a book value of P40,000, have an estimated total
realizable value of P20,000. What is the estimated amount that will become
available for unsecured creditors as a result of the realization of the work in
process?*
1/1

A. 50,000
B. 35,000
C. 30,000
D. 0

1. According to P.D. 1445, government entities shall acknowledge receipts of

revenue
*
1/1

a. through temporary receipts; provided a prior approval by COA is obtained.

c. through duplicate copies which shall not be the exact copies of the original.
d. through pre-numbered official receipts.
b. through the issuance of properly endorsed checks.

1. A government entity remitting collections to the BTr will debit this account
to record the remittance.
*
1/1

a. Cash-Treasury/Agency Deposit, Regular

d. Subsidy from National Government
c. Cash-Modified Disbursement System (MDS), Regular
b. Cash – Collecting Officers

The ABC Partnership reports net income of P60,000. If partners A, B, and C have
income ratio of 50%, 30%, and 20%, respectively. What is the share of Partner C
from the income of the partnership, if he was given a capital ratio of 25%?*
1/1

A. 30,000
B. 12,000
C. 18,000
D. 15,000

*
2/2
A
C
D
B

When allocating a partnership loss to the partners, which of the following is

provided first?*
1/1

Bonuses to partners
Salaries
Interest on the capital contribution of an industrial partner
All of these

1. The basis of accounting required by the GAM for NGAs is

*
1/1

d. Accrual basis
b. Modified accrual basis
c. Cash basis
a. Budget basis

Dean, Inc. owns 100% of Roy Corporation, a consolidated subsidiary, and 80% of
Wall, Inc., an unconsolidated subsidiary at 12/31. On the same date, Dean has
receivables of P200,000 from Roy and P175,000 from Wall. In its 12/31
consolidated balance sheet, Dean should report accounts receivable from
investees at*
1/1

175,000
360,000
35,000
304,000

R and J formed a partnership. Although R and J contributed equal amounts of

cash, it was agreed that the initial credit to R’s capital account should be greater
than that of J. If the bonus method is used, which of the following statements is
correct?*
1/1

R capital bonus is given to J.

The initial capital of the partnership is equal to the sum of R and J’s contributions.
Partner J’s account is not affected by the agreement.
Goodwill must be recorded.

1. This accounting concept is necessary so that users can use information in

the financial statements in noting differences and similarities between those
information presented and information from other sources that the user may
have.
*
1/1

d. Feedback value or confirmatory value

a. Financial statement analysis and ratios
b. Understandability
c. Comparability

A 1:3:2 ratio is the same as

*
1/1

C. 20%; 50%; 30%.

B. 1/6; 1/2; 1/3.
D. 1/10; 3/10; 2/10.
A. 1/10; 3/10; 2/10.

A, B, and C decided to form ABC Partnership. It was agreed that A will contribute
an equipment with assessed value of P100,000 with historical cost of P800,000
and accumulated depreciation of P600,000. B will contribute a land and building
with book value of P1,200,000 and fair value of P1,500,000. The land and building
is subject to a mortgage payable amounting to P300,000 to be assumed by the
partnership.

The partners agreed that B will have 60% capital interest in the partnership. They
agreed that C will contribute sufficient cash to the partnership. A day after the
partnership formation, the equipment was sold for P300,000.
What is the total agreed capitalization of the ABC Partnership?
*
1/1

A. 1,500,000
B. 2,000,000
C. 2,500,000
D. 3,000,000

1. The President’s explanation of the country’s fiscal policy and budget

priorities is contained in a document called the
*
1/1

c. President’s Fiscal Policy and Priorities

b. President’s Budget Message
a. National Expenditure Program
d. Budget of Expenditures and Sources of Financing

At December 31, 2012, Grey, Inc. owned 90% of Winn Corp., a consolidated
subsidiary, and 20% of Carr Corp., an investee over which Grey cannot exercise
significant influence. On the same date, Grey had receivables of P300,000 from
Winn and P200,000 from Carr. In its December 31, 2012 consolidated balance
sheet, Grey should report accounts receivable from affiliates of:*
1/1

175,000
340,000
35,000
200,000

Liabilities in the statement of affairs are classified into*

1/1

Unsecured liabilities with priority

Fully secured creditors.
Partially secured creditors
Unsecured liabilities without priority
All of these

Windsor Windows manufactures and sell custom storm windows for enclosed
porches, Windsor also provides installation service for the windows. The
installation process does not involve changes in the windows, so this service can
be provided by other vendors. Windsor enters into the following contract on June
1, 20x5, with a local homeowner. The customer purchases windows for a price of
P3,500 and chooses Windsor to do the installation. Windsor charges the same
price for the windows irrespective of whether it does the installation or not. The
price of the installation service is estimated to have a fair value of P900. The
customer pays Windsor P3,000 (which equals the fair value of the windows, which
have a cost of P1,700) upon delivery and the remaining balance upon installation
of the windows. The windows are delivered on August 1, 20x5 Windsor completes
installation on September 15, 20x5, and the customer pays the balance due.
(Round amounts to nearest peso).
How many performance obligations exist in this contract on June 1, 20x5?
*
2/2

a. 0
c. 2
b. 1
d. 3

A and B’s partnership agreement provides the following: • Annual salaries of

₱96,000 for A and ₱60,000 for B. ; •10% bonus to A, based on profit after salaries
and bonus.; •P/L ratio of 60:40. The partnership earned profit of ₱200,000 before
salaries and bonus. How much was B’s share?*
1/1

124,000
96,000
112,000
76,000

Thomas Consultants provided Bran Construction with assistance in implementing

various cost-savings initiatives. Thomas’ contract specifies that it will receive a
flat fee of P50,000 and an additional P20,000 if Bran reaches a pre-specified
target amount of cost savings. Thomas estimates that there is a 20% chance that
Bran will achieve the cost savings target.
Assuming Thomas uses that expected value as its estimate of variable
consideration, calculate the transaction price.
*
1/1

a. P20,000
c. P54,000
b. P50,000
d. P70,000

1. A government entity recognizes revenue from exchange or non-exchange

transactions. In which of the following transactions does a government entity
need not recognize revenue?
*
1/1

d. Receipt of a pledge.
b. Receipt of an unconditional grant from a foreign government.
a. Exchange of goods or services of dissimilar nature and value.
c. Receipt of equipment as donation from a good-hearted, private individual.

“Assets realized” is placed on which side of a statement of realization and

liquidation?*
1/1

credit side, measured at realizable value.

credit side, measured at actual net proceeds from sale
debit side, measured at book value
no side

1. No journal entry is made for a disbursement under this mode of

disbursement.
*
1/1

c. eMDS
b. CPC
d. None of these
a. LDDAP-ADA

On January 1, 20x1, A and B decided to liquidate their partnership. As of this

date, their capital balances were ₱492,000 and ₱984,000, respectively. The
partners share in profits and losses on a 60:40 ratio. Before liquidation, the
partnership had ₱98,400 cash and ₱147,600 liabilities. The partnership incurred
loss of ₱590,400 on the sale of non-cash assets. A is solvent but B is insolvent.
How much was the carrying amount of the non-cash assets?*
1/1

1,746,600
1,672,800
1,525,200
1,131,600

1. After the budget call, budget hearings are made whereby agencies defend
their proposed programs and expenditures for the upcoming year before the
*
1/1

a. COA
c. Congress
d. BTr
b. DBM

1. What is the legal basis of the COA in promulgating the GAM for NGAs?
*
1/1
c. Article IX-D, Section 2 par. (2) of the 1987 Constitution of the Republic of the Philippines
a. Revised Penal Code, Art. 217
b. State Audit Code of the Philippines, P.D. No. 1445, Sec. 109
d. R.A. 9298

1. This accounting concept is necessary so that users can use information in

the financial statements in noting differences and similarities between those
information presented and information from other sources that the user may
have.
*
1/1

b. Understandability
d. Feedback value or confirmatory value
c. Comparability
a. Financial statement analysis and ratios

On January 15, 20x5, Bella Vista Company enters into a contract to build custom
equipment for ABC Carpet Company. The contract specified a delivery date of
March 1. The equipment was not delivered until March 31. The contract required
full payment of P75,000 30 days after delivery. His contract should be:
*
1/1

a. recorded on January 15, 20x5.

c. recorded on March 31, 20x5.
b. recorded on March 1, 20x5.
d. recorded on April 30, 20x5.

It refers to the termination of business operations whereby an entity’s assets are

disposed of in order to settle all of the claims on the entity’s assets.*
1/1

solidification
aquatation
dissolution
liquidation

It refers to the implementation of a business plan to restructure or rehabilitate a

corporation with the hopes of increasing company value. In most cases, it
involves changing the entity’s capital structure.*
1/1

Transformation
Mutation
Reorganization
Translation

If the partnership agreement does not specify how income is to be allocated,

profits and loss should be allocated*
1/1

equally.
in proportion to the weighted average of capital invested during the period.
equitably so that partners are compensated for the time and effort expended on behalf of the partnership.
in accordance with their capital contributions.

1. This refers to charges for the use of cash or cash equivalents, or amounts
due to the entity.
*
1/1

a. Financial expenses
b. Personnel services
c. Interest income
d. Capital outlays

1. This account is debited when government entities remit collections to the

National Treasury.
*
1/1

c. Cash-Treasury/Agency Deposit, Regular

b. Cash-Collecting Officers
a. Cash-Modified Disbursement System (MDS), Regular
d. Cash-Tax Remittance Advice

Claims against partners' personal assets by creditors if the partnership can't pay
its debts refers to
*
1/1

A. liquidation.
B. dissolution.
C. mutual agency.
D. unlimited liability.

1. The receipt of a disbursement authority in the form of Non-Cash Availment

Authority (NCAA) is debited to which of the following accounts?
*
1/1

a. Cash-Constructive Income Remittance

c. Accounts Payable
d. Subsidy from National Government
b. Cash-Modified Disbursement System (MDS), Regular

1. Which of the following is not one of the Fundamental Principles for

Disbursement of Public Funds under the GAM for NGAs?
*
1/1

d. Fiscal responsibility shall, to the greatest extent, be assumed solely by the Head of the government agency.
a. No money shall be paid out of any public treasury or depository except in pursuance of an appropriation law
or other specific statutory authority.
c. Trust funds shall be available and may be spent only for the specific purpose for which the trust was created
or the funds received.
b. Government funds or property shall be spent or used solely for public purposes.

It is the termination of the business operations of the winding up of affairs.*

1/1

Dissolution
Liquidation
Incorporation
Division

As of December 31, the books of AME Partnership showed capital balances of: A –
P40,000; M – P25,000; and E – P5,000. The partners’ profit and loss ratio was
3:2:1, respectively. The partners decided to dissolve and liquidate. They sold all
the non-cash assets for P37,000 cash. After settlement of all liabilities amounting
to P12,000, they still have P28,000 cash left.

Assuming that any partner’s capital debit balance is uncollectible, the share of A
in the P28,000 cash for distribution would be
*
1/1

A. 19,000
B. 18,000
C. 17,800
D. 40,000

Which of the following statements is incorrect?*

1/1

No bonus is allocated to any partners when the partnership has incurred loss during the period.
Mr. R and Ms. S. formed a partnership. Mr. R contributed P500,000 cash, while. Ms. S will contribute her
services. Mr. R is an industrial partner, while Ms. S is a capitalist partner
No gain or loss is recognized in the partnership’s books when a new partner is admitted through direct
investment into the partnership.
If a new partner acquires partnership interest directly from the partners rather than from the partnership, the
existing partners’ capital accounts are reduced and the new partner’s capital account is increased.

In job-order costing payroll, taxes paid by the employee for factory employees are
commonly accounted for as:*
1/1

A. Direct labor cost

B. Manufacturing overhead cost
C. Indirect labor cost
D. Administrative cost

1. The “Cash – Treasury/Agency Deposit, Regular” account is used in which of

the following transactions?
*
1/1

b. Taxes withheld are remitted to the BIR.

c. A disbursement authority in the form of Cash Disbursement Ceiling is received.
d. Collections of revenue are remitted to the BTr.
a. Collections from customers are made through direct deposit in the entity’s account maintained with a
Government Servicing Bank (GSB).

1. The budget preparation in the Philippines

*
1/1

c. ends with the issuance of the “Bicam Version” by the Bicameral Committee.
b. uses a “zero-bottoms-up” approach.
d. uses a non-incremental approach
a. starts with the Budget Call from the BTr.

Total free assets in the statement of affairs can be computed as*

1/1

the sum of (a) excess of realizable value of assets pledged to fully secured creditors over the expected net
settlement amount of the fully secured liabilities and (b) total realizable value of assets not pledged as
collateral security
Total assets measured at realizable value less the sum of (a) unsecured creditors with priority, (b) fully secured
creditors, and (c) realizable value of asset pledged to partially secured creditors.
realizable value of total assets less unsecured liabilities with priority
all of these

A and B formed a partnership. Although A and B contributed equal amounts of

cash, it was agreed that the initial credit to A’s capital account should be greater
than that of B. If the bonus method is used, which of the following statements is
correct?*
1/1

A capital bonus is given to B.

The initial capital of the partnership is equal to the sum of A and B’s contributions.
Partner B’s account is not affected by the agreement.
Goodwill must be recorded

*
2/2

D
A
B
C

ABC Co. established a branch in Lipa City. On December 31, 2009, the reciprocal
accounts are balances. On December 31, 2010, the home office account has an
unadjusted balance of P100,000. The following reconciling items are discovered
by the home ABC Co;
i. Lipa Branch collected the receivables of Ibaan branch worth P20,000 but failed
to inform the home office.
ii. The home office paid Lipa’s payables worth P10,000 but failed to inform the
branch.
iii. Inventory worth P30,000 intended to be delivered to San Jose Branch was
delivered to Lipa branch which was retained by the latter.
iv. Inventory worth P40,000 intended to be delivered to Lipa branch was delivered
to Ibaan branch which was retained by the latter.
v. The branch received credit memo from home office amounting to P10,000
which was credited twice by the branch.
vi. The branch’s net loss amounting to P20,000 was debited by the Home office to
investment in branch.
What is the adjusted balance of reciprocal account on December 31, 2010?
*
2/2

a. P80,000
b. P90,000
c. P110,000
d. P120,000

*
2/2

C
A
B
D

1. Under responsibility accounting, a cost is considered controllable at a

given level of managerial responsibility if
*
1/1

d. all of these.
c. the cost is a fixed cost, such that its incurrence is reasonably certain.
b. the cost is non-recurring, can be measured with sufficient reliability and is not immaterial
a. the manager has the power to incur it within a given period of time.

*
2/2

A
B
D
C

A, B, and C decided to form ABC Partnership. It was agreed that A will contribute
an equipment with assessed value of P100,000 with historical cost of P800,000
and accumulated depreciation of P600,000. B will contribute a land and building
with book value of P1,200,000 and fair value of P1,500,000. The land and building
is subject to a mortgage payable amounting to P300,000 to be assumed by the
partnership.

The partners agreed that B will have 60% capital interest in the partnership. They
agreed that C will contribute sufficient cash to the partnership. A day after the
partnership formation, the equipment was sold for P300,000.
What is the capital credit of B in the ABC Partnership after the formation?
*
2/2

A. 900,000
B. 1,500,000
C. 1,400,000
D. 1,200,000

1. Which of the following events or transactions requires recording in the

books of accounts of a government entity?
*
1/1

b. Allotment
d. Incurrence of Obligation
c. Disbursement Authority
a. Appropriation
e. None of these

A, B, and C decided to form ABC Partnership. It was agreed that A will contribute
an equipment with assessed value of P100,000 with historical cost of P800,000
and accumulated depreciation of P600,000. B will contribute a land and building
with book value of P1,200,000 and fair value of P1,500,000. The land and building
is subject to a mortgage payable amounting to P300,000 to be assumed by the
partnership.

The partners agreed that B will have 60% capital interest in the partnership. They
agreed that C will contribute sufficient cash to the partnership. A day after the
partnership formation, the equipment was sold for P300,000.
What is the capital credit of A in the ABC Partnership after formation?
*
1/1

A. 100,000
B. 200,000
C. 300,000
D. 400,000

1. No journal entry is made for the receipt of this type of disbursement

authority.
*
1/1

a. NCA
d. None of these.
c. CDC
b. NCAA
A, B, and C decided to form ABC Partnership. It was agreed that A will contribute
an equipment with assessed value of P100,000 with historical cost of P800,000
and accumulated depreciation of P600,000. B will contribute a land and building
with book value of P1,200,000 and fair value of P1,500,000. The land and building
is subject to a mortgage payable amounting to P300,000 to be assumed by the
partnership.

The partners agreed that B will have 60% capital interest in the partnership. They
agreed that C will contribute sufficient cash to the partnership. A day after the
partnership formation, the equipment was sold for P300,000.
What is the cash to be contributed by C in the ABC Partnership?
*
1/1

A. 500,000
B. 600,000
C. 700,000
D. 800,000

The asset contributions of the partners to the partnership, and any related
liabilities assumed by the partnership, are initially recorded in the partnership
books at*
1/1

historical cost.
fair value.
carrying amount.
any of these

1. Which of the following is not one of the Fundamental Principles for

Disbursement of Public Funds under the GAM for NGAs?
*
1/1

d. Fiscal responsibility shall, to the greatest extent, be assumed solely by the Head of the government agency.
b. Government funds or property shall be spent or used solely for public purposes.
a. No money shall be paid out of any public treasury or depository except in pursuance of an appropriation law
or other specific statutory authority.
c. Trust funds shall be available and may be spent only for the specific purpose for which the trust was created
or the funds received.

1. The GAM for NGAs aims to update all of the following except
*
1/1

a. standards, policies, guidelines and procedures in accounting for government funds and property
b. coding structure and accounts
d. rules and regulations regarding the filing and payment of taxes by government employees
c. accounting books, registries, records, forms, reports and financial statements

ABC Co. established a branch in Lipa City. On December 31, 2009, the reciprocal
accounts are balances. On December 31, 2010, the home office account has an
unadjusted balance of P100,000. The following reconciling items are discovered
by the home ABC Co;
i. Lipa Branch collected the receivables of Ibaan branch worth P20,000 but failed
to inform the home office.
ii. The home office paid Lipa’s payables worth P10,000 but failed to inform the
branch.
iii. Inventory worth P30,000 intended to be delivered to San Jose Branch was
delivered to Lipa branch which was retained by the latter.
iv. Inventory worth P40,000 intended to be delivered to Lipa branch was delivered
to Ibaan branch which was retained by the latter.
v. The branch received credit memo from home office amounting to P10,000
which was credited twice by the branch.
vi. The branch’s net loss amounting to P20,000 was debited by the Home office to
investment in branch.
If the branch receives credit memo from the home office, the branch shall record
it in its separate statement of financial position by
*
2/2

a. Increasing the home office account

b. Crediting the home office account
c. Debiting the home office account
d. Disclosure

1. It is the expenditure authority derived from appropriation laws, government

ordinances, and other decisions related to the anticipated revenue or receipts for
the budgetary period.
*
1/1

a. Notice of Cash Allocation

c. Approved Budget
b. Allotment
d. General Appropriations Bill

ABC Co. established a branch in Lipa City. On December 31, 2009, the reciprocal
accounts are balances. On December 31, 2010, the home office account has an
unadjusted balance of P100,000. The following reconciling items are discovered
by the home ABC Co;
i. Lipa Branch collected the receivables of Ibaan branch worth P20,000 but failed
to inform the home office.
ii. The home office paid Lipa’s payables worth P10,000 but failed to inform the
branch.
iii. Inventory worth P30,000 intended to be delivered to San Jose Branch was
delivered to Lipa branch which was retained by the latter.
iv. Inventory worth P40,000 intended to be delivered to Lipa branch was delivered
to Ibaan branch which was retained by the latter.
v. The branch received credit memo from home office amounting to P10,000
which was credited twice by the branch.
vi. The branch’s net loss amounting to P20,000 was debited by the Home office to
investment in branch.
In the separate statement of financial position of the home office, the investment
in branch account shall be presented as
*
2/2

a. Liability
b. Equity
c. Asset
d. Income

1. These refer to transactions in which one entity receives assets or services,

or has liabilities extinguished, and directly gives approximately equal value to
another entity in exchange.
*
1/1

a. Exchange transactions
d. External events other than transfers
b. Non-exchange transactions
c. Non-reciprocal transactions

1. All of the above involves the physical transfer of cash except

*
1/1

d. Remittance of excess cash advance by an officer

a. Remittance of taxes through the Tax Remittance Advice
b. Remittance of collections of revenue to the National Treasury
c. Remittance of employee contributions to GSIS, Pag-IBIG and PhilHealth

Which of the following transactions or events does not affect the total assets of a
partnership?*
1/1

An old partner retires and his capital balance is settled by the partnership at a lower amount.
An incoming partner purchases interest from an existing partner.
A partnership is dissolved and its assets and liabilities are revalued to fair value.
A new partner is admitted in a partnership when he invested noncash asset to the partnership.

1. It refers to a fund which is available for any purpose other than those which
other funds have been designated to
*
1/1

c. Regular fund
b. Major fund
a. General fund
d. All-purpose fund

1. This accounting concept is necessary so that users can use information in

the financial statements in noting differences and similarities between those
information presented and information from other sources that the user may
have.
*
1/1

d. Feedback value or confirmatory value

a. Financial statement analysis and ratios
c. Comparability
b. Understandability

In a partnership liquidation, the assets of the partnership shall be applied lastly to

*
1/1
A. those owing to outside creditors.
B. those owing to the partners with respect to their share of the profits.
C. those owing to the partners with respect to their capital contributions.
D. those owing to inside creditors in the form of loans or advances for business expenses by the partners.

Debits to Cost of Goods Sold, typically represent the*

1/1

A. Transfer of completed items to finished Goods inventory

B. Costs of items sold.
C. Selling price of items sold.
D. The cost of goods manufactured.

On January 1,2011, Brendan, Inc. reports net assets of P760,000 although

(equipment with a four-year life) having a book value of P440,000 is worth
P500,000 and unrecorded patent is valued at P45,000. Brandon Corporation pays
P692,000 on that date for an 80 percent ownership in Brendan. If the patent is to
be written-off over a 10-year period, at what amount should it be reported on
consolidated statements at December 31, 2012?*
1/1

36,000
40,500
32,400
28,800

Accounting Formation
Problems with Solutions
PROBLEM 1
On April 30, 2022, Aira, Angelica and Angeline formed a partnership by combining their separate business
proprietorships. Aira contributed cash of P50,000. Angelica contributed property with a P36,000 carrying
amount, a P40,000 original cost, and P80,000 fair value. The partnership accepted responsibility for the
P35,000 mortgaged attached to the property. Angeline contributed equipment with a P30,000 carrying
amount, a P75,000 original cost, and P55,000 fair value. The partnership agreement specifies that profits and
losses are to be shared equally but is silent regarding capital contributions. Which partner has the largest
capital account balance at April 30, 2022?
A. Aira
B. Angelica
C. Angeline
D. All capital balances are equal.

SOLUTION:
Aira Angelica Angeline
Capital 50,000 45,000 55,000
(80,000-35,000) FV

PROBLEM 2
Christian, Diana and Ericka formed a partnership. Christian will contribute cash of P50,000 and his store
equipment that originally cost P60,000 with a second-hand value of P25,000. Diana will contribute P80,000 in
cash. Ericka, whose family sells computers, will contribute P25,000 cash and a brand new computer that cost
his family’s computer dealership P50,000 but with a regular selling price of P60,000. They agreed to share
profits and losses equally. Upon formation, what are the capital balances of the partners?
Christian Diana Ericka
a. 75,000 80,000 85,000
b. 80,000 80,000 80,000
c. 88,333 88,333 88,334
d. 110,000 80,000 75,000
SOLUTION:
Aira Angelica Angeline Total
Cash 50,000 80,000 25,000 155,000
Store 25,000 60,000 85,000
Equipmen
t
Total 75,000 80,000 85,000 240,000

PROBLEM 3
On January 1, 2023, James and Jay agreed to form a partnership contributing their respective assets and
equities subject to adjustments. On that date, the following were provided:
James Jay
Cash 28,000 62,000
Accounts 200,000 600,000
Receivable
Inventories 120,000 200,000
Land 600,000
Building 500,000
Furniture and 50,000 35,000
Fixtures
Intangible 2,000 3,000
Assets
Accounts 180,000 250,000
Payable
Other Liabilities 200,000 350,000
Capital 620,000 800,000

The following adjustments were agreed upon:

a. Accounts receivable of P20,000 and P40,000 are uncollectible in James and Jay’s respective books.
b. Inventories of P6,000 and P7,000 are worthless in James and Jay’s respective books.
c. Intangible assets are to be written off in both books.

What will be the capital balances of the partners after adjustments?

James Jay
a. 592,000 750,000
b. 600,000 700,000
c. 592,000 756,300
d. 600,000 750,000

SOLUTION:
James Jay
Capital ₱ 620,000 ₱ 800,00
Cash (20,000) 62,000
Accounts Receivable (20,000) (40,000)
Inventories (6,000) (7,000)
Intangible Assets (2,300) (3,000)
₱ 592,000 ₱ 750,000

James Jay
Capital 20,000 40,000
Accounts 20,000 40,000
Receivable

Capital 6,000 7,000

 Inventories 6,000 7,000

Capital 2,000 3,000

Intangible 2,000 3,000
Assets

PROBLEM 4

Mary admits Jane as a partner in the business. Balance sheet accounts of Mary just before the admission of
Jane show: Cash – P26,000; Accounts Receivable – P120,000; Merchandise Inventory – P180,000; and
Accounts Payable – P62,000. It was agreed that for purposes of establishing Mary’s interest, the following
adjustments be made: 1) an allowance for doubtful accounts of 3% of accounts receivable is to be
established; 2) merchandise inventory is to be adjusted upward by P25,000; and 3) prepaid expenses of
P3,600 and accrued liabilities of P4,000 are to be recognized.

If Jane is to invest sufficient cash to obtain 2/5 interest in the partnership, how much would Jane contribute to
the new partnership?
a. 176,000
b. 190,000
c. 95,000
d. 113,980

SOLUTION:
Mary
Cash 26,000
Accounts Receivable 120,000
Merchandise Inventory 180,000
Accounts Payable (62,000)
264,000

Unadjusted Capital ₱ 264,000

Allowance for Doubtful Accounts (3,600)
Merchandise Inventory 25,000
Prepaid Expense 3,600
Accrued Expense (4,000)
285,000
Divided by 60 %
475,000
Multiply by 40 %
Capital - Jane ₱ 190,000

a. Mary, Capital 3,600

Allowance for Doubtful 3,600
Account

b. Merchandise Inventory 25,000

Mary, Capital 25,000

c. Prepaid Expense 3,600

Mary, Capital 3,600

d. Mary, Capital 4,000

Accrued Liability 4,000
PROBLEM 5
A, B, and C decided to form ABC Partnership. It was agreed that A will contribute an equipment with assessed
value of P100,000 with historical cost of P800,000 and accumulated depreciation of P600,000. B will contribute
a land and building with book value of P1,200,000 and fair market value of P1,500,000. The land and building
is subject to a mortgage payable amounting to P300,000 to be assumed by the partnership.

The partners agreed that B will have 60% capital interest in the partnership. They agreed that C will contribute
sufficient cash to the partnership. A day after the partnership formation, the equipment was sold for P300,000.

A. What is the total agreed capitalization of the ABC Partnership?

a. 1,500,000
b. 2,000,000
c. 2,500,000
d. 3,000,000

SOLUTION:
Fair Market Value 1,500,000
Mortgage Payable (300,000)
1,200,000
Divided by: Capital Interest 60 %
Total Agreed Capital 2,000,000

B. What is the capital credit of A in the ABC Partnership after the formation?
a. 100,000
b. 200,000
c. 300,000
d. 400,000

SOLUTION:
Assessed Value 100,000
Historical Cost 800,000
Less: Accumulated Depreciation (600,000)
300,000

C. What is the capital credit of B in the ABC Partnership after the formation?
a. 900,000
b. 1,500,000
c. 1,400,000
d. 1,200,000

SOLUTION:
Fair Market Value 1,500,000
Mortgage Payable (300,000)
1,200,000

D. What is the cash to be contributed by C in the ABC Partnership?

a. 500,000
b. 600,000
c. 700,000
d. 800,000
SOLUTION:
Agreed Capital 2,000,000
A, Capital (300,000)
B, Capital (1,200,000)
 C, Capital 500,000
Partnership Operations
Problems with Solutions

Problem 1
In the calendar year 2022, the partnership of Arquero and Langit realized a net profit of P240,000. The capital
accounts of the partners show the following postings:

Arquero, Capital Langit, Capital

Debit Credit Debit Credit
January 1 P 120,000 P 80,000
May 1 P 20,000 P 10,000
July 1 20,000
August 1 10,000
October 1 10,000 5,000

If the profits are to be divided, how much will Arquero and Langit received based on the capital balances
ratio?
a. ratio of capital balances at the beginning of the year
b. ratio of capital balances at the end of the year
c. ratio of average capital balances
Solution:
Arquero, Capital
Months
Date Balances Unchanged Total
January 1 P120,000 4 480,000
May 1 100,000 3 300,000
August 1 110,000 2 220,000
October 1 100,000 3 300,000
Total 1,300,000
Divided by 12 months
Average Capital 108,333

Langit, Capital
Months
Date Balances Unchanged Total
January 1 P80,000 4 320,000
May 1 70,000 2 140,000
July 1 90,000 3 270,000
October 1 85,000 3 255,000
Total 985,000
Divided by 12 months
Average Capital 82,083

A. Ratio of capital balances at the beginning of the year

Arquero (120,000/200,000) x P240,000 144,000
Langit (80,000/200,000) x P240,000 96,000
Total 240,000

B. Ratio of capital balances at the end of the year

Arquero (100,000/185,000) x P240,000 129,730
Langit (85,000/185,000) x P240,000 110,270
Total 240,000

C. Ratio of Average Capital Balances

Arquero (108,333/190,416) x P240,000 136,543
Langit (82,083/190,416) x P240,000 103,457
Total 240,000

Problem 2
Perado and Mapalo formed a partnership in 2022. The partnership agreement provides for annual salary
allowances of P55,000 for Perado and P45,000 for Mapalo. The partners share profits equally and losses in a
60:40 ratio. The partnership had earnings of P80,000 for 2022 before any allowance to partners.
What amount of these earnings should be credited to each partner’s capital account?

Solution:
Perado Mapalo Total
Salary allowances 55,000 45,000 100,000
Loss after allowances (12,000) (8,000) (20,000)
Earnings credited to partners 43,000 37,000 80,000

Problem 3
Ambrocio, Hilar and Millares are partners with average capital balances during 2022 of P120,000, P60,000 and
P40,000, respectively. Partners receive 10% interest on their average capital balances. After deducting salaries
of P30,000 to Ambrocio, and P20,000 to Millares, the residual profit and loss is divided equally. In 2022, the
partnership sustained a P33,000 loss before interest and salaries to partners. By what amount should
Ambrocio’s capital account change?

Solution:
Ambrocio Hilar Millares Total
10% Interest on Average
Capital
120,000 x 10% 12,000
60,000 x 10% 6,000
40,000 x 10% 4,000 22,000
Salaries 30,000 20,000 50,000
Balance (Equally) (35,000) (35,000) (35,000) (105,000)
Total 7,000 (29,000) (11,000) (33,000)
Problem 4
If a partnership has net income of P44,000 and Partner Gabriel is to be allocated a bonus of 10% of income
after the bonus. What is the amount of bonus Partner Gabriel will receive?

Solution:
Net income with bonus 44,000
Net Income after the bonus (44,000/110%) 40,000
Bonus 4,000

Problem 5
Partners Ellamil and Vinluan have profit and loss agreement with the following provisions: salaries of P30,000
and P45,000 for Ellamil and Vinluan, respectively; a bonus to Ellamil of 10% of net income after salaries and
bonus; and interest of 10% on average capital balances of P20,000 and P35.000 for Ellamil and Vinluan,
respectively. One-third of any remaining profits will be allocated to Ellamil and the balance to Vinluan.

1) If the partnership had a net income of P22,000, how much should be allocated to Ellamil and Vinluan,
assuming that the provisions of the profit and loss agreement are ranked by order of priority starting with
salaries?

Solution:
Ellamil Vinluan Total
Salaries
(30,000/75,000) x P22,000 8,800
(45,000/75,000) x P22,000 13,200 22,000

2) If the partnership had a net income of P200,000, how much should be allocated to Ellamil and Vinluan?

Solution:
Ellamil Vinluan Total
Salaries 30,000 45,000 75,000
Bonus 11,364 11,364
10% Interest on Average
Capital
(20,000 x 10%) 2,000
 (35,000 x 10%) 3,500 5,500
Balance 36,045 72,091 108,136
79, 120,591 200,000
409

Net Income 200,000

Salaries (75,000)
Net Income with bonus 125,000
Net income (125,000/110%) (113,636)
Bonus 11,364

3) If the partnership had a net loss of P22,000, how much should be allocated to Ellamil and Vinluan?

Solution:
Ellamil Vinluan Total
Salaries 30,000 45,000 75,000
10% Interest on 2,000 3,500 5,500
Average Capital
Balance (34,167) (68,333) (102,500)
(2,167) (19,833) (22,000)

Problem 6
On October 31, 2022, Manlongat and Siapno formed a partnership by investing cash of P300,000 and
P200,000, respectively. The partners agreed to receive an annual salary allowance of P360,000, and to give
Manlongat a bonus of 20% of the net income after partners’ salaries and bonus.

If the profits after salaries and bonus are divided equally, the profits on December 31, 2022 after partners’
salaries but before bonus of Manlongat is P360,000, how much is the share of Manlongat in the profit?

Solution:
Manlongat Siapno Total
Salaries 60,000 60,000 120,000
Bonus 60,000 60,000
Balance 150,000 150,000 300,000
270,000 210,000 480,000

Net Income with salaries and bonus 480,000*

Salaries (120,000)
Net Income after salaries but with bonus 360,000
Net Income without bonus (360,000/120%) (300,000)
Bonus 60,000

Problem 7
Evangelista is trying to decide whether to accept a salary of P40,000 or salary of P25,000 plus a bonus of 10%
of net income after salaries and bonus as a means of allocating profit among partners. Salaries traceable to
the other partners are estimated to be P100,000. What amount of income would be necessary so that
Evangelista would consider choices to be equal?

Amount of bonus needed to equalize (40,000 – 25,000) 15,000

Net Income after bonus and salaries (15,000/10%) 150,000

Multiply by 110%
Net Income before bonus and salaries 165,000
Add: Salaries (100,000 + 25,000) 125,000
Net Income 290,000
Problem 8
Distor, Pit and Vino are capitalist partners and Bergonia, an industrial partner. The partnership reported a net
loss of P100,000. How much is the share of Bergonia in the reported net loss?
Answer:
In case there is an industrial partner, and there is no profit and loss sharing agreement, an
industrial partner shall not be liable for the losses.

Partnership Formation and Operations

Problems with Solutions
Activity 1

Problem 1
On January 2, 2022, Ericka, Myra and Stef formed a partnership. Ericka contributed cash of P100,000 and a
delivery equipment that originally costs him P120,000, but with a second hand value of P50,000. Myra
contributed P160,000 in cash. Stef, whose family sells office equipment, contributed P50,000 in cash and office
equipment that cost his family’s dealership P100,000 but with a regular selling price of P120,000. In 2022, the
partnership reported net income of P120,000.

On December 31, 2022, what would be the capital balance of the partners?

Ericka Myra Stef

Cash contributed P 100,000 P 160,000 P 50,000
Noncash contributed 50,000 120,000
Capital balances, beginning P 150,000 P 160,000 P 170,000
Distribution of net income
(150/480 x 120,000) 37,500
(160/480 x 120,000) 40,000
(170/480 x 120,000) 42,500
Capital balances, 12/31/2022 P 187,500 P 200,000 P 212,500

Problem 2
On January 1, 2022, A, B and C formed ABC Partnership with original capital contribution of P300,000,
P500,000 and P200,000. A is appointed as managing partner. During 2022, A, B and C made additional
investments of P500,000, P200,000 and 300,000, respectively. At the end of 2022, A, B and C made drawings
of P200,000, P100,000 and P400,000, respectively. At the end of 2022, the capital balance of C is reported at
P320,000.

The profit or loss agreement of the partners is provided below:

a. 10% interest on original capital contribution of the partners.
b. Quarterly salary of P40,000 and P10,000 for A and B, respectively.
c. Bonus to A equivalent to 20% of net income after interest and salary to all partners.
d. Remainder is to be distributed equally among partners.

Required:
1. What is C’s share in the partnership profit for the year ended December 31, 2022?

C’s capital balance, December 31, 2022 320,000

Add: C’s drawings at the end of 2022 400,000
Total 720,000
Less: C’s additional investment during 2022 P 300,000
C’s capital balance, January 1, 2022 200,000 500,000
C’s share in partnership profit, 2022 P 220,000

2. What is the partnership profit for the year ended December 31, 2022?

C’s share in profit for the year 2022 P 220,000

Less: C’s interest on original capital contribution 20,000
(200,000 x 10%)
Balance P 200,000
Multiply by number of partners 3
Remaining profit after interest,salary and bonus P 600,000
 Divide by 80% 80%
Net profit after salary and interest but before bonus P 750,000
Add total interest and salary (100,000 + 200,000) 300,000
Partnership profit for the year

3. What is the bonus given to A as managing partner for the year ended December 31, 2022?

Partnership profit for the year ended December 31, 2022 P 1,050,000
Less: Total interest and salary (100,000 + 200,000) 300,000
Net profit after salary and interest but before bonus P 750,000
Multiply by bonus percentage 20%
Bonus to A P 150,000

4. What is the capital balance of A on December 31, 2022?

A’s capital balance, January 1, 2022 P 300,000
Add: A’s additional investment during 2022 P 500,000
A’s share in partnership profit during 2022
(30,000 + 160,000 + 150,000 + 200,000) 540,000 1,040,000
Total P 1,340,000
Less: A’s drawings during 2022 200,000
A’s capital balance, December 31, 2022 1,140,000

5. What is the capital balance of B on December 31, 2022?

B’s capital balance, January 1, 2022 P 500,000

Add: B’s additional investment during 2022 P 200,000
B’s share in partnership profit during 2022
(50,000 + 40,000 + 200,000) 290,000 490,000
Total P 990,000
Less: B’s drawings during 2022 100,000
B’s capital balance, December 31, 2022 P 890,000
Partnership Dissolution
Problems with solutions

Problem 1
The following information pertains to ABC Partnership of Alonzo, Bryan, and Carlo:
Alonzo, Capital (2%) P
200,000
Bryan, Capital (30%) 200,000
Carlo, Capital (50%) 300,000

On this date, the partners agreed to admit Devine into the partnership. Assuming Devine purchased fifty
percent of the partners’ capital and pays P500,000 to the old partners, how would this amount be
distributed to them?

SOLUTION:
Alonzo Bryan Carlo
½ of the capital 100,000 100,000 150,000
Personal Profit 30,000 45,000 75,000
Total 130,000 145,000 225,000

PROBLEM 2
The following balance sheet is presented for the partnership of A, B, and C, who share profits and losses in the
ratio of 5:3:2.
Assets Liabilities and Capital
Cash 120,000 Liabilities 280,000
 Other 1,080,00 A, Capital 560,000
Assets 0
B, Capital 320,000
C, Capital 40,000
Total 1,200,00 Total 1,200,00
0 0

Assume that assets and liabilities are fairly valued on the balance sheet, and the partnership decided to admit
D as a new partner with a one-fifth interest and no bonus is to be recorded. How much should D contribute in
cash or other assets?

SOLUTION:
Total Capital of the Old Partners 920,000
4/5
Total Partnership Capital 1,150,000
1/5
Cash Investment of D 230,000

PROBLEM 3
The capital balances of DEA Partnership are: D, Capital – P60,000; E, Capital – P50,000; and A, Capital –
P40,000 and income ratios are: 5:3:2, respectively. The DEAR Partnership is formed by admitting R to the firm
with cash investment of P60,000 for a 25% interest in capital. What is the amount of bonus to be credited to
A, Capital in admitting R?

SOLUTION:
Contributed Agreed Increase
Capital Capital (Decrease)
Old 150,000 157,500 7,500
Partners
New 60,000 (210,000 x (7,500)
Partner 25%)
52,500
210,000 210,000
Bonus to be credited to Partner A 1,500

PROBLEM 4:
A and B are partners who share profits and losses in the ratio of 6:4, respectively. On May 1, 2022, their
respective capital accounts are as follows: A – 60,000; B – 50,000.

On that date, C was admitted as a partner with one-third interest in capital and profits with an investment of
P40,000. The new partnership began with total capital of P150,000.

Required: What is the capital of A after the admission of C?

SOLUTION:
Contributed Agreed Capital Increase
Capital (Decrease)
A 60,000 60,000 (6,000)
B 50,000 50,000 (4,000)
110,000 100,000 (10,000)
C 40,000 1/3 10,000
50,000
150,000 150,000
PROBLEM 5:
Partnership A has an existing capital of P70,000. Two partners currently own the partnership and split profits
50/50. A new partner is to be admitted and will contribute net assets with a fair value of P90,000. For no
bonus to be recognized, what is the interest in the partnership granted to the new partner

SOLUTION:
Capital contribution of the new partner P90,000
Divide by Total Contributions (70,000 + 160,000
90,000)
56.25%

PROBLEM 6:
A. C purchases 50% of K’s capital interest in KL Partnership for P22,000. The capital balances of K is P40,000
and L is P30,000.

Required:
How much is the capital balance of C?

SOLUTION:
C’s capital balance = 40,000 x 50%
= 20,000

B. C purchases 25% of L’s capital interest in KL Partnership for P5,000. The capital balances of K is P40,000
and L is P30,000.

Required:
How much is the capital balance of C?

SOLUTION:
C’s capital balance = 30,000 x 25%
= 7,500

Partnership Liquidation
Problems with solution

PROBLEM 1
Andrea, Belen, and Christiana are partners in a partnership and share profits and losses 50%, 30%, and 20%,
respectively. The partners have agreed to liquidate the partnership and anticipate that liquidation expenses
will total P14,000. Prior to the liquidation, the partnership balance sheet reflects the following book values:
Cash 21,000
Non-cash assets 248,000
Notes payable to Christiana 32,000
Other liabilities 154,000
Andrea, Capital 60,000
Belen, Capital (deficit) (10,000)
Christiana, Capital 33,000

Assuming that the actual liquidation expenses are P14,000 and that non-cash assets are sold for P218,000,
how would the assets be distributed to partners if Belen has net personal assets of P8,500?

SOLUTION:
 Andrea 50% Belen 30% Christiana Total
20%
Capital Balances 60,000 (10,000) 33,000 83,000
Notes Payable 32,000 32,000
Liquidation (7,000) (4,200) (2,800) (14,000)
Expenses
Loss on (15,000) (9,000) (6,000) (30,000)
Realization
(248,000 –
218,000)
Additional 8,500
Investment
Balances 38,000 (14,700) 56,200 79,500
Absorption of (10,500) 14,700 (4,200) -
Capital
Deficiency
Assets 27, 500 0 52,000 79,500
Distribution

PROBLEM 2
Because of very unprofitable operations, partners Dawn, Erika, and Febe decided to dissolve the
partnership when their capital balances and profit and loss ratio were:
Dawn, capital (30%) -
Erika, capital (20%) 125,000
Febe, capital (50%) 175,000
Total P 475,000

Upon liquidation, all of the partnership’s assets are sold and sufficient cash is realized to pay all liabilities
except one for P25,000. Febe is personally insolvent, but the others are capable of meeting any indebtedness
of the firm. By what amount would the capital of Dawn change?

SOLUTION:
Total Partnership Capital 475,000
Add: Liabilities 25,000
Loss on Realization 500,000

Dawn Erika Febe Total

30% 20% 50%
Capital Balances 175,000 125,000 175,000 475,000
Loss on Realization (150,000) (100,000) (250,000) (500,000)
Balances 25,000 25,000 (75,000) (25,000)
Absorption of Capital
(45,000) (30,000) 75,000 -
Deficiency
Balances (20,000) (5,000)
Additional
20,000 5,000 25,000
Investment
0 0 0

Change in Dawn’s capital

Share in Loss on Realization 150,000
Share in Absorption of Capital 45,000
Deficiency
 Change in Dawn’s capital 195,000

PROBLEM 3
Peter and John, who share profits and losses equally, decided to liquidate their partnership when their net
assets amounted to P260,000, and capital balances of P170,000 and P90,000, respectively. If the noncash
assets were sold for amount equal to its book value, what amount of cash should Peter and John received?

ANSWER:
Peter – 170,000; John – P90,000

Note:
Since the noncash assets were sold for an amount equal to its book value, there is no gain or loss on
realization, therefore the amount of cash that will be received by Peter and John must be the amount of their
capital balances.

PROBLEM 4
Sammy and Michael are partners of SM Partnership sharing profits and losses equally. They decided to
terminate the partnership when their capital balances are: Sammy – P750,000; Michael – P500,000. At this
time, the partnership owes Michael P200,000, as evidenced by a promissory note. Upon liquidation, cash of
P300,000 becomes available for distribution to the partners. In final cash distribution, what would be the
respective share of Sammy and Michael?
SOLUTION:
Total Partnership Capital 1,250,000
Add: Liabilities 200,000
Total Assets 1,450,000
Less: Cash 300,000
Loss on Realization 1,150,000

Sammy Michael
Capital Balances 750,000 500,000
Notes Payable - Michael 200,000
Total Partner’s Interest 750,000 700,000
Loss on Realization (575,000) (575,000)
Share in final cash 175,000 125,000
distribution

PROBLEM 5
As of December 31, the books of AME Partnership showed capital balances of: A – P40,000; M – P25,000; and
E – P5,000. The partners’ profit and loss ratio was 3:2:1, respectively. The partners decided to dissolve and
liquidate. They sold all the non-cash assets for P37,000 cash. After settlement of all liabilities amounting to
P12,000, they still have P28,000 cash left.

Required:
1. How much is the loss on the realization of the non-cash assets?
2. Assuming that any partner’s capital debit balance is uncollectible, how much is the share of A in the
P28,000 cash for distribution?

SOLUTION:
1. Loss on Realization
Total Partnership Capital 70,000
Less: Cash left for distribution 28,000
Loss on Realization 42,000

2. Share of A in the P28,000 cash for distribution

A M E
 50% 33% 17%
Capital Balances 40,000 25,000 5,000
Loss on Realization (21,000) (13,860) (7,140)
Balances 19,000 11,140 (2,140)
Absorption of Capital (1,200) (800) 2,140
Deficiency
Share of A in Cash 17,800 10,200 0

PROBLEM 6
On December 31, 2019, the Statement of Financial Position of ABC Partnership with profit or loss ratio of 6:1:3
is presented as follows:
Cash P Total Liabilities P
1,000,00 2,000,000
0
Receivable from 500,000 Payable to B 1,000,000
A
Other non-cash 2,000,00 Payable to C 100,000
asset 0
A, Capital 700,000
B, Capital (650,000)
C, Capital 350,000

On January 1, 2020, the partners decided to liquidate the partnership. All partners are legally declared to be
personally insolvent. The other noncash assets were sold for P1,500,000. Liquidation expenses amounting to
P100,000 were incurred.

Required:
Compute for the cash received by the partners after liquidation.

SOLUTION:

PROBLEM 7
A B C Partners A, B, and C, who share profits and
losses equally, have the following personal
Personal P 30,000 P 80,000 P 60,000
assets, personal liabilities, and partnership
Assets
capital balances:
Personal 25,000 50,000 72,000
Liabilities
Capital 50,000 (32,000) 70,000
Balances
After applying the doctrine of marshalling of assets, how much is the capital balances of partners A, B and C?

SOLUTION:
A B C
Personal P 30,000 P 80,000 P 60,000
Assets
Personal 25,000 50,000 72,000
Liabilities
Personal P 5,000 P 30,000 (P
Net worth 12,000)

A B C
Capital Balances 50,000 (32,000) 70,000
Additional Investment 30,000 (12,000)
Balances 50,000 (2,000) 58,000
Absorption of Capital (1,000) 2,000 (1,000)
Deficiency
Capital Balances 49,000 0 57,000

Note:
The “doctrine of marshalling of assets” is applied when the partnership and/or one or more of the partners are
insolvent. It provides that partnership assets are first available for payment of partnership debts. Any excess is
applied to individual partner’s debt to the extent of his interest. While personal assets are applied against
personal debts, any excess is applied to partnership creditors, then to partner’s debit capital balance.

AFAR (by: Marc Oliver B. Castañeda, CPA, PhD)

May 27-29, 2023

COST ACCOUNTING

Concerned in determining, analyzing and control of costs for financial reporting and decision making.
Supplements financial accounting.
=>Provides details of cost figures found in the FS
Provides data for financial reporting and decision making Uses the PERPETUAL SYSTEM to account for the flow of costs.
=> detailed analysis of costs.
=> allows the computation of unit costs and inventory costs for periodic reporting
Costs are accumulated by PRODUCTS and BATCHES, or by PROCESSES or DEPARTMENTS.

TYPES OF PRODUCT COSTING SYSTEM

PRODUCT COSTING JOB ORDER COSTING

 A company produces many units of a single product. One Different products produced at a time
unit of product is identical from the other units of product. Products are manufactured to order
The identical nature of each product enables signing the
same average cost per The unique nature of each job requires tracing or
allocating costs to each job, and maintaining cost records
for each job

COST ACCOUNTING SYSTEM

Annual Costing Normal Costing Standard Costing

Actual DM Actual DM Standard DM S

Actual DL Actual DL Standard DL
Actual OH TMC Predetermined Standard FOH
Application Rate (PDAR) TMC
TMC

COS (Standard)
COS (Normal) +/-(over/under MC)
COS (actual) +/-(over/under OH) COS(actual)
COS (actual)
Problem 1
APPLE Company uses a job-order costing system and the following information is available from its records. The company has three
jobs in process: #1, #2, and #3.

Raw material used P260,000

Direct labor per hour P19.00
Overhead applied based on direct labor cost 125%

Of the raw materials used, total of 85% were traceable to the specific jobs (Job #1: 25%; Job #2: 30%; Job #3: 30%) and the balance
of the requisitions was considered indirect. Direct labor hours per job are 2,800; 3,300; and 4,000; respectively. Indirect labor is
P90,000. Other actual overhead costs totaled P100,000.

1. Assuming all of the jobs were completed and the company used actual costing, what is the total cost of goods
manufactured?
Direct Materials 221,200
Direct Labor (10,100 x 19) 191,900
Overhead (Actual)
Indirect Materials (260,000 x 15%) 39,000
Indirect Labor 90,000
Other Overhead costs 100,000
TOTAL 641,900

2. Assuming only Jobs No. 2 and 3 were completed and sold, what is the cost of goods sold at year end?
JOB 2 JOB 3
Direct Materials (260,000 x 30%) 78,000 78,000
Direct Labor (3,300 x 19) 62,700 76,000
Overhead PDAR (62,700 x 15%) 78,375 95,000
TOTAL 219,075 249,000 468,075

3. What is the under (DR) or over (CR) applied overhead?

 Actual OH 229,000
Applied OH (191,900 x 125%) 239,875
(10,875)

Problem 2
BANANA Company uses a job-order costing system. At the beginning of January, the company had two jobs in process with the
following costs:

Direct Material Direct Labor Overhead

Job 001 P3,400 P510 P255
Job 002 1,100 289 ?

BANANA pays its workers P8.50 per hour and applies overhead on a direct labor hour basis.

1. What is the overhead application rate per direct labor hour?

Overhead 255
Divided by Direct Labor (510/8.50) 60
Overhead Rate per hour 4.25

2. How much overhead was included in the cost of Job 002 at the beginning of January?

Predetermined OHR 4.25

x Direct Labor Hour 34.00
144.50

3. During January, BANANA’s employees worked on Job 003. P714 of overhead had been applied to this job. Total
manufacturing cost was P6,800 including the total cost of all other jobs in the amount of P3,981. What amount of
direct material is included in Job 003?

Direct Materials 677

Direct Labor (714/4.25 x 8.50) 1,428
Overhead 714
Cost of Job 3 2,819
Cost of Job 1 and Job 2 3,981
Total Manufacturing Cost 6,800

Problem 3
CHERRY Manufacturing was a company engaging in manufacturing car parts. During this year, CHERRY Manufacturing made
30,000 units of clutch kits. However after further inspection, it was determined that 4% of the units made were spoiled. These spoiled
units can be sold at P150 each.

The following were the total cost of the 30,000 clutch kits:
Direct materials P2,760,000
Direct labor (P140 per direct labor hour) P 840,000
Applied overhead P1,800,000
(300 per direct labor hour inclusive of P50 allowance for spoiled work)

1. Assume that the spoiled goods were due to internal failure, what is the cost transferred to finish goods at the end of
the year?
Direct Material 2,760,000
Direct Labor 840,000
Overhead 1,800,000
Total Manufacturing Cost 5,400,000
Spoiled Units (30,000 x 4% x 180) (216,000)
Cost of Good Units 5,184,000

2. Assume that the spoiled goods were due to exacting specifications, what is the cost per good unit at the end of the
year?
Direct Material 2,760,000
Direct Labor 840,000
Overhead (6,000 hours x 250) 1,500,000
Total Manufacturing Cost 5,100,000
Spoiled Units NRV (30,000 x 4% x 150) (180,000)
Cost of Good Units 4,920,000
Divide by total Good units (30,000 X 96%) 28,800
Cost per unit 170.83
Problem 4
DURIAN Inc. manufactured coil over springs for cars. During this year, DURIAN Inc. manufactured 200 units coil over springs.
After final inspection, it was determined that 15 units were defective. The cost per unit to rework the defective units were the
following: P100 for direct materials, P160 for direct labor and the appropriate factory overhead rate.

The following were the unit cost for the 200 coil over springs:

Direct materials P800

Direct labor P350
Applied overhead 160% of direct labor cost
(150% in case defective units were charged to specific order)

1. Assume that the defective goods were charged to all jobs, what is the cost transferred to finish goods at the end of the
year?

Direct Materials (800 x 200) 160,000

Direct Labor (350 x 200) 70,000
Overhead (70,000 x 160%) 112,000
Total Manufacturing Cost 342,000

2. Assume that the defective goods were due to specific job, what is the unit cost of each good unit at the end of the
year?

Direct Materials 160,000

Direct Labor 70,000
Overhead (70,000 x 150%) 105,000
Rework Costs
Materials (100 x 15) 1,500
Labor 160 x 15) 2,400
Overhead (2,400 x 150%) 3,600
Total Manufacturing Cost 342,500
Divided by units 200
Cost per unit 1,712.50
PROCESS COSTING
=> Used by Manufacturing Companies producing HETEROGENEOUS/SIMILAR Products
=> Continuous process of production of the same/similar products => Accumulate costs on a per DEPARTMENT basis =>
Departments are involved in the production process
=> Each Department will constitute a cost center
Similarities with Job Order Costing:
=> Both systems assign material, labor and overhead costs to products
=>Provide a mechanism for computing units costs => Same manufacturing accounts
=> Flow of costs is the same

What is a Processing Department?

Any location in an organization where materials, labor or overhead is added to a product Activities performed in a processing
department are performed uniformly in all units of production.
The outputs of this department must be HOMOGENEOUS.

PROCESS COSTING (Important Terms)

Units to Account For (UTAF) => Total units for the period
Units Accounted For (UAF) => Where the units where transferred at the end of the period
Equivalent Units of Production (EUP) => No of units produced for the period (finished or unfinished)
Cost To Account For (CTAF) => Cost of the UTAF
Cost/EUP => CTAF/EUP or the unit cost of our products
Cost Accounted For (CAF) =>What is the cost of the UAF

LOST UNITS (LUs)

All units containing imperfections/difformities NOT worth to re-work a few units in the MASS production
I. EUP of LOST UNITS

1. Continuous
LUs are discovered at NO SPECIFIC time or point in the production process
Normal Loss = Follow method of neglect/No extension or EUP
Abnormal Loss = 100% in EUP
If there is an inspection point, follow discrete If there is NO inspection point, follow Continuous

2. Discrete: Normal/Abnormal
LUs are discovered at Specific points in the process
For Direct Materials
a. If placement took place first, check the MAP
b. If inspection took place first, then 0%

For Conversion Cost

EUP= Lost Units* % of completion at the time of inspection

Note:
All RM applied prior to inspection pts are already absorbed by the LUS

LUS are IGNORED if

a. ALL LUS are NORMAL
b. ALL REMAINING units are LUs are discovered at Specific points in the process GOOD units

Problem 1
1. Case A: Beginning inventory 20,000 units ; 75% incomplete
 Transferred-out 100,000 units
Units started 150,000 units
Ending inventory ? 6/7 done

1/5 of materials are added when the units are in the ¼ stage of production; remaining materials are added when the units are 90%
converted

1. EUP for Materials and Conversion using FIFO:

Case B: Transferred-out 480,000 units

Started in Process 600,000 units
Ending Inventory 180,000 units ; 1/8 unconverted

Forty percent of materials are added when the processing is halfway completed; balance when 80% completed. Beginning
inventories, if any, is 3/5 to be completed.

INVENTORY
Beginning 20,000 100,000 Transferred out

Units started 450,000 70,000 Ending

UTAF 170,000 170,000 UTAF

MATERIALS CONVERSION COST

UTAF % EUP % EUP
Beginning 20,000 80% 16,000 75% 15,000
Started this month 80,000 100% 80,000 100% 80,000
Ending 70,000 20% 14,000 6/7 60,000
TOTAL 170,000 110,000 155,000

MATERIALS CONVERSION COST

UTAF % EUP % EUP
Started this month 100,000 100% 100,000 100% 100,000
Ending 70,000 20% 14,000 6/7 60,000
TOTAL 150,000 114,000 160,000
Beginning (20,000) 20% (4,000) 25% (5,000)
Total FIFO 170,000 110,000 155,000

2. EUP for Materials and Conversion using Average Costing:

INVENTORY
Beginning 60,000 480,000 Transferred out

Units started 600,000 180,000 Ending

UTAF 660,000 660,000 UTAF

MATERIALS CONVERSION COST

UTAF % EUP % EUP
Transferred out 480,000 100% 480,000 100% 480,000
Ending 180,000 100% 180,000 7/8 157,500
TOTAL AVE 660,000 660,000 637,500

Problem 2
The following information is available for APLHA Company for the current year:

Beginning Work in Process Costs of Beginning Work in Process:

(25% to complete) 14,500 units Material P 25,100
Started 75,000 units Conversion 50,000
Ending Work in Process Current Costs:
(40% unconverted) 16,000 units Material P 120,000
Transferred out 66,000 units Conversion 300,000
Normal spoilage (Continuous) 5,000 units
All materials are added at the start of production.

Using FIFO, what is the cost per equivalent unit for conversion costs?
INVENTORY
Beginning 14,500 66,000 Transferred out
 Units started 75,000 16,000 Ending

5,000 Normal Spoilage

2,500 Abnormal Spoilage

UTAF 89,500 89,500 UTAF

CONVERSION COST
UTAF % EUP
Transferred out 66,000 100% 66,000
Ending 16,000 60% 9,600
Normal Spoilage 5,000 0% 0
Abnormal Spoilage 2,500 100% 2,500
Beginning (14,500) 75% (10,875)
TOTAL 75,000 67,225

Conversion 300,000
Divide by EUP 67,225
TOTAL 4.46

Problem 3
During July 2021, the 1AT Dept. of BETA Manufacturing Inc., had an opening work-in-process with 80% completed units and an
ending work-in-process with 50% completed units in terms of conversion. All materials are added at the start of processing; units are
inspected at the end of processing. Normal loss should not exceed 2% of the units started during the period. Related data for the
month follow:

Units Materials Conversion Cost

WIP- March 1 12,000 P32,100 P 5,720
Units started 150,000 300,000 317,680
Units transferred-out 142,000
Lost Units 4,000

Compute for the following:

1. Equivalent units of production under FIFO costing for (1) materials and (2) conversion
2. Equivalent units of production under Average costing for (1) materials and (2) conversion
3. Total cost of the units transferred-out under FIFO
4. Total cost of the units transferred-out under Average costing

INVENTORY
Beginning 12,000 142,000 Transferred out

Units started 150,000 16,000 Ending

4,000 Loss Units

UTAF 162,000 162,000 UTAF

Equivalent units of production under FIFO costing for (1) materials and (2)
MATERIALS CONVERSION COST
UTAF % EUP % EUP
Transferred out 142,000 100% 142,000 100% 142,000
Ending 16,000 100% 16,000 50% 8,000
Normal Loss 3,000 100% 3,000 100% 3,000
Abnormal Loss 1,000 100% 1,000 100% 1,000
Beginning (12,000) 100% (12,000) 80% (9,600)
Total 150,000 150,000 144,400

Total cost of the units transferred-out under FIFO

MATERIALS CONVERSION
COST
Cost this month 300,000 317,680
EUP 150,000 144,400
Cost per unit 2.00 2.20 4.20
Cost last month 37,820 32,100+5,720
Transferred out
WIP-beg CC (2,400*2.20) 5,280
Cost this month (130,000*4.20) 546,000 551,280
 (142,000-12,000=130,000)
Normal Loss (3,000*4.20) 12,600
Total Cost 601,700

Equivalent units of production under Average costing for (1) materials and (2) conversion
MATERIALS CONVERSION COST
Total UTAF % EUP % EUP cost of
the units
Transferred out 142,000 100% 142,000 100% 142,000
Ending 16,000 100% 16,000 50% 8,000
Normal Loss 3,000 100% 3,000 100% 3,000
Abnormal Loss 1,000 100% 1,000 100% 1,000
Total 162,000 162,000 154,000
transferred-out under Average costing

MATERIALS CONVERSION COST

Cost this month and last month 332,100 232,400
EUP 162,000 154,000
Cost per unit 2.05 2.10 4.15

Transferred out (142,000*4.15) 589,300

Normal Loss (3,000*4.15) 12,450
TOTAL COST 601,750
Problem 4
CHARLIE Manufacturing Company produces a product that passes through two processes; GRINDING AND POLISHING. During
July, POLISHING Department received 750,000 units from GRINDING Department at a unit cost of P1.20. All materials needed are
added at the start of processing. Units in the POLISHING Department are inspected when they are 80% converted. It has been the
experience of the company that ½ of 1% of the units started/received were lost during processing.

The following information summarized the transaction of the POLISHING Department for the month of July:

Beg. WIP Inventory- 100,000 units (10% to complete) Materials- P12,500; Conversion- P20,500; Transferred-In –P24,500.
Ending WIP Inventory- 60,000 units (10% to complete)
Lost Units- 5,000
Cost Added during the month: Materials- P600,000; Conversion Cost- P828,300

The company uses weighted average and first-in-first-out method in the GRINDING and POLISHING Department, respectively.

1. Compute the total cost transferred to the Finished Goods Inventory

2. Compute the total cost of the ending WIP inventory in the POLISHING Department
INVENTORY
Beginning 100,000 785,000 Transferred out

Transferred in 750,000 60,000 Ending

5,000 Loss Units

UTAF 850,000 850,000 UTAF

MATERIALS CONVERSION COST

UTAF % EUP % EUP
Transferred out 785,000 100% 785,000 100% 142,000
Ending 60,000 100% 60,000 90% 54,000
Normal Loss 3,750 100% 3,750 80% 3,000
Abnormal Loss 1,250 100% 1,250 80% 1,000
Beginning (100,000) 100% (100,000) 90% (90,000)
Total 750,000 750,000 753,000

Transferred in Materials Conversion Cost

Cost this month 900,000 600,000 828,300
Divide by EUP 750,000 750,000 753,000
Cost per unit 1.2 0.80 1.10 = 3.10

MATERIALS CONVERSION
COST
Cost last month 57,500 (12,500+20,500+24,500)
Transferred out
Last month CC (10,000*1.10) 11,000 4.20
This month (685,000*3.10) 2,123,500 32,100+5,720
(785,000-100,000=685,000)
 N
or
m Units Unit Cost Total Cost
al Transferred in 3,750 1.20 4,500
lo Materials 3,750 0.80 3,000
ss CC 3,000 1.10 3,300
4
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an 1
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C , 0
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8 0
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,
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5
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NORMAL LOSS ALLOCATION

NO

Transferred in Materials Conversion Cost

EUP COST EUP COST EUP COST
Cost this month 785,000 4,180 785,000 2,787 785,000 3,088
Divide by EUP 60,000 320 60,000 213 54,000 212
Cost per unit 845,000 4,500 845,000 3,000 839,000 3,300
4,500*785K/845K=4,180 3,000*785K/845K=2,787 3,300*785K/839K=3,088
Joint and By-product costing and FOH

Joint process and joint cost

Joint process
- Single process in which one product cannot be manufactured without producing others
o Food industries
o Chemical industries
o Agricultural industries
o Industries that produce both first-quality and factory seconds merchandise in a single operation
Joint product
- Primary output of the joint process
- Are intended to be manufactured from the beginning
Joint cost
- Materials, labor and overhead incurred during a joint process
- Allocated to the primary products using:
o Physical measures
o Market value method
 Selling at split-off point (SOP)
 Net realizable value (NRV)
Joint process products
By-product
- Nit intended to be manufactured
- The sales value is not substantially high compared to joint products
- Higher sales value compared to scrap
- Are not assigned/ allocated to any costs
- Any salvage value / NRV recoverable:
o Deduction to the Total Manufacturing Cost (TMC)
o Additional sales
o Other revenue
Scrap
- Incidental output of the joint process
- Has the lowest sales value compared to Joint and By-product

Costs at various stages of production

Joint cost
- An expenditure that benefits more than one product
Split-off point
- When joint products are first identifiable as individual products
- At split-off, joint costs are allocated to joint products
o Joint costs are sunk costs once the split-off point is reached
o Joint costs may be reduced by the sales value of by-products
Separate cost
- Cost incurred in later stages of production
- Costs that are assigned to specific primary products

Problem 1
ALPHA Company produces three products from the same process and incurs joint processing costs of P150,000.
Gallons Sales price per gallon Disposal cost per Further processing Final sales price
at split-off gallon at split-off costs per gallon
A 2,400 P225.50 P 62.50 P 50.00 P350.00
B 1,100 300 150.00 100.00 500.00
C 500 500 400.00 100.00 750.00
4,000

Disposal costs for the products if they are processed further are:
A, P 150.00; B, P 275.00; C, P 50.00.

1. How much of the is allocated to Product A using the physical method allocation?
2,400/4,000*150,000 = 90,000
2. How much is the cost per gallon of Product B, assuming that joint costs are allocated using the sales value of
the products at split-off, and that B were processed further after split-off?
Gallons Sales price per
gallon at split-off
A 2,400 x P225.50 = 541,200
B 1,100 x 300 = 330,000
C 500x 500 = 250,000
= 1,121,000
Cost of B (330,000/1,121,000*150,000) 441,149
No. of Gallons 1,100
Cost per gallon @ Split-off 40.14
Further Processing Cost 100
Cost per gallon 140.14
3. How much is the gross profit attributable to Product C, assuming that joint costs are allocated using the Net
Realizable Value at Split-off approach, and after being processed further, all gallons of Product C were sold at its
estimated final sales price per gallon?
Gallons Sales Disposal
price per cost per
gallon at gallon at
split-off split-off
A 2,400 P225.50 - P 62.50 163 391,000
B 1,100 300 - 150.00 150 165,000
C 500 500 - 400.00 100 50,000
4,000 606,2000
Selling price of C (750*500) 375,000
Allocated joint cost (50k/606.2k * 150k) (12,372)
Further processing cost (100*500) (50,000)
Gross profit 312,628
4. How much is the net income attributable to Product A, assuming that joint costs are allocated using the
Approximate Net Realizable Value, and after being processed further, 1,800 gallons of Product A was sold during the
year?
Gallons Final Further Disposal cost
sales processing
price costs
per
gallon
A 2,400 P350.00 P 50.00 - 150.0 =150 360,000
- 0

B 1,100 500.00 - 100.00 - 275.00 =125 137,500

C 500 750.00 - 100.00 - 50.00 =600 300,000
4,000 797,500

Selling price of A 630,000

(350*1,800)
Allocation joint (50,784)
cost (360k/797.5k
* 150k) *
(1,800/2,400)
Further (90,000)
processing unit
(150*1,800)
Gross profit 489,216
Disposal (270,000)
cost(150*1,800)
Net income 219,216

Problem 2
BETA, Inc. manufactures Product A from a process that yields a by-product called Z. The by-product requires additional processing
cost of P30,000, and will require selling and administrative expenses totaling P20,000.

Information concerning a batch produced during the year ended December 31, 2021 follows:

Product Units produced MV at Split-off Units sold

A 100,000 P50 60,000
Z 8,000 P10 8,000

The joint costs incurred up to split-off points are:

Direct materials 2,000,000

Direct Labor 800,000
Overhead 200,000

The selling and administrative expense of BETA for the year ended December 31, 20X1 is P1,000,000, exclusive of that for the by-
product.

1. Assuming that after further processing costs, the by-product was sold at its MV at split-off, what is the gross
profit for the year if the net revenue from the by-product is treated as other income?
Sales 3,000,000
Joint cost - COS (1,800,000)
Gross profit 1,200,000
No cost to be allocated to the by-product
 2. Assuming that after further processing costs, the by-product was sold at its MV at split-off, what is the gross
profit for the year if the net revenue from by-product is presented as additional sales revenue?
Sales 3,000,000
Joint cost - COS (1,800,000)
Sales – by product 80,000
Processing cost (30,000)
Selling and admin. 20,000 30,000
Expense
Gross profit 1,230,000

3. Assuming that after further processing costs, the by-product was sold at its MV at split-off, what is the net
income for the year if the net revenue from by-product is presented as deduction from the cost of goods sold?
Sales 3,000,000
Joint cost - COS 1,800,000
Sales – by product (by (30,000) (1,770,000)
revenue)
Selling and admin. (1,000,000)
Expense
Gross profit 230,000

4. Assuming that after further processing costs, the by-product was sold at its MV at split-off, what is the net
income for the year ended if the net revenue from by-product is presented as deduction from the total manufacturing
cost of the main product?
Sales 3,000,000
Total joint cost - TMC 3,000,000
Sales – by product (by (30,000)
revenue)
Total 2,970,000
COS 60/100 (1,782,000)
Selling and admin. (1,000,000)
Expense
Net income 218,000

5. Assume that a unit of by-product Z can be sold for P15 after incurring P4 disposal cost for a normal profit of
20% of sales. Additional manufacturing costs of P3 are to be incurred after separation. How much is the cost of
ending inventory of Product X on December 31, if the company recognizes by-product when produced, using the
reversal cost method?
Sales price 15 Joint cost (TMC) 3,000,000

Disposal (4) Cost of – by product (40,000)

Normal profit (15*20%) (3) Cost of product A 2,960,000

Additional manufacturing (3) Units unsold 40/100

cost

Unit cost 5 Ending inventory 1,184,000

No. of units 8,000

Total cost 40,000

Factory overhead:
- All manufacturing costs other than DM and DL
- Spent inside and outside the factory
- Not traced but allocated to the products
For allocation methods
1. Traditional/Co-wide/Peanut butter/Single Cost Pool
2. Departmentalization
3. Activity Based Costing

Why apply overhead?

Overhead is applied (allocated) because:
1. It is impossible/difficult to trace overhead costs to particular jobs.
2. Manufacturing overhead consists of many different items. Example: Salary of a manager
3. Many overhead costs are fixed despite the fluctuations in production

Traditional cost method

Manufacturing over is applied (not traced) to jobs that are in process. Based on
- Machine hours, Direct labor hours
- Machine costs, labor costs
- Unit of production
(Used to assign overhead to individual job)
Steps:
1. Collate/Consolidate the FOH budgets of all departments
2. Set the pre-determined application rate (PDAR)
3. Apply FOH to production
Predetermined application rate: Determined BEFORE the period begins
PDAR = Estimated total manufacturing cost for the period/Estimated total units in the allocation base for the period
Allocation base – it is ideally the cost driver that causes overhead

Using predetermine rate makes it possible to estimate job costs sooner. Actual overhead is only known at the end of the period.

Problem 3
CHARLIE Corporation has three production departments: X, Y, and Z. It also has two service departments: Administration and
Personnel. Administration costs are allocated based on value of assets employed, and Personnel costs are allocated based on number
of employees. Assume that Administration provides more service to the other departments than does the Personnel Department.

Department Direct Costs Employees Asset Value

Administration 1,800,000 50 900,000
Personnel 700,000 20 1,200,000
X 1,400,000 30 600,000
Y 400,000 10 300,000
Z 500,000 20 1,600,000

1. Using the direct method, what amount of administration costs is allocated to X?

600,000
300,000
1,600,000
2,500,000

1,800,000*600/2,500= 432,000
2. Using the direct method, what amount of personnel costs is allocated to Y?

30
10
20
60
700,000*10/60 = 116,667
3. Using the step method, what amount of total costs is attributable to Z?
1,200,000
30 600,000
10 300,000
20 1,600,000
60 3,700,000

Share in Share in Total

admin cost personnel
Administration 1,800,000 (1,800,000) 0 0
Personnel 700,000 583,784 (1,283,784) 0
X 1,400,000 291,892 641,892 2,333,784
Y 400,000 145,946 213,964 759,910
Z 500,000 778,379 427,928 1,706,306
Total 4,800,000 4,800,000

4. Using the step method, what mount of administration costs is allocated to X?

Share in Share in Total
admin cost personnel
Administration 1,800,000 (1,800,000) 0 0
Personnel 700,000 583,784 (1,283,784) 0
X 1,400,000 291,892 641,892 2,333,784
Y 400,000 145,946 213,964 759,910
Z 500,000 778,379 427,928 1,706,306
 Total 4,800,000 4,800,000

5. Using the reciprocal method, what amount of administration costs is attributable to Y?

Asset value Employees
Administration - 50
Personnel 1,200,000 -
X 600,000 30
Y 300,000 10
Z 1,200,000 20
Total 3,700,000 110
Equation:
Admin= 1,800,000+50/110P
Personnel= 700,000+1,200/3,700A
Admin = 1,800,000+50/110*700,000+1,200/3,700A
= 2,484,437.82

Administrative Costs. 2,484,437.82

Allocation to Y 300/3,700
Admin Cost to Y 201,440.90

6. Using the reciprocal method, what amount of personnel costs is allocated to Z?

Admin= 1,800,000+50/110P
Personnel= 700,000+1,200/3,700A
Personnel = 700,000+1,200/3,700*2,484,437.82
= 1,505,763.61

Administrative Costs. 1,505,763.61

Allocation to Z 20/110
Admin Cost to Z 273,775.20

Activity based costing (ABC)

How do we allocate overhead if we have more than 1 product)
1. Traditional costing
Also called peanut butter costing (PBC)
- Overhead is allocated using a single activity driver (the volume of activity used to allocate overhead)
o Labor hours
o Labor Cost
o Machine hours
 Applied rate = total FOH / Activity driver
 Applied FOH = Applied rate x Actual activity driver
- Under this method, the organisation assigns costs based on board averages, rather than in a proper and targeted
manner
- This costing method gets its name the way peanut butter is spread on a slice of bread
2. Activity based costing
- Total FOH will be allocated to the activities that it will pass thru before coming up with a finished product. Each
activity will have an activity driver.

Problem 4
ABC Manufacturing has the following budgeted overhead costs for 20x1 for producing product X:
Cost Amount
Electricity P 2,000,000
 Indirect materials 3,000,000
Assembly 1,000,000
Quality control inspections 3,000,000
Test runs 1,500,000
Total budgeted overhead cost P 10,500,000

For the past years, the cost accounting department has been charging overhead production costs based on machine hours. The
estimated capacity for the year is 2,000,000 machine hours.

The company is now shifting to activity-based costing, which they believe would give them a more reliable cost data that, in turn,
would result to a better competitive advantage when pricing their products. The production manager provided the following data
regarding expected 20x1 activity for the cost drivers of the preceding budgeted overhead costs.
Cost Activity Drivers
Electricity 200,000 kilowatt hours
Indirect materials 1,200,000 grams
Assembly Time 500,000 hours
Quality control inspections 400,000 inspections
Test runs 50,000 test runs

The company received an offer to sell 5,000 units of product X to ZEEK Company. The head of the cost accounting department
prepares cost estimates for producing 5,000 units of product X.

Cost Amount
Direct materials P 150,000
Direct labor 400,000
Machine hours 10,000
Direct labor hours 15,000
Electricity-kilowatt hours 1,500
Indirect material (grams) 13,000
Assembly 1,000
Quality control inspections 10
Test runs 10

Determine:
1. Predetermined overhead rate under traditional method.
10,500,000/2,000,000 = 5.25
2. Cost per unit of product X under traditional method.
Direct materials P 150,000
Direct labor 400,000
Machine hours 52,500(10,000*5.25)
Total 602,500
Divided by: units 5,000
Cost per unit 120.50

3. Cost per unit of product X under the proposed ABC method.

Electricity 2,000,000 ÷ 200,000 = 10

Indirect materials 3,000,000 ÷ 1,200,000 = 2.50
Assembly time 1,000,000 ÷ 500,000 = 2
Quality control 3,000,000 ÷ 400,000 = 7.50
inspections
Test run 1,500,000 ÷ 50,000 = 30

Direct materials P 150,000 150,000

Direct labor 400,000 400,000
Machine hours 10,000
Direct labor hours 15,000
Electricity-kilowatt hours 1,500 10 15,000
Indirect material (grams) 13,000 2.5 32,500
Assembly 1,000 2 2,000
Quality control inspections 10 7.5 75
Test runs 10 30 300
599,875
5,000
119.98

Problem 5
SHYTOWN Inc manufactures products of with a complex cost structure, with some jobs requiring much labor and little machine use
and others requiring the opposite mix. Because no single base for a predetermined overhead rate could provide SHYTOWN
management with reliable product cost information, overhead roles in overhead is classified into two cost pools and two
predetermined overhead rates are used. For 20x9, it is estimated that total overhead costs will consist of P400,000 of overhead related
to the usage of direct labor hours and P150,000 of overhead related to machine usage, Total machine usage is expected to be 4,000
hours for the year, and total direct labor hours are expected to be 16,000.

Job 12369 required P20,000 of direct material, 100 hours of labor at P30 per hour, and 50 hours of machine time.

Compute the cost of Job 12369.

Direct 20,000
materials
Direct labor 3,000
Applied OH Overhead Total cost Req’d hrs Cost/driver Cost
Labor hours 400,000 16,000 25 2,500
Machine 150,000 4,000 37.5 1,875 4,375
hours
Cost of job 27,375
STANDARD COSTING

 The practice of substituting an EXPECTED COST for an ACTUAL COST in the accounting records.
 Involves the creation of estimated costs for some or all activities within a company.

ADVANTAGES:

1. Budgeting.
=>A budget is always composed of standard costs (impossible to use actual costs of items when the budget is finalized) => Basis for
comparing actual results with standards set in subsequent periods

2. Inventory Costing.
=> Easily determine the ending inventory (Perpetual Inventory)
=> Multiply the standard cost by each item in ending inventory

3. Overhead Application.
=> Use standard costs to summarize cost pools of a department or service center.

COST ACCOUNTING SYSTEM

Actual Costing Normal Costing Standard Costing

Actual DM Actual DM Standard DM
Actual DL Actual DL Standard DL
Actual OH Predetermined Application Rate (PDAR) Standard FOH
TMC TMC TMC

COS (actual) COS (Normal) COS (Standard)

+/- (over/under OH) +/- (over/under MC)
COS (Actual) COS (Actual)

STANDARD COSTING

Forecast Direct Materials

MANUFCTURING COSTS Direct Labor STANDARD COSTS
FOH

Standard Cost VS Actual Cost

100 > 70 SAVINGS VARIANCE FAVORABLE
100 < 150 ANALYZED
EXCESS SPENDING VARIANCE UNFAVORABLE

ENTRY TO RECORD MATERIALS

To Record MATERIAL PURCHASES
Materials AQ*SP
Price Variance x x
Accounts Payable AQ*SP

To Record MATERIALS USED

WIP SP*SP
Usage Variance x x
Materials AQ*SP

ABC's standard cost per unit of Material X is P13.00 per pound. During the current month 9,000 pounds of Material X were purchased
by ABC at a total cost of P120,690. 8,000 pounds were used during the month. The standard quantity for actual production is 7,600
pounds.

To Record MATERIAL PURCHASES

Materials (AQ*SP) 117,000
Price Variance 3,690
Accounts Payable (AQ*SP) 120,690

To Record MATERIALS USED

WIP (SP*SP) 98,800
Usage Variance 5,200
Materials (AQ*SP) 104,000
 MATERIALS
VARIANCE
Actual Cost Price Usage
AP x AQ Quantity
Variance/Spending SP x AQ Variance/Efficiency
Standard Cost Variance SP x SQ Variance

ABC's standard cost per unit of Material X is P13.00 per pound. During the current month, 9,000 pounds of Material X were
purchased by ABC at a total cost of P120,690. 8,000 pounds were used during the month. The standard quantity for actual production
is 7,600 pounds.

Required:
1. Total Materials Variance = 8,480 unfavorable
2. Purchase Price Variance (13.41-13*9,000) = 3,690 unfavorable
3. Price Usage Variance/Price Variance/Spending Variance (13.41-13*8,000) = 3,280 unfavorable
4. Quantity variance/Efficiency Variance (13*400) = 5,200 unfavorable

1.)
Actual Cost (120,690/9,000*8,000) 107,280
Standard Cost (13*7,600) 98,800
8,480 -unfavorable

ENTRY TO RECORD LABOR

WIP SH*SR
Efficiency Variance ( H*SR) x x
Rate Variance ( H*SR) x x
Accrued Payroll AQ*AP

During the month, 1,200 units of PRODUCT Y were produced. Actual labor required was 650 direct labor hours at an actual cost of
P6,370. According to the standard cost card for PRODUCT Y, half an hour of labor should be required per unit of PRODUCT Y, at a
standard cost of P10 per labor hour.
WIP (SH*SR) 6,000
Efficiency Variance ( H*SR) 500
Rate Variance ( H*SR) 130
Accrued Payroll (AQ*AP) 6,370

During the month, 1,200 units of PRODUCT Y were produced. Actual labor required was 650 direct labor hours at an actual cost of
P6,370. According to the standard cost card for PRODUCT Y, half an hour of labor should be required per unit of PRODUCT Y, at a
standard cost of P10 per labor hour.

Required:
1. Total Labor Variance = 370 unfavorable
2. Compute the labor rate variance/spending variance (9.8-10*650) = 130 favorable
3. Compute labor efficiency variance (10*650-600) = 500 unfavorable
 LABOR VARIANCE
Actual Cost LABOR RATE
AR x AH
VARIANCE/SPENDING SR x AH
LABOR EFFICIENCY
Standard Cost VARIANCE SR x SH VARIANCE

LABOR VARIANCE
Actual Cost AR x AH 6,370
SR x AH
Standard Cost SR x SH 6,000
370 unfavorable

ACTIVITY BASED COSTING (ABC)

How do we allocate overhead if we have more than 1 product?
1.) TRADITIONAL COSTING
2.) ACTIVITY BASED COSTING

TRADITIONAL COSTING
Also called PEANUT BUTTER COSTING (PBC)
⇒ Overhead is allocated using a single activity driver the volume of activity used to allocate overhead
 Labor Hours
Applied Rate = Total FOH
 Labor Cost
Activity Driver
 Machine Hours
Applied FOH = Applied Rate x ACTUAL activity driver

⇒ Under this method, the organisation assigns costs based on broad averages, rather than in a proper and targeted manner.
⇒ This costing method gets its name the way peanut butter is spread on a slice of bread.

ACTIVITY BASED COSTING (ABC)

Total FOH will be allocated to the activities that it will pass thru before coming up with a finished product.
Each activity will have an activity driver.

ENTRY TO RECORD FOH

To Record ACTUAL FOH
FOH-Control Actual OH
Various Accounts x

To Record WIP and FOH Variance

WIP SR*SHRS
Controllable Variance x x
Volume Variance x x
FOH-Control Actual OH
MAANGAL CO. manufacturers doors with the following standard quantity and cost information per door:

Variable Overhead 5 machine hours at 6.00 30

Fixed Overhead 5 machine hours at 4.00 20

Overhead rates are based on normal capacity of 5,000 machine hours

During November, the company produced only 800 hours and the following costs were incurred for the month:;

Variable Overhead 23,600 (based on 4,250 machine hours

Fixed Overhead 19,000 (based on 4,250 machine hours

To Record ACTUAL FOH

FOH-Control (Actual OH) 42,600
Various Accounts 42,600

To Record WIP and FOH Variance

WIP 40,000
Volume Variance 4,000
Controllable Variance 1,400
FOH-Control 42,600

BACKFLUSH COSTING
 Used by companies who have adopted a just-in-time (JIT) regarding inventory controls.
 The carrying of inventories are regarded as a non-value activity
 They attempt to minimize inventory by making components available just when they are needed
  The backflush costing methods accounts for a company's inventories backward by calculating the cost of the product AFTER
they are sold.
 It delays recording journal entries until the goods are moved through the production process.
 It complements JIT because it simplifies the costing of products

TRADITIONAL COSTING VS. BACKFLUSH COSTING

TRADITIONAL COSTING BACKFLUSH COSTING
Raw Materials and WIP Raw Materials and WIP are SEPARATE COMBINES raw materials and WIP into
ACCOUNTS 1 account known as the Raw and In
Process Inventory (RIP)

WIP balance is IMMATERIAL

Why it is combined with raw materials
Direct Labor Major cost and separately accounted Minor cost item, no separate account
Temporary account called
CONVERSION COST CONTROL
Difference of actual CC and applied CC
is closed to COGS
Applied FOH Applied to products as they are produced No WIP to accumulate CC.
CC is applied when products is
completed.

TRIGGER POINTS
 Refers to a stage in a cycle going from the purchase of raw materials to the sale of the finished goods.
 When journal entries are made within the cycle to RECOGNIZE INVENTORY

METHO TRIGGER POINTS WHEN JOURNAL ENTRIES ARE

D MADE
1 3 1. Purchase of raw materials
2. Completion of Finished Goods
3. Sale of Finished Goods
2 2 1. Purchase of raw materials
2. Sale of Finished Goods
3 2 1. Completion of Finished Goods
2. Sale of Finished Goods
4 1 1. Sale of Finished Goods

BB Company manufactures product A. the transactions for the month of February were as follows:

Purchase of raw materials 1,000,000

Labor/wages incurred 300,000
Factory overhead incurred 400,000
Units completed 50,000
Units sold 49,900

There are no beginning inventory. The standard cost per unit of output is 34.80 (19.8 for raw materials, 6 for labor and 9 for applied
overhead)
Prepare the entries for standard costing and backflush costing.

3 TRIGGER POINTS
Raw Materials 1,000,000 RIP Inventory 1,000,000
Accounts Payable 1,000,000 Accts. Payable 1,000,000
WIP 990,000
Raw Materials (19.8*50,000) 990,000
Payroll 300,000
Accrued Payroll 300,000
WIP 300,000 CC Control 700,000
Payroll 300,000 Accrued Payroll 300,000
FOH Control 400,000 Various Accts. 400,000
Various accounts 400,000
WIP 450,000
Applied OH (50,000*9) 450,000
Finished goods 1,740,000 Finished Goods 1,740,000
WIP 1,740,000 RIP inventory 990,000
CC Applied (50k*15) 750,000
COGS 1,736,520 COGS 1,736,520
Finished goods (49,900*34.8) 1,736,520 Finished Goods 1,736,520
Applied FOH 50,000 CC Applied 50,000
COGS 50,000 COGS 50,000
The BETANG Manufacturing Company uses a raw and in process (RIP) Inventory account and expenses all conversion cost of goods
sold account. At the end of each month, Inventories are counted, their conversion cost components are estimated, and inventory
account balances are adjusted accordingly, Raw materials cost is back flushed from the finished goods. The following information is
for the month of April.

Beginning balance of RIP account , including 1,200 of conversion cost 35,000

Raw materials received on credit 347,000
Ending RIP inventory per physical count, including 3,000 conversion cost estimate 30,000

Compute the amount to be backflushed from RIP to finished goods.

Raw materials beg (less: conversion cost) 33,800
Purchases 347,000
Raw materials end (less: conversion cost) (27,000)
RIP to FG 353,800

Compute the amount of Cost of Goods Sold after all transactions and adjustments were made.
Raw materials beg 15,300
Purchases 275,000
Raw materials end (18,100)
COGS 272,200
PFRS 15: Revenue from contracts with customers

Core principle

- An entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods and services.
- Revenue is recognized in accordance with that core principle by applying a five-step model
Revenue

- One of the most important measures of financial performance that a company reports
- Subject to fraud
- Most revenue transaction pose few problems for revenue recognition
- Not all transactions are simple
How and when to recognize Revenue

Before the change

- IAS 18 Revenue

- IAS 11 Construction Contracts

- IFRIC 13 Customer to Loyalty programs

- IFRIC 15 Agreements for the Construction of Real estate

- IFRIC 18: Transfer of Assets from Customers

After the change

- IFRS 15: Revenue from contracts with customers

Single model for performance obligations:

- Satisfied over time

- Satisfied at a point in time
Focuses on the transfer of control over the asset

Applies to all contracts with customers except for:

- Leases Contracts (IAS 17)

- Insurance contracts (IFRS 4/IFRS 17)
- Financial instruments and other contractual/obligations within the scope of IAS 39/IFRS 9, IFRS 10, IAS 27, IAS 28
- Non-monetary exchanges between entities to facilitate sales

5-step model for revenue recognition:

1. Identify the contract with a customer

- Revenues cannot be recognized without a contract
- Agreement between 2 or more parties creating enforceable rights and obligations
- Attributes for the contract to exist for the purposes of revenue recognition
o Parties have approved the contract and are committed to perform
o Each party’s rights and obligations to goods/services can be identified
o The contract has commercial substance
o The payment terms for goods/services can be identified
o It is probable that an entity will collect the consideration
(evaluate the customer’s ability to pay)
A contract does not exist if both of the following are true

1. The contract in underperformed

2. Both the seller and the buyer can terminate a contract without any penalty
Contract with a customer

1. Combination of contracts – can result to a new contract

2. Changes in the contract
- should be reflected prospectively
- change in the scope, price or both => must be approved by parties
- accounting => based on character and price of additional goods/services
o Create a new contract
o Modify the existing contract
Problem 1:

PC hub, a computer manufacturer, enters into a contract with AC University to deliver 30 computers for total price of P600,000
(P20,000 per computer)
Due to necessary preparation works, PC hub agrees to deliver the computers in 3 separate deliveries during the forthcoming 3 months
(10 computers in each delivery). AC University takes control over the computers at delivery

After the first delivery is made, AC University and PC HUB amend the contract. PC HUB will supply 20 additional computers (50 in
total)

How much revenue should PC HUB account from this contract for the year ended December 31 if:

Scenario 1: The price for additional 20 computers was agreed at P388,000, being P19,400 per computer. PC HUB provided a volume
discount of 3% for the additional delivery, which reflects the normal volume discounts provided in similar contracts with other
customers. (New Contract)

Scenario 2: The price for additional 20 computers was agreed at P280,000, being P14,000 per computer. PC HUB provided a discount
of 30% for the additional delivery because it hopes for the future cooperation with AC University (nothing even discussed yet).

As of December 31, PC HUB delivered 40 computers (30 as agreed initially and 10 under the contract amendment).

Performance Sales Price Sales Price 20 units 400,000

obligations
10 units 200,000 200,000 Additional
20 units 400,000 20 units 280,000
Additional 10 194,000 510,000 Total 680,000
Total 794,000 710,000 Divided by: 40 40
Price per unit 17,000

2. Identify the performance obligation (PO)

- An enforceable promise is a contract with a customer to transfer goods/services to the customer
- The entity must evaluate the goods/services performed to determine separate performance obligations
3. Determine the transaction price (TP)
- Transaction price: amount of consideration to which an entity expects to be entitled in exchange for transferring promised
goods/services to a customer excluding the amounts collected on behalf of third parties
- How to determine TP?
1. Cash payment
2. Deferred payment: Discount to PV
3. Non-cash consideration (@ FV)
4. Variable: Consideration is not fixed (estimate the price discount, rebate)
1. Expected value (large number of contracts with similar characteristics)
2. Most likely amount (2 possible outcomes)
- Past experience
Existence of significant financing component

Illustration:

ABC Construction enters into a contract with a customer to build a warehouse for P100,000 with a performance bonus of P20,000 that
will based on the timing of the completion. The amount of the performance bonus decreases by P5,000 per week for every week of
delay beyond the agreed-upon completion date. The contract requirements are similar to contracts that ABC has previously performed
and management believes that such experience is predictive for this contract. Management believes that there is a 60% probability that
the contract will be completed by the agreed-upon completion date, a 30% probability that it will be completed 1 week late, and only a
10% probability that it will be completed 2 weeks late.

Weighted Profitability Most likely outcome

120,000*60% 72,000 Management believes they will meet the deadline and receive the bonus
115,000*30% 34,500
110,000*10% 11,000
Contract price 117,500 120,000

4. Allocate the TP to the PO in the contract

- Objective: Allocate the TP to each performance obligation in an amount that depicts the amount of consideration for
transferring promised goods/services
- How to allocate the TP? Based on relative stand-alone selling prices
Except for:
o Allocating discounts: Allocating consideration with variable amounts
o What is the stand-alone selling price? Price at which the entity would sell promised good or services separately to
the customer (at contract inception)
The stand-alone SP of the product is not known: when goods/services are not sold separately, the transaction price must be allocated to
the separate performance obligations using a reasonable approach.

3 methods:
Adjusted market assessment approach - refers to prices from competitors for similar goods/services
Expected cost plus margin approach-forecast expected costs to satisfy a performance obligation, then add a profit margin
Residual approach - total transaction price less the sum of the observable stand-alone selling prices of other goods/services promised
in the contract.
5. Recognize revenue as the PO is satisfied
- Performance obligation is satisfied when a promised good or service is transferred to a customer
- How can a performance obligation be satisfied? point in time or over time? => Customers’ perspective
If any of the following is present, recognize revenue OVER TIME

1. The customer receives and consumes the benefits as the seller performs.

2. The customer controls the asset as it is created or enhanced.

3. The company does not have any alternative use for the assets created and either (a) the customer receives benefits as the company
performs and therefore the task need not be re-performed, or (b) the company has a right to payment and this right is enforceable.

Problem 2: Jose enters into a 12-month telecom plan with the local mobile operator ABC on July 1, 20x9. The terms of plan are as
follows: Jose's monthly fixed fee is P1,200.

Jose receives a free handset at the inception of the plan. ABC sells the same handsets for P14,000 and the same monthly prepayment
plans without handset for P500/month.

Performance Sales Price % Total revenue Revenue 20x9

obligations
Cellphone 14,000 70% 10,080 10,080
Service 6,000 30% 34,320 2,160 (4,320 x 6/12)

Total 20,000 100% 14,400 12,140

Entries:

July 1 Contract Asset 10,080

Revenue – CP 10,080

Jul 31 A/R 1,200

Revenue – service 360

Contract asset 840

Problem 3:

ManyBits is a software company who entered into contract with ABC Co on July 1, 20x9. Under the contract, ManyBits is obliged to:

- Provide professional services consisting of customization and testing of a software product that ABC has purchased from a
third party.
- Provide post-implementation support for 1 year after the customized software is delivered.
The total contract price is P55,000.

Many Bits assessed its total cost for fulfilling the contract as follows:

- Cost of developers and consultants for customizing and testing the existing software: P43,000;
- Cost of consultants for post-delivery support: P2,000;
- Total estimated cost of fulfilling the contract: P45,000.
As of December 31, 20x9, ManyBits incurred the following costs of fulfilling the contract.

- Cost of developers and consultants for customizing and testing the software: P12,900.

Total Cost Cost of services Percentage Allocation of Revenue earned

rendered to date completed revenue
Professional 43,000 12,900 30% 50,000 15,000
Services
Post delivery 2,000 - 5,000 -
Total Revenue 45,000 12,900 55,000 15,000
12,900/43,000 55,000/1.10

Problem 4:

On January 1, 20x9, ABC Company enters into a contract to transfer Product One and Product Two to XYZ Company for P200,000.
The contract specifies that payment of Product One will not occur urkil Product Two is also delivered. ABC Company determines that
the stand-alone prices are P60,000 for product One and P140,000 for product Two. ABC Company delivers Product One to XYZ
Company on February 1, 20x9. Product Two is delivered on March 1, 20x9.

On January 1, 20x9, how much is the amount of accounts receivable to be recorded?

None

On February 1, 20x9, how much is the amount of accounts receivable to be recorded?

On February 1, 20x9, how much is the amount of revenue to be recorded?

Contract Asset 60,000

Sales Revenue 60,000

On March 1, 20x9, how much is the amount of accounts receivable to be recorded?

On March 1, 20x9, how much is the amount of revenue to be recorded?

Accounts Receivable 200,000

Contract Asset 60,000

Sales Revenue140,000

Problem 5:

YSL sold 3,000 boxes of perfumes on January 20x8 at the price of P90 per box. The sales contract offers a full refund for any product
returned within 30 days from the date of purchase. Based on historical experience, YSL expects that 3% of sales will be returned.

How many performance obligations are there in each sale of a box of perfume? 1

How much revenue should YSL recognize in January?

Boxes sold 3,000

Sales Price 90

Total 270,000

Returns (8,100)

Revenue to be recognized 261,900

What is the journal entry to record the revenue in January assuming one box costs P50 and the company uses the perpetual
system of inventory to record inventory?

Cash/Accounts Receivable 270,000

Sales Revenue 261,900

Refund Liability 8,100

Cost of Sales (2,910 x 50) 145,500

Return Asset 4,500

Inventory (3,000 x 50) 150,000

Independent Case:

How much revenue should YSL recognize in January if 100 bottles of perfume was returned?

Net Boxes sold (3,000-100) 2,900

Sales Price 90

Total 261,000

What is the journal entry to record the net effect of the returns on January after the return?

Refund Liability 8,100

Sales Revenue (10*90) 900

Cash/Accounts Receivable 100 * 90 9,000

Inventory (100*50) 5,000

Return Asset 4,500

Cost of sales (10*50) 500

Assume no returns were made by January and the refund period lapsed, what would be the journal entry to record the lapse
of the refund period?
Refund Liability 8,100

Sales Revenue 8,100

Cost of Sales 4,500

Return Asset 4,500

Entity UPDATES its measurement of the refund liability and return asset at each reporting date for changes in expectations about the
amount of the refunds

Recognize adjustments to the:

Refund liability as REVENUE; and

Return asset as an EXPENSE.[PFRS 15.B24-B25]

Revenue from Construction Contracts

Construction Contracts (LTCC)

A construction contract is a contract specifically negotiated for the construction of an asset or a combination of assets that are closely
interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use

- Constructed over long periods of time (more than 1 year)

Point of view of the contractor Client – PPE

Types of contracts:

Fixed price =>Price could change if there is a Cost Escalation Clause

CONSTRUCTION REVENUE:

Contract is complete = TOTAL amount of consideration receivable under the contract.

Contract is NOT complete = Estimate of what the total consideration will be.
Revenue From the Contract includes:
1. The initial amount of the contract price
2. The variations in the contract work and claims
=> Change orders in the contract. => Reduced by any penalties incurred caused by delays in construction.
=> Incentives/Bonuses the contractor may receive for early completion.

CONSTRUCTION COSTS: => Expenses incurred by the contractor

Construction Costs includes:

1. Costs directly related to the contract
2. Costs attributable to the contract activity
3. Costs which are specifically chargeable to the client

All costs which are recoverable from the client.

1. Incremental costs of obtaining a contract.
2. Costs of fulfilling contract.

Accounting for Construction Contracts

Depends on the Reliability of the Estimates to Complete the Project:
1. Reliable – Percentage of completion
 Contract Price is assured
 Cost can be reliably estimated
 Collection is assured
2. Not Reliable – Zero profit method

Accounting for LTCC applying PFRS 15

Revenue:

- Is recognized when earned

- When we have already fulfilled our performance obligation.
For LTCC:

=>Satisfying their obligation with their client would usually take a longer period of time and the customer does not control the asset as
it is being created.

=> Satisfaction then of the contractor's obligation should be evaluated from the customer's perspective

Acctg for LTCC applying PFRS 15

For LTCC:

=> The satisfaction of a developer's obligation involves the creation of an asset with no alternative

=> Contractor has a right to payment for performance completed to date

(Overtime -> Percentage of Completion method -> Methods of Measuring Progress: 1. Output Method 2. Input Method)

5-Step Model for Revenue Recognition

1. Identify the contract with a customer

=> The Construction Contract between the Contractor and the Client.
2. Identify the performance obligation (PO)

=>The contractor has only ONE PERFORMANCE OBLIGATION, the obligation to deliver the specified construction project in
accordance with the approved construction plan.

3. Determine the transaction price (TP)

=> The transaction Price is the Contract Price of the Project => Fixed Price Contract, Cost Plus Contract, Contract with Variation

4. Allocate the TP to the PO in the contract

=> NO ALLOCATION needed for LTCC because there is only ONE PERFORMANCE obligation.

5. Recognize revenue as the PO is satisfied => Revenue is to be recognized over time using the POC => POC = Cost Incurred to Date
(CITD)/ Total Estimated Cost (TEC)

OR

Construction in Progress (CIP)/ Contract Price (CP)

When the POC is not applicable in construction contracts

- Cost Recovery Method (Zero Profit Method)

1. If the estimates to complete the project are NOT RELIABLE

2. If TEC is > than CP, then: => the PROBABALE LOSS is 100% recognized AT ONCE

REGARDLESS of the POC. => REVERSE the profits recognized in the prior years.

Problem 1

SMDC Construction signed a contract to build a building over a period of 3 years for a price of P7,000,000. Information relating to the
performance of the contract is summarized as follows:

2019 2020 2021

Construction incurred during the year P1,500,000 P2,420,000 P1,680,000
Estimated cost to complete 3,500,000 1,680,000 0
Billings per year 1,200,000 2,600,000 3,200,000
Collections per year 1,000,000 2,700,000 3,300,000

Required:

Determine the gross profit per year under the percentage of completion method.

2019 2020 2021

Contract price 7,000,000 7,000,000 7,000,000
Multiply by: % of 30% 70% 100%
Completion
Revenue to date 2,100,000 4,900,000 7,00,000
CITD (1,500,000) (3,920,000) (5,600,000)
Gross profit to date (GPTD) 600,000 980,000 1,400,000
Gross profit prior year 0 (600,000) (980,000
(GPPY)
Gross profit for the year 600,000 380,000 420,000
(GPY)

Cost incurred to date (CITD) 1,500,000 3,920,000 5,600,000

Total estimated cost (TEC) 5,000,000 5,600,000 5,600,000
POC 30% 70% 100%

2019 2020 2021

Construction in Progress (CIP) 1,500,000 2,420,000 1,680,000
Cash/ A/P 1,500,000 2,420,000 1,680,000
Accounts Receivable 1,200,000 2,600,000 3,200,000
Progress Billings 1,200,000 2,600,000 3,200,000
Cash 1,000,000 2,700,000 3,300,000
Accounts receivable 1,000,000 2,700,000 3,300,000

2019 2020 2021

Contract price 7,000,000 7,000,000 7,000,000
Multiply by: % of 30% 70% 100%
Completion
 Revenue to date 2,100,000 4,900,000 7,00,000
CITD (1,500,000) (3,920,000) (5,600,000)
Gross profit to date (GPTD) 600,000 980,000 1,400,000
Gross profit prior year 0 (600,000) (980,000
(GPPY)
Gross profit for the year 600,000 380,000 420,000
(GPY)

2019 2020 2021

Construction cost 1,500,000 2,420,000 1,680,000
Construction in Progress (CIP) 600,000 380,000 420,000
Revenue 2,100,000 2,800,000 2,100,000
Progress Billings 7,000,000
Construction in Progress (CIP) 7,000,000

2019 2020 2021

Construction in Progress (CIP) 2,100,000 4,900,000 7,000,000
Progress Billings 1,200,000 3,800,000 7,000,000
Asset/(Liability) 900,000 1,100,000 0

Prepare the entries under the percentage of completion method and the cost recovery method.

2019 2020 2021

Contract price 7,000,000 7,000,000 7,000,000
Multiply by: % of 30% 70% 100%
Completion
Revenue to date 2,100,000 4,900,000 7,00,000
CITD (1,500,000) (3,920,000) (5,600,000)
Gross profit to date (GPTD) 600,000 980,000 1,400,000
Gross profit prior year 0 (600,000) (980,000
(GPPY)
Gross profit for the year 600,000 380,000 420,000
(GPY)
2019 2020 2021
Construction cost 1,500,000 2,420,000 1,680,000
Construction in Progress 1,400,000
(CIP)
Revenue 1,500,000 2,420,000 3,080,000

Problem 2

The SUN Construction signed a contract to build a dam over a period of 3 years for a price of P20,000,000. Information relating to the
performance of the contract is summarized as follows:

2019 2020 2021

Construction incurred during the year P4,000,000 P8,000,000 P12,000,000
Estimated cost to complete 12,000,000 12,000,000 0
Billings per year 3,000,000 7,000,000 10,000,000
Collections per year 2,600,000 7,200,000 10,200,000

Required: Determine the gross profit per year under the percentage of completion method.

2019 2020 2021

Contract price 20,000,000 20,000,000 20,000,000
Multiply by: % of 25% - -
Completion
Revenue to date 5,000,000 20,000,000 20,000,000
CITD (4,000,000) (24,000,000) (24,000,000)
Gross profit to date (GPTD) 1,000,000 (4,000,000) (4,000,000)
Gross profit prior year 0 (1,000,000) 4,000,000
(GPPY)
Gross profit for the year 1,000,000 (5,000,000) 0
(GPY)

Cost incurred to date (CITD) 4,000,000 12,000,000 24,000,000

Total estimated cost (TEC) 16,000,000 24,000,000 24,000,000
POC 25% - -
Problem 3

Construction Builders was contracted by Mr. Mayor to construct 35 townhouses. The estimated total cost of the construction was
P49M. Construction bills its clients at 120% of total cost estimated to complete the project at the time the contract was signed.
Details regarding the project are given below:

Units finished Cost incurred to date Estimated cost at completion

20x5 10 14,721,875 58,887,500
20x6 18 36,286,250 55,825,000
20x7 7 55,125,000 ?

What is the realized gross profit during 20x6 using the output measures method?

Contract Price 58,800,000

Estimated cost of completion (20x5) 58,887,500
Loss in 20x5 (87,500)

Contract Price 58,800,000

Estimated cost at completion 55,825,000
Estimated Gross profit 2,975,000
POC 80%
GPTD X6 2,380,000
Loss in 20x5 87,500
Gross profit for 20x6 2,467,500

Problem 4

Construction Co entered into a contract to build a small bridge in Bacolod. The contract price was 3,750,000 and Construction
estimated a total cost of 3,450,000 in 2020. The company incurred 1,150,000 of cost by 2020. By the end of 2021 it was apparent that
Construction had underestimated the real cost of the bridge. The estimated total cost of the project increased to 3,900,000.
Construction cost incurred in 2021 totaled 2,000,000. The project was completed in 2022 at a final cost of 3,700,000. The amount of
progress billings as of December 31, 2021 was 3,250,000 of which 75% was collected at the end of 2022.

What is the realized gross profit (loss) in 2022?

Contract Price 3,750,000

Estimated cost at completion 3,900,000
Loss in 2021 (150,000)

Contract Price 3,750,000

POC 100%
Revenue to date 3,750,000
Construction cost 3,700,000
GPTD 50,000
Loss in 2021 150,000
Gross profit for 2022 200,000

Problem 5

On January 1, 20x6 Contractor Co entered into a contract to build a large office building for Accountant Co for a total contract price
of P5,000,000. Accountant will make annual payments to Contractor Co but the amount of these payments cannot exceed the direct
costs incurred by Contractor Co. the construction contract provides Accountant Co with a final inspection to ensure compliance with
the contract terms prior to accepting the completed project. It has been the accounting policy of Contractor Co to use percentage-of-
completion method to compute its construction revenue and gross profit. On January 1, 20x8, Contractor Co implemented as
accounting change from percentage-of-completion method to zero profit or cost recovery method. The following date were provided
by the bookkeeper of Contractor Co for the years ended December 31, 20x6-20x8:

20x6 20x7 20x8

Costs incurred each year P1,350,000 P2,250,000 P 600,000
Estimated cost to complete 3,150,000 400,000 0
Progress billings each year 400,000 2,000,000 2,600,000
Progress payments received each year 275,000 2,100,000 2,625,000

The above costs incurred for each year are inclusive of actual marketing expense and general administrative costs, which were not
reimbursable under construction contracts and provided by the bookkeeper as follows:

20x6 20x7 20x8

Marketing Expense 70,000 200,000 120,000
General administrative costs 30,000 150,00 80,000
The corporate income tax for the three years is 30%.

What is the net income to be reported by Contractor Co for the year ended December 31, 20x7 under IFRS 15?

20x6 20x7
Contract price 5,000,000 5,000,000
Multiply by: % of 25% 90%
Completion
Revenue to date 1,500,000 4,500,000
CITD 1,350,000 3,600,000
Gross profit to date (GPTD) 150,000 900,000
Gross profit prior year 0 (150,000)
(GPPY)
Gross profit for the year 150,000 750,000
(GPY)

Cost incurred to date (CITD) 1,350,000 3,600,000

Total estimated cost (TEC) 4,500,000 4,000,000
POC 30% 90%

20x7

Gross profit for 20x7 750,000

Operating expenses (350,000)
Income before tax 400,000
Income tax (120,000)
Net Income 280,000

Problem 6

BUILDERS Construction is constructing an office building under contract. The contract calls for progress billings and payments of
P1,240,000 each quarter. The total contract price is P14,880,000 and the company estimates total costs of P14,200,000. The company
estimates that the building will take three years to complete and construction commences on 2022.

At December 31, 2023 BUILDERS Construction estimates that it is 75% complete with their current construction project; however,
the estimate of total costs to be incurred has risen to P14,400,000 due to unanticipated price increases.

How is the difference, debit/(credit) between the construction in progress and the billings on construction in progress
reported?

Revenue 14,880,000
POC 75%
Revenue to date 11,160,000
Progress billings 9,920,000
Excess 1,240,000

If the building was 30% completed by the end of 2022, what is the total amount of expenses to be reported for 2023?

CITD-2023
Total Estimated Cost 14,400,000
POC 75% 10,800,000
CITD-2022
Total Estimated Cost 14,200,000
POC 30% 4,260,000
Cost for 2023 6,540,000
Accounting for Franchise Operations – Franchisor

Licensing:

A LICENSE establishes a customer's rights to the intellectual property of an entity. Licenses of intellectual property may include, but
are not limited to licenses of any of the following:

(a) Software and Technology;

(b) Motion pictures, music and other forms of media and entertainment;

(c) Franchises; and

(d) Patents, trademarks and copyrights. [IFRS 15:B52]

Franchise

A franchise is a contractual agreement which involves the granting of business rights by a franchisor to a franchisee that will operate
in certain geographical area or location

2 Types of Franchise:

1. Contractual arrangement between two private entities or individuals.

2. Contractual arrangement between a private entity or an individual and the government.

Franchises and licenses may be for a definite period of time or for an indefinite period of time

Franchises

PFRS 15 identifies TWO sources of Revenue:

Sales of the initial franchise

1,000,000

400,000 => right to operate under the name

350,000 => other services provided by the franchisor

250,000 => support

How do we account for these fees?

Point in time and Over Time (Based on the Franchisor's PERFORMANCE OBLIGATION)

Continuing fees based on the operations of franchises.

* If the franchisor has many deliverables, the entity should consider if the license is a separate PO or whether it should be combined
with other POS

Franchise

PERFORMANCE OBLIGATIONS of the

Franchisor:

- Each of the following performance obligations of the franchisor are to be accounted for SEPARATELY:
- Grant a right to open a business
- Allow the franchisee to use the trade name or other intellectual property of the franchisor

- To provide continuing services to the franchisor.

Franchise

What is the INITIAL FRANCHISE FEE (IFF)?

Cash Down payment xxx

PV of Future Payments xxx

IFF xxx

When is the IFF earned?

When the Performance Obligation is satisfied by the franchisor. (Point in Time/Over Time)

How is revenue from the CONTINUING FRANCHISE FEE RECOGNIZED?

Recognized using ACCRUAL ACCOUNTING

How is interest income on the note receivable accounted for?

Accounted for using the EFFECTIVE INTEREST METHOD

When are the related expenses recognized?

When the IFF is EARNED, PO=> Satisfied

How is sale of PPE by the franchisor accounted for?

Accounted for as a separate performance obligation

Problem 1

Mikasa Inc enters into a franchise agreement on December 31, 20x1with Eren Co, giving Eren the right to operate as a franchise of
Mikasa for 5 years. Mikasa charges Eren an initial franchise fee of P500,000 for the right to operate as a franchisee. Of this amount,
P200,000 is payable when Eren signs the agreement, and the note is payable in 5-annual payments of P60,000 every December 31. As
part of the agreement, Mikasa will help Eren in the site location, negotiate the lease or purchase of the site, supervise the
construction activity, and provide employee training and the equipment necessary to be a distributor of Mikasa’s products.
Similar training services and equipment are sold separately by Mikasa. Eren also promises to pay Mikasa ongoing royalty
payments of 1% of its annual sales, payable each January 31 of the following year and is obliged to purchase products from Mikasa at
their stand alone selling prices at the time of purchase. The imputed interest for a loan of this type is 8%. The present value of an
ordinary annuity of 8% for five periods is 3.9

Mikasa normally provides training for P100,000, costing P70,000, and sells equipment costing P100,000 for P140,000. The
equipment is installed on January 15, 20x2. A soft opening of the store commences on February 2, 20x2, after Mikasa finishes 80% of
the required training for Eren to fully operate.

How many performance obligations exists in the contract? 3

Determine the revenue to be recognized from the initial franchise fee on February 1, 20x2.

Determine the IFF

Cash payment 200,000

Notes Receivable (PV) 239,400 (60,000 x 3.9)
IFF 439,000

Allocate the IFF

Performance obligations: Residual approach
1. Right to operate the franchise 199,400
2. Provide employee training 100,000
3. Provide equipment 140,000
Total 439,000

Determine the Revenue

Performance obligations: Residual approach PO Satisfied Revenue
1. Right to operate the franchise 199,400 Yes 199,400
2. Provide employee training 100,000 80% 80,000
3. Provide equipment 140,000 Yes 140,000
Total 439,400 419,400

Assume the training is completed during the year and Eren reports sales revenues of P1,000,000, determine the net income of
Mikasa from its franchise with Eren.

Performance obligations: Residual approach PO Satisfied Revenue

1. Right to operate the franchise 199,400 Yes 199,400
2. Provide employee training 100,000 80% 80,000
3. Provide equipment 140,000 Yes 140,000
Total 439,400
CFF (Royalties) (1,000,000 x 1%) 10,000
Interest Income (239,400 x 8%) 19,152
Cost of training (70,000)
Cost of equipment (100,000)
Net Income 298,552

Recognition of Franchise Rights Revenue Over Time

Depending on the economic substance of the rights, the franchisor may be providing ACCESS TO THE RIGHT rather than
transferring CONTROL of the franchise rights.

Right to USE the License/Franchise

=> Franchise right that DOES NOT CHANGE as the Franchise is transferred to the customer (Point in Time)
Right to ACCESS the License/Franchise

=> The franchisee's access to the franchise might CHANGE OVER TIME based on the actions of the franchisor (Over Time)

Problem 2

ABC Company, a franchisor, provides a range of computer services (hardware and software installation, repairs, network solutions
and the like) to customers. Each franchise agreement gives a franchisee the right to open a similar store and sell ABC Company
products and services in their area for 5 years. Under the contract, ABC will provide the franchisees with a number services to support
and enhance the franchise brand, including:

1. Advising and consulting on the operations of the store;

2. Communicating new hardware and software developments and service techniques;
3. Providing business and training manuals; and
4. Advertising programs and training.
As an almost entirely service operation, ABC provides few upfront services to franchisees. Instead, the franchisee recruits service
technicians, who are given ABC training materials (online manuals and tutorials), which are updated for technology changes, on a
monthly basis as a minimum.

ABC enters into a franchise agreement with XYZ Company on December 15, 20x7, giving a franchisee the rights to operate an ABC
franchise for 5 years. ABC charges an initial franchise fee of P500,000 for the right to operate their franchise, payable upon signing
the contract. ABC also receives ongoing royalty payments of 7% of the franchisee’s annual sales, payable every January 15, the next
year. The franchise began operations in January 20x8 and recognizes P850,000 revenue for the 20x8.

What are the performance obligations in this contract?

Right to operate as a Franchise

1. Right to the trade name, market area and propriety know how for 5 years.
2. Licensed rights and the ongoing training materials
3. Providing access to the rights and continue to perform updates and services
What is the revenue for 20x8?

IFF (over time) 500,000

Divided by years 5 years
Revenue from IFF 100,000
Royalties 850,000
Royalty percentage 7% 59,500
CFF 159,500

Problem 3

ABC School is a franchisor that grants franchisees to operate as a mathematics enrichment centre. Each franchise agreement
gives the franchisee the right to open an outlet and provide services in the area for a period of 5-years. Under the contract, ABC
also provides the franchisee with a number of services to support and enhance the franchise brand including giving consultations
on the business operations; communicating upgrades in the curriculum and teaching techniques; and providing trainings and
materials needed for their operations.

The franchisees employ instructors will be trained by ABC, are given instructional modules and are regularly updated for changes,
at least on a monthly basis.

ABC enters into a franchise agreement on December 31, 20x8, giving a franchisee the rights to operate as a franchise for five
years. ABC charges an initial franchise fee of P1,000,000 for the right to operate as franchisee, payable upon signing the contract.
ABC also receives ongoing royalty payments of 5% of the franchise’s annual enrolment(payable each January 15, of the following
year).

What is the franchise revenue on December 31, 20x8? 0

What is the franchise revenue on December 31, 20x9 if the franchisee reports revenue P15,000,000 for 20x9?

IFF 1,000,000
Divided by 5 years 5 years
Revenue from IFF 200,000
Enrolment Revenue 15,000,000
Royalty payment 5%
CFF 750,000
Total Revenue 950,000
Problem 4
ADINAYK a sports clothing line designer has a worldwide recognized brand. A global manufacturer contracts with the designer
to collaborate for the right to use its brand name on shoes that they produce. The terms of agreement provide the shoe
manufacturer with rights to use the brand name on the shoes for two years. ADINAYK will receive P12,000,000 upfront and 15%
of all proceeds from the shoe sales that included their brand. The shoe manufacturer will provide updated sales estimates on a
quarterly basis and actual sales data on a monthly basis. The contract was signed and commenced on August 30, 20x1 and sales
for the months September to December amounted to P25,000,000. December sales amounted to P8,000,000 and royalties for this
month are yet to be received by ADINAYK.

How much is the revenue earned for 20x1?

License 12,000,000
No. of years 2
Months outstanding 4/12 2,000,000
Sales 25,000,000
Royalty payment 15% 3,750,000
Total Revenue 5,750,000

Problem 5

KAINAN grants a franchisee the right to operate a small restaurant in a specific local market using KAINAN’s brand name,
concept and menu for a period of ten years. The entity commonly conducts advertising campaigns, promoting the brand name,
and the general restaurant concept. The franchise will also purchase kitchen equipment from the entity. The entity will receive
P9,500,000 for the franchise right, including kitchen equipment costing P500,000, plus a royalty paid quarterly, based on 5% of
the franchisee’s sales over the life of the contract. Operation with one of the franchisees commences on November 1, 20x1,
generating sales of P5,000,000 as of December 31, 20x1.

Determine the revenue for 20x1.

2 performance obligations

Equipment (Point in Time) 500,000

License (over time) 9,000,000
No. of years 10
Months Outstanding 2/12 150,000
Sales Revenue 5,000,000
Royalty 5% 250,000
Total Revenue 900,000
Home Office and Branch Accounting

Branch

 Identifiable business within the business entity that are EXTENSIONS of the Home Office.
 Separate accounting entities but are NOT separate legal entities.
 The financial statements of the Branch are combined with financial statements of the main office and other Branches at the end of
the year. "COMBINED FINANCIAL STATEMENTS".

INTER-OFFICE Transactions

 Transactions between Home Office and EXTERNAL ENTITIES are recorded in the Home Office books in the USUAL
MANNER.
 Transactions between Branch and EXTERNAL ENTITIES are recorded in the Branch books in the USUAL MANNER.
 Transactions between the Home Office and Branch or vise-versa are INTERCOMPANY TRANSACTIONS.
 INTERCOMPANY TRANSACTIONS are recorded in both the Home Office and Branch books
Reciprocal Accounts

HOME OFFICE BOOKS BRANCH BOOKS

Branch Current Account Home Office Current Account

 An ASSET in the HOME OFFICE BOOKS.  An EQUITY in the BRANCH BOOKS
 INVESTMENT of the home office in the branch  EQUITY of the home office in the branch net
net assets. assets.
 Close nominal accounts to this account
Shipments to Branch
 Account used when the Home Office SENDS Shipments from Home Office
Inventory to the Branch  Account used when the Branch RECEIVES
Inventory from the Home Office

Reciprocal Accounts are ELIMINATED in the COMBINED FINANCIAL STATEMENTS

Home Office & Branch Accounting

Things to REMEMBER:
Reciprocal Accounts
 A continuous relationship between the Home Office and the Branch. (increase/decrease in one account will also result to an
increase/decrease in the other account).
 Check/look for transactions involving time lags (timing difference)
Home Office transferring goods to branch in excess of cost
 The accounting records of the home office are adjusted to permit measurement of actual cost of merchandise transferred.
 Done thru the "Allowance for Overvaluation" or "Loading" or "Unrealized Profit" account.
Freight Costs on Shipments
 Should be included in branch inventory and Cost of goods sold.
 Should not include excessive freight charges
Home Office and Branch expenses allocation
 Necessary to provide accurate measurement of income for the separate units of the enterprise.
Reconciliation of home office and branch accounts
 Necessary if errors have been made in recording reciprocal transactions.
 Approach is similar to the approach to a bank reconciliation

SALES AGENCY VS BRANCH

SALES AGENCY BRANCH

Accounting Records Home Office Own Set of Books Separate entity

Resources Revolving Fund Other Assets aside from cash

=> Accounted for like a petty cash fund.

=> Imprest fund basis
Disbursements When the fund is replenished (except at the end of the year)

Inventory Used as "Samples" Own Inventories (From the Home

Office Local Purchases)

Sales Supplied and fulfilled Own Sales

by the Home Office

Accounting for Home office and branch

PROBLEM 1
Home office opens a branch and enters into the following transactions. Home office transfers P10,000 cash to Branch 1
Home Office Branch 1
Branch Current ] 10,000 Cash 10,000
Cash 10,000 Home Office Current 10,000

Branch 1 pays P1,000 Home Office Expenses

Home Office Branch 1
Expenses 1,000 Home Office Current 1,000
Branch Current 1,000 Cash 1,000

Branch 1 collects P10,000 Home Office Receivables

Home Office Branch 1
Branch Current 10,000 Cash 10,000
A/R 10,000 Home Office Current 10,000

Home office sends goods costing P8,000 to Branch 1 at a billed price of P10,000
Home Office Branch 1
Branch Current 10,000 Shipments from H.O. 10,000
Shipments to Branch 8,000 Home Office Current 10,000
Allow for Overvaluation 2,000

Branch 1 sells goods billed at P9,000 for P18,000. The branch collected P3,000 with the balance on account.
Home Office Branch 1
Cash 3,000
A/R 15,000
Sales 18,000

Home Office collects P10,000 Branch 1 Receivables

Home Office Branch 1
Cash 10,000 Home Office Current 10,000
Branch Current 10,000 A/R 10,000

Branch 1 transfers P1,000 to Branch 5

Home Office Branch 1
Branch Current 5 1,000 Home Office Current 1,000
Branch Current 1 1,000 Cash 1,000

Branch 1 purchases equipment for P5,000 on account. All fixed assets are to be recorded in the Home Office.
Home Office Branch 1
Equipment 5,000 Home Office Current 5,000
Branch Current 5,000 A/P 5,000

Home office pays P1,000 Branch 1 payables.

Home Office Branch 1
Branch Current 1,000 A/P 1,000
Cash 1,000 Home Office Current 1,000

Depreciation of P1,000 on the equipment of Branch 1 is recorded.

Home Office Branch 1
Branch Current 1,000 Depreciation Exp. 1,000
Acc. Dept'n 1,000 Home Office Current 1,000

Branch 1 purchases goods for P3,000

Home Office Branch 1
Purchases 3,000
Cash 3,000

Branch 1 pays P10,000 expenses.

To be allocated as follows:
50% to Home Office,
30% to Branch 1 and
20% to Branch 5
Home Office Branch 1
Expenses-H.O. 5,000 Home Office 7,000
Branch 5 2,000 Expenses-BR 1 3,000
Branch 1 7,000 Cash 10,000

Closing Entries for BRANCH 1

Home Office Branch 1
Sales 18,000
Inventory 4,000
Expenses 3,000
Depreciation Exp 1,000
Purchases 3,000
Shipments from H.O. 10,000
Income Summary 5,000

Closing Entries for BRANCH 1 and HOME OFFICE

Home Office Branch 1
Branch current 5,000 Income summary 5,000
Income summary 5,000 Home office current 5,000

Closing Entries for HOME OFFICE

Home Office Branch 1
Home Office
Income Summary-Branch 5,000
Allowance for overvaluation 1,800
Retained Earnings 6,800

Computation of the Realized Allowance Cost of Sales (COS) Statement

Cost Allowance for overvaluation Billed price
Beginning Inventory
Home office
Local purchases
Shipments from home office 8,000 2,000 10,000
Purchases 3,000 3,000
Goods available for sale 11,000 2,000 13,000
Ending Inventory
Local purchases (3,000) (3,000)
Home office (800) (200) (1,000)
COS 7,200 1,800 9,000

Branch Income statement and true branch net income

Sales 18,000
COS (@ billed price) (9,000)
Expenses (3,000)
Depreciation expense (1,000)
Branch Net Income 5,000
Realized allowance 1,800
True branch net income 6,800

PROBLEM 2
Intercompany Transactions

The Home Office transfers goods costing P10,000 to Branch 1 for P15,000. Branch 1 pays freight of P1,500.
Home office Branch 1 Branch 5
Branch 1 15,000 Ship from HO 15,000
Ship to BR 10,000 Freight-in 1,500
Unrealized Profit 5,000 Home office 15,000
Cash 1,500
The Home Instructs the Branch to transfer % of the goods to Branch 5. Branch 5 pays freight costs of P1,000. If the goods were
directly transferred from the Home Office to Branch 5, freight cost should have been only P800.
Branch 5 3,550 Home office 4,125 Ship from HO 3,750
Expenses 575 Freight-in 375 Freight-in 800
Branch 1 4,125 Ship from HO 3,750 Home office 3,550
Cash 1,000
Expenses: Excess of HO-Br 5 =200 ; Freight from HO-Br 1 =375
PROBLEM 3
Reconciliation of Home Office and Branch Account
Swift Corporation, operates a number of branches in Metro Manila. On June 30, 2021, the Home Office books showed a Sn. Lorenzo
branch account balance of P51,100. The following information may help in reconciling both accounts:
1. A P24,000 shipment, charged by Home Office to Sn. Lorenzo branch, was actually sent to and retained by Sto. Tomas
branch.
2. A P 30,000 shipment, intended and charged to Sn Jose branch was shipped to Sn. Lorenzo branch and retained by the latter.
3. A P4,000 emergency cash transfer from Sn. Lorenzo branch was not taken up in the Home Office books.
4. Home office collects a Sn. Lorenzo branch accounts receivable of P7,200 and fails to notify the branch.
5. Home office was charged for P2,400 for merchandise returned by Sn. Lorenzo branch on June 28. The merchandise is in
transit.
6. Home office erroneously recorded Sn. Lorenzo's TRUE BRANCH net income for May, 2021 at P32,550. The BRANCH net
income is P25,350.
HO Branch
Unadjusted bal. 51,100 50,700
1. (24,000)
2. (30,000)
3. (4,000)
4. (7,200)
5. (2,400)
6. (7,200)
Adjusted Balance: 43,500 43,500

Determining TRUE BRANCH NET INCOME

Cost Allowance for overvaluation Billed price
Beginning Inventory
Home office
Local purchases
Shipments from home office
Purchases
Goods available for sale
Ending Inventory
Local purchases
Home office
COS
PROBLEM 4

GROOVE Co established its first branch in Makati on June 1, 20x8. During the branch’s first year of operations, the home office
supplied merchandise to the branch worth 165,000, which included a mark-up of 25% on cost. The branch also purchased
merchandise from outsiders amounting to 26,000. Sales for cash were 80,000; while sales on account were 250,000. At year-end, the
branch reported operating expenses of 32,000 and ending inventory of 38,000, which includes 10,000 purchased from outsiders.

What is the branch net income as far as the home office is concerned?

Cost Allowance for overvaluation Billed price

Beginning Inventory
Home office
Local purchases
Shipments from home office 132,000 (165k/125%) 33,000 165,000
Purchases 26,000 26,000
Goods available for sale 158,000 191,000
Ending Inventory
Local purchases 10,000 10,000
Home office 22,400 (28k/125%) 5,600 28,000
COS 125,600 27,400 153,000

Ending inventory
Branch is concerned 38,000 (10,000+28,000)
Home office is concerned (Combined EI) 32,400 (10,000+22,400)
Realized allowance for overvaluation 27,400
Ending balance of allowance for overvaluation 5,600

Sales 330,000
Cost of sales @Cost (125,600)
Opex 32,000
True branch net income 172,400

Or
Sales 330,000
Cost of sales @Billed price (153,000)
Opex (32,000)
Branch net income 145,000
Realized allowance 27,400
True branch net income 172,400

PROBLEM 5

The Dwarf Corporation is maintaining a branch in Cebu. During the year, the home office shipped goods to the branch at a cost of
120,000. The branch submitted to the home office the following report summarizing its operations for the period ended December 31,
20X6.

Sales (30% on account), 196,000; Expenses (50% of which is still unpaid), 50,000; Purchases, 25,000; Shipments from Home Office,
150,000; Inventory beg (30% from outsiders), 30,000; Inventory end (40% from Home Office), 90,000; remittance to Home Office,
60,000.

What is the cost of sales in so far as the home office is concerned?

Cost Allowance for overvaluation Billed price

Beginning Inventory
Home office 16,800 (21k x 80%) 4,200 21,000
Local purchases 9,000 9,000
Shipments from home office 120,000 30,000 150,000
Purchases 25,000 25,000
Goods available for sale 170,800 34,200 205,000
Ending Inventory
Local purchases 54,000 54,000
Home office 28,800 (36k x 80%) 7,200 36,000
COS 88,000 27,000 115,000

PROBLEM 6
On January 4, 20x3, Stronger Company opened its first branch in a nearby town. The branch obtained merchandise solely from the
home office; billings from these shipments were at 120% above cost to the home office. The adjusted trial balances for the home
office and the branch on December 31, 20x3, were as follows:

Home Office Branch

Debit (Credit) Debit (credit)
Cash P 46,000 P 14,600
Notes Receivable 7,000
Trade Accounts Receivable, net 80,400 37,300
Inventories 95,800 24,200
Investment in Branch 82,700
Furniture and Fixture, net 48,100
Trade Accounts Payable (41,000)
Ordinary Share, P2 par (200,000)
Accumulated Profits, 1/1/20x3 (25,000)
Dividends Declared 30,000
Home Office Current (82,700)
Sales (394,000) (101,100)
Cost of Goods Sold 200,500 85,800
Operating Expenses 69,500 21,900
Realized Allowance (85,800/220%*) 46,800
Net Income 124,000 40,200
(124,000 + 40,200 = 164,200)

*Billed price 220% – Cost 100% =120%

The physical inventories on December 31, 20x3, were in agreement with the perpetual inventory records of the home office
and the branch. Determine the combined net income of the home office and its branch.

PROBLEM 7

The Home Office sells merchandise to its branch at 120% of cost. The Branch was established several years ago with the policy that
all its merchandise would be acquired from the Home Office. Information from the records of the Home Office and Branch reveals
the following for the current year ended:
 Home Office Branch

Allow. for overvaluation in branch inventory P 9,200

Inventory, beginning P 7,200

Inventory, ending 12,000

The balance that would appear in the Allowance for Unrealized Gross Margin in Branch Inventory account on the Home
Office books, after adjusting and closing entries have been prepared by the Home Office, would be?

Inventory, ending 12,000

Divided by the rate of the allowance for overvaluation on cost 120%
Multiply by allowance rate 20%
Allowance for overvaluation – end 2,000

PROBLEM 8

Primary Sales, Inc. has a branch in Cubao. The Cubao branch buys merchandise from third parties and receives merchandise from the
Home Office for which it is billed at 20% above cost. Below are excerpts from the trial balance and data on the Home Office and
Cubao branch for the month just ended:

Home Office:
Cr. Allowance for Overvaluation of Inventory P 370,000
Cr. Shipments to Branch 850,000
Branch:
Dr. Beginning Inventory 1,440,000
Dr. Shipments from Home Office 1,020,000
Dr. Purchases 420,000
Month-end additional data:
Ending Inventory 1,460,000
From Home Office (at billed price) 1,170,000
From Outsiders (at cost) 290,000

The amount of allowance for overvaluation that was realized from the Branch sales for the month just ended amounted to?

Cost Allowance for Billed price

overvaluation
Beginning Inventory
Home office 1,000,000 (200,000/20%) 200,000 (squeeze) 1,200,000
Local purchases 240,000 240,000
Shipments from home office 850,000 170,000 1,020,000
Purchases 420,000 420,000
Goods available for sale 2,510,000 370,000 2,880,000
Ending Inventory
Local purchases 290,000 290,000
Home office 975,000 (1,170,000/120%) 195,000 1,170,000
COS 1,245,000 175,000 1,420,000
CORPORATE LIQUIDATION

2 Methods/Kinds/Types of Insolvency (Insolvency Act of the Philippines)

1. Voluntary
 The insolvent corporation voluntarily applies a petition to a court of law to be discharged from their liabilities ; or
2. Involuntary
 Three or more creditors of the insolvent corporation file a petition to a court of law for the adjudication of the
corporation as insolvent.

Liquidating the Corporation

Liquidation – the termination of the business/winding up of the affairs.

–The corporation is no longer a Going Concern.

Process of Liquidation

Sell Assets Remainder

Pay Liabilities
NRV Given to owners
 Corporate Liquidation Procedures
Similar to accounting for partnership Liquidation

1. Restate the assets and liabilities at their realizable values.

2. Identify the classification of the assets and liabilities.
3. Compute for the estimated recovery percentage.

Net free Assets

Recovery % = Total Unsecured Liabilities

4. Prepare the statement of affairs.

PROBLEM 1
On December 31, 20x9, the statement of affairs of BANKRUPT COMPANY, which is in bankruptcy liquidation, included the
following:
Assets pledged for fully secured liabilities 100,000
Assets pledged for partially secured liabilities 40,000
Free Assets 120,000
Fully secured liabilities 80,000
Partially secured liabilities 50,000
Unsecured liabilities with priority 60,000
Unsecured liabilities without priority 90,000

Compute the amount paid to:

Fully Secured Unsecured Liabilities w/ Partially Secured Unsecured Liabilities w/o
Liabilities Priority Liabilities Priority

Total Assets @ FV 260 FSL 80

FSL (80)
AP-PSL (40) UL-P 60
Free Assets 140
UL-w/P (60) UL -w/o P 90
NFA 80 Recovery % 80% 72
UL-w/o P
Unsecured PSL 10 PSL
USL w/o Priority 90 Secured 40

Total 100 Unsecured 10

Recovery % 80% 48

PROBLEM 2
A company that was to be liquidated had the following liabilities:
Income Taxes 10,000
Notes Payable secured by land 100,000
Accounts Payable 251,050
Salaries Payable 12,950
Administrative expenses for liquidation 20,000
 The company had the following assets: Book Value Fair Value
Current assets 100,000 95,000
Land 50,000 75,000
Building 150,000 200,000

Determine the following:

1. Total free assets:
2. Total liabilities with priority:
3. Net Free assets:
4. Total unsecured liabilities:

Total Assets @ FV 370,000

FSL 0
AP-PSL (75,000)
Free Assets 295,000
UL-w/P (42,950)
NFA 252,050
UL-w/o P
Unsecured PSL 25,000
USL w/o Priority 251,050

Total 276,050

PROBLEM 3
Weico Co. filed a voluntary bankruptcy petition on August 15, 20x4, and the statement of affairs reflects the following amounts:

Book Value Estimated

Current
Value
Assets:
Assets pledged with fully secured creditors P 450,000 P 555,000
Assets pledged with partially secured creditors 270,000 180,000
Free assets 630,000 480,000
P1,350,000 P1,215,000

Liabilities:
Liabilities with priority P 105,000
Fully secured creditors 390,000
Partially secured creditors 300,000
Unsecured creditors 810,000
P1,605,000

Assume that the assets are converted to cash at the estimated current values and the business is liquidated. What amount of cash will
be available to pay unsecured non-priority claims?

Total Assets @ FV 1,215,000

FSL (390,000)
AP-PSL (180,000)
Free Assets 645,000
UL-w/P (105,000)
NFA 540,000

PROBLEM 4
The following data were taken from the statement of realization and liquidation of CRASHED CO.
Assets to be realized 1,375,000 Assets acquired 750,000
Supplementary credits 2,800,000 Assets realized 1,200,000
Liabilities to be liquidated 2,250,000 Liabilities assumed 1,625,000
Supplementary charges 3,125,000 Assets not realized 1,375,000
Liabilities liquidated 1,875,000 Liabilities not liquidated 1,700,000
The ending balances of capital stock and retained earnings are P1,500,000 and P238,000, respectively. A net loss of P738,000 was
reported for the period.

1. What is the net gain/(loss) for the three-month period?

Net Assets Net Assets
Assets beg Assets sold 1,375 2,800
Assets acquired Assets end 3,125 2,250
 1,875 1,200
Liab. Paid Liab.beg 750 1,625
Liab. End Liab. incurred 1,700 1,375
425
Expenses Revenue

2. How much is the ending balance of cash?

A = L + SHE
Cash + NCAs = L+SHE Ending balances
Cash + 1,375= 1,700=1,500+(238-738)
Cash = 1,325

PROBLEM 5
The following information are related to STANK Corporation which is undergoing liquidation:
a. A bank loan amounting to P455,000 is secured by inventories with book value of P525,000 and net realizable value
of P350,000.
b. Of the P1,120,000 accounts payable, P343,000 is secured by accounts receivable amounting to P413,000 which is
10% uncollectible.
c. Property and equipment costing P875,000 and which is depreciated by 20% has a net realizable value of P588,000.
d. Other unrecorded liabilities are accrued interest payable on bank loan, P45,500; salaries payable, P112,000; taxes
payable, P63,000 and trustee’s fee, P52,500.
e. Cash available before liquidation amounts to P87,500.

Compute for the estimated deficiency to unsecured creditors.

Total Assets @FV 1,397,200)
FSL (343,000)
AP-PSL (350,000)
Free Assets 704,200
UL-w/o P (227,500)
NFA 476,700
UL-w/o P
Unsec-SPL 150,500
USL 777,000 (927,500)
Total 450,800

COMPETENCY APPRAISAL 2023

ADVANCED FINANCIAL ACCOUNTING AND REPORTING
ACCOUNTING FOR NON PROFIT ORGANIZATION (NPO)
PELILIA C. VELOSO, CPA, DBA

Describe the nature of business transactions and financial reporting implications of:
11.1 Voluntary health and welfare organizations(VWHO)
11.2 Hospitals and other health care organization
11.3 Colleges and Universities
11.4 Other not-for-profit organizations such as churches, museums, fraternity, associations, etc.
  Although the IFRSs/PFRSs are designed to apply to business entities, they can also be applied to
nonprofit organizations.

 In practice, the accounting for NPOs is essentially similar to the accounting for businesses. The notable
differences are the terminologies used in the financial statements, which are modified to suit the PO's
purpose, and the presentation and disclosure of equity.

 Non-profit organization (NPO) - is one that carries out some socially desirable needs of the community
or its members and whose activities are not directed towards making profit.

 Surplus revenues of POs do not inure to the benefit of a particular individual or group of individuals but
rather retained in furtherance of the organization's mission. Accordingly, none of the surplus revenues
are distributed as dividends.

Recognition criteria for assets and liabilities:

a. Meets the definition of an asset (or liability);
b. Probable inflow (or outflow) of resources; and
c. Reliable measurement of cost or other value.

PFRS principles applicable to

 Measurement of Asset or Liability:

a. Initial measurement at cost except when a relevant PFRS requires measurement at fair value or
some other value.
b. Subsequent measurement at amortized cost, under the cost model, or some other measurement
model required by a relevant PFRS.

Derecognition of Asset or Liability:

An asset (or liability) is derecognized when it ceases to provide inflow (or require outflow) of resources
embodying economic benefits.

The difference between the carrying amount and net proceeds (or net settlement), if any, is recognized in
change in net assets.

General features in the Presentation of FS:

a. Fair presentation and compliance with PFRSs,
b. Going concern,
c. Accrual basis,
d. Materiality and aggregation,
e. Offsetting,
f. Frequency of reporting,
g. Comparative information, and
h. Consistency of presentation.

Fund theory vs. Fund accounting

 The fund theory stresses great importance on the custody and administration of funds. Accordingly, the
source, nature and purpose of the funds held by the NO are disclosed in order to give information
necessary for users to assess the organization's stewardship over those funds,
 Under fund accounting, the main accounting unit is the fund. Accordingly, transactions are accounted
for in the books and presented in the financial statements strictly based on their fund classifications as
either (1) Unrestricted, (2) Temporarily restricted, or (3) Permanently restricted. Although fund
accounting is an off-shoot of the fund theory. it is not required.

Fund theory-based FS Fund accounting-based FS

Focuses on the reporting entity concept; thus, the Views the entity as being made up of component
accounting unit is the organization as a whole. parts; thus, the accounting units are the various
funds held

Adheres to the accounting point-of-view of Adheres to the bookkeeping point-of-view of

providing useful information to external users. providing useful information to managers.

The term "funds" is more commonly used to refer The term funds is used to refer to specific funds
to the net assets. consisting of cash and other non-cash assets.
 Provides disclosures on the types of restrictions Focuses on classifying assets, net assets, and
on net assets and revenues (ie., unrestricted, changes in them strictly in accordance with their
temporarily restricted, or permanently restricted). fund classifications (Le, unrestricted, temporarily
restricted, or permanently restricted

Current trend Traditional

Contributions
 Contributions refer to resources received in non-reciprocal transactions (i.e., donations).
 Contributions are classified based on donor's restrictions as:
1. Unrestricted,
2. Temporarily restricted, and
3. Permanently restricted.

 These classifications are also applied to the net assets.

 Internally-restricted funds (restricted based on management's sole discretion) are unrestricted.

Recognition and measurement

 Contributions in the form of cash or non-cash assets are recognized as revenues measured at fair
value and reported as either:
1. Unrestricted support - revenue from unrestricted contributions; or
2. Restricted support - revenue from temporarily restricted or permanently restricted contributions.
 Unrestricted support increases unrestricted net assets.
 Restricted support increases either (a) temporarily restricted net assets or (b) permanently restricted
net assets.

Promises to make contribution

 Unconditional promise to give cash or other non-cash assets in a future period is recognized when the
unconditional promise to give is received from the donor. This is classified as a temporarily restricted
contribution because of the time restriction.
 Conditional promise is recognized only when the attached condition is substantially met. If the promised
contribution is received before the attached condition is substantially met, it shall be accounted for as a
liability.

Services
 Contributions of services are recognized if the services received:
a. create or enhance nonfinancial assets; or
b. require specialized skills, are provided by individuals possessing those skills, and would typically
need to be purchased if not provided by donation.

 Contributed services and promises to give services that do not meet the above criteria are not be
recognized.

Works of art and similar items

 An entity need not recognize contributions of works of art, historical treasures, and similar assets if the
donated items are added to collections that meet all of the following conditions:
a. Held for public exhibition, education, or research in furtherance of public service rather than
financial gain;
b. Protected, kept unencumbered, cared for, and preserved; and
c. Proceeds from sales of collection items are to be used to acquire other items for collections. (SFAS
No. 116.11)

Financial statements

PFRSS SFAS No. 117

(based on LASCF's published audited financial
statements)

Statement of financial position Statement of financial position

Statement of activities Statement of activities
Statement of cash flows Statement of cash flows
Notes Notes
Functional classification of Expenses
1. Program services - are the activities that result in goods and services being distributed to
beneficiaries, customers, or members that fulfill the purposes or mission for which the organization
exists. Those services are the major purpose for and the major output of the organization and often
relate to several major programs.
2. Supporting activities - are all activities other than program services. Generally, these include
management and general, fund-raising, and membership development activities. (SFAS No. 117, 26 to
28)

Accounting procedures peculiar

 The following are the specific types of NPOs with peculiar accounting procedures requirements:
a. Health Care Organizations
b. Private, non-profit, Colleges and Universities
c. Voluntary Health and Welfare Organizations
d. Other non-profit organizations

Health Care Organization

• Financial statements:
1. Statement of financial position
2. Statement of operations (in lieu of a statement of activities)
3. Statement of changes in net assets
4. Statement of cash flows, and
5. Notes to the financial statements.

Health Care Organizations

Revenues in the statement of operations are classified into the following:
a. Net patient revenue:
Gross patient service revenue
Less: Contractual adjustments
Emp/oyee discounts
Billed charity care
Net patient revenue

b. Premium revenue - results from capitation agreements

c. Other revenues - all other revenues except those that are restricted.

Health Care Organizations

 A contractual adjustment is the difference between what the hospital considers a fair price for a service
rendered versus an agreed upon amount for the service with the insurance company (e.g., PhilHealth).
 Employee discounts are special discounts available only to the PO's employees (and their immediate
family members). Employee discounts are directly deducted from patient service revenue.
 Charity care pertains to free services rendered to patients. Charity care is not recognized but rather
disclosed only in the notes.
 Capitation agreements are agreements with third parties based on the number of employees instead of
services rendered.
 Health Care Organizations present revenues from restricted contributions separately at the bottom part
of the statement of operations, after unrestricted
 revenues and expenses. •According to the AICPA Guide, the statement of operations shall provide a
performance indicator, such as operating income, revenue over expenses, etc. The policy used in
determining the performance indicator shall be disclosed in the notes.
 Unrealized gains and losses on investments in securities are not a part of the performance indicator,
but shall be reported on the statement of operations after the performance indicator.

Private, non-profit, Colleges and Universities

a. Scholarships and fellowships granted freely are treated as direct reduction of revenues from tuition and
fees, e.g., academic scholarship.
b. Scholarships and fellowships granted as compensation for services rendered by the grantee are treated
as expenses, e.g., scholarships provided to student assistants and faculty members or their
dependents.
c. Refunds of tuition fees from class cancellations and other withdrawal of enrolment are treated as direct
reduction of revenues from tuition and fees.

Voluntary Health and Welfare

 The accounting requirement unique to VHWOs is the provision of a statement of functional expenses
that reports expenses by both functional (i.e., program and supporting) and natural classifications
(salaries expense, depreciation expense, etc.).
 ADVANCED ACCOUNTING FOR NON PROFIT ORGANIZATION

PROBLEM 1: MULTIPLE CHOICE

1. Which of the following statements is correct?

a. The PFRSs are not applicable to non-profit organizations.
b. The financial statements of non-profit entities need not be audited.
c.The preparation of a complete set of financial statements is optional for non-profit organizations.
d. Although the PFRSs are designed to be applied by business entities, they can also be applied by non-profit
organization.

2. It is an organization that carries out socially desirable needs of the community or its members without the
intention of making a profit.
a. NPO
b. NFP
c. NCO
d. All of these

3. According to PAS 1 Presentation of Financial Statements, a non-profit entity that applies the PFRSs
a. must adopt all of the terminologies and principles under the PFRSs without any exception.
b. need not present an additional statement of financial position in cases where the entity applies an
accounting policy retrospectively, restate its financial statements retrospectively, or make reclassification
adjustments during the period.
c. may need to amend the descriptions used for particular line items in the financial statements and for the
financial statements themselves.
d. may suffer negative consequences.

4. According to the Preface to international Financial Reporting

a. are prohibited from using the IFRSs
b. are discouraged from using the IFRS
c. may find the IFRSs appropriate
d. none of these

5. Which of the following principles used by business entities is not applicable to non-profit organizations?
a. Accrual basis of accounting
b. Going concern
c. Use of fair value measurement
d. Disclosure of earnings per share

6. For a non-profit entity, the Operating activities section 0f the statement of cash flows can be prepared using
a. direct method
b. indirect method
c. a or b
d. not prepared

7. Which of the following financial statements are prepared by non-profit organizations?

I. Statement of financial position
II. Statement of activities
III. Statement of cash flows
IV. Notes

a. I and II
b. I, III and IV
c. Y, II, and IV
d. All of these

8. In current practice, the financial reporting for non-profit organizations (choose the incorrect statement)
a. is essentially similar to that of business entities
b. focuses on fund accounting
c. focuses on the reporting entity concept
d. adopts PFRS principles
9. The statement of cash flows of a non-profit entity classifies cash flows into
a. program services and support activities
b. unrestricted, temporarily restricted, and permanently restricted
c. direct and indirect
d. operating, investing, and financing activities

10. Which of the following is not applicable to non-profit entities?

a. The statement of cash flows classifies movements in cash and cash equivalents during the period into
operating activities, investing activities and financing activities. b. Use of accrual basis of accounting
c. Presenting cash flows from operating activities in the statement of cash flows using either direct or indirect
method.
d. Measuring investments in equity securities using the lower of cost and market value.

11. Which of the following is not applicable to non-profit organizations?

a. Depreciating an equipment using the sum-of-the-years digits method.
b. Amortizing an intangible asset with finite useful life
c. Recognizing impairment loss when an asset's carrying amount exceeds its recoverable amount.
d. Reporting extraordinary items in the financial statements,

12. Which of the following is not applicable to non-profit organizations?

a. Accounting for combinations of entities using the principles provided under PFRS 3 Business Combinations.
b. Measuring investments in marketable securities at "fair value and recognizing changes in fair values as
unrealized gains and losses in the statement of activities.
c. Use of present value techniques for financial assets and financial liabilities.
d. Treating organization costs as assets to be amortized over a period not exceeding 5 years.

13. Which of the following may appropriately be applied by a non-profit organization when accounting for a
lease contract that does not qualify as a donation?
a. SFAS No. 116
b. SFAS No. 117
c. PFRS 16
d. All of these

14. According to SFAS No. 116, restricted contributions received by an NPO are recognized
a. when the performance of the condition is reasonably certain.
b. only in the notes
c. as liabilities
d. as restricted revenues

15. According to SFAS No. 116, a restricted fund for the acquisition of a plant asset which was disbursed
during the period
a. increases temporarily restricted net assets
b. decreases unrestricted net assets
c. decreases temporarily restricted net assets .
d. does not affect unrestricted net assets

PROBLEM 2: MULTIPLE CHOICE Instruction: Use U.S. GAAP principles in answering the succeeding
questions.

1. What is the current-period effect of a fund received in the previous period that was restricted for the payment
of salaries of personnel which was totally disbursed in the current period?
a. net increase in temporarily restricted net assets
b. net decrease in unrestricted net assets
c. net decrease in permanently restricted net assets
d. zero net effect on unrestricted net assets

2. Unconditional promises to give contributions are recognized by the donee NPO

a. when the promise is received from the donor.
b. when the condition becomes unconditional.
c. when the performance of the condition is reasonably certain.
d. b or c

3. Conditional promises to give are recognized by the donee NPO

a. when the promise is received from the donor.
b. when the condition becomes unconditional
c. when the performance of the condition is reasonably certain.
d. b or c

4. Contributions are measured at

a cost to the donor
b. Fair value
c. Lower of cost or fair value
d. fair value less cost to sell

5. Cash and other non-cash assets received as contributions are recognized by a non-profit organization as
a. asset
b. revenue
c. a and b
d. not recognized

6. Donations of services that enhance a non-financial asset or require specialized skills are recognized by a
non-profit organization as
a. asset
b. revenue
c. expense
d. b and c

7. Services received as donations that do not enhance a no financial asset or were not provided by a
professional are recognized by a non-profit organization as
a. asset
b. revenue
c. expense
d. not recognized

8.Contributions received by a non-profit organization in the form of works of art and similar items
a. are always capitalized.
b. need not be capitalized if they do not meet the recognition criteria for an asset.
c. are expensed immediately if they do not meet recognition criteria for an asset.
d. b or c

9. Contributions recognized received by an NPO acting as an agent are recognized as

a. asset
b. revenue
C. a and b
d. liability

10. These refer to costs incurred by a non-profit organization on activities that directly result to the fulfillment of
the organization's purpose Losses
a. Program services
b supporting activities
c losses
d. Cost of goods sold

11. Restricted assets acquired during the period that are used for long-term purposes because of donor
restrictions are classified in an NPO's statement of cash flows as
a. operating activities
b. investing activities
c. financing activities.
d. supporting activities

12. Which of the following is a deducted when computing for a health care organization's net patient revenue?
a. contractual adjustments
b. tuition refunds on cancelled enrolments
c. uncollectible accounts
d. direct costs on capitation agreements

13. Dividends received by a health care organization is classified in the statement of operations as
a. Net patient revenue
b. Premium revenue
c. Other revenues
d. Any of these

14. Which of the following is deducted when computing for a private, non-profit, college or university's net
revenues on tuition and fees?
a. contractual adjustments
b. charity care
c. tuition refunds on cancelled enrolments .
d. uncollectible accounts

15. Scholarships and fellowships granted by a private, non-profit p college or university are deducted when
computing for net revenues on tuition and fees when
a. the scholarships and fellowships were granted services rendered by the grantee,
b. the scholarships and fellowships were granted to faculty members or their dependents.
c. the scholarship and fellowships members were granted because of academic excellence rather than as
compensation for services rendered.
d. scholarship grants are not deducted but rather recognized expenses.

PROBLEM 3: MULTIPLE CHOICE Accounting for contributions

Use the following information for the next seven questions:

Budoy Organization, a non-profit organization, received the following donations during the period:

 January 20x1: Land with fair value of P4,000,000 to be used at the discretion of Budoy Organization.
 February 15, 20x1: Cash of P8,000,000, restricted for tie acquisition of a truck. The truck will be used in
Budov Organization's outreachprograms.
 March 1, 20x1: Investment in equity securities with fair value of P2,000,000 to be held indefinitely. Only
the investment income shall be used by Budoy Organization in its current operations.
 May 1, 20x1: JPIA members from various universities • contributed services in a tree-planting activity
initiated by the Budoy Organization. Although the volunteers rendered Their services for free, Budoy
Organization estimates that the fair value of these services would amount to P90,000.

On June 30, 20x1, Budoy Organization acquired a talc ity P8,000,000 and received dividends of P240,000
from the equ securities.

1. How much is the unrestricted contributions revenue?

a. 4,240 000
b. 4,000,000 (4M, fair value of land)
c. 6,020,000
d. 4,020,000

2 How much is the temporarily restricted revenue?

a. 8,000,000 ( Cash of P8,000,000, restricted for tie acquisition of a truck )
b. 12,000,000
c. 12,020,000
d. 10,000,000

3. How much is the permanently restricted contribution revenue?

a. 2,240,000
b. 6,000,000
c. 10,000,000
d. 2,000,000 ( investment in equity securities)
4. How much is the "net assets released from restrictions" in 20x1?
a. 8,240,000
b. 2,000,000
c. 8,000,000 ( Cash of P8,000,000, restricted for tie acquisition of a truck )
d. None

5. How much is the net effect of the transactions in the year-end unrestricted net assets? Ignore depreciation.
Increase (Decrease)
a. 20,240,000
b. 12,240,000 (4M land + 8M truck + 240K cash dividends)
c. (12,240,000)
d. 20,000,000

6. How much is the net effect of the transactions in the year-end temporarily restricted net assets? Ignore
depreciation. Increase (Decrease)
a. 4,000,000
b. (4,000 000)
C. 4,240,000
d. 0 (8M cash - SM net asset released from restriction)

7. How much is the net effect of the transactions in the year-end permanently restricted net assets? increase
(decrease)
a• 2,000,000 ( 2M investment in equity securities )
b. 2,240,000
c. (6,000,000)
d. 0

Classification of contributions
Use the following information for the next three questions:

Doggy Organization, a not-for-profit entity, disclosed the following in its 20x1 notes to the financial
statements:

• Received shares valued at P8,000,000 to be retained with the dividends used to support current operations.
• Net resources of P4,000,000 invested in plant assets.
• Received equipment valued at P20,000,000 which is to be sold with the proceeds used to renovate the
children's playground.
• Board-designated funds of P2,400,000.
• Received P80,000 cash from a donor who did not specify any use restrictions on the contribution; however,
the donor specified that the donation should not be used until 20x2.
• Received P3,200,000 from a donor who stipulated that the contribution shall be invested indefinitely and that
the earnings shall be used for scholarships. Investment income in 20x1 amounted to P200,000.

8. How much is included in the unrestricted net assets?

a. 6,400,000 ( Net resources of P4,000,000 + 2,400,000 )
b. 14,400,000
c. 6,480,000
d. 14,480 000

9. How much is included in the temporarily restricted net assets?

a. 20,080,000
b. 20,000,000
C. 20,200,000
d. 20,280,000 ( equipment valued at P20,000,000 + P80,000 cash from a donor + Investment income in 20x1
amounted to P200,000 )

10. How much is included in the permanently restricted net assets?

a. 11,200,000 ( shares valued at P8,000,000 + P3,200,000 from a donor )
b. 11,400,000
C. 11,280,000
d. 11,480,000

Non-cash assets

11. Bogart Organization, a not-for profit entity, received the following donations during 20x1:

* Land with a fair value of P40,000,000 to be sold to acquire a bus.

• Shares of stocks with fair value of P12,000,000 to be retained indefinitely. The dividends from the shares will
be used to support current operations.

As a result of the donations above, how much should Bogart report as an increase in temporarily restricted net
assets?
a. 40,000,000 ( Land with a fair value of P40,000,000 ) c. 12,000,000
b. 52,000,000 d. 0

Services

12. A short-circuit destroyed the offset printing machine of Scooby Organization, a not-for-profit entity. Mr.
Doug, a professional offset mechanic, repaired the machine for free. The fair value of the services is estimated
at 40,000. The entry to record the transaction includes
a. debit to asset and credit to contributions revenue for P40,000
b. debit to contributions revenue and credit to asset for P40,000
c. debit to expense and credit to contributions revenue for P40,000
d. Only a memorandum entry shall be made.

Contributions revenue

13. Aw-aw Organization, a non-profit entity, received the following during 20x1:

• P80,000 restricted by the donor to be used as allowances of members of Aw-aw's choir.

• P480,000 proceeds from sales of calendars, mugs, T-shirts, and other souvenir items. The fair value of the
items sold is P300,000 while the cost is P200,000.
• P4,000,000 to be used only upon the completion of a new jam room that was only 40% complete as of
December 31, 20x1. If the facility is not completed by May 21, 20x2, the cash shall be returned to the donor.

How much contribution revenue shall Aw-aw recognize from the cash receipts listed above?

a. 180,000
b. 4,380,000
c, 560,000
d. 260,000 (80K restricted support + (480K - 300K) excess of sale price over fair value)

Net assets released from restrictions

Use the following information for the next two questions:

Arf-arf Organization, a non-profit entity, received the following contributions during 20x1:

• P400,000 cash restricted for the purchase of equipment.

• P1,000,000 cash restricted for the renovation of an old building owned by Arf-arf Organization.

Arf-arf made the renovation in 20x2 and acquired the equipment in 20x3.

14. How much revenue is recognized on the contributions in 20x1?

a. 400,000
b. 1,400,000 ( 400K+ 1M = 1.4M restricted support )
C. 1,000,000
d. 0
15. How much "net assets released from restrictions" is reported in Arf-arf s 20x2 statement of activities?
a. 400,000
b. 1,400,000
C. 1,000,000
d. 0

Net effect on net assets

Use the following information for the next two questions:

K9 Organization, a non-profit entity, had the following transactions during 20x1:

• Received Contribution of P800,000 to be used for student scholarships. Of this amount, P480,000 was
expended during the year.
• Expended P200,000 for student scholarships from a 740 0 grant received in previous year.

16. What is the net effect of the transactions above in K9's 20x1 unrestricted net assets? increase (decrease)
a.(120,000)
b. 120,000
c. 680,000
d. 0 (480,000 released from restriction - 480,000 cash expended + 200,000 released from restriction-200,000
cash expended)

17. What is the net effect of the transactions above in K9's 20x1 temporarily restricted net assets? Increase
(decrease)
a.120,000 (800,000 grant - 480,000 released from restriction - 200,000 released from restriction)
b.(680,000)
c. 320,000
d. 0

Receipt of resources as an Agent

18. Green Leaves Organization, a not-for-profit entity, received relief goods to be distributed to typhoon victims
in a specified area. Green Leaves has no discretion in determining the parties to be benefited; it must deliver
the resburces to the specified beneficiaries (i.e, typhoon victims). The relief goods have a fair value of
P400,000 and a cost of P250,000. How much contributions revenue shall be recognized on the goods
received?
a. 400,000
b. 250,000
C.150,000
d. 0

Intermediary between donor and donee

19. Astig Organization, a non-profit entity, is formed to oversee the welfare of battered husbands. Astig
encourages these pitiful husbands to seek legal advice. To provide these services , Astig develops and
maintains a list of lawyers and law firms that are interested in providing free legal services to victims. Astig then
encourages individuals in need of these services to contact Astig for referral to lawyers that may be willing to
serve them. The lawyer decides on whether and how to serve a specific individual.

During the year, Astig Organization referred Mr. Darrell, Mr. Raymund, Mr. Rex, and Mr. Rhad Vic, all suffering
from serious physical injuries inflicted by their respective wives, to Macmod Areno Law Firm, which provided
these husbands free legal services. The husbands would have paid a total of P1OM if they asked legal advice
from other lawyers.

How much i the contrihutions revenue to be recognized by Asti; Organization for the legal services provided to
the victims?

a. 10M
b. 2M
c. 5M
d. 0

Restricted contributions
20. Schneider Hospital, a non-profit entity, had the following receipts during the year:

Sales from canteen 1,000,000

Investment income 200,000
Contributions for the renovation of the Hospital 300,000

How much shall be reported as other revenues on the statement of operations?

a. 1,000,000
c. 300,000
b. 1,200,000 ( Revenues from restricted contributions are presented separately at the bottom part of the
statement of operations, after unrestricted revenues and expenses.)
d. 1,500,000

PROBLEM 4: MULTIPLE CHOICE

Unconditional and Conditional promises to give Use the following information for the next five questions:

On December 31, 20x1, Kulasa Organization, a not-for-profit entity, had the following transactions:

*Ms. Alpha made an unconditional pledge to give Kulasa •Organization P48,000 each year starting year over
the next five years g on December 31, 20x2. The appropriate discount rate

*Ms. Beta promised to provide half of the funds needed to construct a new building if Kulasa can get the
remaining half of the needed funds from other donors by March 1, 20x2. As of December 31, 20x1, Kulasa has
already accumulated 48% of the needed construction funds. Kulasa's Board of Trustees strongly believes that
the remaining 2% will be received by the end of January 20x2. The estimated total costs of construction is
P4,000,000.

*Mr. Charlie promised to give Kulasa Organization a used offset printing equipment if Kulasa acquires a paper
cutting machine. The offset printing equipment has a fair value of p4,800,000. Because of recent cash flow
problems, Kulasa's Board of Trustees believes that it will not be able to acquire a paper cutting equipment in
the near term.
*Mr. Delta gave Kulasa Organization cash of 142,000, 000 as a challenge grant. Kulasa Organization can keep
the P2,000,000 if it can raise an additional P2,000,000 by the end of March 20x2. If Kulasa Organization fails
to comply with the condition, it shall return the amount received to Mr. Delta.

1. How should the transaction with. Ms. Alpha be accounted for by Kulasa?
a. as an unrestricted support for P181,958
b. as a temporarily restricted support for P181,958 (48,000 x PV ordinary annuity of 1 10%, n=5)
c. as asset and liability measured at P181,958
d. not accounted for but disclosed only in the notes

2. How should the transaction with Ms. Beta be accounted for by Kulasa?
a. as an unrestricted support for P2, 000, 000
b. as a temporarily restricted support for X2,000,000 (4M x 50% )=2M, it is assumed that the attached
condition is substantially met.)
c. as asset and liability measured at X2,000,000
d. not accounted for but disclosed only in the notes

3.How should the transaction with Mr. Charlie be accounted for by Kulasa?
a. as an unrestricted support for P4,800,000
b. as a temporarily restricted support for P4,800,000
C. as asset and liability measured at P4,800,000
d. not accounted for but disclosed only in the notes

4. How should the transaction with Mr. Delta be accounted for by Kulasa?
a. as an unrestricted support for 142,000,000
b. as temporarily restricted support for P2,000,000
c. as an asset and a liability, each measured at P2,000,000
d. not accounted for but disclosed only in the notes

5. What is the total net effect of the transactions above in Kulasa's net assets?
a. Increase in temporarily restricted net assets
b. Decrease in temporarily restricted net assets
c. Decrease in unrestricted net assets
d. No effect on net assets

Endowments
6. During 20x1, Blacky Organization, a not-for-profit entity, received the following donations:

• On October 1, 20x1, Mr. Meow established a P4,000,000 endowment fund in favor of Blacky Organization by
appointing Whitey Bank and Trust Co. as the trustee. The income from the fund is to be paid to Blacky
Organization for use in its current operations. Income from the fund is dependent on the investment
performance of the fund.

• On December 31, 20x1, Blacky Organization received P400,000 in cash from Ms. Mingming Too under a
charitable remainder annuity trust agreement designating Blacky Organization as the trustee and charitable
remainder beneficiary. The terms of the trust agreement require Blacky Organization as trustee, to invest the
trust assets and pay P20,000 each year, starting on December 31' 20x2, to Mr. Cute Puppy, the annuitant (i.e.,
income beneficiary) for the remainder of Mr. Cute Puppy. Upon death of Mr. Cute Puppy, n Iva! use its
remainder interest 'for an • Blacky Organization with unrtproastee cison1s01.(ysoteanitidAvtibe its mission. The
appropriate discount rate is 10% and the life expectancy of Mr. Cute Puppy, is 5 years.

What is the total net effect of the transactions above BlackY's net assets?
in
a.increase in temporarily restricted net assets by P324,184
b, increase in temporarily restricted net assets by P4,324,184
c. increase in temporarily restricted net assets by P75,816
d. no effect

Functional classification of expenses

Use the following information for the next seven questions:

Ranger Organization, a non-profit entity, had the following expenditures during the year:

Child care services provided for indigent families 560,000

Work to help elderly citizens 600,000

Administrative salaries 200,000
Fund-raising costs 100,000

7. How much is classified as "program" expenses?

a. 300,000
b. 1,260,000
c. 200,000
d. 1,160,000 (600K + 560K)

8. How much is classified as "support" expenses?

a. 1,160,000
b. 200,000
c. 300,000 (200K+ 100K)
d. 1,260,000

Net patient service revenue

9.Gary Hospital, a non-profit entity, rendered P2,400,000 in services to patients, P2,000,000 of which is
charged to PhilHealth. It is estimated that only P2,120,000 vvill be P140 collected. Of the P280,000
difference, ,000 is the estimated contractual adjustments with PhilHealth, P20,000 is allowance for discounts to
hospital employees, P80,000 is charity care, and N0,000 is the uncollectible accounts. How much is the net
patient service revenue?

a. 2,120,000
b. 2,260,000 .
c 2,160,000 (2.4M - 140K contractual adjustment discount - 20K employee
- 8OK billed charity care) = 2,160,000

- 20K employee
d. 2,180,000

Capitation agreement

10. Sparky Hospital, a non-profit entity sign an agreement with melay incorporation to provide medical services
to each of melay's 100 employees for 2,000 per month , per employee during the month of april 20x1 only 20
employees availed of the medical services how much is the premium revenue recognized in april 20x1?
a. 200,000 (100 x 2,000)
a. 40,000
a. 60,000
a. 0

Other revenues

11. Heart Hospital, a non-profit entity, had the following transactions during the period:

• Sales of P48(1,000 from gift shop and cafeteria.

• Received P80,000 dividends from donated shares. Use of the dividends is unrestricted.
• A computer consultant provided free services on the upgrading of Heart's information system. Heart would
have paid P200,000 for these services if they had not been donated.
• Purchased medicines from a pharmaceutical company for P.4),000. However, the pharmaceutical company
did not charge Heart Hospital for the purchase because the medicines were being donated to Heart Hospital.

How much is classified as other revenues in Heart Hospital's statement of operations?

a. 520,000
b. 600,000
c. 800,000 (480,000+ 80,000+ 200,000+ 40,000 = 800,000)
d. 0

Net patient service revenue

12. Umpong Hospital non-profit entity, had the f receipts during the year:

Billings to patients 4,800,000

Sales from canteen 1,000,000
Undesignated gifts (Unrestricted contributions) 200,000

Contractual adjustments 1,200,000

Billings on capitation agreements 240,000
Interest income 80,000
Uncollectible accounts 400,000
Salaries of doctors 1,400,000

How much is the net patient service revenue?

a. 3,840,000
b.3,600 000 (4.8M -1.2M)=3.6
C. 4,040,000
d. 2,440,000

Net revenues from tuition and fees

13. For the current semester, Piper University , a non- r assessed its students P 4,000,000 for tuition and fees.
The following information was also determined:

Refunds for class cancellations and withdrawals of enrolment 80,000

Student scholarships granted to academic scholars 200,000
Student scholarships granted to student assistants 480,000
Student scholarships granted to faculty members enrolled in the post-graduate program 120,000
Student scholarships granted to faculty members' dependents 240,000
Estimated uncollectible accounts 320,000

How much is the net revenues from tuition and fees?

a. 3,920,000
b. 2,880,000
c. 2,560,000
d. 3,720,000 (4M-80K-200K) = 3,720,000

Accounting for marketable securities

14. Pipita Organization, a non-profit entity, acquired short-term 1 investment in shares of stocks for 800, 0 0 0
using unrestricted net assets. During the year, Pipita received cash dividends of P40,000. At year-end, the
shares have a fair value of 10880,000. What is the effect of the transactions described above on the year-end
statement of activities of Pipita?

a. 120,000 (40K dividend income + 80K increase in fair value) = 120K

b. 80,000
C. 40,000
D. 0

Depreciation

15. On January 1, 20x1, Toby organization, a non profit entity had the following transactions:

• Purchased a vehicle costing P600,000 using unrestricted cash

* Received a vehicle with fair value of P480 000 from donation

Both vehicles have estimated useful lives of 5 years and no residual value. lob has an accounting policy
implying a time restriction on gifts of long-lived assets. in Toby's 20x1 statement of activities, what amount of
total depreciation expense should be included under changes in unrestricted net assets?

a. 1,080,000
b. 120,000
C. 216,000 (600K + 480K) +5=216,000
d.0

Statement of cash flows

Brownie Organization, a non-profit entity, had the following cash flows during the year:
• P200,000 unrestricted contributions.
• P2,400,000 from fundraising activities to support current operations.
• P400,000 from a donor who stipulated that the money be spent in accordance with the wishes of Brownie's
governing board.
• P800,000 cash dividends restricted for the purchase of equipment.
• P800,000 expenditure to acquire equipment with the cash dividends above. • 01,200,000 from a donor who
stipulated that the contribution shall be invested indefinitely. Income from the contribution may be used in
furtherance of Brownie's mission.

16. How much is the net cash flows from operating activities?

a. 2,200,000
b. 2,600,000
c, 3,000,000 (200K+2.4M+400K) = 3M
d. 1,800,000

17. How much is the net cash flows from investing activities?
a. (800,000) (-800K acquisition of equipment) = (800K)
b. 400,000
c. 2,000,000
d. 0

18. How much is the net cash flows from financing activities?
a. 400,000
b. 2,000,000 (800K restricted dividends + 1.2M permanently restricted) =
2M
c. 1,200,000
d. 0

PROBLEM 5:

Recognition and measurement

1. An NPO receives unconditional donations of P300,000 cash and equipment with fair value of P2,000,000
and carrying amount of P1,000,000. What is the journal entry to record the receipt of the donations?

Cash 300,000
Equipment 2,000,000
Contributions Revenue- Unrestricted support 2,300,000

2. On January 1, 20x1, an NPO receives the following donations:

• Cash of P3,000,000 to be used to acquire an equipment.
• Investment in equity securities with fair value of P1,000,000 to be held indefinitely. Only the investment
income shall be used by the entity in its operations.

January 1, 20x1 Cash 3,000,000

Contributions Revenue- Unrestricted support 3,000,000
January 1, 20x1 Investment in equity securities 1,000,000
Contributions Revenue- Unrestricted support 1,000,000

On December 31, 20x1, the entity acquires an equipment for P3,000,000 and receives cash dividends of
P50,000 from the equity securities.

Dec. 31, 20x1 Equipment 3,000,000

Cash 3,000,000
Dec. 31, 20x1 Cash 50,000
Dividend Income 50,000

Unconditional and Conditional promises

3. On January 1, 20x1, Entity A receives the following promises: a. Donor X promises to give an unconditional
donation of P200,000 on January 15, 20x1. b. Donor Y promises to donate construction materials with fair
value of P300,000 if Entity A starts the construction of a children's playground.

Entity A receives the donation of Donor X on January 15, 204 and the donation of Donor Y on February 1,
20x1, although construction of the playground is not yet started.
Fund Accounting

4. Entity A receives the following donations:

• Cash of P2M to be used at the discretion of Entity A's management. Cash of P3M restricted for the
acquisition of equipment. • Trust fund of P5M which Entity A shall never use; only the income therefrom.

Entity A acquires an equipment for P3M and receives cash dividends of igt.200,000 from the investment at the
end of the period.

Requirements:
a. Record the transactions above under a fund accounting system.
b. Compute for the ending balances of unrestricted, temporarily restricted, and permanently restricted
net assets.

Other forms of contributions

5. The receipt of which of the following will give rise to the recognition of a revenue by a non-profit
organization?
a. Services in-kind provided by non-professionals.
b. Donation of work of art to be held for public exhibition, must be preserved and never to be sold.
c. Services in-kind that enhance a non-financial asset or require specialized skills.
d. Relief goods to be distributed to flood victims in a specified area.

Financial statements

6. Which of the following financial statements is generally not required of non-profit organizations?
a. Statement of activities
b. Statement of changes in equity
c. Statement of cash flows
d. Notes
Presentation of Expenses

7. According to SFAS No. 117, the functional classifications of expenses of non-profit organizations are
a. Program services and Supporting activities
b. Selling and Administrative costs
c. Nature and Function expenses
d. Cash and Non-cash expenses

8. According to SFAS No. 117, this functional classification of expenses of non-profit organizations pertains to
activities that result in goods and services being distributed to beneficiaries, customers, or members that fulfill
the purposes or mission for which the organization exists.

a. Distribution costs
b. Program services
c. Supporting Activities
d. Consumption activities

Net patient service revenue

9. ABC Hospital, a non-profit entity, had the following receipts during the year:
Billings to patients 1,200,000
Sales from canteen 250,000
Undesignated gifts (Unrestricted contributions) 50,000
Contractual adjustments 300,000
Billings on capitation agreements 60,000
Interest income 20,000
Uncollectible accounts 100,000
Employee discounts 50,000
Charity care, included in billings 20,000

Requirement: How much is the net patient service revenue?

Answer: P830,000 (1.2M billings to patients 300,000 contractual adjustments - 50,000 employee discounts -
20,000 billed charity care)

Performance indicator

10. A Health Care Organization uses revenues and gains ovi expenses and losses as its performance
indicator. Which of tic following items would be included in the calculation of the indicator?

I Sales from the hospital's canteen

II. Unrealized gains on marketable securities
Ill. Net assets released from restriction used for operating expenses
IV. Contributions received from a donor in the current year that cannot be spent until the following year.
a. I and III
b. I and II
c. I, III and IV
d. I, III and IV

(II) Unrealized gains and losses on investments in securities are not a part of the performance indicator. (IV)
Restricted contributions are presented separately at the bottom part of the statement of operations.
Performance indicator only includes unrestricted items.

Private, non-profit, Colleges and Universities

11. For the current semester, anon-profit university, assessed its students P2,000,000 for tuition and fees.
Additional information follows:

Refunds for class cancellations and withdrawals of enrolment Student 40,000

scholarships granted to academic 100,000
Student scholarships granted to student assistants 240,000
Student scholarships granted to faculty members in the post-graduate program 60,000
Student scholarships granted to faculty members' dependents 120,000
Estimated uncollectible accounts 160,000
Requirement: How much is the net revenues from tuition and fees?

COMPETENCY APPRAISAL
PFRS 11: JOINT ARRANGEMENT
PART I: THEORIES
1. It is characterized by a contractual arrangement whereby two or more parties have joint control of the arrangement.

a. Joint arrangement
b. Joint operation
C. Joint venture
d. Jointly controlled asset

2. It is the contractually agreed sharing of control of an arrangement which exists only when decisions about relevant
activities require unanimous consent of the parties sharing control.

a. Control
b. Significant influence
C. Joint control
d. Solidary control

3. It is a type of joint arrangement whereby the parties that have joint control of the arrangement have right to the total
assets and obligations for the total liabilities relating to the arrangement.

a. Joint venture
b. Jointly controlled asset
c. Joint operation
d. Joint business

4. It is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net
assets of the arrangement.

a. Joint venture
b. Jointly controlled asset
c. Joint operation
d. Joint business

5. What is the classification of the joint arrangement when the arrangement is structured without a separate vehicle
such as when the rights of each party to the total assets and obligations for total liabilities relating to the arrangement
are clearly established?

a. It shall be classified as a joint venture.

b. It shall be classified as a joint operation.
c. Neither joint venture nor joint operation.
d. It can be either a joint operation or joint venture depending on the company policy of the parties to the joint
arrangement.

6. What is the classification of the joint arrangement when the assets and liabilities relating to the arrangement are held
by a separate vehicle or when the arrangement is established with a separate vehicle?

a. It shall be classified as joint venture.

b. It shall be classified as joint operation.
c. Neither joint venture nor joint operation.
d. It can be either a joint operation or joint venture depending on the legal form of the separate vehicle, terms of the
contractual arrangement or other relevant facts and circumstances.

7. Under IFRS 11, how shall the joint venturer account for its Investment in Joint Venture?

a. Equity method
b. Cost method
c. Fair value method under IFRS 9
d. Proportionate consolidation

8. Under IFRS 11, as an exception to the general rule of mandatory equity method accounting for Investment in Joint
Venture, what is alternative treatment available to joint venturer for an investment in joint venture held or is held
indirectly through an entity that s a venture capital organization, mutual trust fund, unit trust and similar entities
including insurance-liked fund?

a. It may elect to measure the investment in joint venture at fair value through profit or loss.
b. It may elect to measure the investment in joint venture at fair value through other comprehensive income.
c. It may elect to measure the investment in joint venture at cost method
d. It may elect to measure the investment in joint venture at proportionate consolidation

9. Under IFRS for SMES, how shall the joint venturer account for its Investment in Joint Venture?

a Equity method
b. Cost method
c. Fair value method under IFRS 9
d. Any of the above

10. Under IFRS 11, how shall the joint operator account for its interest in a joint operation?

a. The joint operator shall account for its interest under Equity Method.
b. The joint operator shall account for its interest under Cost Method.
c. The joint operator shall account for its interest using proportionate consolidation.
d. The joint operator shall account for its interest by recognizing its assets, its liabilities, its revenue, its expenses and its
shares in the jointly controlled assets, jointly incur liabilities, jointly earned revenue and jointly incurred expenses in
accordance with the contractual arrangement.

Part II. Problem Solving

1. On January 1, 2018, Entity A, a public entity, and Entity B, a public entity, incorporated Entity C which has its
fiscal and operational autonomy. The contractual agreement of the incorporating entities provided that the
 decisions on relevant activities of Entity C will require the unanimous consent of both entities. Entity A and Entity
B will have rights to the net assets of Entity C.
Entity A and Entity B invested P1,000,000 and P1,500,000, respectively, equivalent to 40:60 capital interest of
Entity C. The financial statements of Entity C provided the following data for its two-year operation:

Net Income (Loss) Dividends Declared

2018 200,000.00 100,000.00
2019 - 2,000,000.00
1) What is the balance of Investment in Entity C to be reported by Entity A in its Statement of Financial
Position on December 31, 2019? 240,000
2) What is the balance of Investment in Entity C to be reported by Entity B in its Statement of Financial
Position on December 31, 2019? 360,000

Entity A
Beg. x 240,000 end
Investment 1,000,000 40,000 (100,000 * 40%)
Dividends
Net Income (200k * 80,000 800,000 (2,000,000 * 40%) Net
40%) Loss
Amortization x x Amortization
Total 1,080,000 1,080,000 Total

Entity B
Beg. x 360,000 end
Investment 1,500,000 60,000 (100,000 * 60%)
Dividends
Net Income (200k * 120,000 1,200,000 (2,000,000 * 60%) Net
60%) Loss
Amortization x x Amortization
Total 1,620,000 1,620,000 Total

2. Entity A and Entity B incorporated Entity C to manufacture a microchip to be used by the incorporating entities
as component for their final products of cellular phone and tablets. The contractual agreement of the
incorporating entities provided that the decision on relevant activities of Entity C will require the unanimous
consent of both entities.
Entity A and Entity B have rights to the assets, and obligations for the liabilities, relating to the arrangement. The
ordinary shares of Entity C will be owned by Entity A and Entity B in the ratio of 60:40. At the end of first
operation of Entity C, the financial statements provided the following data:

The contractual agreement of Entity A and Entity B also provided for the following concerning the assets and
liabilities of Entity C:
• Entity A owns the land and incurs the loan payable of Entity C.
• Entity B owns the building and incurs the note payable of Entity C.
• The other assets and liabilities are owned or owed by Entity A and Entity B based on their capital interest
in Entity C.
• The sales revenue of Entity C includes sales to Entity A and Entity B in the amount of PI,000.000 and
P2,000,000, respectively. As of the end of the first year, Entity A and Entity B. were able to resell 30%
and 60% of the inventory coming from Entity C to third persons.
 1) What is the amount of total assets to be reported by Entity A concerning its interest in Entity C? 3,600,000
2) What is the amount of total liabilities to be reported by Entity B concerning its interest in Entity C? 1,800,000
3) What is the amount of sales revenue to be reported by Entity A concerning its interest in Entity C? 2,100,000

Entity A Entity B
Assets Assets
Land 3,000,000 Land 5,000,000
Inventory (1M * 60%) 600,000 3,600,000 Inventory (1M * 40%) 400,000 5,400,000
Liability Liability
Loan Payable 4,000,000 Note Payable 1,000,000
Accounts Payable (2M * 1,200,000 5,200,000 Accounts Payable (2M * 800,000 1,800,000
60%) 40%)
Sales (3.5M * 60%) 2,100,000 Sales (3.5M * 40%) 1,400,000

Sales 5,000,000
Less: A (1M * (100% - 30%) 700,000
B (2M * (100% - 60%) 800,000
Total Sales 3,500,000

3. On January 1, 2018, Entity A, a public entity, and Entity B, a public entity, incorporated Entity C by investing
P3,000,000 and P2,000,000 for capital interest ratio of 60:40. The contractual agreement of the incorporating
entities provided that the decisions on relevant activities of Entity C will require the unanimous consent of both
entities: Entity A and Entity B will have righty to the net assets of Entity C.
The financial statements of Entity C provided the following data for 2018:
• Entity C reported net income of P1,000,000 for 2018 and paid cash dividends of P400,000 on December
31,2018.
• During 2018, Entity C sold inventory to Entity A with gross profit of P50,000, Eighty percent of those
inventories were resold by Entity A to third persons during 2018 and the remainder was resold to third
persons during 2019.
• 2018, Entity C sold machinery to Entity B at a loss of P20,000. At the time of sale the machinery has a
remaining useful life of 2 years.

1) What is the investment income to be reported by Entity A for the year ended December 31, 2018? 594,000
2) What is the balance of Investment in Entity C to be reported by Entity B on December 31, 2018? 2,244,000

Net Income (1M * 60%) 600,000

Inventory Purchased (50k * (100% - 80%) * (6,000)
60) 594,000
Investment Income

Entity B
Beg. - 2,244,000 end
Investment 2,000,000 160,000 (400,000 * 40%) Dividends
Net Income (1M * 40%) 400,000 - Net Loss
Amortization – UG (20k * 8,000 4,000 (8k / 2yrs) Amortization - RG
40%)
Total 2,408,000 2,408,000 Total

4. On January 1, 2020. Storm has invested P2M cash in a joint venture for 50% interest, for the years ended
December 31, 2020, 2021 and 2022, the joint venture reported the following net incomes and dividend
distributions:

Net Income (Loss) Dividends Declared

2020 1,000,000.00 300,000.00
2021 - 6,000,000.00 -
2022 7,000,000.00 500,000.00
 1) What is the share in net loss or investment loss to be reported by Storm Inc, for the year ended December
31, 2021 (2,350,000)
2) What is the book value of Investment in joint Venture to be reported by Storm Inc. as of December 3 1,
2022? 2,600,000

Net Loss Undistributed

Investment 2,000,000
Net Income (1M * 50%) 500,000
Less; Dividends (300k * 50%) (150,00
End, 2020 0)
Less: Net Loss (6M * 50%) 2,350,000 (3,000,000) (650,000)
End, 2021 (2,350,00
Net Income (7M * 50%) 0)
Net Loss, Undistributed 2021 0
Dividends (500k * 50%) 3,500,00
End, 2022 (650,000)
(250,00
0)
2,600,00
0

5. On January 1, 2020., Logan lnc., a small and medium enterprise (SME), invested P500,000 cash in a joint venture
for 50% interest. For the year ended December 31. 2020, the joint venture reported net income of P200,000 and
distributed cash dividend in the amount of Po0,000. As of December 31, 2020, the fair value of the investment in
joint venture is P600,000 and the estimated cost of disposal is 10% of fair value. The value in use of the
investment is estimated at P550.000
1) Under IFRS for SMES, what is the book value of Investment in Joint Venture to be reported by Logan Inc. as
of December 31,2020 if the SME elect’s equity method? 550,000
2) Under IFRS for SMES, what is the book value of Investment in Joint Venture to he reported by Logan Inc. as
of December 31, 2020 if the SME elects cost method? 500,000
3) Under IFRS for SMES, what is the book value of Investment in joint Venture to be reported by Logan Inc. as
of December 31,2020 if the SIE elects fair value method? 600,000

Equity Method
Beg. - 550,000 end
Investment 500,000 50,000 (100,000 * 50%)
Dividends
Net Income (200k * 100,000 - Net Loss
50%)
Amortization - Amortization
Total 600,000 600,000 Total

~ The fear of the LORD is the beginning of wisdom, and knowledge of the Holy One is understanding. ~ Proverbs 9:10.

COMPETENCY APPRAISAL
IAS 21 — The Effects of Changes in Foreign Exchange Rates

Objectives, Scope and Definitions of IAS 21

An entity may carry on foreign activities either by conducting transactions in foreign currencies, for example purchasing
a non-current asset from an overseas supplier, exporting goods to an overseas customer or arranging a loan in a foreign
currency, or by having foreign operations, for example a subsidiary or branch located overseas.

In addition, an entity may choose to present its financial statements in a foreign currency. The objective of IAS 21 is to
prescribe how to include foreign currency transactions and foreign operations in the financial statements of an entity,
and how to translate financial statements into a different currency for presentation purposes.

IAS 21 applies to:

1.accounting for transactions that the entity enters into which are in a foreign currency and any resulting balances
(note that items that fall within the Scope of IAS 39 Financial instruments: recognition and measurement are dealt
with by that standard);
2.translating the financial statements of foreign operations that are included in the financial statements of
another entity, for example, on consolidation of subsidiaries or the inclusion of associates by the equity
accounting method; and
3.Translating an entity's results and financial position into a different currency for the presentation of its financial
statements.

Initial recognition
An entity should record foreign currency transactions, for example the buying or selling of goods or services whose price
is denominated in a foreign currency, in a consistent manner. IAS 21 requires that an entity does this by recognizing each
transaction at the spot exchange rate on the date that the transaction took place.

Where there are high volumes of such transactions, for practical reasons an average exchange rate over the relevant
period may be used as an approximation. However, if exchange rates fluctuate significantly over short periods of time it
is not appropriate to use an average rate since it would not be a fair approximation for actual rates.

Reporting at the end of subsequent reporting periods

At the end of each reporting period the following translations of foreign currency should be carried out.

Recognition of exchange differences

The difference that arises from translating the same amounts at different exchange rates is referred to as an exchange
difference. Such amounts will generally arise in the preparation of a set of financial statements from the settlement of
monetary amounts payable or receivable in a foreign currency and the retranslation at the entity's period end.

Exchange differences should normally be recognized as part of the profit or loss for the period. However, where gains
and losses on a non-monetary item are recognized in other comprehensive income, for example a gain on the
revaluation of a property in accordance with IAS 16 Property, plant and equipment, any exchange difference resulting
from retranslation of the revalued asset is also reported as part of other comprehensive income.

Transactions settled within the period

When a foreign currency transaction is settled within the same accounting period as that in which it was originally
recorded, any exchange differences arising are recognized in the profit or loss of that period.

Transaction balance is outstanding at the end of the reporting period

When a foreign currency transaction is settled in a different accounting period to the one in which the transaction
originated, the exchange difference recognized in profit or loss for each period, up to the date of settlement, is
determined by the change in exchange rates during each period.

Essentials in Translating Foreign Currency Financial Statements

The functional currency
The overall approach required by IAS 21 is for an entity to translate foreign currency items and transactions into its
functional currency.

A functional currency "is the currency of the primary economic environment in which the entity operates" and the
primary economic environment “is normally the one in which it primarily generates and expends cash”.
In a group, each entity, for example the parent, each subsidiary and associate, needs to determine its own functional
currency rather than adopting a single one which is common across the whole group.

An entity cannot choose its functional currency; instead, management needs to make an informed assessment of the
facts. IAS 21 includes a number of practical indicators to assist entities in identifying their functional currency, for
example:

1. the currency that mainly influences the prices at which goods and services are sold; 2. the country whose
competitive forces and regulations mainly influence the pricing structure for the supply of goods and services; 3.
the currency in which financing is generated; and

4. the currency in which cash generated from an entity's operating activities is usually retained.

The presentation currency

Although the overall approach required by IAS 21 is for an entity to translate foreign currency items and transactions
into its functional currency, it is not required to present its financial statements using this currency. An entity has a
completely free choice of the currency in which its financial statements are presented. This is referred to as the
presentation currency.

Monetary and non-monetary items

IAS 21 distinguishes between monetary and non-monetary items.

Monetary items are units of currency held, and assets and liabilities to be received or paid in a fixed or determinable
number of units of currency, for example cash, receivables, payables and loans.

Non-monetary item is are therefore those which do not give rise to a right to receive (or an obligation to deliver) a fixed
or determinable amount of money, for example property, plant and equipment, goodwill, inventories and intangible
assets.

Procedures for translation into presentation currency

This section sets out how an entity should retranslate amounts from its functional currency into a different
presentational currency. As mentioned above, an entity has a completely free choice over its presentation currency,
assuming this is permitted by the jurisdiction in which the entity prepares its financial statements.

The translation into a presentation currency can be undertaken by an individual entity, if it decides to present its
financial statements in a currency different to its functional currency. much more commonly, it is undertaken when
entities within a group have functional currencies different from the presentation currency of the parent. For the
preparation of the group's consolidated financial statements, such entities will need to retranslate their financial
statements into the presentation currency being used.

The steps to translate financial statements into a different presentation currency are:

STEP 1: retranslate the assets and liabilities for each statement of financial position presented (I.e. the current period
end and the comparative period) at the closing rate at the date of that statement of financial position;

STEP 2: retranslate income and expenditure recorded in each statement of comprehensive income presented (i.e. the
current period and the comparative period) at the exchange rates. at the dates of the transactions, for practical reasons
an AVERAGE RATE may be used for each period, assuming that the exchange rate does not fluctuate significantly
during the period; and

STEP 3: recognize exchange differences in other comprehensive income.

Where exchange differences relate to a foreign operation that is not wholly owned, accumulated exchange differences
attributable to the minority shareholders should be allocated to minority interests in the consolidated statement of
financial position.

Problem 1:
On November 2, 20x5, PWC Company purchased merchandise from a U.S. firm for $40,000 and opens a letter of credit
with the Bank of the Philippine Islands to cover its importation. Bank charges amounted to P15,000. PWC year-end is
December 31. Relevant spot rates at various dates are as follows:

Dec. 15, 20x5 - date of arrival of goods P46.50

Dec. 31, 20x5 - balance sheet date for the firm 46.55

Jan. 10, 20x6 - date of payment of LC 46.60

Required:
Journal entries in the books of PWC Company for the above transactions.

Problem 2:
On November 3, 20x5, CALTEX Company sold merchandise for $20,000 to a U.S. firm. On November 10, the Philippine
firm avails a packing credit line of P50,000 with BPI to fund its requirement against a confirmed purchase order.

The exchange rates at various dates follow:

November 20, 20x5- Date of shipment P46.60
December 31, 20x5- Balance sheet date 46.70
January 25, 20x6 - Date of collection 46.80

Required:
Journal entries in the books of CALTEX Company for the above transactions.
Problem 3:
Malaysia produces automobile transmissions, which are then sent to the Philippines where they are installed in
domestically built cars. Hvundai Motors, a Filipino auto company received a shipment of transmissions on December 15,
20x5. The transmissions were subsequently paid for on January 20, 20x6. The invoice was denominated in Malaysian
ringgit and totalled 5,000.000 ringgit. The relevant exchange rates are as follows:

December 15, 20x5 - P13.68

December 31, 20x5 - P13.40

January 30, 20x6 - P13.20

Required:
Provide the necessary journal entries to record the above transactions assuming Hyundai Motor's fiscal year ends
December 31.
Problem 4:
On December 1, 20x5, SMC Corporation ordered equipment FOB shipping point from an American Company for US.
$10,000. The equipment was shipped and invoiced to SMC on December 16, 20x5. SMC paid the invoice on January 15,
20x6. Relevant spot rates for US dollars on the respective dates are as follows:

Buying Spot Rate Selling Spot Rate

December 1, 20x5 48.50 48.00
December 16, 20x5 48.90 50.00
December 31, 20x5 49.50 51.00
January 15, 20x6 50.00 50.00

Required:
Prepare all entries on SMC Corporation's books to record the above transactions.

Determine the following:

Foreign exchange gain or loss on:

1. December 16, 20x5 ______________

2. December 31, 20x5 ______________
3. January 15, 20x6 ______________
On December 31, 20x5:
1. Accounts payable __________________
2. Equipment _________________

Problem 5:
KPMG Corporation sold merchandise metal crafts to a Canadian Corporation for 10,000 Canadian dollars. Pertinent
information on exchange conversion rates related to this transaction were as follows:

Buying Spot Rate Selling Spot Rate

November 16, 20x5- receipt of order

31.50 32.00

December 16, 20x5- date of shipment

32.50 33.00

December 31, 20x5 - balance sheet date

33.50 33.75

January 15, 20x6 - date of collection

33.00 34.00
Required:
1. Prepare all entries in KPMG Corporation's books to record the above transactions.
Determine the following:
2. Foreign exchange gain or loss on:
1. December 16, 20x5 _____________
2. December 31, 20x5 ________________ 3. January 15, 20x6 ___________________ On
December 31, 20x5:
1. Accounts receivable _____________________
2. Sales _________________

“Don’t give up, you are almost there” ~ PJGP, CPA, MBA

COMPETENCY APPRAISAL IAS 29 — Financial Reporting in Hyperinflationary Economies

Financial Reporting in Hyperinflationary Economies (IAS No. 29)

Restatement of Financial Statements
The basic principle in IAS 29 is that the financial statements of an entity that reports in the currency of a
hyperinflationary economy should be stated in terms of the measuring unit current at the balance sheet date.
Comparative figures for prior period(s) should be restated into the same current measuring unit.

Historical Cost Financial Statements

Restatements are made by applying a general price index.

1. Monetary items are not restated that are already stated at the measuring unit at the balance sheet date are not
restated.
2. Assets and liabilities linked by the agreement to changes in prices should be adjusted in accordance with the
agreement.
3. All other assets and Liabilities are non-monetary. Some non-monetary items are carried at amounts current at
the balance sheet date, such as net realizable value and market value so they are not restated. All other non-monetary
assets and liabilities are restated.
4. All items in the income statement are expressed in terms of the measuring unit current at the balance sheet
date. Therefore, all amounts need to be restated by applying the change in the general price index from the dates when
the items of income and expenses were initially recorded in the financial statements.
5. A gain or loss on the net monetary position is included in net income. It should be disclosed separately.
The Standard does not establish an absolute rate at which hyperinflation is deemed to arise - but allows judgment as to
when restatement of financials becomes necessary. Characteristics of the economic environment of a country which
indicate the existence of hyperinflation include:

1. The general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency.
Amounts of local currency held immediately invested to maintain purchasing power;
2. The general population regards monetary amounts not in terms of the local currency but in terms of a relatively stable
foreign currency. Prices may be quoted in that currency;
3. sales and purchases on credit take place at prices that compensate for expected loss of purchasing power during the
credit period, even if the period is short;
4. interest rates, wages and prices are linked to a price index; and
5. the cumulative inflation rate over three years approaches, or exceeds, 100%.

IAS 29 describes characteristics that may indicate that an economy is hyperinflationary. However, it concludes that it is a
matter of judgment when restatement of financial statements becomes necessary.

When an economy ceases to be hyperinflationary, and an enterprise discontinues the preparation and presentation of
financial statements in accordance with IAS 29, it should treat the amounts expressed in the measuring unit current at
the end of the previous reporting period as the basis for the carrying amounts in its subsequent financial statements.

Functional Currency is the Currency of a Hyperinflationary Economy.

For an entity whose functional currency is the currency of a hyperinflationary economy, and for which the comparative
amounts translated into the currency of a different hyperinflationary shall be translated into a different presentation
currency using the following procedures:

a. All amounts (i.e., assets, liabilities, equity items, income and expenses, including comparatives) shall be
translated at the closing rate at the date of the most recent balance sheet (i.e., last year's comparatives, as adjusted for
subsequent changes in the price level, are translated at this year's closing rate), except that
b. when amounts are translated into the currency of a non-hyperinflationary economy, comparative amounts shall
be those that were presented in the prior year financial statements (i.e., not adjusted for subsequent changes in the
price level or subsequent changes in exchange rates)

Disposal of a foreign operation

Where a foreign entity is disposed of, any exchange differences that have been recognized in other comprehensive
income and accumulated in a separate component of equity are required to form part of the profit or loss on disposal.
Such amounts will therefore be reclassified from equity to profit or loss as a reclassification adjustment in the period in
which the disposal takes place. [IAS 21.48]

Problem 1:
ROYALE Corporation, a Philippine owned corporation had 100% ownership Interest of BEAUTY Company based in the
Toronto, Canada, BEAUTY's trial balance at December 31, 20x6 in Canadian Dollars is as follows:

Debits Credits
Cash 30,000.00
Accounts receivable 18,000.00
Land and Buildings- net 100,000.00
Accounts payable 18,000.00
Bonds payable- 10% 45,000.00
Capital Stock 50,000.00
Retained earnings, January 1 30,000.00
Dividends 5,000.00
Sales 75,000.00
Cost of sales and expenses 65,000.00
Totals 218,000.00 218,000.00

In addition, the following information was available:

1. Transactions involving land and buildings, bonds payable, and capital stock all occurred in 20x2.
2. Dividends were declared on March 15, 20x6 and paid on October 15, 20x6.
3. The relevant exchange rates for every 1Canadian dollar were as follows:
20x2 35.00
January 1, 20x6 41.00
January 31, 20x6 42.00
March 15, 20x6 46.00
October 15, 20x6 48.00
Average for 20x2-20x6 48.50
Average for 20x6 47.00
December 31, 20x6 49.00

Required:
Translate the financial statement of the Canadian Subsidiary into Presentation Currency if the functional currency is not
the currency of a hyperinflationary economy (Current Rate Method/Net Investment Method/Closing Rate Method),
assuming that:

a. Revenues and costs are assumed to have occurred evenly throughout the year
b. The peso balance of Retained Earnings on December 31, 20x5, was P1,230,000.
Problem 2:
A wholly owned subsidiary of Adelle Inc. has certain expense accounts for the year ended December 31, 20x6, stated in
local currency units (LCU) as follows:

LCU
Depreciation of equipment (related assets were purchased 1/1/20x3)
120,000.00

Provision for doubtful accounts

80,000.00

Rent
200,000.00

Amortization of copyrights (acquired on 1/1/20x4)

50,000.00

The exchange rates of various dates are as follows:

Peso Equivalent of 1LCU

December 31, 20x6 0.40
Average for the year ended 12/31/20x6 0.44
January 1, 20x4 0.50
January 1, 20x5 52.00

The subsidiary's functional currency is not the currency of hyperinflationary economy (Current Rate Method/Net
Investment Method/Closing Rate Met Method)

1. The charges of the expense accounts occurred approximately evenly during the year. What total peso amount
should be included in Adelle’s 20x6 Consolidated income statement to reflect these expenses
_______________________
2. When the subsidiary's functional Currency of a hyperinflationary economy. What total peso amount should be
included in Adelle's 20x6 consolidated income statement to reflect these expenses ignoring price index
____________________________
Problem 3:
COCO Company operates in a hyperinflationary economy. Is balance sheet at December 31, 20x6, follows:

The general price index had moved in this way. The following are the exchange rates:

December 31 December 31
20x2 100.00 20x2 1.20
20x3 130.00 20x3 1.24
20x4 150.00 20x4 1.27

20x5 240.00 20x5 1.50

20x6 300.00 20x6 1.75

The property, plant and equipment were purchased on December 31, 20x4, and there is a sixmonths inventory held. The
noncurrent liabilities were a loan raised on March 31, 20x6.

Determine the following:

1. The Total assets after adjusting for hyperinflationary should be: ____________________
2. The Retained Earnings on December 31, 20x6 after adjusting for hyperinflationary should be:
____________________
3. The Retained Earnings on December 31, 20x6 as translated is ________________

“The more time you spend waiting, the greater the gratitude after you receive it” ~ PJGP, CPA, MBA
 COMPETENCY APPRAISAL
AFAR
Cost Accounting Part 1
Methods of Treating Beginning Inventory in Process Costing (Cost Flow Assumptions)
1. FIFO Method. Only the costs incurred this period are allocated between FG and ending WIP. BI costs are
maintained separately from current period costs.

FG this period are costed separately as either started last period and completed this period or started this period
and completed this period.

a. Units from beginning work in process: you want to complete this units, so how much MORE effort
will be needed to finish these units. You will calculate this as beginning work in process units x
(100% – given % complete) to calculate the amount of additional work necessary to make the unit
100% complete.
b. Units started and completed this period: take the units x 100% complete since they were started
and completed they have received all of their materials, labor and overhead and will not receive any
more since they are finished.
c. Units in Ending work in process: just like with the weighted average method, we will take the
ending work in process units x a given % complete.

2. Weighted Average Method. This method averages all materials, labor and overhead both incurred in the
beginning WIP and those incurred this period. Thus, no differentiation is made between goods started in the
preceding and the current period.
  Units completed and transferred are finished units and will always be 100% complete for equivalent unit
calculations for direct materials, direct labor and overhead. For units in ending work in process, we
would take the units unfinished x a percent complete.

* The percent complete can be different for direct materials, direct labor or overhead.

Illustration:
1. Department II of Mucho Manufacturing Company presents the following production data for the month of May:
Opening inventory, 3/8 complete 4,000 units
Started in process 13,000 units
Transferred 9,000 units
Closing inventory, ½ complete 4,000 units
¾ complete 4,000 units
What are the equivalent units of production for FIFO and Average method for the month of may?
a. FIFO 12,500; WA 13,000 c. FIFO 12,500; WA 14,000
b. FIFO 17,000; WA 12,500 d. FIFO 15,000; WA 14,000

FIFO
IP , beg 4,000 WEIGHTED Work Done Equivalent
Started 13,000 AVE. Unit of
17,000 Deductions
WD EUD Transffered 9,000 100% 9,000
IP, Beg 4,000 5/8 2,500 WIP, end 4,000 50% 2,000
Started 5,000 100% 5,000 4,000 75% 3,000
WIP,end 4,000 50% 2,000 14,000
4,000 75% 3,000
12,500

2. Zoro Company adds materials at the end of the process in Department M. The following information pertains to
Department M’s WIP during April:
WIP 4/1 (60% complete conversion cost) 3,000 units
Started in January 25,000 units
Completed 20,000 units
WIP 4/30 (75% complete conversion cost) 8,000 units
What are the EUP for the month of January?
FIFO Average
a. Materials 28,000; Conversion 28,000 Materials 28,000; Conversion 28,000
b. Materials 20,000; Conversion 20,000 Materials 26,000; Conversion 26,000
c. Materials 20,000; Conversion 24,200 Materials 20,000; Conversion 26,000
d. Materials 24,800; Conversion 20,000 Materials 26,000; Conversion 20,000
WIP, Beg 3,000 WA Work Done EUD. Work Done EUD.
Started 25,000 M C
28,000 Completed 20,000 100% 20,000 20,000 100% 20,000
WIP,end 8,000 0% - 8,000 75% 6,000
28,000 20,000 26,000

FIFO Work Done EUD. Work Done EUD.

M C
Beg 3,000 100% 3,000 3,000 40% 1,200
Started 17,000 100% 17,00 17,000 100% 17,000
Wip,end 8,000 8,000 75% 6,000
20,000 24,200
Joint and Byproduct Costing
Definition of Terms
 Co-products are produced simultaneously with other products but not necessarily from the same raw materials
or the same processing operations.
 Main products result from those manufacturing operations in which companies simultaneously produce two or
more products of significant sales value known as joint products.
 Joint products are individual products that are produced simultaneously from the same raw materials and
processing operations with each product possessing more than a nominal value in the form in which they are
produced (examples: cheese, butter, and yogurt from milk; gasoline and diesel from crude oil)
 Byproducts are secondary or incidental products that are created or obtained during the production or
processing of a primary product.
  Scrap is waste material that is produced as a result of the manufacturing process.

Joint Products A 28/82 x 164k 56,000

- Requires simultaneous common processing – B 34/82 x 164k 68,000 processing of one product
C 20/82 x 164k 40,000
results in the processing of other joint product.
164,000
- Split-off point – the point at which separate products emerge to be
sold as is or processed further. Costs after split-off point do not cause allocation problems as they can be
identified to specific products
- Joint products are the primary outputs of a joint process, each joint product has substantial revenue generating
ability.
- Joint product costs are incurred during joint process while separable product costs are incurred at split-off point.
Joint product costs are allocated to individual products.

Characteristics of Main Products

1. Primary objective of the manufacturing operations
2. Sales value is relatively high as compared with other products
3. If joint product – it is produced through a common process

Characteristics of Byproducts
1. Not the primary objective of manufacturing operations
2. Sales value is comparatively low

Accounting Methods for Main Products

1. Physical output method or Average unit cost method
2. Market value at split-off method

Illustration 1
The following information is available for Aaron Company. Joint costs amounted to P164,000.
Additional
Products Units Produced Disposal Costs MV at Split-off Processing Costs Final MV
A 28,000 P4,000 P8.00 P50,000 P11.50
B 34,000 1,000 7.00 30,000 10.00
C 20,000 5,000 8.50 35,000 14.00

Joint cost = 164k

# Produced Allocation Add Cost Total Cost
A 28,000 56,000 50,000 106,000
B 34,000 68,000 30,000 98,000
C 20,000 40,000 35,000 75,000
82,000 164,000 115,000 279,000
EUD.
C
20,000
6,000
Units x MV Total Add Allocated Total A 224/632 x 164k 58,000 26,000
@SO MV Cost B 238/632 x 164k 62,000
A 28k x 8 224k 50k 58k 108k 1,200
C 170/632 x 164k 44,000
B 34k x 7 238k 30k 62k 92k 17,000
C 24k x 8.5 170k 35k 44k 79k 6,000
MV Total MV Add Cost Cost of Disposal NRV Allocation Total 24,200
632k
A 28k x 11.5 322,000 50,000 4,000 268,000 59,000 109,000
B 34k x 10 340,000 30,000 1,000 309,000 62,000 92,000
C 20k x 14 280,000 35,000 5,000 240,000 48,000 83,000
817,000

Illustration 2
Stef manufactures three joint products from a joint process. The following data pertains to operations of June.

Products Units Produced MV at Split-off

A 5,000 8.40
B 3,000 6.00
 C 2,000 5.00

Allocate the joint cost of P42,000 using:

1. Market Value Method
2. Average unit cost method

Byproducts
2 Methods of Costing:
1. Byproducts are recognized when sold: A byproduct inventory account is not setup. Additional processing costs
are expensed when incurred and disposal costs are expensed at the time of sale. Net revenue = actual sales –
additional processing cost and selling and admin expenses. Net revenue may be presented in the Income
Statement as:
a. Additional sales revenue
b. A deduction from the COGS of the main product
c. Other income
2. Byproducts are recognized when produced: expected value of the byproduct produced is shown as a deduction
from the total production cost of the main products produced. 2 methods to compute peso amount of the
byproduct to be deducted from the production costs
a. Net realizable value method – expected sales value of the byproduct produced is reduced by the
expected additional processing costs and selling and admin expenses.
b. Reversal cost method – expected value of the byproduct is reduced by the expected additional
processing costs, selling and admin expenses and normal gross profit of the byproduct.

Illustration
Jen Company produces product AB from a process that also yields a byproduct, C. the byproduct requires P4,000
additional product cost. The company decided to charge the joint cost AB. The byproduct will require selling and admin
expenses of P1,000. Information concerning a batch produced in June, 2023 follows:
Product Units Produced MV at SO Units Sold
AB 50,000 P10.00 40,000
C 20,000 1.00 15,000
The costs incurred up to the split-off point are:
Direct materials P 120,000
Direct Labor 100,000
FOH 80,000
Required:
1. Income statement showing the net revenue of the byproduct using the different methods:
a. Additional sales revenue
Sales
AB (40k x 10) 400,000
C 10,000
--------------
Total Sales 410,000

b. Deduction from the cost of goods sold of AB

DM 120,000
DL 100,000
FOH 80,000
-------------
TMC 300,000
Inventory, end. (60,000)
---------------
COGS 240,000

c. Other income

Sales

AB (40k x 10) 400,000

C 10,000

--------------
 Total Sales 410,000
COGS. (240,000)
---------------
Gross Profit 170,000
S&A. (80,000)
---------------
Net Income 90,000

2. Income statement showing the NRV of the byproduct as deduction from the total manufacturing cost of AB
Sales 15,000

Less: Additional cost (4,000)

S&A (1,000)

----------------

Net Revenue 10,000

DM 120,000

DL 100,000

FOH 80,000

-------------

TMC 300,000

Less: (10,000)

---------------
Net MC 290,000
Inventory, end (58,000)
-------------
COGS 232,000

Sales 400,000

Less: S&A 240k

(10k) 230,000
Gross Profit P170,000

Less: S&A Exp 80,000

NI P90,000

Sales 400,000

Less: COGS (232,000)

GP P168,000

Less: S&A expense (80,000)

NI P88,000
Activity Based Costing (ABC)
Under ABC, costs are accumulated by activity rather than by department or function for purposes of product costing.
ABC is a system that:
1. Identifies the casual relationship between the incurrence of cost and activities
2. Determines the underlying driver of the activities
3. Established cost pools related to individual cost drivers
4. Develops costing rates
5. Applies cost to product on the basis of resources consumed

Flow of ABC
 Cost drivers are used as basis for allocation (cost drivers are the factors that contribute to increasing or
decreasing costs.)
 Determines value-adding activities associated with the incurrence of costs.
 Accumulates a cost pool for each activity using the appropriate cost driver (activity base)
 Cost pools are assigned to cost objects.
 Nonvalue-added activities are reduced to the lowest extent possible
 Allocation is two-stage: costs are traced to activities then to products.

Illustration 1:
May Fabricators has a diverse product line and a complex cost structure, with some jobs requiring much labor and little
machine use and others requiring the opposite mix. Because no single base for a predetermined overhead rate will
provide May with reliable product cost information, overhead is classified into two cost pools and two predetermined
overhead rates are used. For the current year, it is estimated that total overhead costs will consist of P200,000 of
overhead related to the usage of direct labor hours and P300,000 of overhead related to machine usage. Total machine
usage is expected to be 4,000 hours for the year and total direct labor hours are expected to be 16,000 hours. Job 345
required P2,000 of direct material, 30 hours of labor at P10 per hour and 10 hours of machine time.

Required:
1. Determine the dual predetermined overhead rates.

FOH – 500,000
• 200k/16k = 12.50
• 300k/4k = 75

2. Compute the cost of Job 345.

JOB:
• DM 2,000
• DL 300
• FOH - 30x12.5= 375
10x75 = 750
---------
3,425

Illustration 2:
UCU Community Hospital has found itself under increasing pressure to be accountable for the changes it assesses its
patients. Its current pricing system is ad hoc, based on pricing norms for the geographical area, and it only explicitly
considers direct costs for surgery, medication, and other treatments. UCU’s controller has suggested that the hospital
try to improve its pricing policies by seeking a tighter relationship between costs and pricing. This approach would make
prices for services less arbitrary. As a first step, the controller has determined that most costs can be assigned to one of
the three cost pools. The three cost pools follow along with the estimated amounts and activity drivers.
Activity Center Amount Activity Driver Quantity
Professional salaries 900,000 Professional hours 30,000 hours
Building costs 450,000 Square feet used 15,000 square feet
Risk management 320,000 Patients served 1,000 patients
The hospital provides service in three broad categories. The services are listed below with their volume measures for the
activity centers.
Service Professional hours Square feet Number of Patients
Surgery 6,000 1,200 200
 Housing Patients 20,000 12,000 500
Outpatient Care 4,000 1,800 300
Required:
1. Compute the allocation rates for each activity center.
2. Determine the allocated activity center costs to the three services provided by the hospital

Illustration 3
Zylin has two major components with the following information:
Indoor furniture Outdoor furniture Total
Annual revenue P300,000 P600,000 P900,000
Material costs P40,000 P60,000 P100,000
Labor costs P50,000 P75,000 P125,000
Material hours 80,000 20,000
Number of batches 100 100

The business also has overhead costs as follows:

Cost Pool Cost in Pool Cost Driver
Maintenance P200,000 Machine hours
Setups 175,000 Number of batches
Administrative 125,000 Labor costs
500,000

Required:
1. Determine the income (loss) of each segment if the overhead costs will be allocated to segment based on labor
costs (traditional)
Indoor Outdoor

Revenue 300k 600k

Materials 40k 60k

Labor 50k 75k

FOH

500k/125k x 50k 200k

500k/125k x 75k 300k

Total Cost (290k) (435k)

Net MC 10k 165k

2. Determine the income (loss) of each segment if the overhead costs will be allocated to segment under ABC.

Indoor Outdoor

Revenue 300k 600k

Materials (40k) (60k)

Labor (50k) (75k)

FOH:

Maintenance:
200k/100k x 80 (160k)
200k/100k x 20 (40k)
Setup cost:
175k/200k x 100 (87,500)
175k/200k x 100 (87,500)
Admin:
125k/125k x 50 (50k)
125k/125k x 75 (75k)
NI (LOSS) (87,500) 262,500