PRACTICAL ACCOUNTING P-2

Statement of Financial Position

As of December 31, 2015

Michael Grace
Cash 150,000 50,000
Accts. Receivable 1,200,000 800,000
Supplies inventory 40,000 25,000
Mdse, inventory 900,000 450,000
Land 1,500,000
Building 2,500,000
Equipment 800,000
Furniture & Fixture 500,000
Total Assets P6,290,000 P2,625,000
Accounts Payable 125,000 85,000
Loans Payable 1,200,000
Michael Capital 4,965,000
Grace Capital 2,625,000
Total Equity 6,290,000 P2,625,000

Michael and Grace agreed to the following adjustment:

1. Provide 5% allowance for uncollectible accounts on their accounts receivable.
2. Supplies and Merchandise inventory is to be valued at 90% of their carrying values.
3. Depreciation equal to 10% of Building, Equipment and Furniture and Fixture should be
provided.
4. Prepaid insurance equal to P24,000 should be recognized in the books of Michael.

The partners agreed that they will make settlement among themselves so that their capital will be
in accordance with 60:40 ratio for Michael and Grace, respectively. Profit & loss should be
divided equally, after giving themselves 10% interest on their beginning capital.

Required: Determine the following:

(1) Adjusted capital of Michael and Grace
(2) The amount credited each partner
(3) Entries to record the investment of Michael and Grace in the books of the partnership.

1. ILLUSTRATION

On March 1, 2016, Daniel & Kathrine decided to combine their businesses and form a
partnership. Their balance sheet on this date, before adjustments, is given below:

Daniel Kathrine
Cash P180,000 P70,500
Accounts Receivable 370,000 270,000
Inventories 600,000 390,000
Furniture & Fixtures-net 600,000 180,000
Office Equipment 230,000 50,000
Prepaid expenses 12,750 6,000
Total P1,992,750 P967,000

Accounts Payable P911,500 P360,000

Capital 1,081,250 607,000
Total P1,992,750 P967,000

The parties agreed that Kathrine will make additional cash investment to give her 50% interest in
the firm, after making the necessary adjustment stated below:

1. Provide 5% allowance for doubtful accounts on each Accounts Receivable.

2. Inventories should be recognized only at 80% of their book values.
 3. Furniture & fixture of Daniel is overvalued by P25,000 while the Equipment of Kathrine
is overvalued by P11,500.
4. Prepaid expenses of P6,000 for Daniel and P2,000 for Kathrine is to be recognized.
5. Accrued expenses of P3,000 for Daniel and P1,000 for Kathrine is to be recorded.

Required: Determine the capital of each partner immediately after the formation.

2. ILLUSTRATION: Lump sum liquidation

The partnership of Art and Raffy has been very unprofitable for the last three years. After closing
the partnership books on December 31, 2015 the partners decided to liquidate before the
partnership assets will be totally exhausted. The balance sheet of the partnership as of December
31, 2015 is shown below:
ASSETS
Cash 10,000
Non-cash assets 1,520,000
Total Assets 1,530,000

LIABILITIES & CAPITAL

Liabilities 1,060,000
Art Capital 300,000
Raffy Capital 170,000
Total P1530,000

Additional information:
a) Art is personally insolvent while Raffy is solvent.
b) An offer equivalent to 75% of the carrying value of non-cash assets is acceptable by the
partners.
c) All liabilities including unrecorded utilities bill amounting to P7,500 is paid.
d) Liquidation expenses amounting to P12,000 was paid.
e) The profit & loss ratio is 40:60 for Art and Raffy, respectively.

Required: Determine the amount payable to each partner.

3. ILLUSTRATION: Installment Liquidation

ABC Partnership is winding up it is affairs submitted the following trial balance at April 30,
2016:
_______________________
Debit Credit
Cash P60,000
Accounts Receivable 220,000
Inventory 140,000
Property, plant and equipment 990,000
Amie Loan 120,000
Cathie Loan 75,000
Accounts Payable P470,000
Bobie Loan 70,000
Amie Capital (50%) 400,000
Bobie Capital (30%) 400,000
Cathie Capital (20%) ___________________ 265,000_
Total P1,605,000 P1,605,000_

The partner liquidated the partnership and cash is distributed to the partners at the end of each
month. Summary of transactions follows:

1st month:
 Only 70% of the accounts receivable is collected, the balance is uncollectible.
 P100,000 is received from the entire inventory.
 50% of the property, plant, and equipment is realized at P350,000
 Liquidation expenses of P10,000 is paid
  P300,000 of accounts payable is paid.
 P20,000 is reserved for liquidation expenses
 The balance of cash is paid to partners.

2nd month:
 The remaining property , plant and equipment is realized at P300,000
 Liquidation expenses of P20,000 is paid
 Unrecorded liabilities of P10,000 is paid
 The remaining accounts payable is paid
 Balance, to partners.

Required: Prepare a schedule showing how the cash available in the 1st month and 2nd month
is distributed to the partners using: (a) Periodic of payment and (b) Cash priority program.

Est. realizable
Book values values
Assets:
Cash P240,000 P240,000
Accounts Receivable – net 630,000 480,000
Inventories 600,000 530,000
Equipment – net 450,000 180,000
Land and Building – net 750,000 420,000
Other assets 30,000 -
Total Assets P2,700,000

Liabilities & Stockholders’ Equity:

Accounts Payable 1,200,000
Notes payable 300,000
Wages payable for the last 2 months 72,000
Taxes payable 228,000
Mortgage payable, including P15,000 615,000
Accrued interest
Capital Stock 900,000
Retained Earnings (615,000)
Total Liabilities & Stockholders’ Equity: P2,700,000

Additional information:
1. Accounts Receivable are pledged as security for the notes payable
2. The mortgage payable is secured by the land and building
3. Liquidating expenses are expected to be P35,000
4. Unrecorded liabilities amounting to P20,000 is to be recognized

Required: Determined the following:

a. Total amount available to unsecured creditors
b. % of recovery
c. Amount payable to partially secured creditors
d. Statement of Deficiency

4. ILLUSTRATION:

On January 1, 2015, Toyota Motors offer a special cash price of P750,000 for a 2015 Toyota
Innova costing P500,000 for all purchases made on or before December 31, 2015 or a zero down
payment with extended credit terms of 24 monthly installments of P34,000.

The entry to record the transaction is:

At the date of sale:
January 1, 2015

Installment Receivable-2015(P34,000 x 24) 816,000

Installment Sales 750,000
Unearned interest revenue 66,000

Cost of Installment Sales 500,000

Inventory 500,000

At year end:

5. ILLUSTRATION: Contact with mobilization fee and retention fee

In January 2015, SMD Corporation was contracted to build a building for P150M, the project to
be completed in two years. The contract provided for the following:

a) Initial payment will be 20% of the contract price. This payment will be made upon
signing of the contract and it will be used for mobilization and starting of the works.

b) The succeeding payments will be as follows:

 30% of the contract price at 50% completion
 20% of the contract price at 75% completion
 30% of the contract price at 100% stage of completion

c) All payments made to contractor will be subject to 10% reduction to cater for retention
money. The payment of retention fee will be made after the expiration of Warranty
Period of 10 weeks and after the issuance of Certificate of Completion. All necessary
repairs will have been done to the satisfaction of the client’s engineer before payment is
released.

SMD Corporation uses percentage of completion in accounting for this project. Initially, the
engineer’s estimated a gross margin of 25% on the project. By the end of 2015, SMD
Corporation presented progress billing corresponding to 50% completion.

Required: Determine the Following:

1) The amount of revenue, cost and profit to be presented in the income statement at
December 31, 2015
2) The amount collected from the client as of December 31, 2015.

6. ILLUSTRATION. Determine net income of an agency

Lenovo Company established an agency in Bonifacio Global City (BGC), in December of the
current month, sending its merchandise sample costing P157,500 and a working fund of P20,000
to be maintained on the imprest basis. During the month of December, the agency transmitted to
the home office sale orders which were billed at P643,800. A home office disbursement
chargeable to the sales agency is the acquisition of furniture and fixtures for BGC, P25,000 to be
depreciated at 25% per annum. The agency paid expenses of P28,150. On December 31, 2015,
the agency samples were valued at 75% of its original cost. The gross profit rate of the goods
shipped to the agency was 25% of selling price.

Required: Determine the net income of the agency for the month of December, 2015.

7. ILLUSTRATION. Shipment to branches at above cost

River Island Company maintains a branch in Cebu City. Its policy is to bill outside customers at
40% mark-up on cost while shipments to branches are made at 20% mark-up on cost. The branch
also billed its customer at 40% mark-up on cost. During the year 2016, the following selected
accounts were taken from the records of River Island Company.
 Home Cebu
Office Branch
Merchandise inventory, Jan. 1, P120,000 P80,000
Purchases 1,500,000 300,000
Shipments from home office 840,000
Shipments to branch 750,000
Branch inventory allowance 156,000
Sales ? ?
Merchandise inventory, Dec. 31 on hand 140,000 P103,000
Expenses P250,000 P185,000

On the branch ending inventory, P36,300 came from outside.

Required:
1. What part of the branch inventory in January 1 came from outside?
2. How much is the total sale of the home office and of the branch?
3. How much is the total inventory to appear in the consolidated balance sheet at Dec. 31,
2016?
4. How much is the true net income of the branch?

8. ILLUSTRATION. Various types of consideration is given (merger)

On October 1, 2015, Alpha Company is interested in the business of Beta Company.

Negotiations have been done and on January 1, 2016, an agreement was reached the net assets
were exchanged on this date for the following:
- 100,000 share in Alpha Company, par P10, market value, P25.
- P2M cash, half to be paid on date of exchange and half at the end of the current
year. The Incremental borrowing rate for Alpha Company is 10% per annum.

In issuing the equity instruments, Alpha Company incurred the following:

- Underwriting costs and brokerage fees, P20,000
- Transaction cost such as stamp duties and professional advisers fee, P5,000.

Determine the cost of business combination.

9. ILLUSTRATION. Determining the amount of consideration in a merger

In December 2015, King Company started negotiating for the acquisition of the Princes
Company. The offer was for shareholders of Princes Company to receive one King Company
share with a market value of P125 for every three shares held in exchange for all asset of Princes
Company (except cash and share in listed companies). In addition to the shares, King Company
will transfer its share in listed companies which has a fair market value of P750,000, King
Company will also pay Princes Company sufficient cash to enable Princes Company to pay all
its creditors the Princes will liquate. The shareholders of Princes Company accepted the offer.
Balance Sheet on December 31, 2015 is given below:
_________________________________
King Company Princes Co.
Cash P7,250,000 P260,000
Account Receivable 1,700,000 1,065,000
Inventory 2,800,000 1,500,000
Shares in listed companies 800,000 1,100,000
Land and building, net 3,500,000 2,000,000
Property, plant and equipment, net 6,500,000 5,250,000
Total assets P22,550,000 P11,175,000
Accounts payable P3,250,000 P 2,000,000
Mortgage loan 7,500,000 1,500,000
Equity, Ordinary shares of P50 par 10,000,000 7,500,000
Retained Earnings 1,800,000 175,000
Total P22,550,000 P11,175,000
The net assets of Princes Company are reflected their fair values except for the following:
Inventory, P13,000,000 FMV
Land and building, P4,000,000 FMV
Shares in listed companies, P900,000

REQUIRED: Determine the following:

a) Amount of consideration transferred
b) Goodwill or income resulting from merger
c) Entries in the books of the acquirer (King Company) & in the books of Princes

10. ILLUSTRATION: Subsidiary is 100% controlled by parent

On January 1, 2015, Alpha Company Acquired 100% control of Beta Company’s stocks or net
assets for an amount which is P200,000 over the book value of interest acquired. On this date,
the balance sheet of Alpha Company and Beta Company are as Follows:
______________________________
Alpha Company Beta Company
Assets:
Cash P1,500,000 P1,300,000
Account Receivable 1,700,000 450,000
Inventories 1,150,000 800,000
Equipment – net 5,000,000 1,050,000
Patents 200,000 50,000
Total Assets P9,550,000 P3,650,000

Liabilities and Equity:

Account Payable 600,000 200,000
Bonds Payable 2,000,000 -
Capital Stock 5,000,000 2,000,000
Additional paid in capital 750,000 600,000
Retained Earnings 1,200,000 850,000
Total Liabilities & Equity P9,550,000 P3,650,000

The identifiable assets and liabilities of Beta Company are fairly valued except for Inventories
which are undervalued by P100,000 while Equipment is over depreciated by P50,000. The
inventories of Beta Company on Jan 1, 2015 were all sold during were all sold during the while
the equipment has a remaining life of 5 years.

Determine the amount of goodwill resulting from the business combination and prepare the
elimination entries on the date of acquisition

11. ILLUSTRATION: Subsidiary is 90% controlled by parent.

Assume the same balance sheet data and other information as in Illustration 1, except that the
parent acquired only 90% of the equity of Beta for P3,300,000. Non-controlling interest is
measured proportionately.

REQUIRED: Determine
a) The amount of goodwill resulting from the business combination and
b) Prepare the elimination entries on the date of acquisition.

12. ILLUSTRATION. Job Order Costing using different cost drivers

Tiger Manufacturing Company employs a job order costing system to account for its production
that passes through three departments. Three Jobs order by valued clients were started in July.
The following data related to the three jobs are as follows.
__________________________________________________________________________
Production Direct labor Cost Driver
Department Rate Rates
__________________________________________________________________________
Process 1 P45 per hour 150% of direct material cost
Process 2 P40 per hour P25 per machine hour
Process 3 P35 per hour 200% of direct labor cost

Job Alpha Job Beta Job Charlie

Materials:
Process 1 P200,000 P130,000 P290,000
Process 2 15,000 25,000 70,000
Process 3 0 0 0
Labor Hours:
Process 1 2,500 2,000 1,500
Process 2 1,000 1,250 1,750
Process 3 7,500 9,000 12,500
Machine Hours:
Process 1 0 0 0
Process 2 6,000 7,500 13,500
Process 3 750 1,500 1,000

Jobs Alpha and Beta were completed during July.

Required: Determine the total cost charged to work in process by jobs.