COVERAGE FOR 2"? FINAL EXAM - AFAR PARTNERSHIP ‘Accounting for partnerships ‘The Conceptual Framework for Financial Reporting and the Standard (or PFRS for SMEs, when appropriate) are applicable to all reporting entities regardless of the type of organization. Thus, most ‘accounting procedures used for other types of business organizations are also applicable to partnerships. The main distinction lies on the accounting for equity. In addition, the accounting for partnerships should also comply with relevant provisions of the Civil Code of the Philippines. ‘The following are the major considerations in the accounting for the equity of a partnership: ‘© Formation - accounting for intial investments to the partnership Operation - division of profit or losses '* Dissolution - admission of a new partner and withdrawal, retirement or death of a partner ‘¢ Liquidation - winding- up of affairs Formation ‘A contract of partnership is consensual. Its created by the agreement of the partnership which may be constituted in any form, such as oral or written, Division of profits and losses The partner shall share in the pr partnership agreement. or losses of a partnership im accordance with the Art 1797 of the Philippine ¢) of partners: il Code provides the following additional rules in the profit or loss sharing I only the share of each partner in the profits has been agreed upon, the share of each in the losses shall be in proportion to what he may have contributed, but the industrial partner shall not be liable for the losses. As for the profits, the industrial partner shall receive such share as may be just and equitable under the circumstances. If besides his service he has contributed capital, he shall also receive @ share in the profits in proportion to his capital ‘The designation of losses and profits cannot be entrusted to one of the partners (Art, 1798). A stipulation which excludes one or more partners from any share inthe profits or losses is void (Art 1799), In addition the partnership agreement may also stipulate the following. ‘© Salaries - normally, an industrial partner receives salary in addition to his share in the partnership's office as compensation for his services to the partnershie, ‘© Bonuses - the managing partner may be entitled to @ bonus for excellent management performance, Unlike for salaries, a partner is entitled to a bonus only ifthe partnership earns profit. The partner is not entitled to any bonus if the partnership incurs loss. ‘© Interest on copital contributions - the partnership agreement may stipulate that each partner is entitled to a per annum interest computed on his capital contributions. Dissolution ‘As mentioned earlier, one of the characteristics of a partnership is that is has a “limited life,” in the sense that the partnership agreement can be easily dissolve. Dissolution is different from liquidation. Dissolution is the change ia the relation of the partners cause by ‘any partner ceasing to be associated in the carrying on of the business. Liquidation is the termination of business operations or the winding up of affairs. Partnership dissolution does not necessarily terminate the business. The business continues until the remaining partners decide to liquidate the business. If the business is continued after dissolution, new articles of partnership should be drawn up. ‘The following are the major considerations in the accounting for partnership dissolutions. ‘© Admission of a partner, ‘© Withdrawal, retirement or death of a partner ‘Incorporation of a partnershipCOVERAGE FOR 2"? FINAL EXAM - AFAR The admission of a new partner or the withdrawal, retirement or death of an existing partner dissolves the original partnership agreement because it creates a change in the relation of the partners (eg., 2 change in the number of the partners in a partnership) It should be noted that the admission of a new partner requires the consent of all the existing partners. Admission of partner ‘The admission of a new partner may be effected either through: ‘© Purchase of interest in the partnership, or ‘© Investment in the partnership. Purchase of interest ‘Anew partner may be admitted when he purchases part or all the interest of one or more of the existing partners This transaction is a personal transaction between and among the partners. As such, any consideration paid or received is not recorded in the partnership books. The only entry to be made in the partnership books is a transfer within equity. A new capital account is established for the new partner and 2 corresponding decease is made on the capital account(s) of the selling partner(s). No gain or loss shall is recognized in the partnership books, Revaluation of asset When a partnership is dissolve but not liquidated, a new partnership is created. The asset and liabilities carried over to the new partnership are restated to fair values. Any adjustments to the asset and liabilities is allocated first to the existing partners before recording the admission of the new partner. Investment in the partnership Instead of purchasing interest from the existing partners, a new partner may be admitted by investing rectly in the business. This transaction is a transaction between the new partner and the partnership. As such, any consideration paid by the incoming partner shall be recorded in the partnership books. However, since this sa transaction with an owner, ne gain or loss shall be recognized. ‘Two things may happen when a new partner invests in a partnership: '¢ The new partner's capital account is credited at an amount equal to the fair value of his investment; ‘+ The new partner's capital account is credited at an amount greater than or less than the fair value of his investment. Incorporation of partnership ‘There are various reasons for incorporating a partnership, which may include the following: 2, Limited liability of shareholders - shareholders are not liable to corporate creditors beyond their investment in the corporation. b. Ease of raising additional capital - greater capital can be raised from an increased number of ‘owners. Also, itis easier for a Corporation to generate external financing, as lenders need not worry ‘about the death of the partners. «. Privacy and confidentially - unlike in partnerships, the owners of e corporate are not agents cof the corporation. 6. Dispersion of risk -the risk of loss is dispersed to more owners. ©. Unlimited life - changes in the relationship of the owners of @ corporation do not dissolve the corporation. f. Transferability of ownership - transferring an ownership in a corporation is made simply by selling ‘one’s share stocks. The corporation need not to be dissolved when a shareholder sells his interest in the business. 8. Better public relations - many believes that wider ownership of @ business results to better public relations, ‘When a partnership Is converted into a corporation, the corporation acquires and assumes the assets and liabilities of the partnership in exchange for shares of stocks which shall be issued in settlement of the partners! respective interests,COVERAGE FOR 2"? FINAL EXAM - AFAR lation Liquidation is the termination of business operations or the winding up of affairs. Its @ process by which 1 the assets of the business are converted into cash, 2 the liabilities of the business are settled, and 3. any remaining amount is distributed to the owners. Liquidation may either be voluntary (e.g. per agreement of partners of solvent partnership) or involuntary (eg. pee government mandate or bankrupt). Conversion of non-cash assets into cash The conversion of assets into cash is referred to as “realization" while the settlement of daims cor creditors and owners is referred to as “liquidation”. However, the term liquidation is used in a broader sense to include the entire winding up process. ‘The winding up process starts with the conversion of non-cash assets into cash. As such, the timing of the “realization” of non-cash assets determines the manner on which the “liquidation” (ie., payment of claims) is carried out Methods of liquidation Liquidation may be accomplished either through. 1. Lump-sum liquidation-all of the non-cash assets of the partnership are sold simultaneously or within a very short period of time. The proceeds are then used to settle all ofthe liabilities first, and any remaining amount is paid to the partners under a single, lump-sum payments. Lump-sum liquidation is possiole when there is a contracted buyer of al of the non-cash assets lof the partnership or the assats are sold on a “package deal” bas's 2. Installment iquidation - is most cases, -would take some time before all ofthe assets of a business are converted into cash. In such case, the partners’ claims are settled on installment basis as ‘cash becomes available, but only afterall partnership liabilities are fully settled. Settlement of claims ‘The available cash of the partnership is used to settle claims in the following descending order: 1. First, to outside creditors; 2. Second, to inside creditors (e.g, payables to partners); 3. Third, to owners! interests Right of off-set ‘As shown above, a loan payable to a partner has a higher priority over the partner's capital balance but ‘a lower priority over the claims of outside creditors. However, the legal right of offset allows a deficit in ‘a partner's capital account to be offset by a loan payable to that partner. Lump-sum liquidation vs, Installment liquidation ‘The following procedures shall be observed when accounting for lump-sum liquidation or installment liquidation. Lump-sum Installment Allo the non-cash assets ae converted to cash T Some of he non-cash assets are Converted 10 Gam, 2 The total gain of loss on the sales allocated to the partner's capital balances bated on their profit or last ratios. The earrying amount of any unsold non-cash asset considered as loss Ths ialocated to the partners? capital balances based on their profit and loss ratios. 3, actual Iiquldation expenses are alocated to he partners’ capital balances bated on their profit or loss ratios. 3. Actual and estimated future liquidation expenses 37 allocated to the partners capital balances based on thelr oft or loss ratios. 4, The lables fo GUISE crEGHOTS ae Fully SEMI +. The labilies 10 OUlsde crea ave parialy ar fal settled. 5, The Tables to inside Creators are Pally SEETES 5. The labINies To We HEUTOTS ave partially oF Fal settled but only ater settlement of the labilties to outside creditors Any remaining cash fs GRrTbuted to The Owners Fr ful settlement of tharintarests 6, IFboth the labile: to outside and inside creators are fully setted, any remaining cash less eash set aside for future liquidation expenses i distributed to the owners as partial settlement oftheir interestCOVERAGE FOR 2"? FINAL EXAM - AFAR Marshalling of assets ‘As mentioned earlier, one of the characteristics of a partnership is ‘unlimited liability”. This is because the personal assets of the general partners are subject to the claims of partnership's creditors in case of partnership insolvency. ‘The legal doctrine of marshalling of assets is applied when the partnership and some of the partners are insolvent. The following are the rules when applying this doctrine: 1. First, any available assets of the partnership is used to settle the partnership's liabilities 2, Second, in case the assets of the partnership are insufficient to pay al liabilities (ie, insolvency) the solvent general partners are required to provide additional funds their personal assets. The claims to the personal assets of a partner shall rank in the following order: 1a, Those owing to separate creditors. b. Those owing to partnership creditors. cc. Those owing to partners by way of contribution. 3. Third, in case some partners are insolvent (or limited partners), their eapitel deficiency shall be offset to the capital balances of the other partners. If after allocating the capital deficiency of an insolvent (or limited) partner, a solvent partner's capital balance result to a negative results toa negative amount, the solvent partner is required to provide additional contribution. Cath priority program Another method of ensuring that there are no overpayments to partners is by preparing @ “cash priority program” or “cash distribution program.” This schedule determines which partner shall be paid first and which partner shall be paid last, after all liabilities are settled. This schedule can be prepared even prior to the sale of any asset. ‘The preparation ofthis schedule requires the application of the same concepts as those we have applied earlier, namely: ‘a. Unsold non-cash assets are treated as loss; and b. Expected future liquidation costs and potential unrecorded liabilities are recognized immediately as losses, ‘An additional procedure when preparing a cash priority program is to rank the partners in accordance to their maximum loss absorption capacity. The partner with the highest maximum loss absorption ‘capacity shall be paid first. The partner with the lowest maximum loss absorption capacity shall be paid last. The formula in computing for the maximum loss absorption capacity is as follows: Maximum loss Total partner's interest in the partnership absorption = Partner's profit or loss share percentage capacityCOVERAGE FOR 2"? FINAL EXAM - AFAR {An entity shall apply the principles in PFRS 15 in accounting for revenues from franchise contracts, ‘© Aconstruction contract isa contract specifically negotiated for the construction of an asset or a combination of assats that are closely interdependent in terms of thelr design, technology and function or their ultimate purpose or use ‘© PFRS.15 requires the following steps when recognizing revenue from construction contracts: Step 1: Identify the contract with the customer Step 2: Identify the performance obligations in the contra: Step 3: Determine the transaction price Step 4: Allocate the transaction price to the performance obligations Step 5: Recognize revenue when (or as) a performance obligations is satisfied Step 1: (a) The contract must be approved and the contracting parties are committed to it; (b) rights and payments terms are identifiable; (c) has commercial substance; and (d) the consideration Is probable of collection. No revenue is recognized if the contract does not meet the criteria above, Any consideration received is recognized as liability. Step 2: Each promise in a contract to transfer a distinet good or service is treated as a separate performance obligation, © Agood or service is distinct if The customer can benefit from It, either on its own or together with other resources that are readily available to the customer (eg., the good or service is regularly sold separately); and The good or service is separately identifiable (i.e., not an input toa combined output, does not significantly modify the other promises, or not highly interrelated with the other promises) © The entity shall determine whether a performance obligation is satisfied over time or a point in time. A performance obligation is satisfied over time or at a point in time, A performance obligation is satisfied over time if one of the following criteria is met: The customer simultaneously receives and consumes the benefits provided by the entity's performance as the entity performs. The entity's performance creates or enhances an asset (e.g., work in progress) that the customer control as the asset is created or enhanced, The entity's performance does not create an asset with an alternative use to the entity and the entity has an enforceable right to payment for performance completed to date, ‘¢ Ifthe entity cannot demonstrate that a performance obligation is satisfied over time, itis presumed thatthe performance obigation it satstieg at pon in i ‘+ Ifthe performance obligation is satisfied overtime , the entity shall determine a measure of progress that best depicts its performance + Under the “cost-t-cost” method (an application of the inputs method), the entity's measure of progress is determined using any of the following formulas: Percentage of completion = ( Total costs incurred to date + Estimated total contract costs) OR Percentage of completion = Total costs incurred to date + (Total cost incurred to date + Estimated costs to complete) ¢ Ifthe outcome of a performance obligation that is satisfied over time cannot be measured reasonably, the entity shall recognize revenue only to the extent of costs incurred that are expected to be recovered (i.e, zero-profit method) ‘© changes in measure of progress are accounted for prospectively ‘+ When construction contract becomes onerous (#.., the expected contact costs exceed the transaction price], the entity shall recognize a provision in accordance with PAS 37.COVERAGE FOR 2"? FINAL EXAM - AFAR . An entity shall apply the principles in PERS 15 in accounting for revenues from franchise contracts. . PFRS 15 defines a license as one that “establishes 2 customer's right to the intellectual property on an enti.” Franchises anerample of iense : PRS 15 requires the Tollowing steps when recognizing revenue from Franchise contracts: Step 1: Identify the contract with the customer Step 2: Identify the performance obligations in the contract Step 3: Determine the transaction price Step 4: Allocate the transaction price to the performance obligations Step 5: Recognize revenue when ( or as )a performance obligation is satisfied . In addition to the general principles, PERS 15 requires an entity to apply some specific principles when ‘termining whether a promise to transfer a licenses satisfied over time or ata pointin time. . Ifthe performance obligation in a franchise contract is satisfied over time, revenue is racognized over the duration of the franchise contract as the performance obligation is satisfied. The entity shall determine an appropriate method of measurement of its progress towards the complete satisfaction of the performance obligation . If the performance obligation in a franchise contract is satisfied at a point is satisfied. . Revenue from sales- based or usage-based royalties is recognized when those sales or usage occur.CHAPTER 17 ~ MCP 1, Max, Jones and Waters shared profit and losses 20%, 40%, and 40% respectively and their partnership capital balance is 10,000, 30,000, and 50,000 respectively. 45,000 2. On July 1, ML and PP formed a partnership, agreeing that to share profits and losses in the ratio of 4:6 respectively 50,000 3. Paul, Jeremy and Juan are forming a partnership 90,000 4. Albert, Claude and Jaime form a partnership by contributing 25,000, 70,000, and 80,000 70,000 5. Max, Ike, and Tony are forming a partnership 240,000 6. Richardson, Peterson, and Wilkerson are forming a partnership 15,000 7. Bill and Ken enter into a partnership agreement in which Bill is to have a 60% interest in capital and profits and Ken is to have a 40% interest in capital and profits. 10,000 8, WW and MM drafted a partnership agreement that lists the following assets contributed at the partnership's formation: WW ~ 35,000, MM — 75,000 9. On March 1, 20x4, Evan and Helen decide to combine their business and form a partnership. 50,070 and 32,195, respectively 10, Jones and Smith formed a partnership with each partner contributing the following items: Jones — 360,000, Smith - 260,000 11, CC admits DD as a partner in business. Accounts in the ledger for CC on November 30, 20x4, just before the admission of DD, show the following balances: CC's adjusted capital before the admission of CC: 35,374 12, The amount of cash investment by DD:17,687 13. On March 1, 20x4, CC and FF formed a partnership with each contributing the following assets: On March 1, 20x4, the capital account of FF would show balance of: 280,000 14, Assuming that the partners agreed to bring their respective capital .... How mutch cash is to be invested by CC? 55,000 15. John, Jeff and Jane decided to engage in a real estate venture as a partnership. Under the bonus method, what amounts .... At the formation of the partnership? John — 60,000, Jeff - 60,000, Jane - 60,000 16. Under the revaluation (goodwill) approach .... At the formation of the partnershi| John — 90,000, Jeff — 90,000, Jane - 90,000 17. As of July 1, 20x4, FF and GG decided to form a partnership. If the capital contribution of each partner is the net amount of his assets and liabilities taken .... Accounts of FF and GG would be: 43,500 and 40,500, respectively 18, Assume that the partnership agreement provides for profit and loss sharing of 60% to FF and 40% to GG .... Balance proportionate to the profit and loss ratio. 17,250 19. 00 and PP are partners sharing in this proportion — 60:40. The cash invested by RR is: 59,375 20. The total capital of the partnership after the admission of RR 296,875 21. Cash settlement between OO and PP is: 00 will pay PP 17,537.50 22. CC admits DD for partnership interest in his business. The balance of the capital of CC before the adjustment is: 211,200 23. The total assets of the partnership after the formation is: 393,72024. On July 1 of the current year, J} and GG form a partnership. The value of the merchandise to be invested by GG is: 90,000 25. The cash invested by J) is: 48,000 CHAPTER 17 — THEORIES 1. partnership is a(n) accounting entity 2. Partnerships need not follow GAAP. 3. The major categories in which partnership deviate from GAAP are: a) cash basis instead of accrual basis b) prior period adjustments | cost ¢) use of fair (or current) values instead of histo1 d) recognition of goodwill in situations not invol 1g business combinations 4. A contra-capital account used by partnerships is called the drawings account. 5, When a partnership is being formed, equity dictates noncash asset contributed to the partnership be recorded at their fair (or current) values instead of historical cost. 6. The fundamental objective underlying much of partnership accounting is that of achieving equity among the partners, 7. A method of allocating profits and losses among partners that has the advantage of preventing potential inequities among partners in the event of liquidation is capital balances. 8. An alternative to the partnership form of the organization is the professional corporation. ‘TRUE OR FALSE 9. A partnership is a taxable entity. FALSE 10. A partnership is a tax-reporting entity but not a tax-paying entity. TRUE 11. In a general partnership, only a majority of partners need to have unlimited liability to partnership creditors. FALSE 12. When a partnership agreement has provisions that are contrary to laws pertaining to partnerships, law is controlling. TRUE13, Partnerships are separate legal entities, like corporations. FALSE 14. A partner's drawing account is merely a contra-capital account. TRUE 15. A partner's drawing account is substantively a loan account. FALSE 16. Under the partnership law, partnerships must follow GAAP. FALSE 17. Only individuals are allowed to be partners in a partnership. FALSE 18. Proprietorship and partnerships are similar in that they are both easily turned. TRUE 19. Proprietorship and partnerships are different in that proprietors have unlimited legal liability while each partner's legal liability is limited to his/her percentage ownership in the partnership. FALSE 20. Partnerships are not required to prepare financial statements in accordance with GAAP unless they have publicly traded debt or are required to follow GAAP by a creditor. TRUE 21, Most small partnerships maintain their financial information in accordance with GAAP. FALSE 22. Tax authorities basically view partnerships and proprietorships as extensions of their owners, TRUE 23, Partnerships are not required to pay any taxes. FALSE 24. The proprietary theory of equity is based on the notion that a business entity is distinct from the owners. FALSE 25. The entity theory of equity is based on the notion that a business entity is distinct from the owners TRUE 26. An individual partner's personal responsibility for partnership debts is an example of the entity theory of equity. FALSE 27. Appraisal are not necessarily required when assigning vale to noncash assets contributed to the partnership. TRUE 28. Assigning a noncash asset the contributor’s carrying vale could result in a misallocation of gain or loss if the asset is sold. TRUE 29, An asset's carrying value should not be considered when establishing the initial capital accounts of partners. FALSE 30. The assumption of a liability by the partnership with regard to a noncash asset contributed to the partnership by a partner will affect the value assigned to the partner's capital account TRUEMULTIPLE CHOICE QUESTIONS 31. The partnership form of business is an economic entity. 32. When a partnership is formed, equity dictates that assets contributed to the partnership be recorded in the general ledger at their fair (or current) value 33. A unique feature of partnerships (compared with publicly owned corporations) is that They do not have to follow GAAP 34. distinct and major advantage of the professional corporation form of organizations in comparison with the partnership form of organization is historical cost 35. A partnership is formed by two individuals who were previously sole proprietor: fair value of the property at the date of the investment 36. Which of the following is not a characteristic of a partnership? A partnership requires written articles of partnership 37. Which of the following is not a reason for the popularity of partnerships as a legal form of businesses? Partnerships can more easily generate significant amounts of capital 45. The disadvantages of the partnership form of business organization compared to corporations, include: unlimited liability for the partners 46. the advantages of the partnership form of business organization compared to corporations, include: single taxation 47. A partner's withdrawal of assets from a limited liability partnership that is considered a permanent reduction in that partner's equity is debited to the partner's: Capital account 48. The drawing ledger accounts of limited liability partners are used to reduce the partners’ capital account balances at the end of an accounting period 49. A partner's drawing account in substance is a contra-capital account 50. Which of the following is NOT a characteristic of the proprietary theory that influences accounting for partnership? A partnership is characterized by limited liability. 51. Which of the following statements are true when comparing corporations and partnerships? Unlike shareholders, general partners may have liability beyond their capital balances 52. Which of the following is NOT an advantage of a partnership over a corporation? Unlimited liability53. Under the entity theory, a partnership is unable to enter into contracts in its own name. ‘CHAPTER 18 - MCP 1, PARTNER ALTA, Alta’s share of 20x4 partnership income is P31,000 2, PARTNERS A AND B. Any remainder is split equally, if the partnership had net income of P88,000, how much should be allocated to Partner A: P44,500 3. BB AND GG. What amount of these earnings should be credited to each partner’s capital account? BLUE — P43,000 GREEN — P37,000 4. PARTNERS A AND B. If the partnership had net income of P108,600. How much should be allocated to partner A? P43,225 5. PARTNERS A AND B. If the partnership had net income of P52,000. How much should be allocated to partner A? P14,000 6. PARTNERS ACKER, BECKER & CHECKER. How much should be allocated to Checker? 4,000 7. PARTNERS A AND B. If the partnership had net income of P36,000. How much should be allocated to partner A? P27,100 8. PARTNERS TUBA AND DRUM. How should the P50,000 of earnings be divided? TUBA- P27,000 DRUM — P23,000 9. MACK AND RUBEN. The division of salaries and profits in total to Mack and Ruben would be P120,000 & P80,000 10, ROBBIE AND RUBEN. The division of profits would be P30,000 & P20,000 11. JAMES. How much bonus does James receive? P7,500 12. CHERYL. How much bonus does Cheryl receive for this period? P6,000 13, JOHNSON AND PRITCHARD. How much of the gain will be assigned to Johnson? 27,000 14. KAREN AND ANDREA. How much of the profit is allocated to Karen? P123,000 15, PETER AND RONALD. How much of the gain is allocated to Ronald? P192,500 16. JENNIFER AND ROBERT. What is the amount of change to Robert’s capital account at the date the land is revalued? P28,000 17. Eric and Philip have been partners for several years. During that time... How much will Philip’s capital account be adjusted at the date of change in the profit and loss ratios?18.X, Y, and Z, a partnership formed... Partnership net profit on December 34, 20x4 before salaries, interests and partner's share on the remainder was: 19. A partnership begins... Assume that the net income is P50,000... 20. A partnership begins... Assume that the net loss for the first year... 21. Arthur Plack, a partner in the Brite partnership... What was the net income of the Brite partnership for 20x4? 22.Fox, Greg, and Howe are partners with average... By what amount should Fox’s capital account change? 23. The DEF Partnership reported... How should partnership net income for 20x4 be allocated to D, E, and F? 24. Cleary, Wasser and Nolan formed a partnership... What was Wasser’s share of income for 20x42 What was Nolan’s capital 25. Cleary, Wasser and Nolan formed a partners! balance at the end of 20x4? 26. Cleary, Wasser and Nolan formed a partnership... What was Cleary’s share of income for 20x5? 27.Cleary, Wasser and Nolan formed a partnership... What was Wasser’s capital balance at the end of 20x5? wv 8. A partnership began... What was Young’s share of loss for the first year? 29.A partnership began... What was the balance in Eaton’s Capital account at the end of the first year?30. A partnership began... What was Thurman's share of income or loss for the second year? 31. A partnership began... What was the balance in Young’s capital account at the end of the second year? 133,380 32, The MM-NN Partnership was formed... NN'S initial capital balance in MM-NN is: 60,000 33. The MM-NN Partnership was formed... MM’s share of MM-NN’s net income is: 15,000 34, Partner A first contributed... The annual weighted average capital balance is: 35. BB and CC share profits and losses... What are the total amounts for the allocation of interest, salary, and bonus, and how much over-allocation is present? 36. BB and CC share profits and losses... If the partnership experiences a net loss of 20,000 for the year, what will be the final amount of profit or loss closed to each partner's capital account? 37. The JPB partnership... How should partnership net income for 20x4 be allocated to J, P, and 2 | 38.The APB partnership... Assuming a current year net income of P150,000, what amount should be allocated to each partner? 39. The APB partnership... Assuming a current year net income of P50,000 40. The capital account balances for Donald & Hanes partnership... 41, Maxwell is trying to decide... 42. Maxwell is a partner and has...43. A partnership has the following accounting amounts... Partnership net income (loss) is: 18,000 44, Garcia and Henson formed a partnership... What is Henson's 20x4 bonus? 15,000 45. DD and EE was organized and began... The share of partner DD in the net income 46. DD and EE was organized and began... The capital balance of each partner on March 1, 20x5 should be 47.DD and EE was organized and began... Assuming that the annual salary are to be recognized as operating expenses... 48.DD and EE was organized and began... Assuming the same information in no. 47, the capital balance of each partner on March 1, 20x5: 49.NN and OO created a partnershi NNN and 00 as follows: . The P250,000 should be allocated between 50.Abe, Bert, and Carl are partners sharing profit... The new profit and loss ratio of the partners for 20x5 is 51. Abe, Bert, and Carl are partners sharing profit... The share of partner Bert in the 20x5 net profits is: 1. The ability of partners to withdraw resources from the partnership is controlled exclusively by the laws of the state where the partnership resides. 2. The articles of partnership often control the size of withdrawals partners are allowed to make, TRUE 3. Ifa eo makes a payment on behalf of a partner, a withdrawal has occurred.4. Partnerships are required to indicate the manner in which profits and losses are to be allocated among partners. 5. With the exception of the residual profit and loss ratio, partners can agree to apply profit and loss allocation components in any order. 6. The interest component of partnership profit and loss allocation rewards the partner for labor and expertise brought into the partnershi 7. The purpose of the interest on capital balances component of partnership profit and loss allocation is to reward partners for. 8. The interest on capital balances component of partnership profit and loss allocation is always based 9. The interest on capital balances component of partnership profit and loss allocation is generally. 10. The salary portion of the profit and loss allocation is set in the articles of partnership and will not change over time. FALSE LL. The salary portion of the partnership profit and loss allocation is not included in the partnership income statement. 12. The salary portion of the partnership profit and loss allocation is used to compensate partners for the time and effort expected in the business. TRUE 13, Partnerships are required to have bonus clauses in the articles of partnershi 14. Bonus to partners can be based on any criteria on which the partners agree. 15. Partnership bonus arrangements must consider net income as part of the bonus calculation. 16. A residual interest is always a component of partnership is always a component of partnership profit and loss allocation. 17. Partnership profit and loss residual percentages must be equal. 18. Partnership profit and loss residual percentages must be the same for profits as they are for losses 19. Partnership profit and loss residual percentages are used to allacate any remaining profit or loss to partners after all other allocation components have been considered 20. Partnership residual profit and loss percentages may be changed by agreement of the partners.21. Partnership residual profit and loss percentages do not have to be the last component applied in the profit and loss allocation process 22 When partnership profit and loss ratios are changed, the difference between market and book values should be determined and allocated to partners based on the currently existing profit and loss ratios 23 Partnerships must revalue assets up and/or down when the profit and loss ratios are adjusted, 24, When an error is discovered in the financial records of a partnership, It should be corrected immediately. Allocation of any change to capital accounts as a result of an error correction should be based on the profit and loss ratios that existed when the error occurred, 25, The value assigned to noncash assets invested by partners in a limited partnership is the cost of the assets or the current for value of the assets at the time of investment, whichever is lower 26. Partners are also employees if they are active in the business of the partnership. 27. Theoretically, salary allowances paid to partners should not be reflected as salary in the general ledger: 28. Interest on partnership capital is mandatory in dividing profits and losses. 29. Partnership drawings are30. Drawing 311. Withdrawals from the partnership accounts are typically not used 32. Which of the following is not a withdrawal that may be found in a partnership's drawing account? 33. Which of the following statements is correct with regard to drawing accounts that may be used by a partnership? 34. Which of the following would be least likely to be used as a means of allocating profits among partners who are active in the management of the partnership? 35. Which of the following best describes the use of interest in invested capital may be subject to. ‘manipulation that distorts the measure of invested capital?36. A partnership agreement calls for allocation of profits and losses by salary allocations, a bonus allocation, interest on capital, with any remainder to be allocated by presets ratio. Ifa partnership has a loss to allocate, generally which of the following procedures would be applied? 37. If the partnership agreement provides a formula for the computation of a bonus to the partners, the bonus would be computed 38 Which of the following statement is true concerning the treatment of salaries in partnership accounting? 39. Partners active in a partnership business should have their share of partnership profits based on the following 40. Which of the following could be used as a basis to allocate profits among partners who are active in the management of the partnership? 1. Allocation of salaries 2 The number of years with the partnership3. The amount of time each partner works 4, The average capital invested © 12,3 and 4 41. Ina partnership, interest on capital investment is occounted for as a(n) 42. Bob and Fred form a partnership and agree to share profits in a 2 to 1 ratio. During the first year of operation. the partnership incurs a P20.000 loss. The partners should share the losses 43. Which of the following interest component calculation bases is least susceptible to manipulation when allocating profits and losses to partners ©. Ending capital account balance 44 A partnership agreement calls for location of profits and losses by salary allocations, a bonus allocation, interest on capital with any remainder to be allocated by preset ratios. If a partnership has Alloss to allocate, generally which of the following procedures would be applied? 45. What is the underlying purpose of the interest on capital balances component of partnership profits and losses? 46. What is the underlying purpose of the salary component of allocating partnership profits and losses?CHAPTER 19 page 1334 ‘TRUE / FALSE [Bi The dissolution ofa partnership occurs only when the partnership is terminating operations and going out of business 2. One reason a change in the number of partners in a partnership through the addition or withdrawal of a partner is important because the partners have unlimited liability. TRUE 3. Anew partner in a partnership accepts unlimited liability for actions that occurred before that partner joined the partnership. 4. The admission of a new partner into a partnership can occur without any new assets being invested into the partnership. TRUE 5. If a new partner is going to acquire an ownership interest in a partnership directly from another partner, the other partners do not need to approve the admission. 6, fa new partner acquires 40 percent of an existing partner’ equity inthe partnership, the new partner is also entitled to 40 Percent ofthe existing partner's profit and loss allocation. FALSE 7. When a new partner is joini more than book value... 162 partnership by making a payment to the partnership for an amount 8. The revaluation of assets and liabilities at the date a new partner joins the partnership, by investing assets directly into the partnership, does not eliminate the possibilty that the partnership might need to record bonuses or goodwill as part of the admission of the new partner. TRUE 9. The amount that assets are revalued when 3 new partner joins a partnership is always shared by existing partners equally. PAUSE10. Ifa new partner's capital account is created for an amount less than the value of net assets contributed, an error has been made in the partnership's accounting records. EASE 11, The recognition of @ bonus to existing partners at the date a new partner is admitted to a partnership often occurs in lieu of the recognition of goodwill for the existing partners. TRUE 12. The bonus recognized by existing partners when a new partner is admitted to a partnership is commonly shared among the existing partners based on the existing partners’ relative profit and loss residual ratios.TRUE 13. It is possible for a new partners’ capital account to be established at an amount greater than the market value of the identifiable assets invested. TRUE 14, New partners are never recipients of bonuses when they join the partnership.FALSE 15. A bonus paid to a new partner results in a reduction to the capital accounts of the existing partners in proportion to their profit and loss sharing ratios. TRUE 16. The goodwill method of admitting a new partner to a partnership results in greater total assets than the bonus method of admitting anew partner. TRUE 17. When the goodwill meths is applied to recognize the admission of a new partner and the existing partners are responsible or the goodwill, the new partners’ capital account will always be established equal to the amount of the contribution to the partnership. TRUE 18. The existing partners will always recognize goodwill when a new partner is admitted to the company and the goodwill method is applied. FALSE 19. When the goodwill meths is applied to recognize the admission of a new partner and the new partner is responsible for the goodwill, the new partners’ capital account will be established at the amount of the contribution. 20. When new partner goodwill is recognized at the date the partner joins the partnership, the existing partners capital accounts do not change as a result of the new partner's admission. TRUE 21. A partner may withdraw from a partnership at any time without notice given to the existing partners.22. A withdrawing partner may have his/her partnership interest acquired by an outside investor agreed to by the remaining partners, or the partnership. TRUE 23. If existing partners acquire a withdrawing partner's equity, the existing partners must purchase the withdrawing partner’s equity in proportion to their residual profit and loss ratios.FALSE 24. The revaluation of assets when a partner withdraws from the partnership may e a complete revaluation or 2 partial revaluation, reflecting the change in value with regard to the drawing partner's ownership interest. TRUE 25. A partnership's assets must be revalued when a partner withdraws. FALSE 26. When a partnership's assets are are valued at the date a partner withdraws from the partnership, the withdrawing partner’s equity must be acquired by the partnership. It cannot be acquired by an outside investor of the existing partners personally. FALSE 27. Withdrawing partners from a partnership may receive a bonus or pay a bonus to remaining partners.TRUE 28. Ifthe assets of a partnership are revalued at the date of a partner’s withdrawal, there can be rho bonus recorded. FALSE 29. A bonus can be recorded for a retiring partner only if the partnership acquires the equity of the partner. TRUE 30. At the date of a partner withdraws from a partnership... FALSE 31. Any goodwill recognized at the date a partner withdraws from a partnership is usually allocated 32. Partnerships may have both a revaluation of assets and liabilities as well as goodwill recognition at the date a partner withdraws from a partnership. TRUE MC THEORIES 33. Cob, Inc., a partner in TLC partnership, assigns its partnership... Answer b. ILonly 34. A partner assigned his partnership interest to a third party ‘Answer d. The assignee does not become a partner. 35. Transferable interest of a partner includes all of the following... Answer d. The authority to transact any of the 36. Who may acquire the ownership interest of a partner who is with. Answer d. All of the above 37. If existing partners acquire the equity of a withdrawing partner...Answer d. existing partners are not allowed... 38. Which of the following will not result in the dissolution of a Answer e. neither 1,2,3 or 4 39. The dissolution of a partnership occurs... ‘Answer e. When there is any change in th 440, Which of the following results in dissolution. Answer d. withdrawal of a partner in a partnership 41. Changes in partnership ownership are presumed to be... Answer d. all of the above are possible 42. Which of the following forms of new partner admission will not result Answer b. Purchase of an ownership directly from an existing partner 43. Which of the following must occur for a new partner. ‘Answer c. Existing partner must approve the admission 44, Which of the following must be true when a new partner acquires, ‘Answer c, The new partner must be allocated some amount, 45. When a new partner joins a partnership by investing... Answer d. Any of the three or a combination... 46, Which of the following is a reason to not revalue partnershi Answer c. The partnership has not ¢ 47. A bonus is recognized by existing partners at the date a new... Answer b. The new partner’s contribution less than his/her percentage... Note: pls double check this one thanks 48. Which of the following is not a criterion for recognizing a bonus. ‘Answer a. only cash assets were contribiuted ... Note: pls double check this one thanks 49. Which method of recording the admission of a new partner... Answer c. Either bonus method or goodwill method Note: pls double check this one thanks 50. A bonus recognized by a new partner... 51. Which of the following is not a criterion for recognizing... Answer a. Only cash assets 52. Which of the following statements is false with regard... Answer d. The three partners will have .. 53. Which of the following statements presents a reason that goodwill. Answer c. The total value of the new partners. 54, What portion of the partnership's assets must be revalued.. Answer ¢. Any or all. 55. The admission of a new partner under the bonus method. 56. When a new partner is admitted into a partnership and the new. Answer b. Ilonly 57. When a new partner is admitted into a partnership and the.... Answer b. ILanly 58. When a new partner is admitted into a partnership and the capital of the Answer a. lonly 59. When a partner retires from a partnership and the retiring, Answer c. Either | or Il60. When the old partners receive a bonus upon admission... Answer b Il only 61, When a new partner is admitted into a partnership. Answer b. Il only 62. Which of the following statements is true with regard to... Answer b. A bonus may be paid to the retiring partner 63. What change occurs to continuing partners’ capital... Answer c. Continuing partners capital accounts do not change 64, What amount of goodwill can be recognized at the date a partner... Answer d Either the withdrawing 65. What portion of the partnership's assets must be revalued. Answer c. Any or all 66. Which of the following characterizes the bonus method... Answer d. The market value concept NOTE: Solman is until 68 while the qs in our book is until 66 sk! END 1. Oliver, Patrick and Quincy LLP ‘Answer: B 44,000 2. The balance sheet given below is presented for the partnership of Janet, Anton and Millet Answer D 3. The following condensed balance sheet is presented for the partnership of Andres, Barnes and Crowley Answer C Andres 200k, Barnes, 0, Crowley 220 4, Phil, Harry and Bill are partners Answer Phil 45k. Harry 28k, 22k 5. Rick, Mary and Fran are partners Answer C Rick 46k, Mary 24k, Fran 39k 6. Claire, Doris and Jeff Question; What is Claire’s capital account balance after the transaction is completed? Answer D 48,625 7. Whar is Doris capital account balance after the transaction is completed? ANSEA3)350 8-9. Larry, Marsha, and Natalie are partners in a company that is being liquidated8. Whatis the balance in Larry's capital account after the transaction is completed? ANS!08)/650 9. Whatis the balance in Marsha’s Capital account after the transaction is completed? ARS#62/600 10-11 The following condensed balance sheet is presented for the partnership of D, E and F who share profits and loss in the ratio of 5:3:2, respectively. 10. If the other assets are sold for P280,000, how much should F receive... Ans: 50,000 11. Ifthe other assets are sold for P80,000, and all partners are personally insolvent, how much should E receive upon liquidation? 12. Alocal partnership has assets of cash of P5,000 and a building worth P80,000.... if the building is sold for 50,000, how much cash wil Harry receive in the final setlement? 228,000 13. The year-end balance sheet and residual profit and loss shar ercentages for the Lang, Maas, and Neal partnership on December 31, 2005 are s follows: Ans! Maas in the amount of 55,000 148.15 The balance sheet for the partnership of JJ CC and TT, whose shares of profits and losses are 40, 50, and 10 percent, is as follows: 14. If the inventory is sold for P300,000, how much should J! receive upon liquidation of the partnership? IBDif the inventory is sold for P180,000, how much should TT receive upon liquidation of the partnership? 16. The Abrams, Bartel and Creighton partnership began the process of liquidation... if the non-cash assets were sold for 234,000, what amount of the loss would have been allocated to Bartle? ARS#40}000 17 and 18. Tom, Dick and Harry are partners in an equipment I sing business... 17. What amount of cash will each partner receive as a liquidating distribution if the machinery is sold fo P35. 000° Ans: Tom-30,000 / Dek 8,000 / Harry = 11,000, 18. What amount of cash will each partner receive as a liquidating distribution if the machinery is, sold for P21,100?19. The Keaton, Lewis and Meador partnership had the following balance sheet... what amount of cash would Keaton have received from the distribution of the partnership assets? 20. The Henry, Isaac and Jacobs partnership was about to enter liquidation any assets, the partners determined the amount of cash available for safe payments. How should the cash be distributed? D. P15,000 to Henry and 10,000 to Jacobs 21. Giligan, Skipper, and Professor are partners with a profit and loss ratio of 4:3:3..... the liquidation loss must have been: 22. The Abrams, Bartle, and Creighton partnership began the process of liquidation... For what amount were the non-cash assets sold? 23 and 24- a local partnership was considering the possibility of liquidation since one of the partners (Ding) as insolvent. 23. Ding’s creditor filed aP25,000 claim against the partnerships assets... what Is the minimum amount that Ding’s creditors would have received? 24. Ding’s creditors filed a P25,000 claim against the partnership's assets. ... what is the minimum amount that Tillman's creditors would have received? AnS#67;260 25, Gonda, Herron and Morse is considering. what isthe mi would receive ifthey have filed a claim for P50,000. Ans: 27/500 Fins Donkey, and Fiona are partners in SDF... Under the circumstances: Ansi Shek will receive 27. Taylor, Ullman & Victor partnershi the partnership is: jum that mOrse’s creditors the appropriate journal entry (explanation omitted) for 28. White, sands and Luke has the following capital balances...who gets the money? Ans: Al0 29. During the liquidation of Gym, Hob & Ing Partnership... assuming the noncash asset may be distributed safely to Hob is: Ans B, 12,000 30. During the liquidation of the partnership of Karr, Rice, and Long the net debit to Karr’s account... 31. X, ¥, and Z have capital balances of P90,000, P60,000 and p30,000... Under the circumstances, 2 wl. Ans personally have to contribute an addtional 6,000.Completion statements 1 Theorder of payment to creditors pep es tartar PBA pe GSNSt statement of realization 2. Ahistoricl statement prepared in a partnership liquidation... SRERiGnES FealiatohT=iGURESEGR 3. Aschedule used in connection with the liquidation... Schedule Gf soe Bayete 4. Aprocedure that was in which partnership assets. IAG FEES 5. Inthe lguidation ofa partnership, the subtraction... PUB PSR 6. Ifa partner absorbs the deficit balance. jl MSCOUSS Bast 7. The manner of distributing cash... AGH IG BEES TASH TSP True or false 8. Ina partnership liquidation, the accountant’s primary responsibifty i to manage the company in 4 manner that will ensure payment tothe creditors other than partners. 8 9. The accountants are not liable if the creditors are not paid at the end of a partnership liquidation... 10. All partners will get the same amount of cash distributed to them as part of a liquidation... EaIBB 11. The partners’ creditors and the partnership's creditors one in the same because the partnership is an extension of the partners... EIS 12. Keeping the partnership assets and liabilities separated from the personal assets and liabilities of the individual partners is called the marshalling of assets... TAUB 13. Partnership creditors can have claims against both the partnership’s assets and against the personal personal assets of partners... 14. Partner creditors can have claims against the partner's assets but not against partnerships assets... 15. During a partnership liquidation, the accountants must fully pay all liabilities before cash can be distributed to the partners. 16. The partnership liquidation process generally begins with closing the partnership's accounting, records and allocating any income or loss to partner’s capital accounts .. HEU17. During a partnership liquidation, gains and losses on the sale of noncash assets are assigned directly to the capital accounts. 18. Allocations of gains and losses during partnership liquidation must consider the salaries and bonuses ofthe partners as well as the residual profit and loss ratlos.. 19. Partners may either receive distributions during partnership liquidation or they may have to wait until the sale of all noncash assets is completed and creditors paid in full. 20. A single payment made to partners at the end of the partnership liquidation is called a lump-sum liquidation... 8 21. A series of payments made to partners during partnership liquidation is called a continuous liquidation. 22. In a lump-sum partnership liquidation, all of the assets are sold and the liabilities are paid before a distribution is made to partners. 23, The statement that details the business transaction of a partnership dur CAsh Distribution Plan... FIB8 i liquidation is called a 24, The Statement of Realization and Liquidation prepared during partnership liquidation presents the same information that would be recorded for partnership liquidation but its presented in tabular form... 25. On a Statement of Realization and Liquidation prepared as part of partnership liquidation the difference between the market value of an asset and its carrying value is allocated to gain or loss on sale of asset... FAS 26. The allocation of gains and losses on a stament of realization and liquidation (prepared when a partnerships iqudated) fs typially based on the residual profit and loss ratios. HG 27. Assuming there are positive partner capital account balances at the end of partnership liquidation, the statement of realization and liquidation will display cash equal to the sum of the partner’s capital accounts at the end of the liquidation process. 28. Ifa partner of liquidating limited partnership is unable to pay a capital account deficit, the deficit is observed by the other partner's in the income- sharing ratio of those partners. 29. After the realization of all noncash assets and the distribution of all available cash to the to the creditors, Kapp &Lodi owed P 15,000 to creditors. If at this point Kapp had a capital account balance of P18,000, Lodi had capital account deficit of P3, 000. 30. Gains and losses from the realization of noncash assets by limited partnership in liquidation are divided in the ratio to the partner's capital account balances if there is no income-sharing plan in the partnership contract. 31. A loan receivable from a partner is added to the partners! capital account balance in the preparation of a cash distribution program to be used by the liquidator of the limited liability partnership 32. If the partners’ capital account balances have been reduced to the income sharing ratio...33. If the partners’ capital account balances have been reduced to the income-sharing rat 34. in the computation of the amount cash that may be paid to partners of liquidating imited partnership... 35. The investor's enterprise must use the equity method of accounting for an Investment... Multiple Choice Theories, 35. Ina simple partnership liquidation, the last remaining cash distribution should be made according tothe ratio of 36. If a partner with a debit capital balance during liquidation is personally solvent, the 37. The first step in the liquidation process is to... 38. In partnership liquidation, how are partners salary allocation treated? 39. In partnership liquidation, how are partners salary allocations treated? 40. if cash payments to the partners of a limited partnership in liquidation are delayed until all noncash assets have been realized, any cash remaining after all partnership creditors have been paid is. distributed. 41. In the liquidation of a limited partnership, a loan payable to a partner by the partnership is 42. Which item is not shown on the schedule of partnership liquidation? 43, The following is the priority sequence in which liquidation proceeds will be distributed for partnership: 44, Which of the following statements is correct regarding a partner's debit capital balance? 45. Ifa partnership has only non-cash assets, all liabilities have been properly disbursed and no additional liquidation expense are expected, the maximum potential loss to the partnership in the liquidation process is. 46. Which of the following procedures is acceptable when accounting for a deficit balance in a partner's capital account during partnership liquidation? 47. A partnership dissolution differs from liquidation in that... 48. A partnership in liquidation has converted all assets into cash and paid all liabilities, the order of payment 49. If conditions produce a debit balance in a partner’s capital account when liquidation losses are allocated 50. Which of the following statements are correct? 51. Offsetting a partners loan balance against his debit capital balance referred to as the1. The balance sheet for the partnership of JJ CC and TT, whose shares of profits and losses are 40, 50 and 10 percent. 2. The partnership of Peter, Paul, Mary share profits and losses in the ratio 4:4: 3. The following condensed balance sheet is presented for the partnership of Alpha, Baker and Charley. The first sale of nancash assets having a book value of P90, 000 realized 50,000 and all cash available after settlement... 46 ‘The balance sheet for AA, BB and CC Partnership is as follows. 4. Ifthe firm, as shown on the balance sheet, is dissolved and liquidated by selling assets in installments and if the first sale of noncash assets having a book value... 5. Ifthe facts are in questions 6 exceot that P3, 000 cash to be withheld, the resoective partners.. 6.lf each partner properly received some cash in the distribution after the second sale, if the cash to be distributed amounts to P12, 000 from the third sale... 7. If Arch, Bole and Cusp Partnership is liquidated by the realization of other assets in installments, the first realization... 8, Ifthe facts are as in the previous question, except that P3,000 cash is to be withheld for potential liquidation costs, 9. A partnership has the following capital balance; A ( 20% of profits and losses) = 100,000; 10. On December 1, 20x5, the partners Tim, William, and Levin, who share profits and losses in the ratio of 4:4:2 decided to liquidate their partnership... 11-12. Dennis and Lilly share profits and losses in a 3:2 ratio. During the first month of liquidation, half the inventory is sold for P60, 000. 11. Using a safe payment schedule, how much cash will be distributed to Dennis at the end of the first month. 12. Assume instead that the remaining inventory was sold for P10, 000 in the second month. Whats payments will be made to Dennis and Lilly at the end of the second month? 13. The following condensed balance sheet is presented for the partnership of Arche, Bows and /cross... 14. On January 1, 20x4, the partners of CC, DD and EE, who sharw profits and losses in the ratio of 5:3:2 15. The capital balances, prior to the liquidation of XYZ partnership... 16. After all noncash assets have been converted into cash in the liquidation of the AA and KK Partnership, the ledger contains the following account balance..17. Dancey, Reese, Newman and John were partners who shared profits and losses on a 4:2:2:2 basis, respectively. 18. Harding, Jones and Sandy is in the process of liquidating and the partners have the following capital balances; P20, 000, P22, 000 and P (10,000) respectively, 19. A, 8 and C capital balances of P80, 000, P80, 000 and P40,000, respectively. Profits are allocated 40% to A, 40% to B and 20% to C. 20. The ABC partnership has the following capital accounts on its books at December 31, 20x4. ‘Assume that a partnership had assets with a book value of P240, 000 and a market value of P195,000. 21. How much would Able receive upon liquidation of the partnership assuming profits and losses are allocated equally. 22. How would the first P100, 000 of available assets be distributed assuming profits and losse are allocated equally? 23. If all outside creditors and loans to partners had been paid, how would the balance of the assets be distributed assuming that Chapman, 24. Partners Dalton, Edwards and Finley have capital balances of P40, 000, P90,000 and 30,000 respectively, immediately prior to liquidation... 25. A partnership is currently holding P400, 000 in assets and 234,000 in liabilities. The partnership is to be liquidated, and 20,000 is the best estimation of the expenses that will be incurred, 26. CC, PP, MM and HH are partners who share profits and losses on 2 4:3:2:1 27. Apartnership has gone through liquidation and now reports the following, loan from JU 28. Allen, Branden & Caylin are in the process of liquidating their partnershi 29. The following account balances were available to Perry, Quincy and Renquist... 30. A local partnership was in the process of liquidating and reported...Justice, Capital, Zobart..) 31. The balance sheet of the Partnership Duro, Kemp, and Ruth. 32. Tree, Nee, and Dad who share profits... Total cash payment to partners..33. Tree, Nee, and Dad who share profits...he amount cash withheld for anticipated liquidation. 34, The POR partnership is being dissolved. 35. A cash distribution plan (payment priority program) for Matthew, Norell and Reams ‘Answer: Priority creditors 300,000 Matthew-108,000 Norell-58,000 Reams-84,000 Theory CH 21 TRUE OR FALSE 1. An partnership installment liquidation occurs over a short time period. 2. A partnership installment, liquidation generally results in the partnership cash when... 3. During a partnership installment liquidation, the accountant should... 4, The accountant should pay creditors as quickly... 5, Partnership capital accounts with a deficit balance.. 6, To eliminate a deficit in partner's capital account. 7. The partner with the greatest residual profit. 8, The partner with the greatest capital account balance... 9. Partners who withdraw the least amount from the partnership... 10. The cash distribution plan indicates the order in which payment... 11. A cash distribution plan is a guarantee to partner: 12. A cash distribution plan is prepared before... 13, The loss absorption power computed... 14. The size of a partner's loss absorption power... 15, The schedule of safe payments outlines... 16, The schedule of safe payments can be used in partnership liquidation... 17. The schedule of safe payments must be used for partnership liquidation. MC THEORY CH 21 18, Under the rule of offset, what is the proper disposition... rhe loan Is written off as a partnership loss if the partner does not have the cash to cover the debit balance 19. In partnership liquidations, what are safe payments? ‘he amounts of distributions that can be made to the partners with assurance that such amounts will not have to be returned to the partnership 20. If all partners are included in the first installment... [ANSWER: cash wil be distributed according tothe residual profit and loss sharing ratio21. Partner’s maximum loss absorbable is calculated by... ividing the partner’s capital balance by his or her profit-and-loss-sharing percentage 22. A schedule prepared each time cash... ANSWER! safe payment schedule 23. Which partner is considered the most vulnerable... ANSWER: The partner with the lowest vulnerability ranking, who also has the lowest loss absorption 24, The rank order is for claims against a bankrupt partner of... [ANSWERE1I first, I second and I third 25. The partnership of Clapton, Seidel and Thomas... rhey may seek remuneration from any partner they choose 26. The partnership of Nurr, Cleamons and Kelly... [ANSWER* It ranks lower in priority than Cleamon’s personal creditors and the creditors ofthe partnership 27. What accounting transactions are not recorded by an accountant during liquidation? ANSWER! Remaining unpaid debts settled and the distribution of any remaining assets to the partners based on their profit and loss ratio 28. Which of the following statements is false concerning the schedule of liquidation? [ANSWER Frequent reporting by the accountants is rarely necessary 29. What is the preferred method of resolving partner's deficit balance? rhe partner with a deficit balance contributes personal assets only if those personal assets exceed personal liabilities 30. Which of the following statements is true concerning the distribution of safe payments? fhe distribution of safe payments assumes that any capital deficit balances will prove to be.a total loss to the partnership 31. A schedule prepared each time cash is to be distributed is called (n)? ANSWER: Advance cash distribution schedule 32. An advance cash distribution plan is prepared? fo determine the order and amount of cash each partner will receive as it becomes available for distribution 33. Ina partnership liquidation, the final cash distribution to the partners should be made in accordance with th ANSWER: Balances of the partners’ capital accounts34. The first step in preparing an advance cash distribution plan is to ANSWER: determine the net capital interest of each partner 35. Offsetting a partner’s loan balance against his debit capital balance is referred to as the: ANSWER: right of offset 36. If a partner with a debit capital balance during liquidation is personally solvent, the ANSWER: partner must have invest additional assets in the partnership 37. In partnership liquidation, the final cash distribution to the partners should be made in accordance with the: ANSWER: balances of the partners’ capital accounts 38. In an advance plan for installment distributions of cash to partner's of liquidating partnership, each partners loss absorption potential is computed by ANSWER: dividing the total of each partner's capital account less receivables from the partner 39. In accounting for partnership liquidation, cash payments to partners afterall creditor's claims have been satisfied , but before the final cash distribution , should be according to: [ANISWER: Safe payments computaions 40. Which of the following is not correct with regard to a creditor claims against partnership and individual partners? ANSWER: Partnership creditors can have claims against partnership assets and individual partner assets 41. Which of the following is not possible claim against a partners personal asset? ANSWER: Personal creditors of other partners 42. Which ofthe following statements i correct with regard to a partnership liquidation? ANSWER: Partner capital contributions and undistributed partnership 43. Which of the following is not a part of the partnership liquidation process? [ANSWER: Recognition of market value adjustments 44. Which of the following describes partnership lump-sum liquidation? ANSWER: The sale of all noncash assets and payment of liabilities before a single distributions 45. Which ofthe following describes partnership installment liquidation? [ANSWER: A series f interim distributions to partners while the side sale of noncash assets 46. Which of the following is not correct with regard to a partnership statement of realization and liquidation?ANSWER: Balance sheet and income statement accounts appear on the statement vv. 18. 19. 20, 21, 22, 23, 24. 2s, 26. 27. 28, 29, 30, DID Construction is constructing a building for Hotel Dian On January 1, 20x6, Silver Construction Company signed a contract 1 builders construction builds luxury houses in remote areas Builders Construction enters into a contract with a customer Nair A.G. enters into a contract with a customer to build an apartment... transaction price for this contract, Same... Transaction price assuming Nair is only able to estimate Same... Transaction price assuming Nair has limited info Mediocre inc. has entered into a very profitable fixed price contract Digger commenced contract X47 on July 1, 20x3 Augustus is involved in a number of contracts at September 30, 20x3, A construction company entered into a contract on January 1, 20xS to build a factory A construction contract has a fixed price contract for P100,000 to construct a building Monroe Construction Company uses the percentage-of-completion (overtime) method Adler Construction Co. uses the percentage-of-completion (overtime) method AND Company recognizes construction revenue and expenses Gomez Inc. began work in 20x14 on contract #3814... the portion of total gp to be recognized as income in 20x4 Gomez Inc. began work in 20x14 on contract #3814... the portion of total gp to be recognized as income in 20%5, Tyro Construction Company has two projects, for which is reported Kiner Inc. began work in 20x4 on a contract for 8,400,000... used the percentage-of- completion gp to be recognized in 20x4 Same... uses the cost recovery method (point-in. Horner Construction Co. uses the overtime/percentage-of-completion method, {gp to be recognized for year ended December 31, 2x15, Same... If the point-in-time recovery method (zero profit approach) of accounting was used (On October 31, 20x4, Mr. Cruz bought property D’Vision Heights Hayes Construction Corporation contacted to construct a building Ube Construction Company has consistently used the overtime/percentage-of-completion Layton Construction company has consistently used the percentage-of-completion method Remington Construction Company uses the percentage-of-completion method The Naples Company uses the overtime/percentage-of-completion method ime), gp to be recognized in 20x amount of Lark Corp. has a contract to construct a 5,000,000 cruise ship at an estimated cost of 4,000,000... how much revenue should Lark Corp. recognize Lark Corp. has a contract to construct a 5,000,000 cruise ship at an estimated cost of 4,000,000... what amount will be reported related to the Construction in Process account?31. Lark Corp. has a contract to construct a P5,000,000 cruise ship at an estimated cost of 4,000,000... what amount will be reported for accounts receivable 32. Fora construction firm using the cost recovery method, if costs exceed billings on some contracts by P1,000,000 33. The Key Largo Company uses the overtime/percentage-of-completion method 34, Hiser Builders, Inc. i using the point-in-time/cost recovery method 35. Lake Construction Company uses the overtime/percentage-of-completion method 36. AID Builders is building a multi-unit residential complex... total expected profit for the year 20x8 37. AID Builders is building a multi-unit residential complex... Measure of progress towards completion 38, AID Builders is building a multi-unit residential comple» (sales method) 39, AID Builders is building a multi-unit residential complex... using an input method (cost basis) 40, Anton Builders constructs storage houses... Total expected profit for the year 41, Anton Builders constructs storage houses... The percentage of completion based on work 42, Anton Builders constructs storage houses... what amount should be shown in the statement of profit 43, Anton Builders constructs storage house: of financial position 44, Seasons Construct using an output method what amount should be shown in the statement, s constructing an office b Is the balance in the Accounts Receivable account 45, At December 31, 2x15, Seasons Construction estimates that it is 75% complete... Total amount of Construction Expenses 46, At December 31, 2x15, Seasons Construction estimates that it is 75% complete... Total amount of Construction Expenses... Difference between the Construction in Process and the Billings on Construction in Process accounts 47. Seasons Construction completes the remaining 25% of the building 48, Cooper Construction Company had a contract starting April 20x4... Cooper would recognize gross profit on the building at 49, Cooper Construction Company had a contract starting April 20x4... Cooper would report Construction in Process in the amount of 50. During 20x4, Gates Corp. started a construction job with a total contract price 51. In 20x4, Fargo Corporation began construction work under a three-year contract... How much cash was collected 52. In 20x4, Fargo Corporation began construction work under a three-year contract... what was the initial estimated total income 1g under contract for Cannon Café... What 52. What was the initial estimated total income before tax on this contract Use the following information for questions $3 and $4: Eilert Construction Company had a contract starting April 20x4, to construct building that is expected to be completed in September 20xS, at an estimate P13,750,000. At the end of 20x4, the costs to date were P6,325,000 and the estimated to complete had not changed. The progressbillings during 20x4 were P3,000,000 and the cash collected during 20x4 was P2,000,000. Eilert uses the percentage-of-completion method 53. For the year ended December 31, 20x4, Eilert would recognize gross profit on the building of 54, At December 31, 20x4, Eilert would report Construction in Process in the amount of 55. Belgium Co. is constructing a tunnel for P800 million. Construction began in 20x4 and is estimated to be completed in 20x8. At December 31, 20x6, Belgium has incurred costs totaling P356 million with P85 million of that incurred in 20x6, P143 million in 20x7, and the remainder during 20x8. Belgium believes that it completed 30% of the tunnel during 20x6. although that may change based on future activity. Belgium Co. uses PAS 11 for its accounting and regards its cost numbers as very uncertain (cost recovery method/zeroprofit approach). What amount of revenue should Belgium Co. recognize for the year ended December 31, 20x6? 56. Wynn, Inc. has a contract to construct a large hotel for P12,000,000. The contract was on January 2, 20x4 and it was expected that the hotel would be complete on C. 31, 7. At the date the contract was signed, Wynn, Inc. anticipated the cost of construction would total P11,000,000. At the end of 20xS the total cost estimated P1 1,870,000 and at the end of 20x6 the total cost estimate rose to P12400 000. Due to certain circumstances, Wynn, Inc. believes there are inherent hazards beyond the normal, recurring business risks. Wynn, Inc. expects to recover the contract. Under these conditions, what amount of loss, if any, should Wynn recognize in each of the following years? 57. Wynn Inc has a contract to construct. Under these conditions, what amount of revenue should Wynn Ine, recognize in each of the following years? 58. Gorman Construction Co. began. Which of the following should be shown on the income statement for 20x4 related to Contract 1? 59. Gorman Construction Co. began. Which of the following should be shown on the balance sheet at December 31, 20x4 selated to Contract 2? 60. Gorman Construction Co. began. Which of the following should be shown on the balance sheet at December 31, 20x4 related to Contract 3?61. GR&R Enterprise entered into a construction agreement in 20x4 that called for a contract price of 9, 600, 000. At the beginning. Compute the amount of construction in progress (net) — contract assets or progress billings (net)- contract liabilities for the year 20x5? 62. The Giant Construction Company started work in three job sites during the current year. Any costs incurred are expected to be recoverable. What would the amount of Construction in Progress account to be reported on the year end balance sheet if the (1) overtime/percentage-of-completion method and (2) point in time/ cost recovery method of construction accounting were used? 63. Arizona Desert Homes (ADH) constructed a new subdivision during 20x4 and 20x5 under contract with Cactus Development Co. What would be the journal entry made in 20x4 to record revenue? 64, Arizona Desert Homes (ADH) constructed a new subdivision during 20x4 and 20x5 under contract with Cactus Development Co. In its December 31, 20x4 balance sheet, ADH would report: 65, Arizona Desert Homes (ADH) constructed a new subdivision during 20x4 and 20x5 under contract with Cactus Development Co. What would be the journal entry to record revenue in 2035? 66. As of December 31, 20x6, Cady Construction has one construction job for which the construction in progress (CIP) account has a balance of 20 000 and the billings on construction contract account has a balance of 14 000, Cady has another construction job for whic the construction progress account has a balance of 3 000 and the billings on construction contract account has a balance of $000. Indicate the amount of contract asset and or contract liability that Cady would show in its December 31, 2016 balance sheet? 67. Sahara Desert Homes (SDH) reports under PFRS and constructed a new subdivision during 20x4 and 20x5 under contract with Cactus . What would be the journal entry made in 20x4 to record revenue?68. In its December 31. (0x4 balance sheet SDH would report 69. What would be the journal entry SDH would use to record revenue in 20x5? 70. The company signed an 800 000 contract to build an environmentally friendly access trail to Morayta, Manila. The project... . 71. Chicane builders Inc employs the cost to cost .... The estimated costs to complete the project at December 31, 20x5? 72. Chicane builders Inc employs the cost to cost . The actual costs incurred during the year 20x5 73. On october 1, 20xSdelta signed a fixed term construction contract. Details are Compute the amount contract assets/liabilities using (outpu measure- proportional cost approach?) 74. In 20x4, Kalye Construction Company was contracted to build the private.. In 20x4, Kalye Construction Company realized gross profit from the project amount of? 75. On september 30, 20x4 Jaja Inc was awarded to contract to build a 1000 room hotel In 20x4 assuming use of the percentage of completion method of accounting Jaja Inc received cash a total fee of: 76. In 20x4, AJD construction company was contracted to build village company’s private road network for 100 million. .. Payments made by Village company in 20x4 amounted to:THEORIES CHAPTER 10 1. Companies must use the percentage-of-completion (overtime) method when estimates or progresses toward completion are reasonably dependable. The most popular input measure used to determine the progress toward completion is the cost basis, 3. Ifthe difference between the Construction in Process and the Billings on Construction in Process account balances is a debit, the difference is reported as a current asset 4, The Construction in Process account includes only construction costs under the percentage of completion method (overtime). 5. Under the cost recovery (point in time) method, companies recognize revenue and costs only when the contract is completed. 6. The principal advantage of the cost recovery (point-in-time) method is that reported revenue reflects final results rather than estimates. 7. Companies must recognize a loss on an unprofitable contract under the percentage-of- completion method (overfime) but not the cost recovery (point-in-time) method. 8. A oss in the current period on a profitable contract must be recognized under both the percentage of-completion (overtime and cost recovery (point-in-time) method 9. Under the completion-of-production basis, companies recognize revenue when agricultural crops are harvested since the sales price is reasonably assured and no significant costs are involved in product distribution. 10. The provision for a loss on an unprofitable contract may be combined with the Construction in Process account balance under percentage-of-completion (overtime) but not cost recovery (point-in-time) Method 11. Under the percentage-of-completion (overtime) method, amounts billed and the cash actually received affect income recognition.12. Under the percentage-of: completion (overtime) method, the percent complete is often estimated by comparing the cost incurred to date with the total estimated cost to complete. 13. The percentage-of-completion (overtime) and cost recovery (point-in-time) methods ‘calculate different amounts of total profit or loss for a particular contract. 14. Use of the percentage-of-completion overtime) method is dependent on a firm's ability to make dependable forecasts of future costs. 15. Under the cost recovery (point-in-time) method, gross profit or loss is never recognized until the contract is completed. 16. Under the cost recovery (point-in-time) method used to account for long-term contracts under PERS, equal amounts of revenue and cost are recognized until all costs are recovered. 17. Estimated losses on long-term contracts are recognized ratably over the contract term regardless of the revenue recognition method used 18. The most popular input measure under percentage-of-completion (overtime) accounting is the cost to-cost (point-in-time) method. 19, Estimates of architects and engineers of percentage-of-completion (overtime) are not acceptable under generally accepted accounting principles. 20. At the conclusion of a construction contract, the balance in Construction in Progress will be exactly equal to the amount in Progress Billings on Construction Contracts when using the percentage-of completion (overtime) method. 21. Ifanalysis of construction contracts indicates that there will be an overall loss on the contract, the loss should immediately be recognized in full under the cost recovery (point- inctime) method and me percentage-of-completion (overtime) method. 22. As construction contract estimates change, retroact amount is material. e adjustments are requived if the 23. Change orders are modifications of an original contract that effectively change the provisions of mine contract, only at the option of the contractor.24. Firms have free choice as to whether they use the percentage-of-completion (overtime) method of cost recovery (point-in-time) method to account for a long-term contract. 25. Companies must use the percentage-of-completion (overtime) method when estimates of program toward completion can be estimated reliably. 26. The most popular input measure used to determine the progress toward completion is the cost-to-cost basis. 1. Ifthe difference between the construction in process and the billings on construction in process account balances is a debit, the difference is reported as a current asset. 2. The construction in process account includes only construction costs under the percentage-of- completion (overtime) method. 3. Under the cost-recovery (point-in-time) method, companies recognize revenue and costs only when the contract is completed. 4, The cost-recovery (point-in-time) method recognizes revenue only to the extent of costs incurred that are expected to be recoverable. 5. Companies must recognize a loss on an unprofitable contract under the percentage-of- completion (overtime) method but not the cost-recovery (point-in-time) method. 6. Alossin the current period on 2 profitable contract must be recognized under both the. 7. For contracts in progress, companies should disclose the aggregate amount of costs incurred and... 8. The provision for a loss on an unprofitable contract may be combined with the construction in process. 9. The most popular input measure under percentage-of-completion accounting is the. 10. Estimates of architects and engineers of percentage-of-completion (overtime) are not acceptable... 11. At the conclusion of a construction contract, the balance in construction in progress will be exactly equal to the amount in Progress billings on construction. 12. Ifanalysis of construction contracts indicates that there will be an overall loss on the contract, the loss should immediately. 13. As construction contract estimates change, retroactive adjustments are required if the amount is material 14. Change orders are modifications of an original contract that effectively change the provisions of the 1. Companies must use the percentage-of-completion (overtime)method when reliable estimates are available. 2. The percentage-of-completion (overtime) method must be used when certain conditions exist.3. When work to be done and costs to be incurred on a long-term contract can be estimated reliably, which of the... 4. How should the balances of progress billings and construction in process be shown. 5. In accounting for long-term construction-type contract using the percentage-of-completion (overtime) method, the gross profit recognized. 6. How should earned but unbilled revenues at the financial statement sate on a long-term construction.. 7. One of the more popular input measures used to determine the progress toward completion... 8. Which of the following are recognized each period under the cost-recovery (point-in-time) method? 9. Under the cost-recovery (point-in-time) method of construction accounting. 10. Cost estimates on a long-term contract may indicate that a loss will result on completion 11. Cost estimates at the end of the second year indicate a loss will result on completion of the... 12. When there isa significant increase in the estimated total contract costs but the increase does not... 13. How should the balances of progress billings and construction in process be shown at reporting. 14. In accounting for a long-term construction-type contract using the percentage-of-completion... 15. How should earned but unbilled revenues at the balance sheet date on a long-term construction! 16. One of the more popular input measures used to determine the progress toward completion. 17. Dilla Construction company's projects extend over several years and collection of receivables is. 18. Cost estimates at the end of the second year indicate a loss will result on completion of the entire. 19. How should the balances of progress billings and construction in progress be shown at reporting dates...\ 20. If the percentage-of-completion (overtime) method is used, what is the basis for determining the gross. 21. If the cost recovery method is used, what is the basis for determining the income to be recognized, 22. Which of the following would be used in the calculation of the gross profit recognized in the. 23. Which of the following is not an element as being necessary in order to use percentage-of- completion... 24. Which of the following is not a difference between the percentage-of completion (overtime) and cost recovery methods of accounting, 25. The theoretical support for using the percentage-of-completion (overtime) method... 26. If a company uses the cost recovery method of accounting for long-term construction contracts, 27. When the percentage-of-completion (overtime) method of accounting for long-term. construction, 28. When comparing the percentage-of-completion (overtime) and cost recovery methods of accounting... 29. A company uses the percentage-of-completion (overtime) method to account for a four year 30. In accounting for a long-term construction contract for which there is a projected profit, the balance in the. 1. Jennifer Talosig-Tan enterprises licenses customer-relationship software to jenny company in addition to providing the software itself,2. AA Computers licenses customer-relationship software to ABS company. In addition to providing the software itself... 3. An author, Anton D., Licenses the images and names of the characters of his series of populr...when should revenue be recognized? 4, How many performance obligations exist in this contract for license? 5. Portia Glecilda Nacinopa Pharmaceuticals entered into a licensing agreement with PortGle Lab for anew drug... 6. Rhea untalan mansibang associates sells two licenses to Yvette Tingin-Atienza Company on.....the software license is? 7. The license to use the name, rhea associates is: 8, Rhea Untalan Mansibang... How much revenue will Rhea recognize in 20x6 under this arrangement? 9, Amabella Caceres-Saker Engineering licensed software to oil-drilling 10. Billy Biotech enters into a licensing agreement... Determine the transaction price of the arrangement for Billy Biotech: 11. Billy Biotech enters into a licensing agreement... On December 20, 20%5, license revenue amounted to. 12. Billy Biotech enters into a licensing agreement... On January 15, 20s6, license revenue amounted to, 13. The ReSA Singing Group League... How much of the P1,000,000 initial license fee should the RSGL recognize as revenue in the first year of the contract? 14, Assume that the RSGL anticipates that, in addition to receiving the P1,000,000... 15. ReSA FoodGroup operates several restaurants around the world... How many performance obligations exist in this contract for franchise license? 16. ReSA FoodGroup operates several restaurants around the world... The license fee allocated to the right to operate a restaurant in recognizing as revenue: 17. Darlene Tolentino Ysmael... How many performance obligations exist in the contract for franchise? 18, Darlene Tolentino Ysmael... The initial franchise fee of P1,000,000 is recognized as revenue: 19. Atianzar and Cabalde Computers... How many performance obligations exist in. this contract for franchise? 20. Atianzar and Cabalde Computers... The franchisee revenue should be recognized: 21. Atianzar and Cabalde Computers... The franchisee revenue on December 31, 2087 should be: 22, Atianzar and Cabalde Computers... The franchisee revenue on December 31, 20x8 should be: 23. Fred Esquillo, Inc 24, Liezl Sangalang Malabanan, Inc. 25. On January 1, 20%4 Ethelmea Dulva Dairy Treats, Inc 26, Mean Dones and Jeremie Jane Roldan Inc, 27. KimDrei Group of companies... When KimDrei prepares its financial statements, the franchise fee revemue to be reported is: 28. KimDrei Group of companies... When KimDrei prepares its financial statements, the unearned franchise fee revenue to be reported is,29. Ronella Ocampo sells hairstyling. 30. Joey Muffler sells franchise arrangements... What amount would Joey calculate. 31. Joey Muffler sells franchise arrangements... What journal entry would Joey record... 32, Joey Muffler sells franchise arrangements... How much revenue would Joey recognize.. 33. On April 1, 20x4 Joy Grigsby, Inc. 34, Anna Cielito Joaquin, Inc 35. Carmita Nocom and Ellen Riofrio... The amount of revenue. 36. Carmita Nocom and Ellen Riofrio... The amount of unearned franchise fee... 37. Carmita Nocom and Ellen Riofrio... What entry should Carmita Nocom and Ellen Riofrio. 38. Doriedel Salvador and Lia Mendoza-Lagcao... The amount of revenue from franchise fee on March 20, 2035: 39. Doriedel Salvador and Lia Mendoza-Lagcao... The amount of revenue from franchise fee on June 15, 2035: 40. Doriedel Salvador and Lia Mendoza-Lagcao... The amount of revenue from continuing franchise fee-services. 41, Gina Lopez... How many performance obligations. 42. Gina Lopez... The transaction price of this arrangement... 43. Gina Lopez... The amount of revenue reported each year: 44, A health club enters into a one-year contract... 45. The Rink offers annual P2,000 memberships... How many performance obligations. 46, The Rink offers annual P2,000 memberships... Calculate how much of the transaction price should be allocated? 47. The Rink offers annual P2,000 memberships... How much of the contract price. 48, The Rink offers annual P2,000 memberships... The journal entry to recognize sale of a new membership... 49, Assume that a customer enrolls in AAA’s Premier Membership... The journal entry on August 1, 20x6: 50. Assume that a customer enrolls in AAA’s Premier Membership... The journal entry on. December 31, 20x6: 51, Assume that a customer enrolls in AAA’s Premier Membership... The current liability section, 52. On June 1, DD Company shipped twenty five DVD to BB View Store... The amount remitted by BB View Store is: 53. On June 1, DD Company shipped twenty five DVD to BB View Store... The consignment profit is 54. On June 1, DD Company shipped twenty five DVD to BB View Store... The cost of inventory on consignment... 55. On August 5, 205, Famous Furniture... The amount cash received. 56, On August 5, 20x5, Famous Furniture... The total profit on units sold. 57. TS Trading consigned 100 beds... The number of units sold. 58. TS Trading consigned 100 beds... The amount remitted to TS co. 59. TS Trading consigned 100 beds... 9The consignment profit (loss) of TS Co.60. On November 30, Nortirup Company consigned 90 freezers to Watson Company for sale at $1,600 each and paid $1,200 in transportation costs. A report of sales Was received on December 30 from Watson reporting the sale of 20 freezers, together with a remittance of the $27,200 balance due, The remittance Was net of the agreed 15% commission. How much, and in what month, should ‘Northrup recognize as consignment sales revente? On October 1, 20x4, the NN Co mpany consigned one hundred wall clocks to P &GRetailers, In. each wall clock had a cost of P10. Freight on the shipment was paid by NN Company forP200. On December |, 20x4, P&G submitted an account sales stating that it had sold sixty pieces and itwas remitting the P12,480 balance due. The remittance was net of the following deductions from the salesprice of the walls clocks sold: Commision (20% of sales price)? Advertising 500 Delivery and installation P100 61. What was the total sales price of the walls clock sold by P&G Retailers, Inc.? 62.What was the cost of inventory on consignment? ‘The CC Manufacturing Company delivered ted DVD players to CLTV Company on consignment. ‘These DVD player cost P3000 each and are to be sold at P5000 each... 63. The number of units sold by TV Co. is: 64. The profit (loss) on consignment realized by CC Manufacturing company is: 65. The cost of inventory in the hands of CLTV Company is (On May 1, 20x4, TV Inc. consigned 80 VCD players to E's TV.. 66. The total sales price of the VCD's sold by ED’s TV was: 67. The inventory of VCDs will be reported on whose balance sheet and at what amount? On May 15, 20x4, AA Sales Company received a shipment of merchandise with a selling price of 15,000 from PC Company. The consigned goods cost PC Company 10,000 and freight charges of 120 had been paid to ship the goods to AA Sales Company... 68. The cash remitted by AA sales company is: 69. The profit on consignment is: 70. The cost of unsold units in the hands of Ais:(On May 1, RR Products Company ships five ofits appliances to SZ Company on consignment. The cost of the appliances shipped is P55 per unit. 71. The total amount remitted to consignor as of June is: 72. The profit on consignment is: 73. The cost of inventory on consignment is: Al Company consigned five calculators, with the cost of P800 each, to the OO Company which was to sell these goods for the account and ink of the former for a commission of 15% of selling price... 74. The amount of cash remitted by OO Company is: 75. The consignment profit (1oss) is 76. The amount of inventory on consignment of AL Company is: (On October 5, 20x4, the PPG Trading Co. consigned 30 computer units, costing P8,000 each ta Pampanga, Inc. The units were to be sold on either cash or credit basis at a commission of 15% net sales. 77. The amount due from BB, Inc is: 78. The consignment profit is: 79. The cost of inventory on consignment is: 80. NN Company consigns sign pens to retailers, debiting Accounts Receivable for the retail sales price of the sign pens consigned and crediting Sales.. 81. Berry farm produces organic tomatoes and strawberries. 82. Holmgren Seafoods, Inc. catches and processes salmon and tuna caught off the coast of Maine.... 83. The net income on regular sales is: 84. The net income an consignment sales is: 85. Seahawks, Inc. No sales of consigned goods were made through December 31. Seahawks December 31 balance sheet should include consigned inventory at...MC Theories 6. Which of the following is not true about accounting for revenue from franchise agreements? Ans: 7. All revenue for franchise companies is derived from Ans: ¢. sale of initial franchise and continuing fees 8, Franchise fees should be recognized Ans: d. when performance obligations are satisfied 9. Franchise revenue are recognized over time if ‘Ans: b. the franchisor is providing access. 10. types of franchising arrangements include all of the following except Ans: 11. Continuing franchise fees should be recorded by the franchisor ANNs: as revenue when uncertainty related..... 12. Occasionally a franchise agreement grants the franchisee the right to make future bargain purchases Ans: 13. Franchise revenues are recognized over time if ‘Ans: None of these 20. In consignment sales, the consignee ‘Ans: prepares an “account report”, 21. Revenue is recognized by the consignor when the: ANs: consignor receives an account sales from the consignee 22. Goods on consignment should be included in the inventory of: ANs: the consignor but not the consignee 23. In accounting for sales on consignment, sales revenue and the related cost of goods sold should be recognized by the: Ans: consignor when notification is recelved.... 24. The role of the agent in a Principal ~ agent relationship is to ANs: arrange for the principal. 25. The use of the net method of recognizing revenue by an agent Als: is the correct method... 26. Consignments are a specialized marketing method whereby the... ‘ANs: consignee takes possession of merchandise.27. Consigned goods are recognized as revenues by the Ans: consignor when it receives payment from consignee for goods sold 28. Which of the following is most true regarding consignment arrangements? ‘ANs: Revenue is recognized upon sale by the consignee to an end customer, 29. Consignments are a specialized marketing method whereby the ‘Ans: Consignee takes possession of merchandise but title remains with manufacturer 30. Consigned goods are recognized as revenues by the ANs: consignor when it receives payment from consignee for goods sold Todd Sweeney is an artist who sells his work under consignment... 31. Sweeney most likely should recognize revenue when: Ans: when the barbershop sells the painting 32. After Sweeney has transferred a painting to a barbershop, the painting: ‘Ans: should be counted in Sweeney's inventory until the barbershop sells it 33. Which of the following is most true regarding consignment arrangements? ANNs: c. Revenue is recognized upon sale by the consignee to an end cust,. EXERCISE 7 - MODULE 17 Tre 1. Liquidation is a process by which the assets of the business are converted into cash, the liabilities of the business are settled, and any remaining amount is distributed to the owners, The 2. No bonus is to be allocated if a partnership incurred a loss; however, salaries are provided whether there is profit or loss. False 3. When a new partner invests in a partnership, the new partner's capital account is credited at an amount equal to the carrying value of his investment. The 4.4 partnership is created by agreement between the partners while a corporation is created by the operation of law. Truie's. Partnership dissolution may result to liquidation. Falg@)6. In a partnership, a stipulation which excludes one or more partners from any share in the profit or losses is legal. Falsé!7. Purchase of interest of one or more of the existing partners should be recorded in a journal entry in the partnerships books. ‘Trie!s. A partnership in which all partners are individually liable is called a general partnerships.Fals@ 9. all withdrawals of the partners, whether temporary or permanent are debited to the partners’ capital account, prior to the preparation of closing entries. False 10.In case of dissolution, the transfer of ownership, whether to a new or existing partner, does not require the approval of the remaining partners. ‘True 11. Liquidation is the termination of business operations. 12. Under the cash priority program when all of the priorities are paid, any remaining cashiis distributed to the partners based on their respective profit or loss ratios. True 13. A loan payable to a partner has a lower priority over the claims of outside creditors. 14. Under the bonus method any increase or decrease in the capital credit of a partner deducted from or added to the capital credits of the other partners. IBB:S. Liquidation may either be voluntary or involuntary. Falsé!16. When financial statements are prepared during the liquidation process, all of the assets of the partnership are restated to their fair market values, and liabilities to their carrying amounts. 17. The legal right of offset allows a loan payable by a partner to the partnership to fset against his capital credit balance.18. Liquidation is the conversion of assets into cash, and the payment of owners loans d capital, Falsé19.If the partnership is continued after dissolution, the old articles of partnerships may still apply. ‘Triie)20.0ne of the reasons for incorporation of a partnership is limited liability of shareholders. False 21,In a partnership, there may be dissolution because of the unlimited life of the firm. True 22. In case of partnership insolvency, the rule of marshalling of assets is applied under this rule, only the excess of a partner's personal assets over his personal liabilities will he used to settle partnership debt. False 23. in the absence of stipulation, the share of each partners in the profits and losses shall be equal, but the industrial partner shall not be liable for the losses, Triie)24. On date of incorporation, normally the books of the partnership are closed and new books are set up for the corporation.False 25. In installment liquidation, the carrying amount of any unsold non-cash asset is considered as a loss, which is allocated to the partners’ capital balances equally. [Tril26. A new partner may be admitted when he purchases part or all of the interest of one or more of the existing partners, False)27.|as compared to corporations, the formation of a partnership requires more formality. 2152128 In lump-sum liquidation, the total gain or loss on the sale i allocated to the partners capital balances equally. Fal529. A partnership is formed for a business undertaking that is, normally of continuing nature, just like a joint venture. EXERCISE 8 Falsé 1. "Step 2" of the recognition principles of PFRS 15 is the allocation of the transaction price to the performance obligations in the contract. 2. According to PFRS 15, a measure of progress based on the hours expended onthe contract is an application of the inputs method. False 3. If the entity retains control over an asset created during the construction periodiin a long-term construction contract, revenue is most likely not recognized usi the percentage of completion method. False 4. If the performance obligation is a franchise contract is satisfied overtime, revenue is recognized when the obligation is satisfied,True 5. If the transaction price in a construction contracts includes a variable consideration, for example a penalty provision or performance bonus, the entity shall estimate the variable consideration taking into consideration any constraints to the estimate. False 6. The current PFRSs do not address the accounting for revenues from franchise contracts. True 7. In the construction of complex structures wherein the cost incurred and other efforts expended on the contract do not correlate to the stage of completion of the project, the most appropriate method for measuring progress on the contract are the outputs method. Tlie’. If the entity cannot demonstrate that a performance obligation is satisfied over time, itis presumed that the performance obligation is satisfied at a point in time, PFRS 15 requires that revenue from all long-term construction contracts recognized using the percentage of completion method. False 10. Franchise is not a license. Falsé 11. The percentage of completion under a construction contract is always computed based on the costs incurred to date as it bears to the total expected costs on the contract. 12. According to PFRS 15 Revenue from Contracts with Customers, contracts with customers are generally combined and accounted for as a single contract. True 13. A franchise may be between two private entities or individuals. True 14. Under the current PFRSs, initial franchise fees are recognized in full as revenue|when there is substantial performance by the franchisor indicated by the commencement of operations of the new franchise business. Falsé 15. If the entity cannot demonstrate that a performance obligation is satisfied at a point in time, it is presumed that the performance obligation is satisfied over time. True 16. Revenue from sales-based royalties is recognized at the end of the year of sale. False 17. Lease contracts are covered by PFRS 15.False 18. The transaction price is the initial franchise fee. Fals@ 19. The third step in the recognition of revenue under PFRS 15 is to identify the contract with the customer. False 20. If the performance obligation in a franchise contract is satisfied at a point in time, revenue is recognized over the duration of the contract as the obligation is satisfied.‘© Traditionally, infrastructure for public services, are constructed, operated and maintained by the public sector. However, there may be service concession arrangements whereby a public sector, entity grants a private entity the right to conduct, operate and or maintain an infrastructure for public services. Such arrangements are called “bulld-operate-transfer" (BOT}. © Other terms for ROT arrangements are “service concession arrangement," “rehabilitate-operate- transfer,” public-to private service concession” and “private-public partnership (PPP). © IFRIC 12 applies to BOT contracts whereby the grantor controls or regulates what services the operation must provide using the assets, to whom, and at what price, and also controls any significant residual interest in the assets atthe end of the term ofthe arrangement. @- IFRIS 12 applies to both (a) infrastructure that is yet tobe constructed or acquired by the operator and (b) existing infrastructure thatthe operator undertakes to operate and maintain @ The outsourcing of the operation of a governmental units internal services is nota service concession arrangement within the scope of IFRIC 12 or SIC 28. © The infrastructure in 2 BOT contract is not recognized as an item of PPE by the operator. © The operator in a BOT contract acts as service provider. The operator shall recognize revenue from the service concession arrangement using PFRS 15 for both construction or upgrade services and operation services, @ The common characteristics of all service concession arrangements is thatthe operator both receives right and incuts an obligation to provide public services, © The operator recognizes a financial assets iit has a contractual ight to receive cash or other financial asets from the grantor. © The operator recognizes an intangible assets ifthe operation has a contractual right to charge users ofthe public services, © An operator capitalizes borrowing costs in accordance with PAS 23 Borrowing Costs f the consideration in a service concession arrangement is an intangible asset. @ Financial assets and intangible assets received as consideration from a BOT contract are subsequently accounted for under PERS 9 and PAS 38, respectivel Relevant provision of the PFRS for SMEs Section 34 Specialized Activities Service concession arrangements Aservice concession arrangement is as arrangement whereby a government or other public sector body (the grantor) contracts with a private operator to develop (or upgrade}, operate and maintain the grantor’ infrastructure assets such as roads, bridges, tunnels, airports, energy distribution networks, prisons or hospitals. In those arrangements, the grantor controls or regulates what services the operator must provide using the assets, to whom, and at what price, and also controls any significant residual interest in the assets at the end of the term of the arrangement. Two I categories of service concession arrangements ‘There are two principal categories of service concession arrangements: A. mone, the operator receives a financial asset - an unconditional contractual right receive a specific or determinable amount of cash or another financial asset from the government in return for constructing or upgrading a public sector asset, and then operating and maintaining the asset for a specified period of time. This category inclucles guarantees by the government to pay for any shortfall between amounts received from users of the public service and specified or determinable amounts, B. In the other, the operator receives an intangible asset - aright to charge for use of a public sector ‘asset that it constructs or upgrades and then operates and maintain for a specified period of time. A right to charge users is not an unconditional right to receive cash because the amounts are contingent on the extent to which the public uses the service. Sometimes, a single contract may contain both types: to the extent that the government has given an Unconditional guarantee of payment for the construction of the public sector asset, the operator has a financial aszet; to the extent that the operator has to rely on the public using the services in order to ‘obtain payment, the operator has an intangible asset. Accounting financial asset model ‘The operator shall recognize a financial asset to the extent that is has an unconditional contractual right to receive cash or another financial asset from or at the direction grantor for the construction services. ‘The operation shall measure the financial asset at fair value. Thereafter, it shall follow Section 11 BasicFinancial Instruments and Section 12 Other Financial Instruments Issues in accounting for the financial asset. ‘Accounting - intangible asset model The operator shall recognize an intangible asset to the extent that it receives aright (a license) to charge users of the public service, The operator shall initially measure the intangible asset at fair value ‘Thereafter, i shall follow Section 18 in accounting for the intangible asset Operating revenue ‘The operator of a service concession arrangement shall recognize, measure and disclose revenue in accordance with Section 23 Revenue for the services it performs,DERIVATIVES: Derivatives are financial contracts or other contract with all the three of the following characteristics (as 39) (1) Whose value changes in response to change in a specific interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index or other variable (sometimes called the “underlying”). For example, a call option that gives the holder a right to purchase a share for a fixed price increases in value when the price of that share increases. In the case, the share price is an underlying that affects the value of the option, (2) It requires no intial net investment or an initial net investment that is smaller than would be required for other types of contracts. For instances, @call option on a share can usually be purchased for an amount much smaller ‘than what will be required to purchase the share itself. (3) Itis settled at a future date For instance, a call option on a share is settled on the future date on which the holder may ‘exercise that call option to purchase the share for a fixed price. Common examples of derivatives are forward contracts, swaps and options. In the statement of financial position, derivatives are measured at fair values. As a general rule, changes in the fair value of a derivatives are recognized in profit or loss. However, when the derivative is used to offset risk and special hedge accounting conditions are met, some or all changes in fair value are recognized as a separate component of equity. HEDGING Hedging is a risk management technique that involves using one or more derivatives or other hedging instruments to offset changes in fair value or cash flows of hedged items, The general provisions on hedging and hedge accounting are contained in PAS 39. & hedging relationship has two ‘components namely (1) Hedged item. & hedge item is an asset, liability, form commitment, highly probable forecast transaction , oF net investment ina foreign operation. To be designated as a hedged item, the designated hedged item should expose the entity to risk of changes in fair value or future cash flows. (2) Hedging instruments. A hedging instrument is a designated derivative or a designated rnon-derivatives financial liability whose fair value or cash flaws are expected to offset changes in alr value or cash flows of a designated hedged item. Examples of hedging instruments are foreign exchange forward contracts, interest rate swap and commodity future contracts. There are three types of hedging relationships. These are: (2) Fair value hedge. This is a hedge of the exposure to changes in fair value ofa recognized asset or liability or an unrecognized firm commitment that is attributable to a particular risk, and that could affect profit or loss. Under far value accounting, changes in the far value of the hedging instrument and fof the hedged item are recognized in profit or loss at the same time. The result is that there willbe no {cet impact on profit or loss ofthe hedging instrument and the hedge item i the hedge is fll effective, because in fair value will offset each other. Ifthe hedge is nat 100 percent effective (ie, the changes in {aie value do not fully offset), such ineffectiveness is automatically flected in profit oF loss. (b) Cash flow hedge. This sa hedge of the exposure toa variability in cashflow that i attributable to particular risk associated with a recognized asset or lability ora highly probable forecast transactions land could affect profit or loss. Under cash flow hedge accounting, changes in the fair value of the hedging instcuments attributable to the hedge risk are deferred (rather than being recognized immediately in profit o loss). The accounting for the hedged item is not adjusted. (c) Foreign current hedge. This is a hedge of the exposure to foreign currency exchange gains or losses on anentiy’s net investment in a foreign operation (which s the amount ofthe entity's interest inthe net ‘asset of that operation). Hedges of net investments of foreign operations are accounted for like cash flow hedges. Hedge AccountingHedge accounting recognized the offsetting effects on profit or loss of changes in the far value of the hedging instrument and the hedge Item every accounting period. (However, under BSP Circular 476, banks are required to book the market-to market valuation for securities at fair value through profit or loss on a daily basis although they are permitted to do the booking every end of the month provided it has an adequate mechanism in place to determine the daily fair values of the securities) To qualify for hedge accounting, the hedging relationship should meet the following conditions: (1) There isa formal designation and documentation of the hedging relationship and the entity's risk management objective and strategy for undertaking the hedge. Hedge accounting is permitted only from the date such designation and documentation isin place. (2) The hedge is expected to be highly effective in achieving offsetting changes in fair value or cash flows, attributable to the hedged risk (3) The effectiveness of the hedge can be measured reliably. (4) The hedge is assessed on an going basis and determined actually to have been highly «effective throughout the financial reporting periods for which the hedge was designated. (5) For cash flow hedges, a hedged forecast transaction must be highly probable and must present an ‘exposure to variations in cash flows that could ultimately affect profit or loss FOREIGN CURRENCY FORWARD CONTRACT A foreign currency forward contract is an agreement to exchange currencies of different countries ona specific future date at the specific rate(the forward rate). ‘The fair value of a foreign currency forward contract is determined by reference to changes in the forward rate over the life of the contract. The changes in the forward rate may be discounted to the present value. Foreign value currency contracts are usually entered into for the following purposes: 41. A fair value hedge - ths includes hedges against a change in the fair value of: © A recognized foreign currency denominated asset or lability, © An unrecognized foreign currency firm commitment. 2. Acash flow hedge - this includes hedges against the change in cash flow associated with: @ A forecast foreign currency transaction. © An unrecognized foreiga currency firm commitment. Fair Value Hedge of an Exposed Net Asset or Net Liability Position ‘A foreign currency exposed net asset position is the excess of assets denominated in foreign currency ‘over the liabilities denominated in the same foreign currency and translated at the current rate. A foreign currency exposed net lability position is the excess of liabilities denominated in a foreign ‘currency aver assets denominated in that foreign currency and translated at the current rate. Companies enter into forward contracts to limit the amount of gains or loss from the delayed settlement of foreign-currency- denominated accounts receivable and payables. A forward contracts to hedge an exposed _asset of liability position may be used by either Importer to hedge accounts payable, Le.,2 company enters into a forward contract to purchase foreign currency or by exporters to hedge accounts receivable, .¢., 3 company enters into a forward contract to sell foreign currency for future delivery ‘When the exposed asset or liability position is completely hedged, no net forex gains or losses is to be recognized. Forex gains and the offsetting losses are to be recognized in the computation of ‘comprehensive income and of the carrying value of the hedge items. Normally, banks set the forward rate at an amount different from the spot rate on the contract date. The ference between these rates represants the cost of avoiding the risk of exchange rate fluctuations, Result of Hedging. Forward rate are ordinarily set so that a cost is incurred related to the hedge, Usually, the rates for future contracts result in hedges that increase income, In summary, a forward contract is recorded at the forward rate, while the underlying asset or iablty Is recorded at the spot rate (and adjusted to the changes in rates and values at the financial statements date) ‘over the lfe of the contract, the intial difference between the spot and the forward rate isthecost of hedging the exchange risk, which is sometimes called premium or discount. Since the gain and losses on the both the hedge and the underlying are recorded in current earnings, the net cost reported inthe income statement is the change in the relative value of the spot and forward rates, If company enters a forward contract for foreign currency units in excess of the foreign currency units recognized in its exposed net assets or net lability position (a speculation in the currency), the difference tends up either as a gain or loss. Ths is due to the difference in the change in the value of the derivative ‘and the change in the value of the underlying items hedged both being reported in the income statement. Fi ‘Value Hedge of a Foreign Currency Denominated Commitment A foreign currency commitment is a contract or agreement to purchase or sell goods to a foreign entity inthe future, to be settled in the foreign currency. The settlement will not be made until after delivery of the goods: therefore, it fs exposed to changes in currency exchange rates before the transaction date (che date of the delivery of the goods). The accounting for the forward contract must begin when the Forward contract is designated as a hedge of 3 foreign currency commitment. 2017 Mar. 31 (1) Forward contract payable 425,000 Cash 425,000 To record seitlement of forward contract. (2KCash (fo) 380,000 Loss on forward contract 30,000 Forward contract receivable 410,000 To record receipt of 41,000,000 from BP when the exchange rate i P38. (3) Firm commitment for machinery 30,000 Goin on firm commitment 30,000 To record the change in the value of the underiying firm commitment, ¥1,000,000 x (P.1 P38) (4) Machinery 425,000 Firm commitment for machinery 45,000 Cash (fc) 380,000 To record purchases of machinery Cash Flow Hedge of e Foreign Currency Forecasted Transaction It is important to differentiated accounting treatment of a hedge of a forecasted transaction as a cash flow hedge versus that of an identifiable foreign currency commitment, a forecasted transaction is anticipated but not guaranteed. Under cash flow hadge the changes in fair value of the hadging instruments is deferred and recognized as ‘other comprehensive income. This is accumulated and reported as a separate line in the stockholders” ‘equity section of the statement of financial position ‘Summary of Hedging Transactions When transactions are denominated in one currency and measured in another, changes in currency ‘exchange rates can expose the transacting party to potential exchange gains or losses. In order to reduce the uncertainty associated with exchange rate changes, forward contracts and other derivatives are often used to hedge against this exposure, ‘The following table summarizes some of the details relating to forward contracts: Hedge of Forecasted | Hedge of an Hedge of Denominated Transaction Identifiable Asset or Libility Firm Commitment T. Type of hedge Tash Flow Hedge Fair value hedge or cash | Fair value hedge or cash flow hedge. Most often | flow hedge. Most often fair value, fair value.2. Basic purpose oF Hedge against changes | Hedge against exchange | Hedge the exchange hedge. inthe cash flows due to_| rate risk occurring rate risk between the exchange risk occurring _| between the transaction date and between the time of the | commitment date and | the payment / probableforecasted | the transaction date, _| settlement date, transaction and the resulting actual transaction, "3 Recognition over | Changes in valueare | Changes n value are | Changes in value are time changes in the | recognized asa recognized currently as _| recognized currently as value ofthe derivative | component of other | a components of a components of comprehensive income. | income. income, ‘OPTION CONTRACTS ‘An option is a financial derivative contracts that provides the holder the right to buy or sell an underlying in the future, for a price set today. The price of the option is separate from the price of the underlying, The following terms are usually associated on options contracts: Premium - the option price. Ths is the sum of money that the option buyers pays the potion sellers to obtain the “right” being sold in the option, This money is paid when the option contract is initiated, “> Time value of the option - This is the difference between the option market price and its intrinsic value. Changes in the time value of the option are taken to current earnings. + Intrinsie value of the option - This is the difference between the current market price and the option price of the hedge item. This is also the value of the option if it were exercised today. Strike price - the price at which the holder has the option to buy or sell the item. + Option to buy “in the money’ - This exists when the market price is more than the strike price. Option to buy “out of the money’ - This exists when the market price is less than the strike price. “> Underlying - The asset, financial instrument or any other basis (e.g., interest rates)to which the option is inked, and from where its value is derived. The underiying can be a stock, bond, interest rate, foreign currency or commodity. ‘Two Basic Types of Options ‘An options can be either one of the following = 1. Call Option - an option granting the right to buy the underlying. Options of this type may simply be called “calls 2. Put Option - an option granting the right to sell the underlying. Options of this type may simply be called “put” FOREIGN CURRENCY OPTION A foreign currency option gives the holder of the option the right but not the obligation to trade foreign currency in the future. A put option is for the sale of foreign currency by the holder of the option; a call ‘option is for the purchase of foreign currency by the bank holder of the option. Foreign currency option ‘can be purchased directly from a bank. SUMMARY ‘An option premiums has two parts “the intrinsic value and the time value”. Intrinsic Value refers to the amount of value in the option if it were exercised today. Any increase in the intrinsic value is treated as a gain and any decreased is treated as a gain and any decrease is treated as a loss. Time value is the difference between whatever the intrinsic value is and what the premium is. An increase in the time value is treated also as gain, while a decrease is treated also as a loss. The treatment of the changes in the intrinsic value and the time value of the option are summarized below: Fair value Hedge Cath Flow Hedge Increase in Intrinsic Value Gain on Hedge Other ComprehensiveActivity Income Decrease in Intrinsic Value Loss on Hedge Other Comprehensive Activity Income Increase in Time Value Gain on Hedge Gain on Hedge Activity Activity Decrease in Time Value Loss on Hedge Loss on Hedge Activity Activity Hedging Disclosures Hedge accounting is one of the more complex aspects of financial instruments accounting under IAS 39. For each type of hedge described in IAS 39( ic. fir value hedges, cash flow hedges, and hedges of net investment in foreign operations), an entity engaged in hedging must disclose. 1. A descrintion of each type of hedge; 2. A description ofthe financial instrument designated as hedging instruments and their far values at the reporting date; and 2. The nature of the rsk being hedge Inthe cash of cash flow hedges, the reporting entity needs to disclose: 1. The periods when the cash flows are expected to occur and when they are expected to affect profit or loss; 2. A description of any forecasted transaction for which hedge accounting had previously been used, but which is no longer expected to occur; 3. The amount that was recognized in equity during the per 4, The amount that was removed from equity and included in profit and loss for the period, showing the ‘amount included in each line item in the income statements; and 5. The amount that was removed from the equity during the period and included in the initial cost or other carrying amount of a nonfinancial asset or nonfinancial lability whose acquisition or incurrence was ‘a hedged of a highly probable forecast transaction, ‘The reporting entity isto disclose separately: 1. For fair value hedges, gains, or losses a) The hedging instrument; and b) The hedge item attributable to the hedged risk. 2. The ineffectiveness recognized in profit in loss that arises from cash flows hedges; 3. The ineffectiveness recognized in profit in loss that arises from hedges of net investments in foreign operations.1. Companies manage their foreign currency exposure by a technique called hedging. 2. The three categories of foreign currency exposures that can be managed are exi ing assets and liabilities, firm commitments and foreign transactions. 3. Hedging a noncancellable sales order is a hedge of a firm commitment anticipatory transaction. 4. Hedging a budgeted export sales is a hedge of a forecasted transaction. A specific foreign currency exposure being hedge is commonly called the hedging item. 6. The financial instrument used to achieve the hedge is commonly called the hedging instrument. 7. The two most commonly used hedging instrument to hedge a foreign currency exposures are FX forwards and FX options. 8. FX forwards result in a two-sided hedge because both the downside risk and the upside potential on the hedged item are counter balanced. 9, FX options result in a one-sided hedge because only the downside risk on the hedged item is counter balanced. 10. Hedge accounting is a special accounting treatment that achieves both counterbalancing and either concurrent recognition or concurrent deferral of mark-to- market adjustments. 11. In an FX option, one part has the contractual right to buy or sell a specific quantity of currency at an exchange rate during a specific period. 12. An option to buy is a call. And an option to sell is a put. 13. The party having the contractual right is the option holder. 14. The party having the obligation to honor the option contract is the option writer. 15. The price paid to acquire an option is called the pret m. 16. An option exercising is said to be in the money. 17. Split accounting in the context of option refers to accounting for the time value element separately from the intrinsic value element. 18. An FX forward is an agreement to buy or sell a foreign currency 19. In an FX forward, each party must 20. In an FX forward to buy a foreign currency, the buyer must take 21. FX forwards are .... in nature executory 22. Adjustments to FX forwards at intervening financial reporting datesunrealized 23. The fair value of the obligations of each party in a forward exchange The net position, setoff 24. The difference between the spot rate and the forward rate Premium, discount, time value 25. Entering into an FX forward to buy a foreign currency at more than the spot rate Premium, decrease 26. Accounting for premiums and discounts separately from the intrinsic value Split accounting 27. For an FX forward to qualify as a hedge of a firm foreign-currency-denominated commitment Designated, effective, firm 28. Entering into an FX forward for purposes other than hedging speculating 28. Entering into an FX forward prior to the delivery Firm commitment, forecasted transaction 30. The three types of risk associated with derivatives Market, credit, liquidity 31. Ina derivative, the party that isin a receivable position Market, credit 32. Ina derivative, the party that is ina payable position Market, liquidity 33. Ina derivative, the party that is either in a payable position or can go into unlimited 34, Market risk can consist of both “on-balance-sheet,” “off-balance-sheet 35, Derivative financial instruments are contracts that create igRSEHSBBRBSHGRS that meet the definitions of assets and liabilities, 36, ll derivatives are valued in the balanced sheet at their fal vale 37. Gains and loses on derivatives cannot be deferred and reported as SSH MGB, 38. The four types of hedging categories that exists are (1) undesignated hedges (hedges that do not qualify as hedges in any of the following three categories), 39.1 a fairvalue hedge, the concern s that a oss will be incurred (1) on an existing SSSSEBEIMEY or (2) on firm commitment. 40. In a cash flow hedge, the concem is that an adverse cash flow result will occur on a forecasted 41, Hedging a firm commitment is generally a falf Value hedge.42. Hedging 2 forecasted transaction is generally a ESB HAW hedge. 43, Hedging an investment in a foreign subsidiary i 2 REETAVSEERGHE hedge. 44, FX gains and losses on fair value hedges are reported in earnings when they arise, 45, FX gains and losses on cashflow hedges are reported in ether comprehensive income when they arise and later reported in eaftiings, 46. In a cash flow hedge, amounts i jally reported in Other Comprehensive Income are reclassified to (SSFRIRS winen the transaction on the hedged item is reported in eHIAL 47. All FX forwards are valued using the change in the forward exchange rate. 48, Split accounting encompasses both (1) the manner of Waluing a derivative and (2) the manner of ‘eporting the change in derivative’s carrying value, 49, Split accounting comes into play in determining how to assess HEtinig SSCRVERESS, 50. In assessing hedging effectiveness the change in derivative’s carrying value attributable to the change in the derivative’s III element may or may nat be used. 51. Reporting in earnings currently is mandatory for that portion of a derivative’s FX gain that is determined to be ineffective, 52. Companies can hedge firm commitments but not forecasted transactions. FALSE 53, 54, 55. 56, 87, 58, 59, 60, 61, Hedging and hedge accounting are synonymous terms. FALSE Hedging a foreign currency payable is protecting against the loss of a forecasted transaction. FALSE Hedging a foreign currency receivable is protecting against the loss on a forecasted transaction. FALSE Hedging a domestic company's budgeted export sales is a hedge of a forecasted transaction, TRUE Not all anticipatory transactions are firm commitments. TRUE ‘An expected future sale that is under contract would be considered a forecasted ‘transaction. FALSE ‘An expected future sale that is not under contract would be considered a forecasted transaction. TRUE Hedging a domestic company's budgeted import purchases to the extent of orders, placed could be hedges of firm commitments. TRUE Hedging a domestic company's budgeted export sales is always a hedge of a firm commitment.FALSE 62 Hedging the potential loss of domestic sales because of an expected weakening of a foreign currency would be a strategic hedge. TRUE 63 Hedging the potential loss of budgeted export sales because of an expected weakening of a foreign currency would be a hedge of a forecasted transaction. FALSE 70. Hedge accounting is not defined as accounting for the time value element separately from the intrinsic value element of the hedging instrument. 71. Hedge accounting is defined as accounting for the time value element ina manner consistent with accounting for the intrinsic value element of the hedging instrument. 72, Hedge accounting is defined as accounting for mark-to-market adjust ments on the hedged item in the same manner as accounting for mark-to-market adjustments on the hedging instrument. 73. In an FX option written by an FX trader, the FX trader always has a contractual obligation to deliver foreign currency to the option holder if the option holder exercises the option. 74, In a foreign currency option, the option writer has potential loss exposure-not the option holder. 75. An option to buy is referred to as a “call.” 76. An option to sell is referred to as a "put. 77. Options have premiums but not discounts. 78, Options that are “out of the money" have no intrinsic value. 79 Options that are "in the money" have intrinsic value but not time value. 80. An option that is "out of the money” has no time value 81. Split accounting is not a possibility for FX options. 82. To "write" an option, an entity must be an FX trader. Thus, a domestic importer or exporter could not write an option-such an entity can be only an option holder.83. In an FX forward, there is potential for either a gain or a loss. 84, In FX forwards, each party to the contract must deliver a currency to the other party at the expiration date. 85. in FX forwards, only one party to the contract must deliver a currency to the other party at the expiration date 86. FX forwards can be tailored to the exposure as to both (a) the quantity of currency and (b) the duration of the exposure. 87. In an FX forward to sella foreign currency, the seller must make delivery of the foreign currency to FX dealer at the expiration date. 88, In an FX forward to buy a foreign currency, the buyer must make delivery of the foreign currency to the FX dealer at the expiration date, 89. In practice, the obligations of each party in an FX forward are recorded on the books at the inception of the contract. 90. Whether or not the obligations of each party to an FX forward are to be recorded in the general ledger at the inception of the contract. 91. Just like the issuance of a sales order. FX forwards are executory in nature. 92. In an FX forward entered into for hedging purposes, recording adjustments for the change in the forward rate is accounting for only the 93. The accounting for an importing transaction and the accounting for a related hedging transaction using an FX forward are completely independent of each other. 94, When a domestic importer desires to hedge a foreign currency payable using an FX forward, the importer will contract to sell a specified number of foreign currency units 95. When a domestic exporter desires to hedge a foreign currency receivable using an FX forward, the exporter will contract to sell a specified number of foreign currency units. 96. Reporting in the balance sheet the fair value of the net position of the obligations of each party to an FX forward is mandatory under U.S. GAAP. sic value element.