Advanced Financial

Accounting and
Reporting
(AFAR)

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 PARTNERSHIP ▪ The capital ratio is a claim against the net asset
of the partnership as shown by the balance in the
PARTNERSHIP FORMATION: partner’s capital account.
• Governed by the Partnership Law [Philippine Civil
Code Articles 1767 to 1867]. ▪ The profit and loss ratio (P&L ratio) determines
how much will the income or loss be distributed
• Article 1767: By the contract of partnership, two or among the partners.
more persons bind themselves to contribute
money, property or industry to a common fund with Accounting for Partnership Formation
the intention of dividing the profits among • Cash investment
themselves. ✓ Local currency is valued at face value.

Characteristics of Partnership ✓ Foreign currency is valued at the current

✓ Ease of formation exchange rate.
✓ Limited life
✓ Mutual agency • Noncash investment
✓ Separate legal entity ✓ Recorded at agreed value which is normally the
✓ Sharing of profit and losses fair value of the properties at the time of
✓ Unlimited liability investment.

Types of Partnership • Liabilities assumed by the partnership should be

• General Partnership value at the present value (fair value) of the
✓ Each partner is personally liable to the remaining cash flows.
partnership’s creditors if the partnership
assets are not enough to pay such creditors. • The difference between the fair value of the assets
contributed by the partners and the liabilities
✓ There is at least one general partner in each assumed by the partnership is credited to the
partnership. partners’ capital accounts.

• Limited Partnership ✓ If the partners’ initial investment is not equal to

✓ Partners are liable only up to the extent of that partner’s agreed capital, the bonus
their capital contributions. approach will be used.

Accounting for Partnership Activities ✓ Under the bonus approach, one partner’s capital
account decreases, while the other partner’s
• Capital Account (normal balance: credit) capital account increases at the same amount.
▪ Increases
✓ Initial investment Bonus Approach Pro-forma Entry
✓ Additional investment
✓ Share in net income A, Capital xx
B, Capital xx
▪ Decreases
✓ Permanent withdrawal Total agreed capital xx
✓ Drawings in excess of a specific amount x Capital interest xx%
✓ Share in net loss Partner’s individual capital interest xx
Less: B, capital interest xx
• Drawing Account (normal balance: debit) Bonus to B xx

▪ Increases PARTNERSHIP OPERATIONS

✓ Regular drawings • Division of Profits and Losses

• Loan Accounts ▪ The Partnership Law provides that profits and

▪ Transactions between the partners and the losses of the partnership are to be divided in
partnership. accordance with the partners’ P&L agreement.

▪ Must be reported as separate balance sheet ▪ If no agreement is made between and among the
items. partners, profits and losses are to be divided
✓ Loan from partners – presented as a according to their original capital contributions.
liability.
▪ Should the partners agree to divide the profits
✓ Loan to partners – presented as other only, losses shall be divided in the same manner
receivable (current asset). as that of dividing profits.

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 ▪ However, should the partners agree to divided ▪ Use of average capital balances is preferable
losses only, profits shall be divided by the because it reflects the capital actually available
partners according to their original capital for use by the partnership during the year.
contributions.
• Interest Allowed on Partners’ Capital
▪ The ratio in which partnership profits and losses ▪ Partnership contract may provide for interest
are divided is known as the profit and loss ratio. allowances on partners’ capital in order to
The possible methods of dividing net income or encourage capital investments. Remaining
loss among partners may be summarized as profits are then divided equally or in any other
follows: specified ratio.
✓ Equally.
▪ Interest allowed to partners may vary from one
✓ In an unequal or arbitrary ratio. partner to another due to the differences of
capital contributions and balances.
✓ In the ratio of partners’ capital account
balances on a particular date, or in the ▪ Partnership contract should therefore provide
ratio of average capital account balances that a specific interest rate shall be allowed to a
during the year. partner based on his beginning, ending or
average capital balances.
✓ Allowing interest on partners’ capital
account balances and dividing the ▪ Interest on partners’ capital accounts is not an
remaining net income or loss in a specified expense of the partnership.
ratio.
• Salary and Bonus Allowances
✓ Allowing salaries to partners and dividing ▪ When the services rendered by the individual
the remaining net income or loss in a partners to the partnership are not equal, due to
specified ratio. differing abilities of partners or differences in
time spent on partnership business, it is not
✓ Bonus to managing partner based on net proper to provide for such differences through
income. the use of profit and loss sharing ratios.

▪ These alternative methods emphasize that the ▪ A partnership contract may provide for a bonus
value of personal services rendered by individual to the managing partner equal to a specified
partners may vary widely, as may the amounts of percentage of income. When bonuses are to be
capital invested by each partner. allowed, the agreement must clearly specify the
basis of the bonus.
▪ Therefore, as a preliminary step, agreements
should be made for salaries to partners and ▪ The computation of the bonus may be based on:
interest on their respective capital account ✓ Net income before allowances for salaries,
balances. Any remaining profit or loss then may interest and bonus.
be divided in a specified ratio.
✓ Net income before allowances for salaries
• Division of Profit and Loss in the Ratio of Partners’ and interest but after deduction of the
Capital bonus.

▪ The capital contributions of partners are usually ✓ Net income after allowances for salaries
considered in the determination of profit and and interest but before bonus.
loss sharing agreement.
✓ Net income after allowances for salaries,
▪ If partners’ capital account is considered in interest and bonus.
allocating partnership income, the agreement
should specify whether the ratio is based on the PARTNERSHIP DISSOLUTION
original capital contributions, beginning capital • Changes in ownership interest.
balances, ending capital balances or average
capital balances. • Capital Interest
▪ Claim against the net assets of the partnership
▪ In addition, several interpretations of average as shown by the balance in the partner’s
capital balances are possible, and capital capital account.
balances may be determined before or after
drawing accounts are closed to the partners’ ▪ Evidenced by the capital ratio.
capital accounts.

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 • Profit and Loss Interest
▪ Determines how the partner’s capital interest ✓ Elimination of capital deficiencies.
will increase or decrease as a result of income
or loss allocation. ✓ Payment to partners (in order):

▪ Evidenced by the profit and loss (P&L) ratio. o Loan accounts

Admission or Withdrawal of a Partner o Capital accounts

• Admission by purchase of interest
▪ Case 1: Purchase of interest for one partner • Installment Liquidation
A, Capital xx ▪ A process of realizing some assets, paying
B, Capital xx creditors, paying the remaining available cash to
partners, realizing additional assets, and making
▪ Case 2: Purchase of interest from all partners additional cash payment to partners.
A, Capital xx
B, Capital xx
C, Capital xx Basic Principles in Installment Liquidation
• Schedule of Safe Payments
• Admission by investment ▪ Method of computing the amount of safe
▪ Observe the following rules: payments and preventing excessive payments to
✓ Contributed capital (CC) any partners.
✓ Agreed capital (AC)
✓ Total contributed capital (TCC) ▪ Assume total loss on all remaining noncash
✓ Total agreed capital (TAC) assets. Provide all possible losses, including
potential liquidation cost and unrecorded
TCC=TAC No Adjustment. liabilities.
TCC>TAC Overstatement of the asset or diminution
in partner’s capital. ✓ Maximum possible loss = amount of
TCC<TAC Unrecorded net assets or the required unrealized noncash assets + amount of
additional investment in partner’s cash withheld (i.e., unrecorded unpaid
capital. expenses, and anticipated liquidation
CC=AC No transfer of capital. expenses)
CC>AC Capital transfer or bonus to old partners. ▪ Assume that partners with a potential capital
CC<AC Additional capital credit (bonus method) deficit will be unable to pay anything to the
from the old partners. partnership (assumed to be personally
insolvent).
Total agreed capital xx
Less: Total contributed capital xx ✓ Hypothetical or assumed deficit
Difference xx balance is allocated to the partners who
have credit balances using profit and loss
• Withdrawal of a partner ratio. This portion is the maximum
▪ Same accounting as admission of a new partner potential loss on noncash assets.
discussed above.
▪ Cash Priority Program (Cash Distribution
Program)
PARTNERSHIP LIQUIDATION
• The termination phase of the partnership’s activities. ✓ Ranking of the partners’ vulnerability level.

BASIC PROCEDURES IN LIQUIDATION ✓ Total interest (equity) account = balance of

the capital account +/- loans from (to) the
• Lump-sum Liquidation
partners
▪ All assets are converted into cash within a very
✓ Loss Absorption Ability = Total interest
short time, creditors are paid, and a single, lump-
account/Profit and Loss assigned ratio
sum payment is made to the partners for their
capital interest.
• Vulnerability Rankings
✓ Realization and distribution of gain or loss ▪ The partner with the lowest absorption ability is
to all partners on the basis of their profit the most vulnerable to partnership losses.
and loss ratio.
- - End - -
✓ Payment of liquidation expenses, if any.

✓ Payment of liabilities to third parties.

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 PARTNERSHIP

THEORY

1. Which of the following is not an advantage of a partnership over a corporation?

a. Ease of formation c. Less governmental regulations
b. Unlimited liability d. All of the above

2. For financial accounting purposes, assets of an individual partner contributed to a partnership are recorded
by the partnership at
a. Historical cost c. Fair market value
b. Book value d. Lower of cost or market

3. On July 1, X and Y formed a partnership. X contributed cash. Y, previously a sole proprietor, contributed
property other than cash, including realty subject to a mortgage, which the partnership assumed. Y’s capital
account on July 1, should be recorded at
a. Y’s book value of the property on July 1
b. Y’s book value of the property less the mortgage payable on July 1
c. The fair value of the property less the mortgage payable on July 1
d. The fair value of the property on July 1

4. Mr. A and Mr. B agreed to form a partnership. The fair values of the partner’s net contribution vary;
however, the partners agreed to have equal capital credits. Cash settlement shall be made between them
for the difference. Which of the following statements is correct?
a. The asset contributions of the partners shall be debited to equal amounts
b. The cash settlement between the partners will either increase or decrease the total partnership
capital
c. The cash settlement between the partners will not be recorded in the partnership books
d. Mr. A shall pay Mr. B to have their capital balances equal

5. How should the partners in a business partnership share in the profits or losses of the partnership?
a. Equally
b. At whatever basis of allocation that the dominating partner deems reasonable
c. In accordance with the partnership agreement
d. None of the above

6. According to the Philippine Civil Code, if only the share of each partner in the profits has been agreed upon,
the share of each in the losses shall be
a. In equal amounts
b. In equal amounts, but excluding the industrial partner
c. In proportion to the partners’ contributions
d. The same as the sharing in profits

7. According to the Philippine Civil Code, in the absence of a stipulation on the sharing of profits or losses,
partnership profits and losses shall be shared by the partners
a. Equally
b. In accordance with the partnership agreement
c. In proportion to what the partners may have contributed
d. In proportion to what the partners may have contributed, but the industrial partner shall not be
liable for the losses

8. Partners active in a partnership business should have their share of partnership profits based on the
following
a. A combination of salaries plus interest based on average capital balances
b. A combination of salaries and percentage of net income after salaries and any other allocation basis
c. Salaries only
d. Percentage of net income after salaries is paid to inactive partners

9. Which of the following best describes the use of interest on invested capital as a means of allocating profits?
a. If interest on invested capital is used, it must be used for all partners
b. Interest is allocated only if there is partnership net profit
c. Invested capital balances are never affected by drawings of the partnerships
d. Use of beginning or ending measures of invested capital may be subject to manipulation that
distorts the measure of invested capital
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 10. 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 preset ratios. If a partnership has a loss to allocate,
generally which of the following procedures would be applied?
a. Any loss would be allocated equally to all partners
b. Any salary allocation criteria would not be used
c. The bonus criteria would not be used
d. The loss would be allocated using the profit and loss ratios, only

11. Which of the following statements is true concerning the treatment of salaries in partnership accounting?
a. Partner salaries may be used to allocate profits and losses; they are not considered expenses of the
partnership
b. Partner salaries are equal to the annual partner draw
c. The salary of a partners is treated in the same manner as salaries of corporate employees
d. Partner salaries are directly closed to the capital account

12. Partnership drawings are

a. Always maintained in a separate account from the partner's capital account
b. Equal to partners' salaries
c. Usually maintained in a separate draw account with any excess draws being debited directly to the
capital account
d. Not discussed in the specific contract provisions of the partnership

13. When a new partner is admitted into a partnership and the capital of the old partners decreases, which of
the following explains the reason for the decrease?
I. Undervalued liabilities were written up to their fair values.
II. Undervalued assets were written up to their fair values.
a. I only c. Both I and II
b. II only d. Neither I nor II

14. Under the bonus method, any increase or decrease in the capital credit of a partner is
a. Deducted from or added to the capital credits of the other partners
b. Recognized as goodwill
c. Recognized as expense
d. Deferred and amortized to profit or loss

15. The admission of a new partner effected through purchase of interest from (an) existing partner(s) is
a. Recorded in the partnership’s books as a debit to cash or other asset and credit to the incoming
partner’s capital account
b. Recorded in the partnership’s books as a transfer within equity
c. Recorded in the partnership’s books as a transfer from equity to liability
d. Not recorded in its entirety

16. In XY Partnership, X and Y had a capital ratio of 3:1 and a profit and loss ratio of 2:1, respectively. The bonus
method was used to record Z’s admittance as a new partner. What ratio would be used to allocate, to X and
Y, the excess of Z’s contributions over the amount credited to Z’s capital account?
a. X and Y’s new relative capital ratio c. X and Y’s old capital ratio
b. X and Y’s new relative capital profit and loss ratio d. X and Y’s old profit and loss ratio

17. When partner X retired, the partnership paid X an amount that was lower than the balance of his capital
account. Which of the following statements is incorrect?
a. The partnership assets decreased as a result of the retirement
b. The other partner’s capital balances increased
c. The partnership assets were not affected
d. The number of capital accounts in the partnership chart of accounts decreased

18. A bonus is recognized by existing partners at the date a new partner joins a partnership when which of the
following relationships occur?
a. The new partner’s contribution exceeds his/her percentage of total partnership capital after the
investment is made
b. The new partner’s contribution is less than his/her percentage of total partnership capital after the
investment is made
c. The new partner’s contribution is equal to his/her percentage of total partnership capital after the
investment is made
d. It is not possible to determine the answer to this question
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 19. Which of the following statements is true with regard to a withdrawing partner?
a. A bonus must be paid to the retiring partner
b. A bonus may be paid to the retiring partner
c. A bonus must be paid to the retiring partner or to the remaining partners
d. Recognizing a bonus is not appropriate when a partner retires

20. A simple partnership liquidation requires

a. Periodic payments to creditors and partners determined by a safe payments schedule
b. Partnership assets to be converted into cash with full payment made to all outside creditors before
remaining cash is distributed to partners in a lump sum payment
c. Only creditors to be paid in an orderly manner
d. Periodic payments to partners as cash becomes available

21. The following is the priority sequence in which liquidation proceeds will be distributed for a partnership
a. Partnership drawings, partnership liabilities, partnership loans, partnership capital balances
b. Partnership liabilities, partnership loans, partnership capital balances
c. Partnership liabilities, partnership loans, partnership drawings, partnership capital balances
d. Partnership liabilities, partnership capital balances, partnership loans

22. What is the nature of liability of general partners as to partnership debts or obligations?
a. They are liable equally up to the extent of their separate assets after the partnership assets are
exhausted
b. They are liable pro-rata up to the extent of their separate assets after the partnership assets are
exhausted
c. They are liable pro-rata up to the extent of their capital contribution only
d. They are liable solidarily up to the extent of their separate assets after the partnership assets are
exhausted

23. X and Y are partners of XY Partnership which is undergoing liquidation. After XY Partnership’s assets were
realized and its liabilities settled, X’s capital account has a negative balance. Which of the following
statements is correct?
a. Y shall absorb X’s capital deficiency if X is solvent
b. X shall make an additional contribution if X is insolvent
c. X and Y shall make pro rata contributions to eliminate X’s capital deficiency
d. Y shall absorb X’s capital deficiency if X is insolvent

24. If a partner with a debit capital balance during liquidation is personally solvent, the
a. Partner must invest additional assets in the partnership
b. Partner’s debit balance will be allocated to the other partners
c. Other partners will give the partner enough cash to absorb the debit balance
d. Partnership will loan the partner enough cash to absorb the debit balance

25. In accounting for liquidation of partnership, cash payments to partners after all non-partner creditors’ claims
have been satisfied, but before the final cash distribution, should be according to
a. The partners’ relative profit and loss sharing ratios
b. The final balances in partner capital accounts
c. The partners’ relative share of the gain or loss on liquidations
d. Safe payments computations

26. If a partnership has only non-cash assets, all liabilities have been properly disbursed, and no additional
liquidation expenses are expected, the maximum potential loss to the partnership in the liquidation process
is
a. The fair market value of the non-cash assets
b. The book value of the non-cash assets
c. The estimated proceeds from the sale of the assets less the book value of the non-cash assets
d. None of the above

27. In partnership liquidation, the last remaining cash distribution should be made according to the ratio of
a. The individual partner’s profit and loss agreement
b. The individual partner’s capital accounts, increased by partner loans to the partnership
c. The individual partner’s capital accounts, increased by partnership loans to the partners and
decreased by partner loans to the partnership
d. The individual partner’s capital accounts, decreased by partnership loans to the partners and
increased by partner loans to the partnership
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 28. If all partners are included in the first installment of an installment liquidation, then in future installments
a. Cash will be distribution according to the residual profit and loss sharing ratio
b. Cash should not be distributed until all non-cash assets are converted into cash
c. A safe payments schedule must be prepared before each cash distribution to avoid excessive
payments to partners
d. A cash distribution plan must be prepared so that partners will know when they will be included in
cash distributions

29. Which partner is considered the most vulnerable as a result of a computation of vulnerability rankings?
a. The partner with the lowest vulnerability ranking, who also has the lowest loss absorption potential
b. The partner with the lowest vulnerability ranking, who also has the highest loss absorption potential
c. The partner with the highest vulnerability ratio, who also has the lowest loss absorption potential
d. The partner with the highest vulnerability ranking, who also has the highest loss absorption
potential

30. A partner's maximum loss absorbable is calculated by

a. Dividing the partner's capital balance by his or her profit-and-loss-sharing percentage
b. Multiplying the partner's capital balance by his or her profit-and-loss-sharing percentage
c. Multiplying distributable assets by the partner's profit-sharing percentage
d. Dividing the partner's capital balance by his or her percentage interest in capital

PROBLEMS

1. X and Y formed a partnership. Their contributions are as follows:

X Y
Cash 400,000 -
Accounts receivable 250,000 -
Land 750,000
Equipment _______ 180,000
Total 650,000 1,130,000

Additional information:
• Only 80% of the accounts receivable is deemed collectible.
• The land is stated at original cost. The fair value is P1,000,000. The partnership assumes a P250,000
unpaid mortgage on the land.
• Y acquired the equipment on a long-term financial basis. Y promised to pay the unpaid principal
balance of P80,000 using his personal funds. The equipment is under-depreciated by P30,000.

Requirement: Compute for the partners’ capital balances under each of the following independent
scenarios:

Scenario 1: X and Y agreed to have credits equal to their capital contributions.

Scenario 2: X and Y agreed to share in profits and losses equally. A partner should make an additional
contribution in order for the partner’s capital balances to reflect the partners’ equal interest in the
partnership.

Scenario 3: X and Y agreed to have equal interests in the partnership’s equity and profit and losses. The
partners’ initial capital credits should reflect this agreement using the bonus method.

Scenario 4: X and Y agreed to have their capital accounts initially credited at equal amounts. Cash settlement
shall be made between the partners.

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 Scenario 5: X and Y agreed to have their capital accounts initially credited at equal amounts. A partner shall
provide additional investment (or withdraw part of his investment) to the partnership in order to equalize
the balances of the partners’ capital accounts.

2. A and B decided to form a partnership on January 1, 2021. Their Statements of Financial Position on this
date were:
A B
Cash P65,625 P164,062.50
Accounts Receivable 1,487,500 896,875
Merchandise Inventory 875,000 885,937.50
Equipment 656,250 1,268,750
Total 3,084,375 3,215,625
Accounts payable 459,375 1,159,375
A, Capital 2,625,000
B, Capital _ 2,056,250
Total 3,084,375 3,215,625

They agreed the following adjustments shall be made:

● Equipment of A is underdepreciated by P87,500 and that B is overdepreciated by P131,250.
● Allowance for doubtful accounts is to be set up amounting to P297,500 for A and P196,875 for B.
● Inventories of P21,875 and P15,312 are worthless in the books of A and B respectively.
● The partnership agreement provides for a profit and loss ratio of 70% to A and 30% to B.

Question 1: Upon the formation of the partnership, how much is the capital of A and B, respectively?

Question 2: Assuming that the capital balances are to be equaled to their P&L ratio, how much is the capital
of A and B, respectively?

Question 3: Compute for the total assets of the partnership.

Question 4: Assuming that B is to invest certain amount of cash such that his capital balance will be 10%
higher than A’s. How much should B invest?

3. A and B formed a partnership. The following are their contributions:

A B
Cash P100,000 -
Accounts receivable 50,000 -
Inventory 80,000 -
Land - 50,000
Building ________ 120,000
Total 230,000 170,000

Note payable 60,000 -

A, capital 170,000 -
B, capital ________ 170,000
Total P230,000 P170,000

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 Additional information:
• Included in accounts receivable in an account amounting to P20,000 which is deemed uncollectible.
• The inventory has an estimated selling price of P100,000 and estimated costs to sell of P10,000.
• The partnership assumed a P10,000 unpaid mortgage on the land.
• The building is underdepreciated by P25,000.
• There is an unpaid mortgage of P15,000 on the building which B agreed to settle using his personal
funds.
• The note payable is stated at face amount. A proper valuation requires the recognition of a P15,000
discount on note payable.
• A and B shall share in profits and losses on a 60:40 ratio, respectively.

Question 1: Compute for the adjusted balances of the partners’ capital accounts.

Question 2: Assume that a partner’s capital shall be increased accordingly by contributing additional cash
to bring the partners’ capital balances proportionate to their profit and loss ratio. Which partner should
provide additional cash and how much is the additional cash contribution?

4. As of July 1, 2025, X and Y decided to form a partnership. Their balance sheets on this date:
X Y
Cash P1,500 P3,750
Accounts Receivable 54,000 22,500
Merchandise Inventory - 20,250
Machinery equipment 15,000 27,000
Total P70,500 P73,500
Accounts payable 13,500 24,000
X, Capital 57,000
Y, Capital ______ 49,500
Total P70,500 73,500

The partners agreed that the machinery and equipment of X is under depreciated by P1,500 and that of Y
by P4,500. Allowance for doubtful accounts is to be set up amounting to P12,000 for X and P4,500 for Y.

Question 1: If the capital contribution of each partner is the net amount of his assets and liabilities taken
over by the partnership, the capital accounts of X and Y would be
a. P43,500 and P40,500, respectively
b. P46,500 and P49,500, respectively
c. P57,000 and P49,500, respectively
d. None of the above

Question 2: Assume that the partnership agreement provides for profit and loss sharing of 60% to X and
40% to Y, and that the new capital of the partnership is to be agreed on the profit and loss ratio based on
the adjusted capital of Y. How much additional cash must be invested by X in order to bring the partner’s
capital balances proportionate to the profit and loss ratio
a. P14,250
b. P5,250
c. P17,250
d. None of the above

5. The AB partnership has the following plan for the distribution of partnership net income (loss):
A B
Salaries P80,000 P100,000
Bonus 6% 12%
Interest on average capital balance 7% 7%
Remainder (if positive) 60% 40%
Remainder (if negative) 50% 50%

Required: Calculate the distribution of partnership net income (loss) for each independent situation below
(For each situation, assume the average capital balance of A is P140,000 and of B is P240,000)
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 Situation 1: Partnership net income is P360,000.

Situation 2: Partnership net income is P240,000.

Situation 3: Partnership net loss is P40,000.

6. X, Y and Z Partnership was formed on January 1, 2021. The original cash investments were as follows:
X P96,000
Y 144,000
Z 216,000

According to the general partnership contract. The partners were to be remunerated as follows:
● Salaries of P14,400 for X, P12,000 for Y and P13,600 for Z.
● Interest at 12% on the average capital account balances during the year.
● Remainder divided 40% to X, 30% to Y and 30% for Z.

Income before partners’ salaries for the year ended December 31, 2021 was P92,080. X invested an
additional P24,000 in the partnership on July 1; Z withdrew P36,000 from the partnership on October 1; and
as authorized by the partnership contract, X, Y and Z each withdrew P750 monthly against their shares of
net income for the year.

Requirements:
1. Share of each partner in net income.
2. Capital balances of the partners on December 31, 2021.
3. If the salaries to partners are to be recognized as operating expenses by the partnership, determine
the share of each partner in net income.

7. A and B organized AB Partnership on Jan. 1, 2021. The following entries were made into their capital
accounts during 2021:

The partnership agreement called for the following in the allocation of partnership profits and losses:
● Salaries of P48,000 and P36,000 would be allocated to A and B, respectively.
● Interest of 8% on average capital balances will be allocated.
● B will receive a bonus of 10% on all partnership billings in excess of P300,000.
● Any remaining profits/losses will be allocated 60/40 to A and B, respectively.

Required (account for each situation independently):

a. Determine the distribution of partnership net income. Assume the following priority of allocation:
interest, bonus, salaries, then remaining assuming partnership income of P85,000; partnership billings
amounted to P400,000.

b. Determine the distribution of partnership net income of P165,000 on billings of P400,000. No specific
priority is given to any of the allocation criteria.

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 8. The net income of XY Partnership for 2021 amounted to P504,000. X is the managing partner. Assume that
the partners agreed on the allocation of net income as follows:
● Bonus of 20% to X.
● Salaries to X, P48,000 and Y, P72,000.
● Interest on average capital balances: X, P14,400 and Y, P9,600.
● Residual balance in net income be allocated to X and Y in the ratio of 2:1 ratio.

Requirement: Compute for the bonus assuming:

1. Bonus is based on net income before bonus, salaries and interest.
2. Bonus is based on net income after bonus but before salaries and interest.
3. Bonus is based on net income after bonus and salaries but before interest.
4. Bonus is based on net income after bonus, salaries and interest.
5. Bonus is based on net income after salaries but before bonus and interest.
6. Bonus is based on net income after interest but before bonus and salaries.
7. [Assume that P504,000 is income before tax] Bonus is based on income before bonus but after
income tax (tax rate is 35%).
8. [Assume that P504,000 is income before tax] Bonus is based on net income, that is, after bonus and
income tax (tax rate is 35%).

9. X, Y and Z are partners in a business which manufactures calculators. Their profit and loss agreement has
the following provisions:
● Salaries of P40,000, P20,000 and P45,000 for X, Y and Z, respectively.
● Y will receive a bonus equal to 5% of sales in excess of P1,000,000. Annual sales revenue was
P1,100,000.
● All partners will receive a bonus of 10% of net income in excess of P150,000 after the total of all
such bonuses.
● Partners will be allocated interest on their weighted-average capital balance. Drawings in excess of
annual salaries will be considered reduction in capital, interest is computed at the rate of 10%.
● Remaining profits and losses will be allocated 35%, 25% and 40% to X, Y and Z, respectively.
● Gains and losses from the sale of depreciable assets will be excluded from the above provisions and
will be equally allocated among the partners.

Activity in the partners’ capital and drawing accounts during the year was as follows:

X Capital X Drawings Y Capital Y Drawings Z Capital Z Drawings

Beginning P75,000 P0 P125,000 P0 P40,000 P0
Balance
February 1 15,000 25,000 30,000
March 31 10,000 5,000 15,000
June 1 10,000
June 30 10,000 5,000 15,000
August 1
September 30 ______ 10,000 ________ _______ _______ 15,000
Ending balance P85,000 P45,000 P125,000 P35,000 P70,000 P45,000

The partnership generated net income of P200,000, including a gain on the sale of equipment of P15,000.

Requirement: Determine the respective shares of each partner on the net income for the year.

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 10. A partnership began its first year of operations with the following capital balances:

X, Capital P143,000
Y, Capital 104,000
Z, Capital 143,000

The Articles of Partnership stipulated that profits and losses be assigned in the following manner. X was to
be awarded an annual salary of P26,000 with P13,000 salary assigned to Z.

Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the
year. The remainder was to be assigned on a 5:2:3 basis, respectively. Each partner was allowed to withdraw
up to P13,000 per year.

Assume that the net loss for the first year of operations was P26,000 with net income of P52,000 in the
second year. Assume further that each partner withdrew the maximum amount from the business each year

Question 1: What was X’s share of loss for the first year?
a. P3,900 loss c. P10,400 loss
b. P11,700 loss d. P24,700 loss

Question 2: What was the balance in Y’s Capital account at the end of the first year?
a. P120,900 c. P126,100
b. P118,300 d. P80,600

Question 3: What was Z’s share of income or loss for the second year?
a. P17,160 income c. P19,760 income
b. P4,160 income d. P17,290 income

Question 4: What was the balance in X’s Capital account at the end of the second year?
a. P133,380 c. P105,690
b. P84,760 d. P132,860

11. Z joins the partnership of X and Y. The partnership’s statement of financial position before Z’s admission is
as follows:
Cash 30,000 Accounts payable 80,000
Accounts receivable 140,000 X, Capital (60% interest in P/L) 515,000
Inventory 200,000 Y, Capital (40% interest in P/L) 275,000
Equipment 500,000 _______
Total assets 870,000 Total liabilities and equity 870,000

The following adjustments are determined:

a. The recoverable amount of the accounts receivable is P120,000.
b. The inventory has a net realizable value of P160,000.
c. The equipment has a fair value of P450,000.
d. Unrecorded liabilities amount to P20,000.

Requirements: Compute for the capital balances and profit and loss ratios of the partners after Z’s admission
for each of the following independent scenarios.

Scenario 1: Z acquires half of Y’s capital interest for P800,000.

Scenario 2: Z purchases 20% of X and Y’s capital interest for P800,000.

Scenario 3: Z wants to invest for a 20% in the net assets and profits of the partnership. If no bonus is allowed,
how much should Z invest, and what would be the new P/L ratio of the partners after Z’s admission?

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 Scenario 4: Z invests P100,000 for a 20% interest in the net assets and profits of the partnership.

Scenario 5: Z invests P180,000 for a 20% interest in the net assets and profits of the partnership.

12. A and B have capital balances of P200,000 and P220,000, respectively before admission of C. Their profit
and loss agreement was 35:65. C was to be admitted for 40% interest in the partnership and 20% in the
profits and losses by contributing a used machine which had a cost of P205,000 and an appraised value of
P180,000. After admission of C, A and B agreed to share profits and losses equally. At the end of the year
the new partnership generated net income of P130,000.

Question 1: How much is the capital balance of B after admission of C?

a. P174,500 c. P181,000
b. P259,000 d. P240,000

Question 2: How much is the capital balance of A at the end of the year?
a. P231,0000 c. P224,500
b. P221,000 d. P247,000

Question 3: Assuming there is an implied undervaluation or overvaluation of an asset, how much is the
undervaluation or overvaluation of the asset?
a. P300,000 over c. P300,000 under
b. P150,000 over d. P150,000 under

Question 4: Assuming there is an implied undervaluation or overvaluation of an asset, how much is the
capital balance of B at the end of the year?
a. P467,000 c. P369,500
b. P77,000 d. P174,500

13. The capital balances of the partners in ABC Partnership on July 1, 2021 before any necessary adjustments
are as follows:
A, Capital (20%) P150,000
B, Capital (30%) 250,000
C, Capital (50%) 100,000
Total P500,000

The partnership reported profit of P900,000 for the six months ended June 30, 2021.

Requirement: Compute for the partners’ adjusted capital balances under each of the following independent
scenarios:

Scenario 1: On July 1, 2021, C withdrew from the partnership when he was bought out by his co-partners
for P620,000 cash. The net assets of the firm as of this date approximate their fair values.

Scenario 2: C retired on July 1, 2021. The partnership settled c’s interest for P620,000 cash.

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 Scenario 3: C retired on July 1, 2021 and received cash of P500,000 and land with carrying amount of
P100,000 and fair value of P300,000 from the partnership as settlement for his interest.

14. ABC Partnership is converted into a corporation on January 1, 2021. Relevant information are as follows:
Carrying amounts Fair values
Cash P20,000 P20,000
Receivables 60,000 40,000
Inventory 80,000 70,000
Equipment 540,000 670,000
Payables 50,000 50,000
A, Capital (20%) 150,000 N/A
B, Capital (30%) 200,000 N/A
C, Capital (50%) 300,000 N/A

The corporation’s authorized capitalization is P2,000,000 divided into 200,000 ordinary shares with par
value of P10 per share.

Requirement: Determine the number of shares to be issued to each partner.

Scenario 1: Assume that the shares to be issued to the partners are based on their respective adjusted
capital balances.

Scenario 2: Assume that A, B and C agreed to be issued 14,000, 21,000 and 35,000 shares, respectively.

Scenario 3: Assume that the corporation was authorized to issue P100 par preference shares and P10 par
ordinary shares. The partners agreed to receive 1,000 ordinary shares each and even multiples of preference
shares for their remaining interest.

15. XY Partnership admits Z as a new partner. The Statement of Financial Position before the admission of Z is
shown below:

Cash 26,000 Accounts payable 62,000

Accounts receivable 120,000 X, Capital (60% interest in P/L) 170,000
Inventory 180,000 Y, Capital (40% interest in P/L) 94,000
Total assets 326,000 Total liabilities and equity 326,000

The following adjustments are determined:

a. The recoverable amount of the accounts receivable is P116,400.
b. A P25,000 recovery of a previous write-down on the inventory should be recognized.
c. Prepaid assets of P3,600 and accrued liabilities of P4,000 should be recognized.

Question 1: Z acquires half of Y’s interest in the partnership for P100,000. How much is the capital balance
of Y after the admission of Z?
a. P47,000 c. P51,200
b. P21,500 d. P182,600

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 Question 2: Z invests P71,250 cash for a 20% interest in the net assets and profits of the partnership. Z’s
capital account is credited for the fair value of the 20% interest he acquired. How much is the capital balance
of Y after the admission of Z?
a. P102,400 c. P86,400
b. P94,000 d. P120,400

Question 3: Z invests P100,000 cash for a 20% interest in the partnership’s net assets and profits. If the
bonus method is used, how much is the capital balance of Y after the admission of Z?
a. P165,350 c. P100,000
b. P111,600 d. P77,000

Question 4: If no bonus is allowed, how much should Z invest in order to obtain 2/5 interest in the
partnership?
a. P190,000 c. P285,000
b. P185,000 d. P220,000

16. The partners in XYZ Company had the following capital balances and P/L sharing percentages: X (50%)
P320,000; Y (30%) P192,000; and Z (20%) P128,000.

Question 1: X decided to retire and sold his interest to Y for P360,000. The entry on X’s retirement included
a
a. Debit to Y’s capital for P24,000 c. Credit to Y’s capital for P360,000
b. Debit to Z’s capital for P16,000 d. Credit to Y’s capital for P320,000

Question 2: X withdrew and the partnership paid him P360,000. How much is the capital balance of Z after
X’s withdrawal?
a. P112,000 c. P168,000
b. P116,800 d. P172,000

17. X and Y are partners sharing profits and losses in the ratio of 1:2, respectively. On July 1, 2021, they decided
to form XY Corporation by transferring assets and liabilities from the partnership to the Corporation in
exchange for its stocks. The following is the post-closing trial balance of the partnership:
Debit Credit
Cash P 45,000
Accounts receivable (net) 60,000
Inventory 90,000
Fixed Assets (net) 174,000
Liabilities P 60,000
X, Capital 94,800
Y, Capital ________ 214,200
P369,000 P369,000

It was agreed that adjustments be made to the following assets to be transferred to the corporation:
Accounts receivable P40,000
Inventory 68,000
Fixed Assets 180,600

XY Corporation was authorized to issue P100 par preferred stock and P10 par common stock. X and Y agreed
to receive for their equity in the partnership 720 shares of the common stock each, plus even multiples of
10 shares of preferred stock for their remaining interest. The total number of shares of preferred and
common stock issued by the Corporation in exchange of the assets and liabilities of the partnership are
Preferred Stock Common Stock Preferred Stock Common Stock
a. 2,540 shares 1,500 shares c. 2,642 shares 1,440 shares
b. 2,592 shares 1,440 shares d. 2,642 shares 1,550 shares

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 18. On January 1, 2021, the partners of ABC Partnership decided to liquidate their partnership. The following
information were made available:
Cash P20,000
Accounts receivable 60,000
Inventory 120,000
Equipment, net 300,000
Total P500,000

Accounts payable P30,000

Payable to B 20,000
A, Capital (20%) 100,000
B, Capital (30%) 150,000
C, Capital (50%) 200,000
Total P500,000
Requirement: Determine the amount of cash distributed to the partners under the two independent
scenarios below.

Scenario 1: Information on the conversion of non-cash assets is as follows:

a. P50,000 was collected on the accounts receivable, the balance is uncollectible.
b. P70,000 was received for the entire inventory.
c. The equipment was sold for P250,000.
d. P2,000 liquidation expenses were paid.

Scenario 2: Using the same information above but assume that the partnership will be liquidated over a
prolonged period of time. Distributions to the partners will be made as cash becomes available. Information
on the first conversion of non-cash assets is as follows:
a. 75% of the accounts receivable was collected for only P30,000.
b. Half of the inventory was sold for P40,000.
c. Equipment with carrying amount of P200,000 was sold for P120,000.
d. Actual liquidation expenses of P2,000 were paid.
e. Estimated future liquidation expenses totaled P1,000.
f. P9,000 cash was retained in the business for potential unrecorded liabilities and anticipated
expenses.

19. On January 1, 2021, the partners of ABC Partnership decided to liquidate their partnership. The following
information were made available:
Cash P20,000
Accounts receivable 60,000
Inventory 120,000
Equipment, net 300,000
Total P500,000

Accounts payable P30,000

Payable to B 20,000
A, Capital (20%) 100,000
B, Capital (30%) 150,000
C, Capital (50%) 200,000
Total P500,000

The partnership will be liquidated on an installment basis. Distributions to owners will be made as cash
becomes available:

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 January 2021:
The following transactions occurred in January 2021:
a. 75% of the accounts receivable was collected for only P30,000.
b. Half of the inventory was sold for P40,000.
c. Equipment with carrying amount of P200,000 was sold for P120,000.
d. P2,000 liquidation expenses were paid. Estimated future liquidation expenses totaled P1,000.
e. P9,000 cash was retained in the business for potential unrecorded liabilities and anticipated
expenses.

February 2021:
The following transactions occurred in February 2021:
a. P10,000 was collected on the remaining accounts receivable, the balance was deemed uncollectible.
b. The other half of the inventory was sold for P20,000.
c. The remaining items of equipment were sold for P30,000.
d. P10,000 liquidation expenses and previously unrecorded liabilities were paid.
e. The liquidation process ended on February 28, 2021.

Requirement: Compute for the cash payments to the partners for January and February 2021 using:
a. Safe Payments Schedule
b. Cash Priority Program.

20. X and Y, who share in profits and losses in the ratio of 3:7, decided to liquidate their XY Partnership. The
partner’s capital balances were P300,000 and P190,000, respectively.

Question 1: If all partnership assets and liabilities are realized and settled at their carrying amounts, how
much will Y receive from the liquidation?
a. P300,000 c. P120,000
b. P190,000 d. P0

Question 2: The partnership has total liabilities of P200,000. If all partnership assets are realized for
P500,000, how much will X receive from the liquidation?
a. P243,000 c. P300,000
b. P57,000 d. P133,000

Question 3: If after all partnership assets are realized and all liabilities are settled the partnership has
remaining cash of P120,000, how much will Y receive from the liquidation?
a. P189,000 c. P69,000
b. P120,000 d. P0

Question 4: If on the final settlement of the partners’ claims Y received P99,000, how much did X receive?
a. P261,000 c. P89,000
b. P234,000 d. P0

21. The balance sheet for the X, Y and Z Partnership is as follows. Figures shown parenthetically reflect agreed
profit and loss sharing percentages.
Assets Liabilities and Capital
Cash P20,000 Liabilities P50,000
Other assets 180,000 X, Capital (40%) 37,000
Y, Capital (40%) 65,000
Z, Capital (20%) 48,000
Total P200,000 Total P200,000

If the 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 of P90,000 realizes P50,000 and all cash available after
settlement with creditors is distributed, the respective partners would receive (to the nearest peso):
X Y Z X Y Z
a. P8,000 P8,000 P4,000 c. P0 P13,333 P6,667
b. P6,667 P6,667 P6,666 d. P0 P3,000 P17,000
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 22. Assume that P3,000 cash is to be withheld, the respective partners would then receive (to the nearest peso):
X Y Z X Y Z
a. P6,800 P6,800 P3,400 c. P0 P11,333 P5,667
b. P5,667 P5,667 P5,666 d. P0 P1,000 P16,000

23. If 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, and if unsold assets with P8,000 book value remain,
ignoring previous questions, the respective partners would receive
X Y Z
a. P4,800 P4,800 P2,400
b. P4,000 P4,000 P4,000
c. 37/150 of P12,000 65/150 of P12,000 48/150 of P12,000
d. P0 P8,000 P4,000

24. Partners X and Y have decided to liquidate their business. The following information is available
Assets Liabilities and Capital
Cash P100,000 Accounts payable P100,000
Inventory 200,000 X, Capital 120,000
________ Y, Capital 80,000
Total P300,000 Total P300,000

X and Y share profits and losses in a 3:2 ratio. During the first month of liquidation, half the inventory is sold
for P60,000, and P60,000 of the accounts payable is paid. During the second month, the rest of the inventory
is sold and the remaining accounts payable are paid. Cash is distributed at the end of each month, and the
liquidation is completed at the end of the second month.

Question 1: Using a safe payments schedule, how much cash will be distributed to X at the end of the first
month?
a. P64,000 c. P24,000
b. P60,000 d. P36,000

Question 2: Assume instead that the remaining inventory was sold for P10,000 in the second month. What
payments will be made to X and Y at the end of the second month?
X Y X Y
a. P0 P0 P5,000 P5,000
b. P10,000 P0 P6,000 P4,000

25. A balance sheet for the partnership of X, Y and Z who share profits in the ratio of 2:1:1 shows the following
balances before the liquidation
Cash P12,000
Other assets 59,500
Liabilities 20,000
X, Capital 22,000
Y, Capital 15,500
Z, Capital 14,000

On the first installment of the liquidation, certain assets are sold for P32,000. Liquidation expenses of P1,000
are paid, and additional liquidation expenses are anticipated. Liabilities are paid amounting to P5,400, and
sufficient cash is retained to ensure the payment to creditors before making payment to partners. On the
first payment to partners, X receives P6,250.

Question 1: The total cash payment to partners in the first installment is

a. P25,000 c. P12,500
b. P20,000 d. P10,000

Question 2: The amount of cash withheld for anticipated liquidation expenses and unpaid liabilities are
a. P2,000 c. P16,600
b. P14,600 d. P17,600

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 PARTNERSHIP LIQUIDATION
Additional Exercises

PROBLEM 1

The partnership of A, B and C is currently undergoing liquidation. ABC Partnership has cash of P22,000, noncash
assets with a book value of P264,000 and liabilities of P173,250.

The following information relate to the partners as of January 1, 2021:

• A has capital balance of P129,250, personal assets of P27,500, personal liabilities of P13,750.

• B extended a loan to the partnership in the amount of P13,750, deficit of P38,500, personal assets of
P41,250, personal liabilities of P16,500.

• C has a capital balance of P8,250, personal assets of P68,750 and personal liabilities of P41,250.

• The profit and loss ratio of A, B and C is 3:1:1, respectively.

The following transactions happened in January:

• Assets with book value of P82,500 were sold for P55,000 cash. The proceeds were used to pay off
liabilities of the partnership.

• The partners agreed to contribute personal assets, to whatever extent possible, in order to eliminate
their respective deficits.

• Assets with book value of P55,000 and a fair value of P63,250 were distributed to A.

• Additional noncash assets with book value of P110,000 were sold for P148,500.

Requirement: Compute for the cash distributions to partners A, B and C.

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 PROBLEM 2

XYZ Partnership has the following account balances before liquidation:

Cash P350,000 Liabilities P1,125,000

Noncash assets 7,375,000 Loan from Z 50,000
Loan to Y 150,000 X, Capital (40%) 1,250,000
Receivable from X 20,000 Y, Capital (40%) 1,900,000
Expenses 2,230,000 Z, Capital (20%) 1,000,000
Revenues 4,800,000

Some noncash assets were sold that resulted to a loss of P46,125. Liquidation expenses of P175,000 were paid
and additional expenses amounting to P90,000 were expected to be incurred through the following months of
liquidation the partnership. Liabilities to outsiders amounting to P875,000 were paid.

What is the book value of the noncash assets which were sold for Y to receive P555,550?

PROBLEM 3

The Statement of Financial Position of ABC Partnership is provided below:

Assets: Liabilities and Equity:

Cash P15,000 Loan from B P6,000
Non-cash assets 95,000 Liabilities 20,000
Receivable from A 5,000 A, Capital (15%) 33,000
Loan to C 4,000 B, Capital (55%) 25,000
C, Capital (30%) 35,000
Total P119,000 Total P119,000

Question 1: If P40,000 of the book value of the non-cash assets are sold for P18,000, additional expenses of
P2,500 are incurred and paid, cash withheld is P5,400, and all of the outside creditors are paid, how much is the
total cash paid to partners during the first installment?
a. P15,265
b. P5,530
c. P5,100
d. P10,500

Question 2: During the first installment, the following data are relevant: P56,000 of the book value of the
noncash assets are sold for P38,000; additional liquidation expenses of P12,000 are incurred and paid; all of the
outside creditors are also paid. If A received P11,000 during the first installment, how much is the cash withheld?
a. P8,500
b. P10,000
c. P9,500
d. P10,500

- - End - -

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 CORPORATE LIQUIDATION liquidation expenses, trustees’ fees and
salaries.
• Liquidation is the process of selling off all the
assets of an entity, settling its liabilities, ✓ Unsecured liabilities without priority - no
distributing any remaining funds to shareholders, collateral relating to their indebtedness.
and closing it down as a legal entity.
• The liquidation process is a possible outcome of • Owner’s Equity
bankruptcy, which a company enters when it does ✓ Deficiency or Capital
not have sufficient funds to pay its creditors.
• A financial condition in which the sum of all debts • Estimated Recovery %, or dividend to general
is greater than all of its assets at a fair valuation. unsecured creditors = Net Free Assets / Total
• A bankruptcy filing can be voluntary or Unsecured Creditors
involuntary. A petition to liquidate a company can
be made to the applicable court by creditors who Statement of Realization and Liquidation
have not been paid by the company; if granted, • An activity statement which shows the progress
the business will involuntarily enter bankruptcy. of the liquidation.
• It shows the actual transactions that transpired
Roles during the period covered (Income Statement
• Creditors - appoint a trustee to manage the equivalent).
debtor’s estate. • Bottomline is the net income or net loss during
the period.
• Trustees
✓ Continue operating the debtor’s business if
+ -
directed by the court. Assets Realized
✓ Realize free assets of the debtor’s estate. Assets to be Realized
✓ Pay cash to the creditors. Identifies proceeds
Identifies the individual
received from the
assets to which the
• Accountant - proper reporting of the financial trustee has taken title
conversion of specific
condition of the debtor and adequate accounting assets.
from the debtor.
and reporting for the trustee.

Financial Statements Assets acquired Assets not Realized

• Statement of Affairs - financial condition
prepared for a corporation entering into the stage Itemizes the assets Identifies the assets
discovered from remaining with the trustee
of liquidation or bankruptcy (Balance Sheet
operating activities at the end of the reporting
equivalent).
during the period. period.

• Assets
✓ Assets pledged with fully secured creditors
- expected to realize an amount at least
Liabilities to be Liabilities Liquidated
sufficient to satisfy the related debt. liquidated
Identifies specific
✓ Assets pledged with partially secured Identifies the liabilities liabilities paid by the
creditors - expected to realize an amount that the trustee took trustee.
below the related debt. responsibility at the date
of appointment.
✓ Free assets - not pledged and are available
to satisfy the claims of creditors with
priority, partially secured creditors, and Liabilities incurred Liabilities not liquidated
unsecured creditors.
Reflects those that Reflects those that
remain to be paid by the remain to be paid by the
• Liabilities trustee. trustee.
✓ Fully secured liabilities – collateralized;
expect to be paid in full as a result of having
sufficient collateral to satisfy the
indebtedness. Supplementary Supplementary Credits
Charges
✓ Partially secured liabilities – collateralized; (Revenue excluding gains
the proceeds of which are expected to be (Excluding assets losses on assets realization and
insufficient to satisfy the indebtedness. and write-offs) liability settlements)

✓ Unsecured liabilities with priority - with

priority under the law. Examples are taxes,
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 STATEMENT OF AFFAIRS
-- DATE

Estimated
Book
Assets Realizable Value Free Assets
Value
Pxx Assets Pledged to Fully Secured Creditors: Pxx
Less: Liabilities to Fully Secured Creditors xx Pxx
xx Assets Pledged to Partially Secured Creditors: Pxx
xx Free Assets: Pxx xx
Total Free Assets Pxx
Less: Unsecured Liabilities with Priority xx
Pxx Net Free Assets Pxx
Estimated deficiency to Unsecured Creditors xx
Total Pxx

Book Liabilities and Equity Unsecured

Creditor’s Claim
Value Liabiities
Pxx Fully Secured Creditors Pxx
xx Partial Secured Creditors Pxx
Less: Value of Pledged Assets xx Pxx
xx Unsecured Creditors with Priority Pxx
xx Unsecured Creditors without Priority: xx
xx Stockholder’s Equity Pxx
Pxx Total Pxx

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 CORPORATE LIQUIDATION

THEORY

1. In a Statement of Financial Affairs, a company's assets should be valued at

a. Historical cost
b. Net realizable value, if lower than historical cost
c. Replacement cost
d. Net realizable value, whether higher or lower than historical cost

2. In a Statement of Financial Affairs, a company's liabilities should be valued at

a. The present value of future cash flows c. The amount required for settlement
b. Net realizable value d. Replacement cost

3. In a Statement of Financial Affairs, a specific liability may be classified as

a. Current or long-term c. Monetary or nonmonetary
b. Secured or unsecured d. Direct or indirect

4. A Statement of Financial Affairs a corporation in financial difficulty indicates that unsecured creditors would
receive a percentage of their claims. Which one of the following assets is most likely to realize the smallest
percentage of its book value?
a. Accounts receivable c. Plant and equipment
b. Inventories d. Goodwill

5. The estimated deficiency to unsecured creditors without priority is computed as

a. Net free assets less total unsecured liabilities without priority
b. Net free assets divided by total unsecured liabilities without priority
c. Total assets at realizable values less total liabilities at expected net settlement amounts
d. A or C

6. In a Statement of Affairs
a. Assets pledged with partially secured creditors are shown on the asset side of the statement and as a
deduction on the liability side of the statement
b. Assets pledged with fully secured creditors are shown only on the liability side of the statement
c. Liabilities owed to fully secured creditors are shown only on the asset side of the statement
d. Liabilities owed to partially secured creditors are shown on the asset side of the balance sheet and as a
deduction on the liability side of the statement

7. The recovery percentage is calculated by which of the following formulas?

a. Estimated amount available for unsecured creditors with/without priority divided by total claims of
unsecured creditors with/without priority
b. Estimated realizable value of all debtor assets divided by book value of debtor assets
c. Estimated gain/loss on liquidation divided by total estimated net realizable value of debtor assets
d. Net estimated proceeds available to unsecured creditors divided by total claims of unsecured creditors

8. A corporation’s Statement of Affairs shows a recovery percentage of 115%. This means

a. Secured creditors will receive an amount in excess of the book value of their claims
b. Unsecured creditors will receive an amount in excess of the book value of their claims
c. Stockholders may expect some return on their interests
d. An error was made in the preparation of the statement

9. What are free assets?

a. Assets for which net realizable value is greater than historical cost
b. Assets for which no market exists
c. Assets for which replacement cost is greater than historical cost
d. Assets available to be distributed for liabilities with priority and other unsecured obligations

10. All of the following items are liabilities with priority except
a. Obligations arising between the date an order of relief is issued and the date of final realization of assets
b. Employee claims for contributions to benefit plans earned more than 180 days preceding the filing of a
petition
c. Government claims for unpaid taxes
d. Claims for the return of deposits made by customers to acquire property or services, which were never
delivered or provided by the debtor
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 PROBLEMS

1. Company X filed a voluntary bankruptcy petition, and the Statement of Affairs reflected the following
amounts:
Estimated Current
Assets Book Value Value
Assets pledged with fully secured creditors P900,000 P1,110,000
Assets pledged partially secured creditors 540,000 360,000
Free assets 1,260,000 960,000
P2,700,000 P2,430,000
Liabilities
Liabilities with priority P210,000
Fully secured creditors 780,0000
Partially secured creditors 600,000
Unsecured creditors 1,620,000
P3,210,000

Assume the assets are converted to cash at their estimated current values. What amount of cash will be
available to pay unsecured non-priority claims?
a. P720,000 c. P960,000
b. P840,000 d. P1,080,000

2. Company X recently petitioned for bankruptcy and is now in the process of preparing a Statement of Affairs.
The carrying values and estimated fair values of the assets of Company X are as follows:

Carrying Value Fair Value

Cash P20,000 P20,000
Accounts receivable 45,000 30,000
Inventory 60,000 35,000
Land 75,000 70,000
Buildings (net) 180,000 100,000
Equipment (net) 170,000 80,000
P550,000 P335,000
Liabilities of Company X are as follows:
Accounts payable P60,000
Wages payable (all have priority) 10,000
Taxes payable 10,000
Notes payable (secured by receivable and inventory) 120,000
Interest on Notes Payable 6,000
Bonds Payable (secured by land and building) 150,000
Interest on Bonds Payable 7,000
Total P363,000

Question 1: What is the total amount of unsecured claims?

a. P93,000 c. P121,000
b. P113,000 d. P126,000

Question 2: What estimated amount will be available for general unsecured creditors upon liquidation?
a. P28,000 c. P113,000
b. P93,000 d. P121,000

Question 3: What is the estimated dividend percentage?

a. 23% c. 77%
b. 93% d. 68%

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 3. Company X’s financial position before the start of its liquidation is as follows:

Assets Liabilities and Equity

Cash 100,000 Accounts payable 1,600,000
Accounts receivable 600,000 Income tax payable 900,000
Inventory 1,560,000 Note payable (secured by equipment) 1,000,000
Land 800,000 Loan payable (secured by land and building) 1,200,000
Building 1,200,000 Share capital 2,000,000
Equipment, net 400,000 Retained earnings (deficit) (2,040,00)
Total 4,660,000 Total 4,660,000

Additional information:
a. Only 60% of the accounts receivable is collectible.
b. The entire inventory is expected to be sold half of the price.
c. The land and building are expected to be sold at a lump sum price of P2,300,000.
d. The equipment is expected to be sold at carrying amount but after refurbishment costs of P70,000.
e. Certain accounts payable are measured gross of P23,000 cash discount which X intends to take. A
supplier waived repayment of a P420,000 account.
f. The taxing authority gave a six-month tax amnesty to settle the tax liability for P780,000.
g. Interests of P80,000 and P70,000 are expected to be paid on the note and loan, respectively.
h. Liquidation costs of P120,000 are expected to be incurred.
i. SSS, Philhealth and Pag-ibig contributions of P160,000, not reflected on the balance sheet above,
are expected to be paid.

Question 1: How much is the estimated deficiency to unsecured creditors without priority?
a. P567,000 c. P767,000
b. P697,000 d. P817,000

Question 2: How much are the net free assets?

a. P1,210,000 c. P1,907,000
b. P1,570,000 d. P2,207,000

Question 3: How much total amount can the issuer of the note payable expect to receive?
a. P693,018 c. P805,875
b. P729,078 d. P908,127

Question 4: Mr. X, an unsecured creditor without priority, has a claim of P80,000. How much can Mr. X
expect to recover on his claim?
a. P33,513 c. P49,260
b. P43,135 d. P50,760

4. Company X’s financial position before its liquidation is as follows:

Assets Liabilities and Equity
Cash 100,000 Accounts payable 1,600,000
Accounts receivable 600,000 Loan payable 1,500,000
Inventory 900,000 Share capital 2,000,000
Equipment, net 400,000 Retained earnings (deficit) (3,100,000)
Total 2,000,000 Total 2,000,000

Transactions in the first quarter of liquidation are as follows:

a. 90% of the accounts receivable were collected. Commission of third party collectors amounted to
P108,000. The collectors expect to collect the remaining receivables in the next quarter.
b. Half of the inventory was sold at 80% of carrying amount. The other half is expected to be sold at
60% of carrying amount.
c. The equipment was sold for P380,000 after it was refurbished for P50,000.
d. P100,000 accounts payable were paid.
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Page | 25
 e. Employee termination benefits of P100,000 were recorded and P80,000 of that amount were paid.
f. The lender accepted P1,000,000 as full payment of the loan.
g. Liquidation costs of P50,000 were paid.
h. Scrap materials from clearing the warehouse were sold for P10,000.

Question 1: How much “assets realized” is presented on Company X’s Statement of Realization and
Liquidation?
a. P1,122,000 c. P1,312,000
b. P1,212,000 d. P1,321,000

Question 2: How much net gain (loss) is reported on Company X’s Statement of Realization and Liquidation?
a. P178,000 c. P192,000
b. (P178,000) d. (P192,000)

Question 3: How much is the ending balance of cash?

a. P1,800 c. P5,000
b. P2,000 d. P0

5. Company X has been undergoing liquidation since January 1. As of March 31, it’s condensed Statement of
Realization and Liquidation is presented below
Assets:
Assets to be realized P1,375,000
Assets acquired 750,000
Assets realized 1,200,000
Assets not realized 1,375,000
Liabilities:
Liabilities liquidated P1,875,000
Liabilities not liquidated 1,700,000
Liabilities to be liquidated 2,250,000
Liabilities assumed 1,625,000
Revenues and Expenses:
Supplementary charges/debits P3,125,000
Supplementary credits 2,800,000

Question 1: The net gain(loss) for the three-month period ending March 31 is
a. P250,000 c. P425,000
b. (P325,000) d. P750,000

Question 2: Compute the ending cash balance of cash account assuming that common stock and deficits are
P1,500,000 and P500,000 respectively
a. P425,000 c. P1,325,000
b. P575,000 d. P1,375,000

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 CORPORATE LIQUIDATION
Additional Exercise

ABC Corporation is in the process of liquidating all its assets. The following information are available:

a. Bonds payable amounting to P73,600 is secured by inventory with book value of P123,000 and
net realizable value of 2/3 of the recorded amount.

b. Of the P195,600 accounts payable, P55,000 is secured by equipment with a carrying amount of
P76,800 which is 70% realizable.

c. Building with a carrying amount of P129,000 has a net realizable value of P99,000.

d. Other unrecorded liabilities are accrued interest payable on bonds, P3,100; salaries payable,
P17,400; taxes payable, P11,600; and trustee’s fee, P8,500.

e. Cash available prior to liquidation amounts to P11,900.

f. Total assets of ABC Corporation presented in the Statement of Financial Position prior to
liquidation amounts to P480,000.

g. Except for prepaid expenses and goodwill with recorded amounts of P7,600 and P22,000
respectively, remaining assets other than those whose realizable values were mentioned above
have a realizable value of 60% of the recorded amount.

h. Total liabilities of ABC Corporation presented in the Statement of Financial Position prior to
liquidation amounts to P380,000.

Compute for the following:

1. Recovery percentage
2. Net free assets
3. Estimated deficiency
4. Payment to fully secured creditors
5. Payment to partially secured creditors
6. Payment to unsecured creditors with priority
7. Payment to unsecured creditors without priority

Final answers:

1. 57.21%
2. P144,520
3. P108,120
4. P76,700
5. P54,469
6. P37,500
7. P143,826 (P251,400 x 57.21%) – the unsecured portion of partially secured of P1,240 must
not be included in the computation.

- - End - -
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 HOME OFFICE AND BRANCH
• All entries in the accounting records of the branch
• Branches are established to decentralize are also entered, at least in summary form, in the
operations or to expand into new markets. accounting records of the home office.

• Branches are with regulated autonomy to operate • The records of the home office and the branch are
as an independent entity. linked by two reciprocal entities, the Home Office
account (an equity account) in the books of branch
• The branch has its own complete set of accounting and the Investment in Branch account (an asset
records, all its transactions including those with account) in the books of the Home Office.
the home office are recorded in its books.
• Because they are reciprocal, it means that the two
• It also presents its own set of financial statements accounts always have the same balance although
called separate financial statements. the Investment in Branch is a debit account and the
Home Office is a credit account. The two accounts
• A branch and its home office represent two frequently show different balances on a temporary
accounting systems but just one accounting and basis due to errors and items in transit.
reporting entity.

ILLUSTRATIVE JOURNAL ENTRIES:

Transactions Home Office Branch

1) Transfer of cash from Home Investment in Branch xx Cash xx

Office Cash xx Home Office Equity xx

2) Transfer of cash from the Cash xx Home Office Equity xx

Branch Investment in Branch xx Cash xx

3) Transfer of merchandise Investment in Branch xx Shipment from HO xx

from HO at cost Shipment to branch xx HO Equity xx

4) Transfer of merchandise Investment in Branch xx Shipment from HO xx

from HO Above cost Allowance for OV xx HO Equity xx
Shipment to Branch xx

5) Payment by HO of branch Investment in Branch xx Expenses xx

expenses Cash xx HO Equity xx

6) Allocation of paid branch Investment in Branch xx Expenses xx

expenses Expenses xx HO Equity xx

7) Transfer of fixed assets Memo entry Memo entry

from HO to Branch

8) Take up branch profit Investment in Branch xx Income Summary xx

Branch Income xx HO Equity xx

9) To take up Branch loss Branch loss xx HO Equity xx

Investment in Branch xx Income Summary xx

10) To adjust the reported Allowance for overvaluation No entry

branch net income for Branch Income
realized allowance

INTERBRANCH TRANSFERS:

• Detailed computation of realized allowance for overvaluation thru sales by branch to outsiders during the period:

Billed Price Cost Price Mark-up on Cost

Branch beginning inventory (from HO) xx xx xx
Current shipments (from HO) xx xx xx
Branch ending inventory (from HO) (xx) (xx) (xx)
Cost of goods sold xx xx xx

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 • Cost = Billed price / 100% + % markup on cost =
Markup on cost / % markup on cost. The amount
of allowance considered realized will be the
allowance carried by the cost of goods sold.

• There are two pricing methods used by the home

office in billing the branch for merchandise
transfers:

✓ Billed at cost. The merchandise is

transferred at cost when the branch sells the
merchandise; the entire gross margin is
included in the net branch income.

✓ Billed at cost plus markup. The merchandise

is transferred at an amount between cost
and the selling price. The intermediate
pricing method allocates part of the gross
margin to the branch and the remainder to
the home office.

• Working paper adjustments and eliminations

guidelines are as follows:

✓ Eliminate intercompany balances from the

combined statements to avoid redundancy.

✓ Adjust some items in the cost of sales section

of the branch net income statement to their
true cost as a consequence of the billing
policy not equal to cost.

• The working paper adjustment/elimination entries are as follows:

Billed at cost Billed above costs

HO Equity xx HO Equity xx
Investment in Branch xx Investment in Branch xx

Accounts Payable xx Accounts Payable xx

Accounts Receivable xx Accounts Receivable xx

Shipment to Branch xx Shipment to Branch xx

Shipment from Head Office xx Allowance for Overvaluation xx
Shipment from HO xx

Allowance for Overvaluation xx

Branch beginning inventory xx

Branch ending inventory (Income Statement) xx

Branch ending inventory (Balance Sheet) xx

• When a company is composed of a home office and more than one branch, the home office records include a
separate investment in branch account and a separate allowance for overvaluation account for each branch.
Separate worksheet adjustments are made for each branch.

• When assets are transferred from one branch to another branch, the home office account on each branch’s records
is used to record the transfers. The transferring branch reverses the entry to record the transfer from the home
office, and the receiving branch enters a transfer as if it comes from the home office.

- - End - -

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 HOME OFFICE AND BRANCH
THEORY

1. The “Investment in Branch” and “Home Office” accounts are best described as
a. Contra accounts c. Reciprocal accounts
b. Adjunct accounts d. Investment accounts

2. The “Home Office” ledger account in the accounting records of a branch is best compared to
a. An equity account c. A liability account
b. A revenue account d. A deferred revenue account

3. For external reporting, the individual financial statements of the home office and branch are combined
a. By using complex consolidation procedures
b. By recognizing the home office’s own assets, liabilities, income and expenses plus its share in the
branch’s assets, liabilities, income and expenses
c. By adding together similar items of assets, liabilities, income and expenses
d. By adding together similar items of assets, liabilities, income and expenses and eliminating
reciprocal accounts

4. In preparing the combined financial statements of the home office and its various branches
a. Both reciprocal and non-reciprocal accounts are combined
b. Both reciprocal and non-reciprocal accounts are eliminated
c. Reciprocal accounts are eliminated but non-reciprocal accounts are combined
d. Reciprocal accounts are combined but non-reciprocal accounts are eliminated

5. Which of the following accounts would be shown in the combined financial statements of the home office
and branch
a. Investment in branch account c. Home office account
b. Allowance for unrealized gross margin in branch inventory d. None of the above

6. The main difference between the net income reported in the separate income statement of the branch and
the net income reported by the home office for the branch’s operation is the
a. Overstatement of beginning and ending inventory reported by the branch
b. Overstatement of total goods available for sale reported by the branch
c. Overstatement of costs of goods sold reported by the branch
d. Overstatement of shipment from home office reported by the branch

7. Which represents the proper journal entry for a periodic inventory system that should be made on the books
of the home office when goods that cost the home office P100,000 to manufacture are shipped to a branch
at a transfer price of P125,000 and the billed price is not recorded in the shipments to branch account?
a. Investment in Branch P100,000
Shipments to branch P100,000
b. Investment in Branch P125,000
Shipments to branch P125,000
c. Investment in Branch P125,000
Shipments to branch P100,000
Unrealized profit 25,000
d. Shipment to branch P100,000
Unrealized profit 25,000
Shipments from home office P125,000

8. Which of the following statements is/are true regarding sales agency and branch?
I. A sales agency is not a self-contained business but rather acts only on behalf of the home office
II. A branch is a self-contained business which acts independently, but within the bounds of the company
policy and subject to the control of the home office
a. I only c. I and II
b. II only d. Neither I nor II
PROBLEMS

1. Selected information from the trial balances of the home office and the branch of Katherine Company on
December 31, 2021 is provided. The branch acquires merchandise from the home office and outside
suppliers.
Home Office Branch
Sales P60,000 P30,000
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 Shipments to branch 8,000
Allowance for overvaluation of branch inventory 3,600
Shipments from home office 10,000
Purchase (outsiders) 35,000 5,500
Merchandise inventory 12/01/2021 20,000 15,000
Expenses 14,000 6,000

Additional information:
Merchandise inventory, December 31, 2021:
Home office P20,000
Branch (P7,500 from home office and P2,500 from outsiders) 10,000

Question 1: The billing rate of home office to branch for merchandise shipments is
a. 120% of cost c. 130% of cost
b. 125% of cost d. 135% of cost

Question 2: How much of the December 1 inventory of the branch represent purchases from outsiders and
goods shipped from home office
a. Home office, P5,000 and Outsiders, P10,000 c. Home office, P8,000 and Outsiders, P7,000
b. Home office, P15,000 and Outsiders, P00,000 d. Home office, P12,000 and Outsiders, P3,000

Question 3: The net income reported by the branch is

a. P4,500 c. P3,500
b. P5,600 d. P2,500

Question 4: The combined net income for Home office and branch operations is
a. P22,500 c. P25,100
b. P24,600 d. P21,500

2. The following data were provided by the accountants of the Home Office and Branch for the year ended
December 31, 2021:
Home Office Book Branch Book
Net sales to outside customer 1,000,000 800,000
Beginning inventory 300,000 140,000
Net purchases from outside supplier 800,000 250,000
Shipment to branch 400,000
Shipment from Home Office 500,000
Ending inventory 100,000 200,000
Operating expenses 200,000 100,000
● It is the policy of the company to use specific identification for inventory.
● For the year ended December 31, 2020, the Home Office bills its branch with a gross profit rate
of 40% based on cost.
● Half of the beginning inventory of the branch was acquired from outside suppliers.
● The ending inventory of the branch is broken down as follows:
o 60% from outside suppliers
o 26% from 2021 shipment from home office
o 14% from 2020 shipment from home office

Question 1: What is the net income of the branch in its books for the year ended December 31, 2021?
a. P77,000 c. P7,000
b. P10,000 d. P8,000

Question 2: What is the cost of goods sold of the branch in the combined statements for the year ended
December 31, 2021?
a. P588,400 c. P594,600
b. P690,000 d. P589,600

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 Question 3: What is the combined net income to be presented by the Home Office in the Statement of
Comprehensive Income for the year ended December 31, 2021?
a. P210,000 c. P314,000
b. P311,600 d. P219,800

Question 4: What is the balance of the unrealized profit in branch ending inventory on December 31,
2021?
a. P16,000 c. P15,600
b. P17,300 d. P18,400

3. The following information is extracted from the books and records of Elaine Company and its branch. The
balances are as of December 31, 2021 of the company’s operations.
Home Office Branch
Sales P260,000
Shipments to branch P 78,000
Shipments from home office 104,000
Purchases 39,000
Expenses 78,000
Inventory, January 1, 2021 26,000
Allowance for overvaluation of branch inventory 31,200

However, no shipments in transit between home office and the branch were made. Both shipments
accounts are properly recorded. The ending inventory includes merchandise acquired from the home office
amounting to P26,000 and P7,800 from outsiders for a total of P33,800.

Question 1: What is the realized profit in branch inventory?

a. P21,000 c. P22,533
b. P31,200 d. P24,700

Question 2: What is the amount of branch merchandise beginning inventory that was acquired from the
home office?
a. P14,000 c. P15,600
b. P19,000 d. P20,800

4. Anjelah Corporation has one branch operation located 500 miles away from the home office. The branch
office sales merchandise which is shipped to it from the home office. The merchandise is transferred at cost,
but the branch pays reasonable freight charges. The branch office makes sales and incurs and pays operating
expenses. At the end of the current accounting period the true adjusted balance for the home office account
on the branch’s books and the branch office account on the home office’s books is P500,000.

The following items may or may not be reconciling items. The current year is 2020.
● The home office has shipped merchandise to the branch office which cost P10,000 and which
incurred P500 freight charges paid by the home office but charged to the branch. This merchandise
is received by the branch on January 5, 2021.
● The branch has transmitted P17,000 in cash back to the home office as a partial payment on such
purchased merchandise. This cash is received by the home office on January 6, 2021.
● The branch office returns some defective merchandise to the home office. The cost of the returned
merchandise is P750. The branch office pays P25 of freight costs which will be charged back to the
home office.
● On December 31, 2021, the home office sends a check for P25,000 to replenish the branch’s charged
back to the home office.
● The branch pays an advertising expense of P800 that should have been paid by the home office
since it applied to advertising fees incurred by the home office of its own benefit.
● The home office allocated P12,000 of general and administrative expenses to the branch. The
branch had not entered the allocation as of the end of the year.
● The home office pays insurance premiums on the branch store. The amount paid by the home office
is P1,000 but the branch erroneously records it as P776.

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 Question 1: What is the unadjusted balance of the Home Office account?
a. P481,425 c. P500,000
b. P452,276 d. P518,575

Question 2: What is the unadjusted balance of the Branch account?

a. P433,701 c. P518,575
b. P500,000 d. P452,276

5. Jensen Company has a branch in Baguio and Davao. The reciprocal accounts between the
home office and the branches were in agreement at the beginning of 2021. However as of
December 31, 2021, the following reciprocal balances are found in the home office books:

Investment in Baguio P186,500

Investment in Davao 84,000

Data for reconciliation of the reciprocal accounts are as follows:

● On December 29, 2021, the home office has instructed Baguio to transfer P74,000
cash to Davao. Baguio recorded this transaction immediately. Upon receipt, Davao
has recorded this transfer at P47,000. The home office however has not yet recorded
this interbranch transaction as of the end of the year.
● Jensen has transferred goods costing P28,900 to Baguio branch and paid P2,500 of
shipping cost on December 16, 2021. Baguio shipped all of these goods to Davao upon
instruction of the home office on December 30, 2021. Shipping cost is P3,600 freight
collect. Had the goods been shipped directly to the Davao, P5,000 of freight cost
should have been incurred. The interbranch shipment was not recorded by the
branches and the home office as well.
● Baguio has collected cash of P5,750 from Davao’s customer. This transaction is not
yet recorded by Davao and the home office.
● The home office has already allocated P11,000 and P9,000 of administrative expenses
to Baguio and Davao, respectively. The branches are not yet notified.
● Baguio remitted P14,300 cash to the home office on December 12, 2021. The home
office has failed to record the said remittance.
● Davao returned goods costing P6,850 to the home office. The goods were shipped on
December 19 and received on December 24, but no entries have been made in the
home office books.

Question 1: Unadjusted balance of Home Office Current account in Baguio’s books

a. P52,150 c. P107,250
b. P87,200 d. P92,950

Question 2: Unadjusted balance of Home Office Current account in Davao’s books

a. P236,250 c. P115,150
b. P122,000 d. P84,850

6. On October 1, 2021, the Greenbelt Main Office established a sales agency in Ortigas.
● The main office sent samples of its merchandise amounting to P8,400 and a working fund amounting
to P72,000 to be maintained on the imprest basis.
● The samples sent were intended to last until June 1, 2022. During the first two months of operations,
the agency transmitted to the home office sale of goods costing P291,600, but the home office were
not able to fill-up 25% of the said transmitted sales orders.
● Collections from customers amounted to P73,941, net of 2% sales discount.
● Payments made by the agency during October and November were as follows: annual rent of
P57,600, advertising expense worth P5,600 and utilities amounting to P7,200.
● It also purchased an equipment worth P9,000 which will be depreciated at 20% per annum.
● The gross profit rate on sales agency order is 20% of gross sales.
Compute the net income of the agency for the two months ended November 30, 2021
a. P17,431 c. P29,875
b. P28,366 d. P26,866

- - End - -
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 JOB ORDER COSTING
• The journal entry to record the incurrence of rework costs
Cost Accounting Systems is provided as follows:
MOH (Rework costs) xxx
• Cost accounting involves the measuring, recording, and
Raw materials xxx
reporting of product costs. From the data accumulated,
Salaries payable xxx
companies determine both the total cost and the unit cost
MOH xxx
of each product.
• CASE 2: Charged to customer/ “exacting
• There are two basic types of cost accounting systems:
specification”/specific job
✓ A job order system where the company assigns
Total cost of goods xxxx
costs to each job or to each batch of goods.
Rework costs xxxx
✓ A process cost system used when a company
manufactures a large volume of similar products. Cost transferred to FG xxxx
Divide: Good units xxxx
Cost per unit xxxx
Job Order Cost Flow
• The flow of costs (direct materials, direct labor, and
• Note: Rework costs will be included in the costs
manufacturing overhead) in job order cost accounting
transferred to FG.
parallels the physical flow of the materials as they are
converted into finished goods.
• The journal entry to record the incurrence of rework costs
is provided as follows:
• There are two major steps in the flow of costs:
MOH (Rework costs) xxx
Raw materials xxx
✓ Accumulating the manufacturing costs incurred;
Salaries payable xxx
these costs are accumulated in three accounts:
MOH xxx
▪ Raw Materials Inventory
▪ Factory Labor
SPOILED GOODS
▪ Manufacturing Overhead
NRV of spoiled xxxx
✓ Assigning the accumulated costs to Work in Process
Cost of spoiled (xxxx)
Inventory (WIP) and eventually to Finished Goods
Loss xxxx
Inventory (FG) and Cost of Goods Sold (COGS).
Total units xxxx
• Three entries are made to accumulate the manufacturing
Spoiled units (xxxx)
costs incurred.
Good units xxxx
✓ When the company receives the raw materials it has
purchased, it debits the costs of the materials to Raw
Materials Inventory. • CASE 1: If the rework costs are charged to the entity/to all
production/internal failure.
✓ The cost of factory labor consists of gross earnings of Total Cost of Goods* xxxx
factory workers, employer payroll taxes, and fringe Cost of Spoiled (xxxx)
benefits (sick pay, pensions, and vacation pay) Cost transferred to FG xxxx
incurred by the employer. Divide: Good units xxxx
Cost per unit xxxx
✓ Companies debit labor costs to Factory Labor as they * include allowance to cost
incur those costs. Factory labor is assigned to Work in
Process and manufacturing overhead at the end of the • Note: Loss will be charged to manufacturing overhead
period. (MOH) and will be an actual overhead (OH).

✓ A company may record overhead costs periodically • The journal entry to record the incurrence of loss is
through adjusting entries by debiting Manufacturing provided as follows:
Overhead. Manufacturing Overhead is a control account Spoiled goods (NRV) xxx
and the subsidiary ledger consists of individual MOH (Loss) xxx
accounts for each type of cost (factory utilities, factory WIP xxx
repairs, etc.).
• CASE 2: Charged to customer/ “exacting
DEFECTIVE GOODS specification”/specific job
• Components of rework cost: Total Cost of Goods xxxx
1. Direct material NRV of Spoiled (xxxx)
2. Direct labor Cost transferred to FG xxxx
3. Manufacturing overhead Divide: Good units xxxx
Cost per unit xxxx
• CASE 1: If the rework costs are charged to the entity/to all
production/internal failure.
Total cost of goods xxxx • Note: Loss will be included in the costs transferred to FG.
Divide: Good units* xxxx
Cost per unit xxxx • The journal entry to record the incurrence of loss is
provided as follows:
*Good units = Total units Spoiled goods (NRV) xxx
WIP xxx
• Note: Rework costs will be charged to manufacturing - - End - -
overhead (MOH) and will be an actual overhead (OH).
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 JOB-ORDER COSTING
THEORY

1. The two basic types of cost accounting systems are

a. Job order and job accumulation systems c. Process cost and batch systems
b. Job order and process cost systems d. Job order and batch systems

2. Two basic costing systems for assigning costs to products or services are job order and process costing.
These two costing systems are usually viewed as being on opposite ends of a spectrum. The fundamental
criterion employed to determine whether job costing or process costing should be employed is
a. Proportion of direct (traceable) costs expended to produce the product or service
b. Number of cost pools employed to allocate the indirect costs tot eh product or service
c. Type of bases used in allocating the indirect cost pools to the product or service
d. The nature and amount of the product or service brought to the marketplace for customer
consumption

3. Job order costing and process costing have which of the following characteristics?
Job Order Costing Process Costing
a. Homogeneous products Heterogeneous products
and large quantities and small quantities
b. Homogeneous products Heterogeneous products
and small quantities and large quantities
c. Heterogeneous products Homogeneous products
and large quantities and small quantities
d. Heterogeneous products Homogeneous products
and small quantities and large quantities

4. Which of the following would be accounted for using a job order cost system?
a. The production of personal computers c. The refining of petroleum
b. The production of automobiles d. The construction of a new campus building

5. In a job cost system, the application of factory overhead is usually reflected in the general ledger as an
increase in
a. Factory overhead control c. Work in process control
b. Finished goods control d. Cost of goods sold

6. When a job is completed and all costs have been accumulated on a job cost sheet, the journal entry that
should be made is
a. Finished Goods Inventory c. Raw Materials Inventory
Direct Materials Work in Process Inventory
Direct Labor
Manufacturing Overhead
b. Work In Process Inventory d. Finished Goods Inventory
Direct Materials Work in Process Inventory
Direct Labor
Manufacturing Overhead

7. Spoiled units are

a. Units that cannot be economically reworked to bring them up to standard
b. Units that can be economically reworked to bring them up to standard
c. The same as defective units
d. Considered abnormal losses

8. Normal spoilage is defined as unacceptable production that

a. Arises because of a special job or process c. Is caused specifically by human error
b. Occurs in on-going operations d. Is in excess of that which is expected

9. Abnormal spoilage is
a. Spoilage that is forecasted or planned c. Accounted for as a product cost
b. Spoilage that is in excess of planned d. Debited to Cost of Goods Sold

10. Which of the following statements concerning spoilage in a job-order costing is correct?
a. The cost of abnormal spoilage is recorded as period cost or expense

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 b. When normal spoilage occurs because of the specification of a particular job, cost of normal loss
shall be capitalized to that specific job reduced by the current disposal value/net realizable value of
the spoiled units
c. When normal spoilage is a characteristic of a given production cycle, the cost of normal loss is not
charged to a specific job but will be closed to manufacturing overhead control account
d. All of the above

11. Which of the following statements concerning rework costs in a job-order costing is correct?
a. If the normal rework cost is attributable to a specific job, it shall be capitalized to that particular job
b. If the normal rework cost is common to all jobs, it shall be debited to manufacturing overhead
control account
c. If the rework cost is abnormal, it shall be recorded as a period cost or expense
d. All of the above

12. When the amount of overapplied factory overhead is significant, the entry to close overapplied factory
overhead will most likely require
a. A debit to cost of goods sold
b. Debits to cost of goods sold, finished goods inventory, and work in process inventory
c. A credit to cost of goods sold
d. Credits to cost of goods sold, finished goods inventory and work in process inventory

PROBLEM
1. Selected cost data concerning the past fiscal year’s operations of the Krystelle Manufacturing Co. are
presented below:
Inventories
Beginning Ending
Materials P75,000 P85,000
Work in process 80,000 30,000
Finished goods 90,000 110,000

●Materials used, P326,000.

●Total manufacturing costs charged to production during the year (including direct materials, direct
labor, and factory overhead applied at the rate of 60% of direct labor cost), P686,000.
● Cost of goods available for sale, P826,000.
● Selling and general expenses, P25,000.
Question 1: What is the amount of direct materials purchased during the year?
a. P360,000 c. P336,000
b. P316,000 d. P411,000

Question 2: What is the direct labor cost charged to production during the year?
a. P216,000 c. P225,000
b. P135,000 d. P360,000

Question 3: What is the cost of goods manufactured during the year?

a. P736,000 c. P636,000
b. P716,000 d. P766,000

Question 4: What is the cost of goods sold during the year?

a. P716,000 c. P801,000
b. P691,000 d. P736,000

2. Judy Inc. is employing normal costing for its Job orders. The overhead is applied using a predetermined
overhead rate. The following information relates to the company for the year ended December 31, 2021:
Job No. 101 Job No. 102 Job No. 103
Job in Process, January 1, 2021:
Direct materials 40,000 30,000 0
Labor 60,000 40,000 0
Factory overhead 30,000 20,000 0
Costs added during 2021:
Materials 20,000 10,000 100,000
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Page | 36
 Labor 100,000 200,000 400,000
Factory overhead ? ? ?

Additional information:
● Actual overhead for the year 2020 amounted to P350,000
● Jobs No. 101 and 102 were completed and transferred to finished goods during year 2021
● Job No. 101 was sold during year 2021
● The gross profit rate is 20% based on cost
Question 1: What is the total manufacturing cost for 2021?
a. P1,400,000 c. P480,000
b. P1,180,000 d. P1,200,000

Question 2: What is the cost of goods manufactured for 2021?

a. P680,000 c. P580,000
b. P700,000 d. P780,000

Question 3: What is the cost of goods sold for 2021?

a. P1,180,000 c. P700,000
b. P300,000 d. P1,200,000

Question 4: What is the gross profit for 2021?

a. P236,000 c. P140,000
b. P60,000 d. P240,000

Question 5: What are the cost of work in process on December 31, 2021 and the cost of finished goods on
December 31, 2021, respectively?
a. P800,000 and P500,000 c. P600,000 and P300,000
b. P700,000 and P400,000 d. P900,000 and P200,000

3. Josephine Company uses a job order cost system. The following data were obtained from the company’s
cost records as of June 30. No jobs were in process at the beginning of June, all costs listed being incurred
during the month.
Job Order No. Direct Materials Direct Labor Hours Direct Labor Cost
1001 P4,320 1,300 P1,600
1002 9,150 3,700 7,250
1003 11,275 8,200 14,325
1004 3,225 1,500 2,800
1005 6,500 3,200 6,100
1006 2,750 980 1,650

● Manufacturing overhead costs are charged to jobs based on P1.50 per direct labor hour.
● The actual manufacturing overhead cost for the month totaled P30,350.
● During June, Job Order Nos. 1001, 1002, 1004 and 1005 were completed.
● Jobs 1001 and 1002 were shipped out and the customers were billed P9,000 for Job 1001 and
P20,000 for Job 1002.
The cost of goods manufactured would be:
a. P55,500 c. P56,495
b. P55,495 d. P57,500

4. Alvin Co. has underapplied overhead of P45,000 for the year. Before disposition of underapplied overhead,
selected year-end balances from its accounting records were
Sales 1,200,000
Cost of goods sold 720,000
Direct materials inventory 36,000
Work in process inventory 54,000
Finished goods inventory 90,000

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Page | 37
 Under its cost accounting system, over or underapplied overhead is assigned to appropriate inventories and
cost of goods sold based on year-end balances. In its year-end income statement, the company should
report cost of goods sold of
a. P682,500 c. P757,500
b. P684,000 d. P765,000

5. At the end of the last fiscal year, Levlyn Co. had the following account balances:
Overapplied overhead 6,000
Cost of goods sold 980,000
Work in process 38,000
Finished goods 82,000
If the most common treatment of assigning overapplied overhead was used, the final balance in cost of
goods sold would have been
a. P985,340 c. P974,000
b. P974,660 d. P986,000

6. Dionalynne Company’s Job 007 manufactured 13,750 units that was completed in August at unit costs
presented as follows:
Direct materials P50
Direct labor 45
Factory overhead 45
Final inspection of Job 007 disclosed 1,250 spoiled units, which were sold for P37,500.

Compute the unit cost under the following independent cases:

Case 1: [Normal specific] The spoilage loss is attributable to exacting specifications of Job 007.

Case 2: [Normal common] The spoilage loss is attributable to all jobs.

Case 3: [Abnormal] The spoilage loss is treated as abnormal.

7. During August 2021, Danna Inc. incurred the following costs for Job 007 (450 drum sets):
Direct materials P42,500
Direct labor P65,250
Factory overhead P78,300

45 units of drum sets were found to be defective and the company had to incur the following to remedy the
said defects:
Direct materials P13,550
Direct Labor P15,250

Compute the unit cost under the following independent cases:

Case 1: [Normal specific] The rework cost is attributable to exacting specifications of Job 007.

Case 2: [Normal common] The rework cost is attributable to all jobs.

Case 3: [Abnormal] The rework cost is treated as abnormal.

- - End - -
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 PROCESS COSTING Lost units (xxx)
Started & completed units xxx
Uses of Process Cost Systems
Completed/transferred-out units xxx
• Process cost systems are used to apply costs to Beginning inventory in units (xxx)
similar products that are mass-produced in a Started & completed units xxx
continuous fashion.
EUP SCHEDULE
• Once production begins, it continues until the
finished product emerges, and each unit of 1. Weighted average method
finished product is like every other unit.
Beginning inventory xxx
Process Cost Flow Started & completed xxx
Ending inventory x % of completion xxx
• The company can add materials, labor, and Weighted average, EUP xxx
manufacturing overhead in each production
department. 2. First-in First-out method

• The costs of units completed are transferred from Beginning inventory (1 - % of completion) xxx
one department to another as those units move Started & completed xxx
through the manufacturing process. Ending inventory x % of completion xxx
Weighted average, EUP xxx
• The costs of completed work are transferred to
Finished Goods Inventory.
• Lost units: EUP SCHEDULE
• When inventory is sold, costs are transferred to
▪ Discrete: Normal/Abnormal
Cost of Goods Sold.
✓ Direct materials
Assignment of manufacturing costs
o If the placement took place first, then
• The accumulation of the costs of materials, labor,
100%
and manufacturing overhead is the same in a
process cost system as in a job order cost system.
o If the inspection took place first, then 0%
• Entries to assign the costs of raw materials, factory
✓ Conversion costs
labor, and overhead consist of a debit to Work in
Process for each department and a credit to Raw
o Lost units x % of inspection
Materials Inventory, Factory Labor, and
Manufacturing Overhead.
▪ Continuous Loss – method of neglect
• The entry to record units completed and
✓ Normal loss = 0% as to materials and
transferred to the warehouse is a debit to Finished
conversion costs
Goods Inventory and a credit to Work in Process.
✓ Abnormal loss = 100% as to materials and
• The entry to record the sale of goods is a debit to
conversion costs.
Cost of Goods Sold and a credit to Finished Goods
Inventory.
- - End - -
Formulas related to process costing

• Formula to compute completed/transferred-out

units:

Beginning inventory in units xxx

Started/transferred-in units xxx
Ending inventory in units (xxx)
Lost units (normal + abnormal) (xxx)
Completed/transferred-out units xxx

• Formulas to compute started a completed units:

Started/transferred-in units xxx

Ending inventory in units (xxx)
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 PROCESS COSTING

THEORY

1. What is the best cost accumulation procedure to use when a single product is manufactured in a continuous
process?
a. Process c. Standard
b. Job order d. Actual

2. Process costing is used in companies that

a. Engage in road and bridge construction
b. Produce sailboats made to customer specifications
c. Produce hollow blocks for sale to the public
d. Construct houses according to customer plans

3. The FIFO method of process costing differs from the average method in that the FIFO method
a. Considers the stage of completion of beginning work in process inventory in computing equivalent
units of production, but the average method does not
b. Does not consider the stage of completion of beginning work in process inventory in computing
equivalent units of production, but the average method does
c. Is applicable only to those companies using the FIFO inventory pricing method, but the average
method may be used with any inventory pricing method
d. Allocates costs based on whole units, but the average method uses equivalent units

4. The average and FIFO process costing methods differ in that the average method:
a. Can be used under any cost flow assumption
b. Is much more difficult to apply than the FIFO method
c. Requires that ending work in process inventory be stated in terms of equivalent units of production
d. Does not consider the degree of completion of beginning work in process inventory when
computing equivalent units of production

5. Current period’s cost per equivalent unit under FIFO process costing considers current period costs
a. Only c. Less cost of beginning WIP
b. Plus cost of beginning WIP d. Plus cost of ending WIP

6. Equivalent units of production are equal to the

a. Units completed by a production department in the period
b. Number of units worked on during the period by a production department
c. Number of whole units that could have been completed if all work of the period had been
used to produce whole units
d. Identifiable units existing at the end of the period in a production department

7. In a process costing system using the weighted average method, cost per equivalent unit for a given cost
component is found by dividing which of the following by EUP?
a. Only current period cost
b. Current period cost plus the cost of beginning inventory
c. Current period cost less the cost of beginning inventory
d. Current period cost plus the cost of ending inventory

8. In a cost of production report using process costing, transferred-in costs are similar to the
a. Cost of material added at the beginning of production
b. Conversion cost added during the period
c. Cost transferred out to the next department
d. Cost included in beginning inventory

9. A continuous loss
a. Occurs unevenly throughout a process
b. Never occurs during the production process
c. Always occurs at the same place in a production process
d. Occurs evenly throughout the production process

10. The method of neglect handles spoilage that is

a. Discrete and abnormal c. Continuous and abnormal
b. Discrete and normal d. Continuous and normal
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 11. The cost of normal discrete losses is
a. Absorbed by all units past the inspection point on an equivalent unit basis
b. Absorbed by all units in ending inventory
c. Considered a period cost
d. Written off as a loss on an equivalent unit basis

12. The cost of abnormal continuous losses is

a. Considered a product cost
b. Absorbed by all units in ending inventory and transferred out on an equivalent unit basis
c. Written off as a loss on an equivalent unit basis
d. Absorbed by all units past the inspection point

13. Normal spoilage units resulting from a continuous process

a. Are extended to the EUP schedule
b. Result in a higher unit cost for the good units produced
c. Result in a loss being incurred
d. Cause estimated overhead to increase

14. If normal spoilage is detected at an inspection point within the process (rather than at the end), the cost of
that spoilage should be
a. Included with the cost of the units sold during the period
b. Included with the cost of the units completed in that department during the period
c. Allocated to ending work in process units and units transferred out based on their relative
values
d. Allocated to the good units that have passed the inspection point

PROBLEMS

1. The following information is available for Fatima Company for April:

Started this month 80,000 units
Beginning WIP
(40% complete) 7,500 units
Normal spoilage (discrete) 1,100 units
Abnormal spoilage 900 units
Ending WIP
(70% complete) 13,000 units
Transferred out 72,500 units

Beginning Work in Process Costs:

Material P10,400
Conversion 13,800
Current Costs:
Material P120,000
Conversion 350,000

All materials are added at the start of production and the inspection point is at the end of the process.

Question 1: What are equivalent units of production for material using FIFO?
a. 80,000 c. 78,900
b. 79,100 d. 87,500

Question 2: What are equivalent units of production for conversion costs using FIFO?
a. 79,700 c. 81,100
b. 79500 d. 80,600

Question 3: What are equivalent units of production for material using weighted average?
a. 86,600 c. 86,400
b. 87,500 d. 85,500

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 Question 4: What are equivalent units of production for conversion costs using weighted average?
a. 83,600 c. 82,500
b. 82,700 d. 81,600

Question 5: What is cost per equivalent unit for material using FIFO?
a. P1.63 c. P1.50
b. P1.37 d. P1.56

Question 6: What is cost per equivalent unit for conversion costs using FIFO?
a. P4.000 c. P4.34
b. P4.19 d. P4.38

Question 7: What is cost per equivalent unit for material using weighted average?
a. P1.49 c. P1.56
b. P1.63 d. P1.44

Question 8: What is cost per equivalent unit for conversion costs using weighted average?
a. P4.19 c. P4.55
b. P4.41 d. P4.35

Question 9: What is the cost assigned to ending inventory using FIFO?

a. P75,920 c. P56,420
b. P58,994 d. P53,144

Question 10: What is the cost assigned to abnormal spoilage using FIFO?
a. P1,350 c. P5,256
b. P3,906 d. P6,424

Question 11: What is the cost assigned to normal spoilage and how is it classified using weighted average?
a. P6,193 allocated between WIP and Transferred Out
b. P6,424 allocated between WIP and Transferred Out
c. P6,193 assigned to loss account
d. P6,424 assigned to units Transferred Out

Question 12: What is the total cost assigned to goods transferred out using weighted average?
a. P435,080 c. P428,656
b. P429,824 d. P423,400

2. The following information is available for Jorralyn Company for the current year:
Beginning Work in Process Costs of Beginning Work in Process:
(75% complete) 14,500 units Material P25,100
Started 75,000 units Conversion 50,000
Ending Work in Process Current Costs:
(60% complete) 16,000 units Material P120,000
Abnormal spoilage 2,500 units Conversion 300,000
Normal spoilage 5,000 units
(continuous)
Transferred out 66,000 units

All materials are added at the start of production.

Question 1: Using weighted average, what are equivalent units for material?
a. 82,000 c. 84,500
b. 89,500 d. 70,000

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 Question 2: Using weighted average, what are equivalent units for conversion costs?
a. 80,600 c. 83,100
b. 78,100 d. 75,600

Question 3: What is the cost per equivalent unit for material using weighted average?
a. P1.72 c. P1.77
b. P1.62 d. P2.07

Question 4: What is the cost per equivalent unit for conversion costs using weighted average?
a. P4.62 c. P4.48
b. P4.21 d. 4.34

Question 5: Using FIFO, what are equivalent units for material?

a. P75,000 c. P84,500
b. P72,500 d. P70,000

Question 6: Using FIFO, what are equivalent units for conversion costs?
a. P72,225 c. P69,725
b. P67,225 d. P78,100

Question 7: Using FIFO, what is the cost per equivalent unit for material?
a. P1.42 c. P1.71
b. P1.66 d. P1.60

Question 8: Using FIFO, what is the cost per equivalent unit for conversion costs?
a. P4.46 c. P4.30
b. P4.15 d. P3.84

3. Irish Company employs process cost system. A unit of product passes through two departments: Assembly
and Finishing before it is complete. Information regarding Assembly Department follow:

Work in-process, Aug 1 4,000 units

Spoiled units 3,000
Started in Production 26,000
Transferred out 24,000

Raw materials are added at the beginning of processing in the Assembly department without changing the
number of units being processed. Work in Process on August 1 was 90% complete as to conversion while
80% converted on August 31. In the Assembly Department, inspection takes place when the units are 75%
converted. The company usually experienced a 5% loss based on the completed units. Cost data for the
month of August follow:
Materials Labor Overhead
Work in-process beginning P32,400 P26,400 P28,500
Current cost P111,600 P88,200 P 114,750

Using Weighted Average Costing, compute

Total cost of units transferred-out and total cost of work in process, end
a. P331,200; P37,376 c. P331,200; P36,000
b. P343,684; P37,376 d. P343,684; P36,000

- - End - -

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 JOINT AND BY-PRODUCT COSTING ✓ Used if the value of the by-product is
significant or material.
• When two or more different products are
manufactured in the same production process it is ✓ NRV of the by product is treated as a
called a joint production process. reduction from the joint costs of the main
products.
• The major products resulting from a joint production
process are called joint products. ✓ Any loss of the by-product or scrap is added
to the cost to the cost of the main products
• A product yield in joint production process with a
relatively small value is called a by-product. • Realizable Value approach

• The costs incurred in the joint production process ✓ By products are accounted during sale.
which is common to all products are called joint
costs. ✓ Used if the value of the by-product is
insignificant or immaterial.
• The split-off point is the point in the production
process where the products become identifiable, ✓ The realized value of the by-product or scrap
and as a result of their separate identity, their maybe reported as other sales revenue or
production costs can be measured separately. other income.

• All costs incurred beyond the split-off point that is - - End - -

assignable to one or more individual products are
called separable costs.

METHODS OF ALLOCATING JOINT COSTS

• Allocate joint costs using Physical Measure

✓ Units of Production Method - allocates joint

costs based on the number of units produced.

✓ Weighted Average Method - allocates joint

costs based on the weight, units or other
measure.

• Allocate joint costs using Market Value

✓ Sales Value at Split-off - allocates joint costs

to joint products on the basis of the relative
sales value at the split off point.

✓ Net Realizable Value at Split-off - allocates

joint costs on the basis of estimated
realizable value at split-off point.

✓ Approximated Net Realizable Value -

allocates joint costs to joint products on the
basis of relative estimated NRV (final sales
value minus the expected separable costs)

✓ Constant Margin Approach - allocates joint

costs in such a way that the overall gross
margin percentage is identical for the
individual products.

ACCOUNTING FOR BY PRODUCTS

• Net Realizable Value approach

✓ Products are accounted for during

production.

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 JOINT AND BY-PRODUCT COSTING
THEORY

1. Joint costs are useful for

a. Setting the selling price of a product
b. Determining whether to continue producing an item
c. Evaluating management by means of a responsibility reporting system
d. Determining inventory cost for accounting purposes

2. This method of allocating joint manufacturing costs to main/joint products allocates joint costs on the basis
of estimated sales value at split off of a given joint product relative to the sales value at split off of total joint
production?
a. Market value at split-off approach
b. Hypothetical market value or approximated net realizable value approach
c. Average unit or production output method
d. Weighted average method

3. For products that need further processing, this method is more suitable because it takes into account the
additional costs needed to further process and sell the joint products. Under this method of allocating
manufacturing costs to main products, joint cost is allocated to products using the following the net
realizable value ratio of the products
a. Market value at split-off approach
b. Hypothetical market value or approximated net realizable value approach
c. Average unit or production output method
d. Weighted average method

4. Approximated net realizable value for joint products is computed as

a. Selling price at split-off minus further processing and disposal costs
b. Final selling price minus further processing and disposal costs
c. Selling price at split-off minus allocated joint processing costs
d. Final selling price minus a normal profit margin

5. In a joint production process, a by-product is also described as

a. A simultaneously produced product of relatively low value
b. A form of main product with controllable production proportions
c. Waste
d. Products of low value recovered at the end of a production process

6. If the net realizable value of the by-product of a joint production process is significant, how shall it be
accounted for?
a. The net realizable value of the by-product shall be recorded as deduction from the total joint
manufacturing cost thereby reducing the cost of the main products also known as replacement cost
method
b. The net realizable value of the by-product shall be recorded as deduction from the net sales of the
main product
c. The net realizable value of the by-product shall be recorded as deduction from the cost o sales of
the main product
d. The net realizable value of the by-product shall be recorded as other income

7. The net realizable value approach is normally used when the NRV of the by-product is expected to be
Insignificant Significant Insignificant Significant
a. Yes Yes c. No No
b. No Yes d. Yes No

PROBLEMS
1. Charlene Company produces two products from a joint process: X and Z. Joint processing costs for this
production cycle are P8,000.
Disposal
Sales price cost per Further Final sale
per meter at meter at processing price per
Meters split-off split-off per meter meter
X 1,500 P6.00 P3.50 P1.00 P 7.50
Z 2,200 9.00 5.00 3.00 11.25

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Page | 45
 If X and Z are processed further, no disposal costs will be incurred or such costs will be borne by the buyer.
Question 1: Using a physical measure, what amount of joint processing cost is allocated to X?
a. P4,000 c. P5,500
b. P4,757 d. P3,243

Question 2: Using a physical measure, what amount of joint processing cost is allocated to Z?
a. P4,000 c. P5,500
b. P3,243 d. P4,757

Question 3: Using sales value at split-off, what amount of joint processing cost is allocated to X?
a. P5,500 c. P4,000
b. P2,500 d. P3,243

Question 4: Using sales value at split-off, what amount of joint processing cost is allocated to Z?
c. P5,500 c. P2,500
d. P4,000 d. P4,757

Question 5: Using net realizable value at split-off, what amount of joint processing cost is allocated to X?
a. P4,000 c. P2,390
b. P5,610 d. P5,500

Question 6: Using net realizable value at split-off, what amount of joint processing cost is allocated to Z?
a. P5,500 c. P2,390
b. P4,000 d. P5,610

Question 7: Using approximated net realizable value at split-off, what amount of joint processing cost is
allocated to X?
a. P3,090 c. P4,000
b. P5,204 d. P2,390

Question 8: Using approximated net realizable value at split-off, what amount of joint processing cost is
allocated to Z?
a. P72,796 c. P4,000
b. P4,910 d. P2,390

Question 9: Which products would be processed further?

a. Only X c. Both X and Z
b. Only Z d. Neither X nor Z

2. Alkhail Chemical Company produces a product known as “X” from which by product results. This by-product
can be sold at P50 per pound. The manufacturing costs of the main product and by-product up to the point
of separation for the three months ended March 31, 2021 follows: Materials, P875,000; Labor, P500,000;
Overhead, P500,000. The units processed were 175,000 pounds of the main product and 17,500 pounds of
the by-product. During the period 157,500 pounds of the “X” were sold at P240, while the company was
able to sell 13,125 pounds of the by-product. Selling and administrative expenses related to the main
product amounted to P1,050,000. Disposal cost per each unit of the by-product is P10.
Compute the unit cost of “X” and net income under the following independent cases:

Case 1: Assume that the by-product is inventoried and recorded at net realizable value

Case 2: Assume that the by-product is recorded as realized.

--End--
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 JUST-IN-TIME (JIT) SYSTEM department, or cell, to the next and subsequently to
Finished Goods.
• Involves the elimination of waste and excess by
acquiring resources and performing activities only as • Materials and Conversion Costs are charged directly
they are needed by customers at the next stage in to Cost of Goods Sold.
the process.

• Inventory buffers are viewed as an “evil” in that they • Then, at the end of the period, the remaining
hide problems such as defective parts, production finished and partially completed units are counted
bottlenecks, long machine set-ups and competitive and inventory costs are charged in a backward
behavior within the company. direction from COGS to Finished Goods, RIP and
Conversion Cost accounts.
• A JIT system requires an attitude that places
emphasis on the following: • These so-called backflushed costs are usually based
✓ Cooperation with a value chain perspective on budgeted or standard costs per unit
✓ Respect for people at all levels
✓ Quality at the source Trigger Points
✓ Simplification or just enough resources
✓ Continuous improvement ✓ Three trigger points
✓ A long-term perspective
a) Purchase
• A JIT system also incorporates the following
practices: Raw & In-process xx
✓ Just-in-time purchasing Accounts payable xx
✓ Focused factories
✓ Cellular manufacturing Conversion costs xx
✓ Just-in-time production Various accounts xx
✓ Just-in-time distribution
✓ Simplified accounting b) Completion
✓ Process oriented performance measurements
Finished goods xx
BACKFLUSH COSTING Raw & In-process xx
• A variety of simplified cost accumulation methods Conversion costs xx
that tend to be used by companies that adopt JIT
systems. c) Sale

• Most cost systems that include the backflush Cost of goods sold xx
method are periodic inventory systems because Finished goods xx
perpetual inventory records are eliminated.
✓ Two trigger points
• In backflush systems, the usual inventory accounts
are replaced with a simplified set of accounts. a) Purchase

✓ The Materials and Work in Process accounts Raw & In-process xx

are combined into an account referred to as Accounts payable xx
Raw and in Process, or RIP.
Conversion costs xx
✓ The Direct Labor and Overhead accounts are Various accounts xx
replaced by a single account for Conversion
Costs. b) Sale

✓ The other accounts in the system include the Cost of goods sold xx
familiar Finished Goods and Cost of Goods Sold Raw & In-process xx
(COGS) accounts. Conversion costs xx

• During an accounting period, purchases of direct ✓ Ultimate JIT

materials, along with direct labor and overhead costs
are charged to the cost of goods sold account as a) Sale
incurred.
Cost of goods sold xx
• The usual entries are omitted including the entries to Accounts payable xx
transfer the cost of goods manufactured from one Various accounts xx

- - End - -
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 JIT AND BACKFLUSH

THEORY

1. Just-in-time (JIT) inventory systems

a. Result in a greater number of suppliers for each production process
b. Focus on a "push" type of production system
c. Can only be used with automated production processes
d. Result in inventories being either greatly reduced or eliminated

2. It is a product costing system generally used in just-in-time inventory environment. This costing system delays
the costing process until the production of goods is completed by eliminating the detailed tracking of cost
throughout the production system and preparing journal entries only at trigger points
a. Backflush costing c. Normal costing
b. Standard costing d. Traditional costing

3. [SKIP]

PROBLEMS

1. Rona Manufacturing Company uses a Materials and In-Process (MIP) inventory account. At the end of each
month, all inventories are counted, their conversion costs components are estimated, and inventory account
balances are adjusted accordingly. Raw materials is backflushed from MIP account to Finished Goods account.
The following data is for the month of February:

Beginning balance of MIP account P338,625

Conversion cost incurred 42,000
Raw materials purchased 5,950,000
Conversion cost allocated 46,375
Ending balance of MIP account 366,625

The amount of direct materials and conversion costs to be backflushed to finished goods are:
a. P5,922,000 and P46,375 respectively c. P5,922,000 and P42,000 respectively
b. P5,950,000 and P46,375 respectively d. P5,950,000 and P42,000 respectively

2. Erwin Corporation manufactures electrical meters. For February, there were no beginning inventories of
materials. The company uses a Just in Time system and backflush costing with three trigger points for making
entries to record their manufacturing process. The February standard costs per meter are direct materials,
P375 and conversion costs, P300. The following data pertains to February operations:

Materials purchased P2,062,500

Conversion costs incurred 1,650,000
Number of finished units 5,250 units
Number of units sold 5,000 units

What are the balances of MIP inventory and Finished Goods inventory accounts at the end of February?
a. P2,062,500 and P168,750, respectively c. P93,750 and P168,750, respectively
b. P2,062,500 and P3,543,750, respectively d. P93,750 and P3,543,750, respectively

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Page | 48
 3. Rio Company has a cycle of 3 days, uses a Raw and In Process Account (RIP) and charges all conversion costs
to cost of goods sold. At the end of each month, all inventories are counted, conversion costs components
are estimated, and inventory account balances are adjusted. Raw material cost is backflushed from Raw and
in Process (RIP) Account to finished goods. The following information is provided for the month of June:

Beginning Balance of RIP account, including P1,000 conversion cost 5,000

Beginning Balance of finished goods account including P6,000 conversion cost 10,000
Raw materials received on credit 400,000
Direct labor cost 300,000
Factory overhead applied 500,000
Ending RIP inventory per physical count, including P7,000 conversion cost 20,000
Ending finished goods inventory per physical count, including P4,000 conversion cost 6,000

Question 1: What is the amount of conversion cost included cost of goods sold in June?
a. P802,000 c. P794,000
b. P796,000 d. P800,000

Question 2: What is the amount of direct materials backflushed from RIP to finished goods?
a. P391,000 c. P387,000
b. P404,000 d. P395,000

Question 3: What is the amount of direct materials backflushed from finished goods to cost of goods sold?
a. P395,000 c. P393,000
b. P400,000 d. P389,000

- - End - -

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 ACTIVITY-BASED COSTING (ABC) Limitations of ABC
Although ABC systems often provide better product cost
Traditional Costing and Activity-Based Costing data than traditional volume- based systems, there are the
• Often the most difficult part of computing accurate following limitations:
unit costs is determining the proper amount of o ABC can be expensive to use; identifying multiple
overhead cost to assign each product, service or job. activities and applying numerous cost drivers results in
increased costs.
o Some arbitrary allocations continue; certain overhead
Traditional Costing System
costs still have to be allocated by some arbitrary volume-
• A traditional costing system allocates overhead to based cost driver (i.e.-labor hours).
products on the basis of predetermined plantwide or
departmentwide volume of unit-based output rates such When to Use ABC
as direct labor or machine hours. The presence of one or more of the following factors would
point to possibly using ABC:
Activity-Based Costing ✓ Product lines differ greatly in volume and
• Activity-based costing (ABC) allocates overhead to manufacturing complexity.
multiple activity cost pools and assigns the activity cost ✓ Product lines are numerous, diverse, and require
pools to products and services by means of cost drivers. differing degrees of support services.
o In ABC, an activity is any event, action, transaction, ✓ Overhead costs constitute a significant portion of total
or work sequence that causes the incurrence of costs.
cost in producing a product or providing a service. ✓ The manufacturing process or the number of products
o A cost driver is any factor or activity that has a has changed significantly.
direct cause-effect relationship with the resources
consumed. Value-Added Versus Non-Value-Added Activities
o Under ABC, overhead costs are usually shifted from ▪ Activity-based management (ABM) is an extension
a high-volume product to a low-volume product. of ABC from a product costing system to a
management function that focuses on reducing costs
• ABC allocates overhead in a two-stage process: and improving processes and decision making.

o In the first stage, overhead costs are allocated to ▪ Value-added activities increase the worth of a
activity cost pools, rather than to departments. product or service to customers.
Each is a distinct type of activity. o Examples include engineering design,
o In the second stage, the overhead allocated to the machining, assembly, painting, and packaging.
activity cost pools is assigned to products using ▪ Non-value-added activities are product- or
cost drivers which represent and measure the service-related activities that simply add cost to, or
number of individual activities undertaken or increase the time spent on, a product or service
performed to produce products or provide without increasing its market value.
services. o Examples include repair of machines, storage
of inventory, moving of raw materials,
assemblies and finished product, building
• Activity-based costing involves the following four -
maintenance, inspections and inventory
steps:
control.
1. Identify and classify the major activities involved in
the manufacture of specific products and allocate ▪ The purpose of ABM is to reduce or eliminate the time
manufacturing overhead costs to the appropriate and cost devoted to non-value-added activities.
cost pools.
Classification of Activity Levels:
2. Identify the cost driver that has a strong correlation o A classification of ABC activities consisting of four levels are
to the costs accumulated in the cost pool. defined as:
✓ Unit-level activities: activities performed for each unit
3. For each cost pool, compute the activity-based of production.
overhead rate per cost driver. ✓ Batch-level activities: activities performed for each
batch of products rather than each unit.
Activity Based = Estimated Overhead per Activity ✓ Product-level activities: activities performed in
Overhead Rate Expected Use of Cost Driver Per Activity support of an entire product line.
✓ Facility-level activities: activities required to
4. Assign manufacturing overhead costs for each support an entire production process.
cost pool to products, using the overhead rates o Companies may achieve greater accuracy in overhead cost
(cost per driver). allocation by recognizing the different levels of activities
Benefit of ABC and developing specific activity cost pools and their
related cost drivers.
• The primary benefit of ABC is more accurate product
o Nonrecognition of this classification of activities is one of
costing because:
the reasons that volume-based cost allocation causes
o ABC leads to more cost pools being used to assign
distortions in product costing.
overhead costs to products.
o The resources consumed by batch-, product-, and facility-
o ABC leads to enhanced control over overhead costs;
level supporting activities do not vary at the unit level, nor
companies can trace many overhead costs directly to
can managers control them at the unit level.
activities under ABC.
o ABC leads to better management decisions; more
- - END - -
accurate product costing should contribute to desired
product profitability levels.
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 ACTIVITY-BASED COSTING (ABC)

THEORY

1. An accounting system that collects financial and operating data on the basis of the underlying nature and extent of the
cost drivers is
a. Direct costing c. Cycle-time costing
b. Activity-based costing d. Variable costing

2. Design of an ABC system requires

a. That the job bid process be redesigned
b. That a cause-and-effect relationship exists between resource costs and individual activities
c. An adjustment to product mix
d. Both (b) and (c)

3. Of the following, which is the best reason for using activity-based costing?
a. Keep better track of overhead costs
b. To more accurately assign overhead costs to cost pools so that these costs are better controlled
c. To better assign overhead costs to products
d. To assign indirect service overhead costs to direct overhead cost pools

4. An objective of activity-based management is to

a. Eliminate the majority of centralized activities in an organization
b. Reduce or eliminate non-value-added activities incurred to make a product or provide a service
c. Institute responsibility accounting systems in decentralized organizations
d. All of the above

5. Activity-based management (ABM) is

a. A costing system in which multiple overhead cost pools are allocated using bases that include one or more
nonvolume related factors
b. A base used to allocate the cost of a resource to the different activities using it
c. The use of information obtained from ABC to make improvements in the firm
d. A base used to allocate the cost of an activity to products and customers

6. A(n)_______________ method first traces costs to activities and then to products

a. Direct costing c. Traditional costing
b. Absorption costing d. Activity-based costing

7. A(n) _______________ method first traces costs to a department and then to products
a. Direct costing c. Traditional costing
b. Absorption costing d. Activity-based costing

8. A basic assumption of activity-based costing (ABC) is that

a. All manufacturing costs vary directly with units of production
b. Products or services require the performance of activities, and activities consume resources
c. Only costs that respond to unit-level drivers are product costs
d. Only variable costs are included in activity-cost pools

9. Which of the following is not typical of traditional costing systems?

a. Use of a single predetermined overhead rate
b. Use of direct labor hours or direct labor cost to assign overhead
c. Assumption of correlation between direct labor and incurrence of overhead cost
d. Use of multiple cost drivers to allocate overhead

10. Traditional overhead allocations result in which of the following situations?

a. Overhead costs are assigned as period costs to manufacturing operations
b. High-volume products are assigned too much overhead, and low-volume products are assigned too little
overhead
c. Low-volume products are assigned too much, and high-volume products are assigned too little overhead
d. The resulting allocations cannot be used for financial reports

11. Cost allocation bases in activity-based costing should be

a. Cost drivers c. Activity centers
b. Value-added activities d. Processes

12. A cost pool is

a. All of the costs of a particular department
b. All costs in a group such as variable costs or discretionary fixed costs
c. All costs related to a product or product line
d. All costs that have the same driver
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Page | 51
 13. Value-added activities
a. Increase the worth of a product or service to customers
b. Involve resource usage and related costs that customers are willing to pay for
c. Are the activities of actually manufacturing a product or performing a service
d. All of the above

14. Which of the following is a value-added activity?

a. Inventory storage c. Building maintenance
b. Machining d. Bookkeeping

15. Which of the following is a value-added activity?

a. Inventory control c. Packaging
b. Inspections d. Repair of machines

16. Which of the following is a non-value-added activity?

a. Inventory control c. Assembly
b. Machining d. Painting

17. Which of the following is a non-value-added activity?

a. Painting c. Packaging
b. Finishing d. Building maintenance

18. The cost of processing customer complaints is a(n)

a. Appraisal cost c. Internal failure cost
b. External failure cost d. Prevention cost

19. Worker training is a(n)

a. Appraisal cost c. Internal failure cost
b. External failure cost d. Prevention cost

20. ____________ are those performed each time a unit is produced or sold
a. Batch-level activities c. Sustaining activities
b. Facility-sustaining activities d. Unit-level activities

21. Costs that are common to many different activities within an organization are known as ____________ costs
a. Product- or process-level c. Batch-level
b. Organizational level d. Unit-level

22. ____________ are those that a company performs when it makes a group of units
a. Batch-level activities c. Sustaining activities
b. Facility-sustaining activities d. Unit-level activities

23. ____________ relate to an entire plant as a whole

a. Batch-level activities c. Sustaining activities
b. Facility-sustaining activities d. Unit-level activities

24. Examples of activities at the unit level of costs include

a. Cutting, painting, and packaging
b. Scheduling, setting up, and moving
c. Designing, changing, and advertising
d. Heating, lighting, and security

25. Examples of activities at the product level of costs include

a. Cutting, painting, and packaging c. Designing, changing, and advertising
b. Scheduling, setting up, and moving d. Heating, lighting, and security

26. Examples of activities at the batch level of costs include

a. Cutting, painting, and packaging c. Designing, changing, and advertising
b. Scheduling, setting up, and moving d. Heating, lighting, and security

27. Examples of activities at the plant level of costs include

a. Cutting, painting, and packaging c. Designing, changing, and advertising
b. Scheduling, setting up, and moving d. Heating, lighting, and security

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Page | 52
 CLASSIFICATION

1. A list of possible cost drivers is presented below:

Code

A Engineering hours D Number of subassemblies

B Setups E Boxes
C Machine hours F Orders

For each of the following activity cost pools, select the most appropriate cost driver:
Code Cost Pool
_____1. Machine setup _____4. Engineering design
_____2. Ordering and receiving _____5. Machining
_____3. Packaging and shipping _____6. Assembly

2. Label the following costs as value-adding (VA) or non-value-adding (NVA):

_____1. Engineering design _____5. Assembly
_____2. Machine repair _____6. Painting
_____3. Inventory storage _____7. Inspections
_____4. Machining _____8. Packaging

3. Venir Company manufactures small tools. Classify each of the following activity costs of the tool company as either
unit level, batch level, product level, or facility level:
______ 1. Plant management _____5. Product design
______ 2. Drilling _____6. Cutting
______ 3. Painting _____7. Inspection
______ 4. Machine setups _____8. Inventory management

4. Jessela Company manufactures hand-made pine storage boxes for a variety of clients. As production manager, you have
developed the following value chart:
Operation Average Number of Days
Receiving materials 1
Storing materials 2
Handling materials 3
Cutting/measuring materials 6
Assembling materials 4
Building boxes 7
Attaching hinges 2
Inspection 1

a. Determine the value-added activities and their total time.

b. Determine the non-value-added activities and their total time.
c. Calculate the manufacturing cycle efficiency.

PROBLEMS

1. The controller for Luisa Corporation has established the following overhead cost pools and cost drivers:
Overhead Cost Pool Budgeted Overhead Cost Cost Driver
Machine setups P240,000 Number of setups
Material handling 90,000 Units of raw material
Quality control inspection 48,000 Number of inspections
Other overhead costs 160,000 Machine hours
Total P538,000

Overhead Cost Pool Budgeted Level for Cost Driver Overhead Rate
Machine setups 200 setups P1,200 per setup
Material handling 60,000 units P1.50 per unit
Quality control 1,200 inspections P40 per inspection
Other overhead 20,000 machine hours P8 per machine hour

Order no. 715 has the following production requirements:

Machine setups: 7
Raw material: 11,200 units
Inspections: 16
Machine hours: 850

a. Compute the total overhead that should be assigned to order no. 715 by using activity-based costing.
b. Suppose that Luisa were to use a single, predetermined overhead rate based on machine hours. Compute
the rate per hour and the total overhead assigned to order no. 715.
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Page | 53
 2. Ronald Corporation has provided the following data from its activity-based costing system:

Activity Cost Pool Total Cost Total Activity

Assembly ............................. P613,250 55,000 machine-hours
Processing orders ................ P 46,170 1,500 orders
Inspection ........................... P146,110 1,900 inspection-hours

Data concerning one of the company’s products, Product X, appear below:

Selling price per unit ........................................ P113.70
Direct materials cost per unit .......................... P48.14
Direct labor cost per unit ................................. P11.62
Annual unit production and sales .................... 360
Annual machine-hours ..................................... 1,040
Annual orders .................................................. 60
Annual inspection-hours .................................. 30

According to the activity-based costing system, the product margin for product X is:
a. P 3,668.60 c. P 5,515.40
b. P 5,975.60 d. P 19,418.40

3. Shella Company use activity-based costing. The company produces two products: coats and hats. The annual
production and sales volume of coats is 8,000 units and of hats is 6,000 units. There are three activity cost pools with
the following expected activities and estimated total costs:
Activity Estimated Expected Expected
Cost Pool Cost Activity Activity
Coats Hats Total
Activity 1 P20,000 100 400 500
Activity 2 P37,000 800 200 1,000
Activity 3 P91,200 800 3,000 3,800

Question 1: Using ABC, the cost per unit of coats is approximately:

a. P 2.40 c. P 6.60
b. P 3.90 d. P 10.59

4. Jackeline Accounting performs two types of services, Tax and Consulting. The overhead costs consist of computer
support, P200,000; and legal support, P100,000. Information on the two services is:
Tax Consulting
Direct labor cost P50,000 P100,000
CPU minutes 40,000 10,000
Legal hours used 200 800

Question 1: Overhead applied to tax services using traditional costing is

a. P 100,000 c. P 180,000
b. P 120,000 d. P 200,000

Question 2: Overhead applied to consulting services using traditional costing is

a. P 100,000 c. P 180,000
b. P 120,000 d. P 200,000

Question 3: Overhead applied to tax services using activity-based costing is

a. P 100,000 c. P 180,000
b. P 120,000 d. P 200,000

Question 4:
Overhead applied to consulting services using activity-based costing is
a. P 100,000 c. P 180,000
b. P 120,000 d. P 200,000

5. Jing Company produces two products, A and B, and uses a costing system in which all overhead is accumulated in a
single cost pool and allocated based on machine hours. The management has decided to implement ABC because a
cost study has revealed significant amounts of overhead cost related to setup activity and design activity. The number
of setups and the number of design hours will be the activity drivers for the two new cost pools, and machine hours
will continue as the base for allocating the remaining overhead. Selected information follows for the company's most
recent year of operations:
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 A B Total
Units produced ............................................... 500 15,500 16,000

Direct material cost:

Per unit .................................................... P 200 P 20
Total ........................................................ P 100,000 P 310,000 P 410,000

Machine hours ................................................ 3,000 47,000 50,000

Direct labor cost.............................................. P 50,000 P 350,000 P 400,000
Setups ............................................................. 120 80 200
Design hours ................................................... 6,000 4,000 10,000

Overhead:
Setup-related........................................... P 250,000
Design-related ......................................... 350,000
Other ....................................................... 900,000
Total overhead ........................................ P 1,500,000

(1) Calculate the total and per-unit costs reported for the two products by the existing costing system.
(2) Calculate the total and per-unit costs reported for the two products by the ABC system.

6. Mikelle Corporation manufactures three types of remote-control devices: Economy, Standard, and Deluxe. The
company, which uses activity-based costing, has identified five activities and related cost drivers. Each activity, its
budgeted cost, and related cost driver is identified below.
Activity Cost Cost Driver
Material handling P 225,000 Number of parts
Material insertion 2,475,000 Number of parts
Automated machinery 840,000 Machine hours
Finishing 170,000 Direct labor hours
Packaging 170,000 Orders shipped
Total P3,880,000

The following information pertains to the three product lines for next year:
Economy Standard Deluxe
Units to be produced 10,000 5,000 2,000
Orders to be shipped 1,000 500 200
Number of parts per unit 10 15 25
Machine hours per unit 1 3 5
Labor hours per unit 2 2 2

Question 1: What is the cost application rate for the material-handling activity?
a. P 1.00 per part c. P 6.62 per labor hour
b. P 2.25 per part d. P 13.23 per part

Question 2: What is the cost application rate for the automated machinery activity?
a. P 24.00 per machine hour c. P49.42 per unit
b. P 24.50 per labor hour d. P50.00 per machine hour

Question 3: What is the cost application rate for the finishing activity?
a. P 5.00 per labor hour c. P5.00 per unit
b. P 5.00 per machine hour d. P7.50 per unit

Question 4:
What is the cost application rate for the packaging activity?
a. P 4.86 per machine hour c. P 10.00 per unit
b. P 5.00 per labor hour d. P 100.00 per order shipped

Question 5: Under an activity-based costing system, what is the per-unit cost of Economy?
a. P 141 c. P 225
b. P 164 d. P 228

Question 6:
Under an activity-based costing system, what is the per-unit cost of Standard?
a. P 164 c. P 272
b. P 228 d. P 282

Question 7:
Under an activity-based costing system, what is the per-unit cost of Deluxe?
a. P 272 c. P 320
b P 282 d. P 440
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 FOREIGN EXCHANGE (FOREX) ✓ The date of transaction is the date when the
conditions for the initial recognition of an asset
• The objective of PAS 21 The Effects of Changes in or liability are met in line with PFRS.
Foreign Exchange Rates is to prescribe:
• Subsequent reporting
✓ How to include foreign currency transactions
and foreign operations in the financial ✓ Subsequently, at the end of each reporting
statements of an entity. period, you should translate:

✓ How to translate financial statements into a ▪ All monetary items in foreign currency
presentation currency. using the closing rate.

Functional vs. Presentation Currency ▪ All non-monetary items measured in terms

of historical cost using the exchange rate at
• Functional currency is the currency of the primary the date of transaction (historical rate).
economic environment in which the entity operates.
It is the own entity’s currency and all other ▪ All non-monetary items measured at fair
currencies are “foreign currencies”. value using the exchange rate at the date
when the fair value was measured.
✓ The most important factor in determining the
functional currency is the entity’s primary How to report foreign exchange differences
economic environment in which it operates.
• All exchange rate differences shall be recognized in
✓ The primary economic environment is normally profit or loss, with the following exceptions:
the one in which the entity primarily generates
and expends the cash. The following factors can ✓ Exchange rate gains or losses on non-monetary
be considered: items are recognized consistently with the
recognition of gains or losses on an item itself.
▪ What currency does mainly influence sales For example, when an item is revalued with the
prices for goods and services? changes recognized in other comprehensive
income, then also exchange rate component of
▪ In what currency are the labor, material and that gain or loss is recognized in OCI, too.
other costs denominated and settled?
✓ Exchange rate gain or loss on a monetary item
▪ In what currency are funds from financing that forms a part of a reporting entity’s net
activities generated (loans, issued equity investment in a foreign operation shall be
instruments)? recognized:

• Presentation currency is the currency in which the ▪ In the separate entity’s or foreign operation’s
financial statements are presented. financial statements: in profit or loss.

• An entity can decide to present its financial ▪ In the consolidated financial

statements in a currency different from its functional statements: initially in other comprehensive
currency – for example, when preparing income and subsequently, on disposal of net
consolidation reporting package for its parent in a investment in the foreign operation, they
foreign country. shall be reclassified to profit or loss.

• While an entity has only 1 functional currency, it can • Change in functional currency
have 1 or more presentation currencies, if an entity
decides to present its financial statements in more ✓ When there is a change in a functional currency,
currencies. then the entity applies the translation
procedures related to the new functional
How to report transactions in Functional Currency currency prospectively from the date of the
change.
• Initial recognition
How to translate financial statements into
✓ Initially, all foreign currency transactions shall be a Presentation Currency
translated to functional currency by applying • When an entity presents its financial in the
the spot exchange rate between the functional presentation currency different from its functional
currency and the foreign currency at the date of currency, then the rules depend on whether the
the transaction. entity operates in a non-hyperinflationary economy
or not.

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 • Non-hyperinflationary economy

✓ When an entity’s functional currency is NOT the

currency of a hyperinflationary economy, then
an entity should translate:

▪ All assets and liabilities for each statement

of financial position presented using the
closing rate at the date of that statement of
financial position. This rule applies for
goodwill and fair value adjustments.

▪ All income and expenses and other

comprehensive income items using the
exchange rates at the date of transactions.
PAS 21 permits using some period average
rates for the practical reasons, but if the
exchange rates fluctuate a lot during the
reporting period, then the use of averages is
not appropriate.

▪ All resulting exchange differences shall be

recognized in other comprehensive income
as a separate component of equity.

▪ However, when an entity disposes the

foreign operation, then the cumulative
amount of exchange differences relating to
that foreign operation shall be reclassified
from equity to profit or loss when the gain or
loss on disposal is recognized.

- - End - -

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 FOREX

THEORY

1. A foreign currency transaction includes which of the following?

a. Purchase and sale of goods whose price is denominated in a foreign currency
b. Borrowing and lending of funds when the amounts payable or receivable are denominated in a
foreign currency
c. Incurrence and settlement of liabilities denominated in foreign currency
d. All of the above

2. What is a company's functional currency?

a. The currency of the primary economic environment in which it operates
b. The currency of the country where it has its headquarters
c. The currency in which it prepares its financial statements
d. The reporting currency of its parent for a subsidiary

3. In accounting, the term translation refers to

a. The calculation of gains or losses from hedging transactions
b. The calculation of exchange rate gains or losses on individual transactions in foreign currencies
c. The procedure required to identify a company's functional currency
d. A procedure to prepare a foreign subsidiary's financial statements for consolidation

4. For a foreign subsidiary that uses the US dollar as its functional currency, what translation method is
required?
a. Current/Noncurrent Method c. Current Rate Method
b. Monetary/Nonmonetary Method d. Temporal Method

5. According to PAS 21, which method is usually required for translating a foreign subsidiary's financial
statements into the parent's reporting currency?
a. The temporal method c. The current/noncurrent method
b. The current rate method d. The monetary/nonmonetary method

6. Which accounts are remeasured using current exchange rates?

a. All revenues and expenses c. All monetary assets and liabilities
b. All assets and liabilities d. All current assets and liabilities

7. In translating a foreign subsidiary's financial statements, which exchange rate does the current method
require for the subsidiary's assets and liabilities?
a. The exchange rate in effect when each asset or liability was acquired
b. The average exchange rate for the current year
c. A calculated exchange rate based on market value
d. The exchange rate in effect as of the balance sheet date

8. The translation adjustment from translating a foreign subsidiary's financial statements should be shown as
a. An asset or liability (depending on the balance) on the consolidated balance sheet
b. A revenue or expense (depending on the balance) on the consolidated income statement
c. A component of stockholders' equity on the consolidated balance sheet
d. A component of cash flows from financing activities on the consolidated statement of cash flows

9. Which of the following statements is incorrect?

a. Foreign currency is a currency other than the functional currency of the entity
b. Functional currency is the currency of the primary economic environment in which the entity
operates
c. An entity is required to present the financial statements using the functional currency
d. Presentation currency is the currency in which the financial statements are presented

10. How is the disposition of the translated gain or loss reported on the parent company's financial statements?
a. Net income/loss on the income statement
b. Cumulative translation adjustment as a deferred asset
c. Cumulative translation adjustment as a deferred liability
d. Other comprehensive income
Note: Answer should be letter A. According to PAS 21, upon disposition, the foreign currency translation gain or loss in OCI
shall be subsequently reclassified into profit or loss.
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 PROBLEMS

1. Dianne, Ltd. is a British subsidiary of a Philippine company. The Philippine company’s functional currency is
the peso. The following exchange rates were in effect during 2021:
January 1 P1 = €.625
June 30 P1 = €.610
December 31 P1 = €.620
Weighted average rate for the year P1 = €.630

Question 1: Dianne reported sales of €1,500,000 during 2021. What amount (rounded) would have been
included for this subsidiary in calculating consolidated sales?
a. P2,380,952 c. P2,429,150
b. P2,400,000 d. P2,419,355

Question 2: On December 31, the company had accounts receivable of €280,000. What amount (rounded)
would have been included for this subsidiary in calculating consolidated accounts receivable?
a. P444,444 c. P142,600
b. P451,613 d. P176,400

2. The following account balances are available for Mari Corporation, a foreign subsidiary for 2021:
Beginning inventory €20,000
Purchases €400,000
Ending inventory €15,000

Relevant exchange rates as follow:

4th quarter average, 2020 P.93 = €1
December 31, 2020 P.94 = €1
Average 2021 P.96 = €1
4th quarter average, 2021 P.99 = €1
December 31, 2021 P1.01 = €1

Question 1: Compute the cost of goods sold for 2021 in peso using the temporal method
a. P376,650 c. P388,800
b. P387,750 d. P400,950

Question 2: Compute the cost of goods sold for 2021 in peso using the current rate method
a. P376,550 c. P388,800
b. P387,750 d. P400,950

Question 3: Compute ending inventory for 2021 under the temporal method
a. P13,950 c. P14,400
b. P14,100 d. P14,850

Question 4: Compute ending inventory for 2021 under the current rate method
a. P13,950 c. P14,850
b. P14,100 d. P15,150

3. Kristal Inc., a British company, was acquired by a Philippine company on January 1, 2020. Selected account
balances of Kristal Inc. are available for the year ended December 31, 2021, and are stated in euro, its local
currency.

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 Sales €400,000
Inventory (bought on February 1, 2021) 20,000
Equipment (bought on January 1, 2020) 90,000
Dividends (paid on September 1, 2021) 20,000
Accumulated depreciation – Equipment 12/31/2021 45,000
Depreciation expense – Equipment, 2021 9,000
Relevant exchange rates are given below:

January 1, 2020 P.91

January 1, 2021 P.93
February 1, 2021 P.94
September 1, 2021 P.97
December 31, 2021 P1.01
4th quarter average, 2020 P.90
4th quarter average, 2021 P.98
Average, 2021 P.95

Question 1: Assume the functional currency is the euro, compute the restated amount for sales for 2021
a. P364,000 c. P380,000
b. P372,000 d. P360,000

Question 2: Assume the functional currency is the euro, compute the restated amount for inventory for
2021
a. P18,600 c. P18,000
b. P19,600 d. P20,200

Question 3: Assume the functional currency is the euro, compute the restated amount for equipment for
2021
a. P81,900 c. P83,700
b. P90,900 d. P88,200

Question 4: Assume the functional currency is the euro, compute the restated amount for dividends for
2021
a. P19,000 c. P18,600
b. P20,200 d. P19,400

Question 5: Assume the functional currency is the euro, compute the restated amount for accumulated
depreciation for 2021
a. P40,950 c. P45,450
b. P41,850 d. P42,750

Question 6: Assume the functional currency is the euro, compute the restated amount for depreciation
expense for 2021
a. P8,190 c. P9,090
b. P8,370 d. P8,550

Question 7: Assume the functional currency is the peso, compute the restated amount for sales for 2021
a. P364,000 c. P380,000
b. P372,000 d. P360,000

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 Question 8: Assume the functional currency is the peso, compute the restated amount for inventory for
2021
a. P18,600 c. P18,000
b. P19,600 d. P20,200

Question 9: Assume the functional currency is the peso, compute the restated amount for equipment for
2021
a. P81,900 c. P83,700
b. P90,900 d. P88,200

Question 10: Assume the functional currency is the peso, compute the restated amount for dividends for
2021
a. P19,000 c. P18,600
b. P20,200 d. P19,400

Question 11: Assume the functional currency is the peso, compute the restated amount for accumulated
depreciation for 2021
a. P40,950 c. P45,450
b. P41,850 d. P42,750

Question 12: Assume the functional currency is the peso, compute the restated amount for depreciation
expense for 2021
a. P8,190 c. P8,820
b. P8,370 d. P9,090

4. On November 19, 2021, Mica Company, a Philippine Company ordered merchandise from X Company for
31,800 pounds. The merchandise was delivered on December 18, 2021. The invoice was dated December
2, 2021, the shipping date (FOB shipping point). The company paid the invoice on January 28, 2022.

The spot rates for a pound on the respective dates were:

November 19, 2021 P76.90
December 2, 2021 P76.15
December 18, 2021 P75.75
December 31, 2021 P72.35
January 28, 2022 P73.15
What amount will affect profit or loss in 2021?
a. P120,840 gain c. P25,440 loss
b. P108,120 gain d. P144,690 gain

5. On October 5, 2020, Joy Company sold goods on account to X Corporation for 50,320 pounds. The date of
invoice is October 29, 2020 and payment is due on January 30, 2021.

Exchange rates were as follows:

BID rate OFFER rate
Oct. 05, 2020 P67.50 P69.20
Oct. 29, 2020 P68.70 P66.80
Dec 31, 2020 P64.10 P63.40
Jan. 30, 2021 P62.40 P65.50
What amount will affect profit or loss in 2021?
a. P171,088 loss c. P231,472 loss
b. P85,544 loss d. P105,672 gain

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 6. On September 1, 2020, Patricia Company sold merchandise to a foreign firm for 250,000 francs. Terms of
the sale require payment in francs on February 1, 2021. On September 1, 2020, the spot exchange rate was
P1.20 per franc. On December 31, 2020, the company’s year-end, the spot rate was P1.19 but the rate
increased to P1.22 by February 1, 2021, when payment was received. How much should it report as foreign
exchange transaction gain or loss in its 2021 income statement?
a. 0 c. 5,000 gain
b. 2,500 loss d. 7,500 gain

7. Novefe Corp. bought inventory items from a foreign supplier in Japan on November 15, 2020 for 100,000
yen, when the spot rate was P0.4295. On December 31, 2020, the spot rate was P0.4245. On January 15,
2021, the company bought 100,000 yen at the spot rate of P0.4345 and paid the invoice. How much should
it report in its income statements for 2020 and 2021 as foreign exchange transaction gain or loss?
2020 2021 2020 2021
a. P500 (P1,000) c. (P500) 0
b. P0 (P500) d. (P1,000) 500

8. On August 3, 2020, Raphael Company entered into a non-cancellable purchase agreement with a foreign
vendor involving a custom-made machine. The company took delivery of the machine on 12/1/2020 (120
days later). The purchase prices were 100,000 foreign currency units, which it remitted to the vendor on
January 1, 2021 (60 days after delivery). Direct exchange rates on the respective dates are as follows:
Aug. 3, 2020 Dec. 1, 2020 Dec. 31, 2020 Jan. 31, 2021
Spot rate P1.60 P1.64 P1.67 P1.70
Forward rate 1.60 1.64 1.67 1.70
What is the foreign exchange gain or loss recognized in earnings for 2020 on the foreign currency
commitment?

9. Nestor Corp. owns a subsidiary in Singapore whose statement of financial position in Singapore Dollars for
the last two years follow:
December 31, 2020 December 31, 2021
Assets:
Cash and Cash equivalents SP 90,000 SP 75,000
Receivables 367,500 442,500
Inventory 480,000 510,000
Property and Equipment, 765,000 690,000
net
Total Assets SP 1,702,500 SP 1,717,500

Liabilities and Equity:

Accounts Payable SP 165,000 SP 225,000
Long-term debt 967,500 855,000
Common stock 345,000 345,000
Retained earnings 225,000 292,500
Total Liabilities and Equity SP 1,702,500 SP 1,717,500

Relevant exchange rates are:

January 1, 2020 SP 1 = P 45
December 31, 2020 SP 1 = P 42.50
December 31, 2021 SP 1 = P 47.50
Average 2020 SP 1 = P 43.75
September 12, 2020 SP 1 = P 40

It formed the subsidiary on January 1, 2020. Income of the subsidiary was earned evenly throughout the
years and the subsidiary declared dividends worth SP15,000 on September 12, 2020 and none were declared
during 2021. How much is the translation adjustment for 2021?
a. P1,818,750 c. P3,018,750
b. P1,706,250 d. P2,625,000

- - End - -
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 DERIVATIVES Basic Types of Derivatives

• A financial instrument that derives its value from • Forward contract

the movement in commodity prices, foreign
exchange rate and interest rate of an underlying ✓ A contract to purchase or sell a particular
asset or financial instrument. commodity at a designated future date at a
predetermined price.
• It is an executory contract, not a transaction,
because it is an exchange of promises about future ✓ A private or over-the-counter contract between
action. two parties. Banks are the typical
counterparties.
• Derivatives are used for hedging. Derivatives are
also called hedging instruments. • Futures contract

• It creates rights and obligations that have the effect ✓ A contract to purchase or sell a particular
of transferring between the parties to the commodity at a designated future date at a
instrument the financial risks inherent in an predetermined price.
underlying primary financial instrument.
✓ A standard contract traded in a future exchange
• Financial risks are of four (4) types: market and one party will never know who is on
the other side of the contract.
✓ Price risk – uncertainty in future price of an
asset. ✓ All cash settlements are made through the
exchange market.
✓ Credit risk – uncertainty over whether a
counterparty or the party on the other side of • Option
the contract will honor the terms of the
contract. ✓ A contract that gives the holder the right (not
an obligation) to purchase or sell an asset at a
✓ Interest rate risk – uncertainty about future specified price within a given future time
interest rates and their impact on cash flows period.
and the fair value of the financial instruments.
✓ Can be a:
✓ Foreign exchange risk – uncertainty about ▪ Call option – gives the holder the right to
future Philippine peso cash flows stemming purchase an asset (part of the buyer).
from assets and liabilities denominated in
foreign currency. ▪ Put option – gives the holder the right to
sell an asset (part of the seller).
Characteristics
✓ A derivative that requires initial small payment
• Its value changes in response to the change in an for the protection against unfavorable
“underlying” variable. movement in price. Thus, an option must be
paid for unlike an interest rate swap, forward
✓ An underlying is a specified interest rate, contract and futures contract.
commodity price, foreign exchange rate, index
of prices or rates and other variables. • Interest rate swap (IRS)

✓ An underlying may be a price or rate of an asset ✓ A contract whereby two parties agree to
or a liability but not the asset or liability itself. exchange cash flows for future interest
payments based on a contract of loan. Thus, a
✓ A derivative has a speculative amount of contract of loan is the primary financial
currency, number of shares, or number of units instrument while interest rate swap agreement
or volume. is the derivative financial instrument.

• It requires either no initial net investment or a little Hedged Items

initial net investment that would be required for
other types of contracts that have similar response • Hedged items can be:
to changes in market conditions.
✓ A single asset or liability
• It is readily settled at a future date by a net cash
payment. ✓ Firm commitment

✓ Highly probable forecast transaction

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 ✓ Net investment in a foreign operation ✓ Hedge of a net investment in foreign operation

Hedging ▪ The effective portion of the gain or loss

on the hedging instrument is reported in
• Means designating one or more hedging equity.
instruments so that their change in fair value is an
offset, in whole or in part, to the change in fair value ▪ The ineffective portion of the gain or loss
or cash flows of a hedged item. on the hedging instrument is reported
immediately in earnings.
• A means of protecting a financing loss or the
structuring of transactions to reduce risk.
- - End - -
• Categorized into three types of relationship:

▪ Fair value hedge – is a protection against the

risk from changes in fair value caused by fixed
terms, rates or prices.

▪ Cash flow hedge – is a protection against the

risk from changes in cash flows caused by
variable terms, rates or prices.

▪ Hedge of a net investment in a foreign

operation – involves an underlying variable
which is the foreign currency.

Hedge Accounting

• All derivatives are recognized as either

“investment” assets or liabilities being recognized
by either party, as market conditions change.

• They are measured at fair values. A change in fair

values requires the recognition of a gain or loss. A
gain or loss on derivative financial instruments is
accounted for depending on how the derivative is
used:

✓ No hedging designation

▪ Changes in fair value are recognized in

earnings immediately.

✓ Fair value hedge

▪ Changes in fair value are recognized in

earnings immediately.

▪ Gain or loss on the hedged item

attributable to the hedged risk should
adjust the carrying amount of the hedged
items and be recognized in earnings
immediately.

✓ Cash flow hedge

▪ The effective portion of the gain or loss

on the hedging instrument is reported in
equity.

▪ The ineffective portion of the gain or loss

on the hedging instrument is reported
immediately in earnings.
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 DERIVATIVES

THEORY

1. It is a financial instrument that derives its value from an “underlying” such as a share price, exchange rate
or interest rate
a. Derivative c. Financial liability
b. Financial asset d. Equity instrument

2. The basic purpose of derivative financial instruments is to manage some kind of risk such as all of the
following, except
a. Currency fluctuation c. Stock price movement
b. Interest rate variation d. Uncollectibility of accounts receivable

3. All of the following are characteristics of a derivative, except

a. It is settled at a future date
b. It requires no initial investment or an initial small net investment
c. Its value changes in response to the change in a specified underlying
d. It is acquired for the purpose of generating a profit from short-term fluctuations

4. Entities that attempt to exploit inefficiencies in various derivative markets by attempting to lock in profits
by simultaneously entering into transactions in two or more markets are called
a. Arbitrageurs c. Hedgers
b. Gamblers d. Speculators

5. Any financial or physical variable that has either observable changes or objectively verifiable changes
qualifies as
a. Notional amount c. Financial instrument
b. Hedge d. Underlying

6. Which of the following is an underlying?

a. A credit rating c. An average daily temperature
b. A security price d. All of these could be underlyings

7. An example of a notional amount is

a. Currency swap c. Number of barrels of oil
b. Interest rate d. Stock price

8. Which of the following instruments is not considered a derivative financial instrument?

a. Currency futures c. Bank certificate of deposit
b. Stock index option d. Interest rate swap

9. It is a commitment to purchase a specified commodity on a future date at a specified price through a futures
exchange market
a. Forward contract c. Call option
b. Futures contract d. Put option

10. A call option is

a. Not recognized in the financial statements but only disclosed
b. Recognized and classified as current asset
c. Recognized and classified as noncurrent asset
d. Recognized as expense immediately

11. Which of the following provides the holder the right to sell at an exercise or strike price anytime during a
specified period a gain accrues to the holder as the market price of the underlying falls below the strike
price?
a. Forward contract c. Swaption
b. Put option d. Call option

12. Which is incorrect concerning an option?

a. A call option is the right to purchase an asset at a specified price during a definite period at some
future time
b. A put option is the right to sell an asset at a specified price during a definite period at some future
time
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 c. An option is a right and not an obligation to purchase or sell an asset
d. An option requires no initial payment

13. It is an agreement whereby one party will receive a swap payment from another party if the interest rate is
more than the underlying interest rate and will make a swap payment to the other party if the interest rate
is lower than the underlying interest rate
a. Receive fixed interest rate swap c. Receive fixed, pay variable interest rate swap
b. Receive variable, pay interest rate swap d. Receive variable interest rate swap

14. A derivative may be

a. An asset account c. An owner’s equity account
b. A liability account d. Either an asset or a liability account

15. Derivatives are measured at

a. Fair value c. Fair value less cost to sell
b. Cost d. Higher between fair value and cost

16. Change in fair value of a derivative financial instrument that is determined to be an effective cash flow hedge
shall
a. Be recognized in profit or loss c. Be included in retained earnings
b. Be recognized directly in equity d. Not be recognized

PROBLEMS

1. The following data applies to Harris Company’s purchase of 45,400 Belgium francs under a forward contract
dated November 1, 2020, for delivery on January 31, 2021:
11/1/20 12/31/20 01/31/21
Spot rates P55.75 P53.90 P54.50
30-day forward rate P51.30 P56.15 P53.20
60-day forward rate P57.65 P52.30 P55.75
90-day forward rate P54.25 P55.45 P52.10
The company entered into the forward contract to speculate in the foreign currency. In its income statement
for the year ended December 31, 2020, what amount of gain/loss should it report from this forward
contract?
a. P83,990 gain c. P86,260 loss
b. P83,990 loss d. P86,260 gain

2. On November 1, 2020, Joseph Company entered into a firm commitment to acquire a machinery from X
Company. Delivery and passage of title would be on February 28, 2021 at the price of 37,800 euros,
accounted for as fair value hedge. On the same date, to hedge against unfavorable changes in the exchange
rate, Joseph entered into a 120-day forward contract with ABC Bank for 37,800 euros.
Exchange rates were as follows:
Spot Rate Forward Rate
Nov. 01, 2020 P96.50 P94.30
Dec. 31, 2020 97.25 96.50
Feb. 28, 2021 99.70 99.70

Question 1: What amount will affect profit or loss regarding the derivative asset on the financial statement
date in 2020?
a. P28,350 loss c. P83,160 loss
b. P28,350 gain d. P83,160 gain

Question 2: The Firm Commitment account balance as shown in the December 31, 2020 statement of
financial position amounted to: (Indicate whether asset or liability)
a. P83,160 liability c. P28,350 asset
b. P83,160 asset d. P28,350 liability

3. Sherina Company sold merchandise for 111,200 euros to a customer in France on November 02, 2020.
Collection in euros was due on January 31, 2021. On the same date, to hedge this foreign currency exposure,
the company entered into a futures contract to sell 111,200 euros to ABC Bank for delivery on January 31,
2021.
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 Exchange rates for euros on different dates are as follows:
Nov. 2 Dec. 31 Jan. 31
Spot rate 81.9 80.7 80.1
30-day futures 82.3 80.4 83.9
60-day futures 81.8 80.3 82.6
90-day futures 80.6 81.6 83.4
120-day futures 80.1 81.4 82.8

Question 1: What amount will affect profit or loss regarding the hedged item on the financial statement
date in 2020?
a. P22,240 gain c. P133,440 gain
b. P22,240 loss d. P133,340 loss

Question 2: What amount will affect profit or loss regarding the hedging instrument on the settlement date
in 2021?
a. P66,720 gain c. P33,360 gain
b. P66,720 loss d. P11,120 gain

Question 3: As a result of all foregoing transactions, what amount will affect current earnings on the
settlement date in 2021?
a. P33,360 gain c. P11,120 loss
b. P33,360 loss d. P11,120 gain

4. Sarah Company acquired machinery for $169,200 from a vendor in New York on December 1, 2020. Payment
in US Dollars was due on March 31, 2021. On the same date, to hedge this foreign currency exposure, Sarah
entered into a futures contract to purchase $169,200 from ABC Bank for delivery on March 31, 2021.
Exchange rates for US Dollars on different dates are as follows:
Dec. 1 Dec. 31 March 31
Selling spot rate 41.4 42.3 43.7
30-day futures 42.3 41.8 43.2
60-day futures 41.8 42.2 42.6
90-day futures 40.6 42.5 43.4
120-day futures 42.2 42.8 42.9

Question 1: What amount will affect profit or loss regarding the hedged item on its settlement date in 2021?
a. P152,280 loss c. P236,880 loss
b. P152,280 gain d. P236,880 gain

Question 2: What amount will affect profit or loss regarding the hedging instrument on the financial
statement date in 2020?
a. P50,760 loss c. P16,920 loss
b. P50,760 gain d. P16,920 gain

Question 3: As a result of all foregoing transactions, what amount will affect current earnings on the financial
statement date in 2020?
a. P33,840 gain c. P101,520 loss
b. P33,840 loss d. P101,520 gain

5. On October 1, 2020, Abigail Company took delivery from Thailand firm of inventory costing 1,140,000 baht.
Payment is due on January 30, 2021. Concurrently, it paid P15,700 cash to acquire an at-the-money call
option for 1,140,000 baht. Strike price is P12.40

10/1/2020 12/31/2020 1/30/2021

Market price P12.40 P12.423 P12.427
Fair value of call option P28,200 P30,780

Question 1: The gain/loss on hedging instrument due to change in the ineffective portion on December 31,
2020
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 a. P12,500 gain c. P26,220 gain
b. P26,220 loss d. P13,720 loss

Question 2: The gain/loss on hedging instrument due to change in the effective portion on December 31,
2021
a. P4,560 loss c. P2,580 gain
b. P4,560 gain d. P1,980 loss

Question 3: The December 31, 2020 gain/loss in the hedging activity amounted to
a. P13,720 loss c. P38,720 gain
b. P13,720 gain d. P38,720 loss

Question 4: The gain/loss on hedging instrument in 2021 if changes in the time value will be included from
the assessment of hedge effectiveness
a. P4,560 gain c. P1,980 gain
b. P1,980 loss d. P2,580 gain

6. On December 1, 2020, Erin Company acquired 4,600 shares of X Company at a cost of P28 per share. Erin
company classifies them as FVOCI. On this same date, Erin company decides to hedge against a possible
decline in the value of the securities by purchasing, at a cost of P11,900, an at-the-money put option to sell
the 4,600 shares. The option expires on April 1, 2021. The fair values of the investment and the options
follow:
12/1/20 12/31/20 4/1/21
Erin Company shares (per share): P28 P 26.50 P23.50
Put Option (4,600 shares)
Market value P15,400 P20,700

Question 1: The gain/loss on option contract due to change in time value on December 31, 2020
a. P3,400 gain c. P3,400 loss
b. P6,900 loss d. P6,900 gain

Question 2: The gain/loss on option contract due to change in intrinsic value in 2021
a. P5,300 gain c. P13,800 loss
b. P5,300 loss d. P13,800 gain

Question 3: The 2021 net gain/loss in the hedging activity amounted to

a. P13,800 loss c. P8,500 loss
b. P13,800 gain d. P5,300 gain

Question 4: The gain/loss on option contract on December 31, 2020

a. P3,400 loss c. P6,900 gain
b. P3,500 gain d. P6,900 loss

7. On August 1, Angelie Company forecasted the purchase of 60,000 units of inventory from Thailand
Company. The purchase would probably occur on November 2 and require the payment of 2,340,000 baht.
It is anticipated that the inventory could be further processed and delivered to customers by early
December. On August 1, the company purchased a call option to buy 2,340,000 baht at a strike price of 1FC
= P7.95. An option premium of P8,850 was paid. Changes in the time value of the option will be excluded
from the assessment of hedge effectiveness.

Spot rates and option values are as follows;

Aug 1 Aug 31 Sept. 30 Nov. 2
Spot rate P7.93 P7.952 P7.963 P7.97
Fair value of call option P8,850 P15,690 P34,410 P46,800

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 On November 2, the company purchased 60,000 units of inventory at a cost of 2,376,000 baht. The option
was settled/sold on November 2 at its fair value. After incurring further processing costs of P240,000, the
inventory was sold for P29,400,000 on December 7.

Question 1: The gain/loss on option contract on August 31 that would affect earnings
a. P4,680 gain c. P2,160 gain
b. P6,840 gain d. P0

Question 2: The gain/loss on option contract on September 30 presented as other comprehensive income
a. P4,860 loss c. P30,420 gain
b. P7,020 loss d. P25,740 gain

Question 3: The gain/loss on option contract on November 2 that would affect earnings
a. P8,850 loss c. P12,390 gain
b. P3,990 loss d. P16,380 gain

Question 4: What is the net income effect of the above transactions?

a. P10,214,430 c. P10,261,230
b. P10,223,280 d. P10,270,080

8. On January 2, 2020, Y Company received a two-year P5,000,000 loan, which calls for payments to be made
at the end of each year based on the prevailing market rate at January 1 of each year. The interest rate at
January 2, 2020 was 10%. Another company, X. also has a two-year P5,000,000 loan, but X’s loan carries a
fixed interest rate of 10%.

Y does not want to bear the risk that interest rates may increase in 2021. X believes that rates may decrease,
and it would prefer to have variable debt. Through an intermediary, the two companies enter into an
interest rates swap whereby X agrees to make Y interest payment in 2021 and Y agrees to make X’s interest
payment in 2021.

Questions:
1. From the point of view of Y, how should the hedging activity be classified?
2. From the point of view of X, how should the hedging activity be classified?
3. If the interest rate on January 1, 2021 is 8% what amount would Y receive (pay) form (to) X?

- - End - -

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 BUSINESS COMBINATION ✓ IFRS 3 permits 2 methods of measuring non-
Consolidated Financial Statements controlling interest:
▪ Fair value, or
• IFRS 3 establishes principles and requirements for ▪ The proportionate share in the
how the acquirer: recognized acquiree’s net assets.
✓ Recognizes and measures the identifiable
assets acquired, the liabilities assumed and • Step 4: Recognize and measure goodwill or a gain
any non-controlling interest (NCI) in the from a bargain purchase.
acquiree. ✓ Goodwill is an asset representing the future
✓ Recognizes and measures the goodwill economic benefits arising from other assets
acquired in the business combination, or a gain acquired in a business combination that are
from a bargain purchase. not individually identified and separately
✓ Determines what information to disclose recognized.
about the business combination.
▪ It is calculated as a difference between:
Applying the acquisition method o The aggregate of:
• Once the investor acquires a subsidiary, it has to ✓ The fair value of the
account for each business combination by applying consideration transferred.
the acquisition method. ✓ The amount of any non-
controlling interest.
• The acquisition method involves 4 steps: ✓ In a business combination
✓ Identifying the acquirer. achieved in stages: the
✓ Determining the acquisition date. acquisition-date fair value of the
✓ Recognizing and measuring the identifiable acquirer’s previously-held
assets acquired, the liabilities assumed and equity interest in the acquiree;
any non-controlling interest in the acquiree. and
✓ Recognizing and measuring goodwill or a gain ✓ The acquisition-date amounts of
from a bargain purchase. net assets in an acquiree.

• Step 1: Identify the acquirer. ▪ The goodwill can be both positive and
✓ The acquirer is usually the investor who negative:
acquires an investment or a subsidiary. o If the goodwill is positive, then you
shall recognize it as an intangible asset
• Step 2: Determine the acquisition date. and perform annual impairment test.
✓ The date on which the acquirer obtains control o If the goodwill is negative, then it is a
of the acquiree. gain on a bargain purchase. You
✓ The date on which the acquirer legally should:
transfers the consideration (the payment for ✓ Review the procedures for
the investment), acquires the assets and recognizing assets and liabilities,
assumes the liabilities of the acquiree – the non-controlling interest,
closing date. previously held interest and
✓ Can be earlier or later than the closing date, consideration transferred (i.e.
too. It depends on the contractual check whether they are error-
arrangements in the written agreement, if free);
something like that exists. ✓ Recognize a gain on bargain
purchase in profit or loss.
• Step 3: Recognize and measure the identifiable
assets acquired, the liabilities assumed and any non- ▪ Consideration transferred is measured
controlling interest in the acquiree at fair value, including any contingent
consideration. Subsequent change in a
✓ 3.1 Acquired assets and liabilities consideration transferred is accounted for
▪ An acquirer or investor shall recognize depending on the initial recognition of the
all identifiable assets acquired, liabilities contingent consideration.
assumed and non-controlling interests
in the acquiree separately from Control as the basis for consolidation (PFRS 10)
goodwill. • The basic rule is:
▪ All assets and liabilities are measured at ✓ If an investor controls its investee,
acquisition-date fair value. then investor must consolidate.
✓ If an investor does NOT control its investee,
✓ 3.2 Non-controlling interest then investor does NOT consolidate.
▪ Non-controlling interest is the equity in
a subsidiary not attributable, directly or
indirectly, to a parent.
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 • What is control? Parent’s adjusted equity @ Book Value xxxx
✓ An investor controls an investee when the Non-controlling interest of Subsidiary xxxx
investor: Consolidated equity at acquisition date xxxx
✓ Is exposed to, or has right to variable
returns from its involvement with the 5) Consolidated Sales
investee. Reported sales of Parent xxxx
✓ Has the ability to affect those returns. Reported sales of Subsidiary xxxx
✓ Through its power over the investee. Total sales xxxx
Intercompany sale related to inventory
(xxxx)
Accounting requirements of IFRS 10 (upstream & downstream)
Consolidated sales xxxx
• Consolidation procedures
✓ In order to prepare consolidated financial 6) Consolidated Cost of Sales
statements, IFRS 10 prescribes the Reported cost of sales of Parent xxxx
following consolidation procedures: Reported cost of sales of Subsidiary xxxx
▪ Combine like items of assets, liabilities, Intercompany sales (xxxx)
equity, income, expenses and cash flows Unrealized profit in ending inventory xxxx
of the parent with those of its subsidiaries. Realized profit in ending inventory (xxxx)
Depreciation of FVA on inventory xxxx
▪ Offset (eliminate): Consolidated cost of sales xxxx
✓ The carrying amount of the parent’s
investment in each subsidiary; and 7) Consolidated Gross Profit
✓ The parent’s portion of equity of Consolidated sales xxxx
each subsidiary. Consolidated cost of sales (xxxx)
✓ Eliminate in full intragroup assets Consolidated gross profit xxxx
and liabilities, equity, income,
expenses and cash flows relating to 8) Parent’s Adjusted Net Income
transactions between entities of the Reported net income (cost method) xxxx
group. Dividend from Subsidiary (xxxx)
Unrealized profits (xxxx)
FORMULAS MOSTLY USED IN PFRS 3 AND 10 Impairment loss of goodwill (xxxx)
Adjusted Net Income xxxx
1) Goodwill/Gain on a bargain purchase
FV of consideration given up xxxx 9) Subsidiary’s Adjusted Net Income
Non-controlling interest (NCI) xxxx Reported net income (book value) xxxx
FV of previously held interest xxxx Effects of amortization of differences of
Initial carrying amount xxxx BV and FV of Subsidiary’s assets and xxxx/(xxxx)
FV of net assets acquired (xxxx) liabilities
Goodwill (Gain on bargain purchase) xxxx Effect of upstreams transactions xxxx/(xxxx)
Effect of subsidiary-subsidiary xxxx/(xxxx)
transactions
2) Consolidated Assets at Acquisition Date
Impairment loss on total goodwill (xxxx)
Parent’s total assets at acquisition date xxxx
Adjusted net income xxxx
Consideration given up (cash or NCA) (xxxx)
Payments to other costs on acquisition date (xxxx)
Goodwill on business combination xxxx 10) Consolidated Comprehensive Income
Parent’s adjusted total assets @ book value xxxx Net income of Parent xxxx
Subsidiary’s adj. total assets @ fair value xxxx Net income of Subsidiary xxxx
Consolidated assets at acquisition date xxxx Consolidated net income xxxx

3) Consolidated Liabilities at Acquisition Date 11) Consolidated Retained Earning

Parent’s total liabilities @ acquisition date xxxx Consolidated retained earnings, beginning xxxx
Contingent consideration (if asset) xxxx Consolidated net income attributable to
Parent’s adjusted total liabilities @ BV xxxx Parent [Net income of Parent + (Net
xxxx
Subsidiary’s adjusted total liabilities @ FV xxxx income of Subsidiary x controlling interest)]
Consolidated liabilities at acquisition date xxxx Consolidated retained earnings, ending xxxx

4) Consolidated Equity at Acquisition Date 12) Non-controlling Interest

Parent’s Equity at acquisition date xxxx Non-controlling interest, beginning xxxx
Shares issued as consideration at TFV xxxx CNI attributable to non-controlling interest xxxx
Gain on bargain purchase xxxx Dividends declared by Subsidiary to NCI (xxxx)
Acquisition date costs (xxxx) Non-controlling interest, ending xxxx
Stock issuance costs (xxxx)
Remeasurement gain/loss on previously
xxxx/(xxxx)
held interest
Others presented at PL xxxx/(xxxx)
- - End - -

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 BUSINESS COMBINATION

THEORY

1. PFRS 3 defines it as a transaction or event in which an acquirer obtains control of one or more businesses
a. Business combination c. Merger
b. Consolidation d. Acquisition of net assets

2. A business combination whereby the company taking over the properties of other companies retains its
identity and continues operations as a larger unit and the other companies are dissolved is known as a
a. Consolidation c. Pooling of interests
b. Merger d. Quasi-reorganization

3. A business combination in which a new corporation is created, and two or more existing corporations are
combined into the newly created corporation is called a
a. Merger c. Pooling-of-interests
b. Purchase transaction d. Consolidation

4. Under PFRS 3, how should an entity (acquirer) account for each business combination?
a. Pooling of interest method c. Acquisition method
b. Proportionate consolidation method d. Equity method

5. It refers to the date on which the acquirer obtains control of the acquiree
a. Business combination date c. Control date
b. Acquisition date d. Consolidation date

6. The acquisition method of accounting for a business combination requires all of the following, except
a. Identifying the acquirer
b. Determining the acquisition date
c. Recognizing and measuring the identifiable assets acquired, the liabilities assumed and the
noncontrolling interest in the acquiree at carrying amount
d. Recognizing goodwill or gain from bargain purchase

7. In a business combination, goodwill is measured as the excess of

a. The consideration transferred over the identifiable net assets acquired
b. The total of the consideration transferred and the amount of any non-controlling interest in the
acquiree over the identifiable assets acquired
c. The total of the consideration received and the fair value of the previously held interest in the
acquiree over the identifiable net assets acquired
d. The total of the consideration transferred, the amount of any non-controlling interest in the
acquiree and the fair value of previously held interest in the acquiree over the identifiable net assets
acquired

8. Under PFRS 10, an investor controls an investee if the investor has all of the following, except
a. The power over the investee
b. Exposure or rights to variable returns from the involvement with the investee
c. The ability to use the power over the investee to affect the amount of the investor’s returns
d. All of these indicate control

9. Control is presumed to exist when the parent owns directly or indirectly through subsidiaries
a. More than half of the equity of the entity
b. More than half of the ordinary shares of an entity
c. More than half of the preference and ordinary shares of an entity
d. More than half of the voting power of an entity

10. Which of the following statements is(are) correct according to PFRS 10?
a. Consolidated financial statements are the financial statements of a group in which the assets,
liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented
as those of a single economic entity
b. Separate financial statements are the financial statements by a parent in which the investments are
accounted for on the basis of the direct equity interest
c. Noncontrolling interest is that portion of the profit or loss and net assets of a subsidiary attributable
to equity interests that are not owned directly or indirectly through subsidiaries by the parent
d. All of the above
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 11. How shall the parent corporation present the Noncontrolling Interest (NCI) in the Consolidated Statement
of financial Position?
a. It shall be presented within Consolidated Stockholder’s Equity, separately from the equity of the
owners of the parent
b. It shall be presented as non-current liability
c. It shall be presented as non-current assets
d. It shall be presented as contra-equity account like treasury shares and subscription receivable

PROBLEMS

1. The following are the condensed Statement of Financial Position of X and Y on January 1, 2021:
X Y
Total Assets P10,250,000 P3,057,500
Liabilities P 2,775,000 P 800,000
Ordinary shares 3,100,000 1,295,000
Share premium 1,250,000 100,000
Retained Earnings 3,125,000 862,500

Z Corp. acquired the net assets of both X and Y by paying cash in the amount of P185,000 and by issuing
198,500 shares to X and by paying cash in the amount of P72,000 and by issuing 54,350 shares to Y. The par
value of these shares is P35/share and market value as of January 1, 2021 is P40/share.

Z Corp. also incurred the following unpaid expenses:

X Y
Indirect costs P 93,750 P101,250
Finder’s fee 66,250 35,000
Accounting and legal fees for SEC registration 343,750 362,500
Printing costs of stock certificates 125,000 93,750

Z’s retained earnings has a balance of P10,750,000 on January 1, 2021 immediately before the acquisition.

As a result of the merger, compute for the amount of:

● Goodwill
● Net increase or (net decrease) in retained earnings in the statement of financial position of Z
Corporation
● Net increase or (net decrease) in the stockholders’ equity of Z Corporation
● Net increase or (net decrease) in the identifiable assets of Z Corporation

2. X Corporation acquired 100 percent of Y Company's common stock on January 1, 2021 for P150,000. Balance
sheet data for the two companies immediately following the acquisition follow:

Item X Corporation Y Company

Cash P30,000 P25,000
Accounts Receivable 80,000 40,000
Inventory 150,000 55,000
Land 65,000 40,000
Buildings and Equipment 260,000 160,000
Less: Accumulated Depreciation (120,000) (50,000)
Investment in Y Company Stock 150,000
Total Assets P615,000 P270,000

Accounts Payable P45,000 P33,000

Taxes Payable 20,000 8,000
Bonds Payable 200,000 100,000
Common Stock 50,000 20,000
Retained Earnings 300,000 109,000
Total Liabilities and Stockholder’s Equity P615,000 P270,000
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 At the date of the business combination, the book values of Y’s net assets and liabilities approximated fair
value except for inventory, which had a fair value of P60,000, and land, which had a fair value of P50,000.
The fair value of land for X Corporation was estimated at P80,000 immediately prior to the acquisition.

Question 1: At what amount should total land be reported in the consolidated balance sheet prepared
immediately after the business combination?
a. P130,000 c. P115,000
b. P105,000 d. P120,000

Question 2: What amount of total assets will appear in the consolidated balance sheet prepared
immediately after the business combination?
a. P756,000 c. P750,000
b. P735,000 d. P642,000

Question 3: What amount of goodwill will be reported in the consolidated balance sheet prepared
immediately after the business combination?
a. P0 c. P6,000
b. P21,000 d. P15,000

Question 4: What amount of liabilities will be reported in the consolidated balance sheet prepared
immediately after the business combination?
a. P615,000 c. P300,000
b. P406,000 d. P265,000

Question 5: What amount of retained earnings will be reported in the consolidated balance sheet prepared
immediately after the business combination?
a. P300,000 c. P259,000
b. P409,000 d. P191,000

Question 6: What amount of total stockholder's equity will be reported in the consolidated balance sheet
prepared immediately after the business combination?
a. P300,000 c. P315,000
b. P479,000 d. P350,000

3. On January 1, 2021, X acquired 90% of the equity share capital of Y in a share exchange in which X issued
two new shares for every three shares it acquired in Y. Additionally, on December 31, 2021, X will pay the
shareholders of Y P1.76 per share acquired. X’s cost of capital is 10% per annum. At the date of acquisition,
shares in X and Y had a stock market value of P6.50 and P2.50 each, respectively.

Income statements for the year ended September 30, 2021:

X Y
Revenue 64,600,000 38,000,000
Cost of sales (51,200,000) (26,000,000)
Gross profit 13,400,000 12,000,000
Distribution costs (1,600,000) (1,800,000)
Administrative expenses (3,800,000) (2,400,000)
Investment income 500,000 Nil
Finance costs (420,000) Nil
Profit before tax 8,080,000 7,800,000
Income tax expense (2,800,000) (1,600,000)
Profit for the year 5,280,000 6,200,000

Equity as at October 1, 2020

Equity shares of P1 each 30,000,000 10,000,000
Retained earnings 54,000,000 35,000,000

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 The following information is relevant:

At the date of acquisition, the fair values of Y’s assets were equal to their carrying amounts with the
exception of two items:
● An item of plant had a fair value of P1.8 million above its carrying amount. The remaining life of the
plant at the date of acquisition was three years. Depreciation is charged to cost of sales.
● Y had a contingent liability which X estimated to have a fair value of P450,000. This has not changed
as of September 30, 2021.
● Y has not incorporated these fair value changes into its financial statements.

X’s policy is to value the non-controlling interest at fair value at the date of acquisition. For this purpose, Y’s
share price at that date can be deemed to be representative of the fair value of the shares held by the non-
controlling interest.

Calculate the consolidated goodwill at the date of acquisition of Y.

4. On January 2, 2021, the Statement of Financial Position of X and Y Company prior to the combination are:
X Co. Y Co.
Cash P 675,000 P 22,500
Inventories 450,000 45,000
Property and equipment (net) 1,125,000 157,500
Total Assets P 2,250,000 P 225,000

Current Liabilities P 135,000 P 22,500

Ordinary shares, P100 par 225,000 22,500
Share premium 675,000 45,000
Retained Earnings 1,215,000 135,000
Total Liabilities and Stockholder’s Equity P 2,250,000 P 225,000

The fair value of Y Company’s equipment is P229,500.

Assume the following independent cases:

● Assuming X Company acquired all of the outstanding stock of Y Company resulting to a goodwill of
P99,000, contingent consideration is P54,000, how much is the price paid to Y Company’s stock?
● Assuming X Company acquired 70% of the outstanding common stock of Y Company for P157,500
and Non-controlling interest is measured at fair value of P91,500, how much is the goodwill (gain
on acquisition)?
● Assuming X Company acquired 80% of the outstanding common stock of Y Company for P205,200
and Non-controlling interest is measured at Non-controlling interest’s proportionate share of Y
Company’s identifiable net assets, how much is the consolidated stockholder’s equity on the date
of acquisition?
● Assuming X Company acquired 90% of the outstanding common stock of Y Company for P364,500
and Non-controlling interest is measured at fair value, how much is the total consolidated assets on
the date of acquisition?

5. On January 1, 2020, B Company acquired 80 percent of A Company's common stock for P280,000 cash. At
that date, A reported common stock outstanding of P200,000 and retained earnings of P100,000, and the
fair value of the noncontrolling interest was P70,000. The book values and fair values of A’s assets and
liabilities were equal, except for other intangible assets which had a fair value P50,000 greater than book
value and an 8-year remaining life. A reported the following data for 2020 and 2021:
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 A Corporation
Comprehensive
Year Net Income Income Dividends Paid
2020 P25,000 P30,000 P5,000
2021 P35,000 P45,000 P10,000

B reported net income of P100,000 and paid dividends of P30,000 for both the years.

Question 1: What is the amount of consolidated comprehensive income reported for 2020?

Question 2: What is the amount of consolidated comprehensive income reported for 2021?

Question 3: What is the amount of comprehensive income attributable to the controlling interest for 2020?

Question 4: Based on the preceding information, what is the amount of comprehensive income attributable
to the controlling interest for 2021?

6. On January 2, 2021, A Corporation purchase 80% of B Company’s common stock for P810,000. P37,500 of
the excess is attributable to goodwill and the balance to a depreciable asset with an economic life of ten
years. Non-controlling interest is measured at its fair value on date of acquisition. On the date of
acquisition, stockholders’ equity of the two companies were as follows:
A Corp. B Co.
Ordinary shares P1,312,500 P 300,000
Retained earnings 1,950,000 525,000

On December 31, 2021, B Company reported net income of P131,250 and paid dividends of P45,000 to A.
A reported earnings from its separate operations of P356,250 and paid dividends of P172,500. Goodwill
had been impaired and should be reported at P7,500 on December 31, 2021.

Question 1: How much is the consolidated profit on December 31, 2021?

a. P447,187.50 c. P450,000
b. P473,437.50 d. P442,500

Question 2: How much is the consolidated retained earnings attributable to parent’s shareholders equity on
December 31, 2021?
a. P2,202,750 c. P2,196,750
b. P2,197,500 d. P2,599,687.50

Question 3: How much is the non-controlling interest in profit of B Company on December 31, 2021?
a. P23,437.50 c. P26,250
b. P23,250 d. P17,250

Question 4: What amount of non-controlling interest is to be presented in the consolidated statement of

financial position on December 31, 2021?
a. P205,312.50 c. P193,125
b. P208,500 d. P181,875

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 Question 5: How much is the consolidated profit attributable to parent shareholders on December 31, 2021?
a. P420,000 c. P425,250
b. P445,500 d. P450,000

7. On January 2, 2020, X Company acquired 90% of the outstanding shares of Y Inc. at book value. During 2020
and 2021, intercompany sales amounted to P2,000,000 and P4,000,000, respectively. X Company
consistently recognized a 25% mark-up based on cost while Y Inc. had a 25% gross profit on sales. The
inventories of the buying affiliate, which all came from inter-company transactions show:
Dec. 31, 2020 Dec. 31, 2021
X P240,000 P160,000
Y 100,000 40,000
On October 1, 2020, Y Inc., purchased a piece of land costing P1,000,000 from X Company for P1,500,000.
On December 1, 2021, Y Inc., sold this land to unrelated party for P1,500,000. On the other hand, on July 1,
2021, Y Inc. sold a used photocopier with a carrying value of P60,000 and remaining life of 3 years to X
Company for P42,000.

Separate Statement of Comprehensive Income for the two companies for the year 2021 follow:
X Company Y Inc.
Sales P25,000,000 P14,000,000
Cost of Sales (15,000,000) ( 8,400,000)
Gross Profit P10,000,000 P5,600,000
Operating Expenses (6,000,000) (3,800,000)
Operating Profit P 4,000,000 P1,800,000
Loss on Sale of Office Equipment (18,000)
Dividend Revenue 40,000
Net Income P4,000,0000 P1,822,000

Compute the following amounts for/as of December 31, 2021

Question 1: Consolidated Gross Profit

a. P19,632,000 c. P15,632,000
b. P15,712,000 d. P15,584,000

Question 2: Consolidated Net Income attributable to Parent

a. P6,183,300 c. P6,169,800
b. P6,369,000 d. P6,191,300

Question 3: Non-controlling interest in Net Income

a. P189,700 c. P188,200
b. P185,700 d. P184,200

Question 4: Consolidated Operating Expense

a. P9,800,000 c. P9,803,000
b. P9,788,000 d. P9,789,500

8. On January 1, 2021, Entity A acquired 90% of outstanding ordinary shares of Entity B at a price of P900,000.
Entity A paid P20,000 costs related to acquisition of shares.
● At the acquisition date, the net assets of Entity B were reported at P950,000. All the assets of Entity
B are properly valued except for a machinery which is undervalued by P150,000. The machinery has
a remaining useful life of 5 years.
● For the year ended December 31, 2021, Entity B reported net income of P200,000 and declared
dividends in the amount of P30,000.
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 ● The fair value of Investment in Entity B on December 31, 2021 is P1,000,000 while the cost of
disposal is 5%.
● Entity A voluntarily prepared its separate financial statements.

Question 1: If Entity A elects cost method to account its Investment in Entity B in its separate financial
statements, what is the carrying amount of the Investment in Entity B on December 31, 2021?
a. P900,000 c. P1,000,000
b. P920,000 d. P950,000

Question 2: What is the investment income for 2021 if Entity A elects cost method to account its Investment
in Entity B in its separate financial statements?
a. P7,000 c. P180,000
b. P27,000 d. P107,000

Question 3: If Entity A elects fair value model to account its Investment in Entity B in its separate financial
statements, what is the carrying amount of the Investment in Entity B on December 31, 2021?
a. P900,000 c. P1,000,000
b. P920,000 d. P950,000

Question 4: What is the net effect in profit or loss for 2021 if Entity A elects fair value model to account its
Investment in Entity B in its separate financial statements?

9. Entity A acquired 75% of the outstanding common shares of Entity B on January 1, 2020 at an amount equal
to the book value and fair value of identifiable net assets when the shareholders’ equity of B is composed
of capital stock of P3,000,000 and retained earnings of P2,000,000. NCI was elected to be initially measured
at proportionate share of fair value of identifiable net assets.

A summary of the separate 2022 income statements of Entity A and Entity B, were as follows:
Entity A Entity B
Sales P9,000,000 P5,400,000
Gain on sale of equipment 180,000 -
Dividend income 262,500 -
Cost of goods sold (3,600,000) (2,340,000)
Depreciation expense (900,000) (540,000)
Other expenses (1,440,000) (720,000)
Net income P3,502,500 P1,800,000

There was an upstream sale of equipment with a book value of P720,000 for P1,170,000 on January 2, 2020.
At the time of the intercompany sale, the equipment had a remaining useful life of five years. Entity A uses
straight-line depreciation with no residual value. The buying affiliate used the equipment until December
31, 2022, at which time it was sold to a third-party, Entity Z, for P648,000. The balance of retained earnings
of Entity A and Entity B at the beginning of 2022 are P10,000,000 and P5,000,000, respectively, while
dividends declared for the year amounted to P1,500,000 and P350,000 for Entity A and Entity B, respectively.

Question 1: In the December 31, 2022 consolidated statement of financial position, how much is the balance
of retained earnings?
a. P15,340,000 c. P12,340,000
b. P16,090,000 d. P16,452,500

Question 2: In the December 31, 2022 consolidated statement of financial position, how much is the balance
of non-controlling interest?
a. P1,612,500 c. P2,362,500
b. P2,450,000 d. P1,250,000

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 10. The following transactions occurred for the period ended December 31, 2020 regarding Entity A and its two
subsidiaries, Entity B and Entity C:
● On January 1, 2020, Entity A acquired 60% of the outstanding common stock of Entity B and 70% of
the outstanding common stock of Entity C. It is the policy of Entity A to account all its investments
in subsidiary using cost method in its separate financial statements.
● On May 1, 2020, Entity A sold inventory to Entity C with cost of P75,000 at a price of P100,000. On
June 1, 2020, Entity C resold all the inventory coming from Entity A at a price of P150,000 as follows:
80% to unrelated parties and 20% to Entity B.
● On July 1, 2020, Entity B sold a new set of inventory to Entity C with cost of P125,000 at a price of
P200,000. On August 1, 2020, Entity C resold all the inventory coming from Entity B at a price of
P300,000 as follows: 40% to unrelated parties and 60% to Entity A.
● For the period ended December 31, 2020, the Entities A, B and C reported sales revenue of
P3,000,000, P2,000,000 and P1,000,000, respectively, and cost of sales of P1,000,000, P750,000 and
P500,000, respectively, in their separate income statements.

Question 1: What is the amount of sales revenue to be reported in the consolidated income statement for
the year ended December 31, 2020?
a. P5,700,000 c. P5,620,000
b. P5,490,000 d. P5,870,000

Question 2: What is the amount of cost of sales to be reported in the consolidated income statement for
the year ended December 31, 2020?
a. P1,910,000 c. P2,005,000
b. P2,155,000 d. P1,860,000

11. The following transactions occurred for the years ended December 31, 2020 and December 31, 2021
regarding Entity A and its two subsidiaries, Entity B and Entity C:
● On January 1, 2020, Entity A acquired 75% of the outstanding common stock of Entity B. On this
date, the equipment on Entity B with remaining useful life of 5 years has a book value of P200,000
but its fair value is estimated to be P250,000.
● On April 1, 2020, Entity A acquired 62% of the outstanding common stock of Entity C.
● It is the policy of Entity A to account all its investments in subsidiary using cost method in its separate
financial statements.
● On January 1, 2021, Entity B sold his undervalued equipment to Entity A at a price of P150,000.
● On April 1, 2021, Entity A resold the said equipment to Entity C at a price of P300,000.
● On July 1, 2021, Entity C resold the said equipment to a third party at a price of P180,000.

Question 1: What is the consolidated gain on sale of equipment to be reported by Entity A in its consolidated
income statement for the year ended December 31, 2021?
a. P5,000 c. P30,000
b. P25,000 d. P40,000

- - End - -

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 JOINT ARRANGEMENT Accounting for Interest in Joint Venture
• The objective of PFRS 11 Joint Arrangements is to • PFRS 11 requires accounting for the investment in a
establish principles for financial reporting by entities joint venture using the equity method according to
that have an interest in arrangements that are PAS 28 Investments in Associates and Joint Ventures.
controlled jointly.
Accounting for Interest in Joint Operation
To meet this objective, PFRS 11: • When an investor classifies its investment as a joint
• Defines joint control; operation, then you should recognize in the financial
• Requires determining the type of joint arrangement; statements:
and
• Account for the interest in a joint arrangement based • Its assets, including its share of any assets in
on the type. accordance with the contractual agreement.

PFRS 11 defines joint control as the contractually agreed • Its liabilities, including its share of any liabilities
sharing of control of an arrangement, which exists only incurred in accordance with the contractual agreement.
when decisions about the relevant activities require the
unanimous consent of the parties sharing control. • Its revenue from the sale of its share of the
output arising from the joint operation.
There are three (3) basic elements of joint control:
✓ Contractual arrangement - often in writing in the • Its share of the revenue from the sale of the output by
form of contract or some documented decisions of the joint operation.
the parties involved.
• Its expenses, including its share of any expenses
✓ Sharing of control - his condition or element is met incurred in accordance with the contractual agreement.
when all parties, or group of parties, considered
collectively, are able to direct the relevant decisions Accounting for SMEs
of the arrangement. • Jointly controlled operations

✓ Unanimous consent - it means that every party of ✓ The venturer should recognize assets that it
the joint arrangement must agree with (or at least controls and liabilities it incurs as well as its share
does not object to) the decision and no one can block of income earned and expenses that are incurred.
it.
• Jointly controlled assets
There are two (2) types of joint arrangements:
✓ Joint venture: In a joint venture, the parties having ✓ The venture should recognize its share of the
joint control have rights to the net assets of the assets and liabilities it incurs as well as income it
arrangement. These parties are called “joint venturers”. earns and expenses that are incurred.

✓ Joint operation: In a joint operation, the parties • Jointly controlled entities

having joint control have rights to the assets and
obligations for the liabilities relating to the There is an option for the venture to use:
arrangement. These parties are called “joint operators”. ✓ Fair value model
✓ Cost model
When assessing the rights and obligations from the joint ✓ Equity method
arrangements, it’s very important to look at how the joint
arrangement is structured, mainly whether the arrangement FVPL Cost Equity
is structured through separate vehicle or not. method method
✓ Separate vehicle is a separately identifiable financial Initial Fair Historical Historical cost
structure, including separate legal entities (e.g., measurement value cost or FVNAA,
company) or some entities recognized by a statute (not higher
necessarily having legal personality). Transaction Expensed Capitalizable Capitalizable
cost
✓ NOT structured through a separate vehicle Subsequent Fair Cost less Book value
When a joint arrangement is NOT structured through measurement value impairment under equity
a separate vehicle, then the classification is easy: it is method less
a clear joint operation. impairment
Gain or loss Yes in None None
✓ Structured through a separate vehicle on changes in P/L
fair value
When the joint arrangement is structured through Dividend Yes Yes None
separate vehicle, then it can be either joint venture or income from (Deduction
joint operation. investee from
investment
account)
▪ For making your conclusion, you should
Share in net None None Yes
examine further:
income (loss),
OCI of
✓ The legal form of joint arrangement;
investee
✓ The terms of the contractual arrangement;
Impairment None Yes, if book Yes, if book
and loss value > value >
✓ Other facts and circumstances when relevant.
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 recoverable recoverable
amount amount

- - End - -

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 JOINT ARRANGEMENT
THEORY

1. It is characterized by a contractual arraignment whereby two or more parties have joint control of
the arrangement
a. Joint arrangement c. Joint venture
b. Joint operation d. Jointly controlled asset

2. It is contractually agreed sharing of control of an arrangement which exists only when decisions
about relevant activities required unanimous consent of the parties sharing control
a. Control c. Joint control
b. Significant influence d. Solidary control

3. It is a type of joint arrangement whereby the parties that have joint control of the arrangement have
right to the total assets and obligations for the total liabilities relating to the arrangement
a. Joint venture c. Joint operation
b. Jointly controlled asset d. Joint business

4. It is a type of joint arrangement whereby the parties that have joint control of the arrangement have
rights to the net assets of the arrangement
a. Joint venture c. Joint operation
b. Jointly controlled asset d. Joint business

5. What is the classification of the joint arrangement when the assets and liabilities relating to the
arrangement are held by a separate vehicle or when the arrangement is established with a separate
vehicle?
a. It shall be classified as joint venture
b. It shall be classified as joint operation
c. Neither joint venture nor joint operation
d. It can be either a joint operation or joint venture depending on the legal form of the separate
vehicle, terms of the contractual arrangement or other relevant facts and circumstances

6. Under PFRS 11, how shall the joint venturer account for its Investment in Joint Venture?
a. Equity method c. Fair value method under IFRS 9
b. Cost method d. Proportionate consolidation

7. Under PFRS 11, how shall the joint operator account for its interest in a joint operation?
a. The joint operator shall account for its interest under Equity Method
b. The joint operator shall account for its interest under Cost Method
c. The joint operator shall account for its interest using proportionate consolidation
d. The joint operator shall account for its interest by recognizing its assets, liabilities, revenues,
expenses and shares in the jointly controlled assets, jointly incurred liabilities, jointly earned
revenue and jointly incurred expenses in accordance with the contractual agreement

PROBLEMS
1. On January 1, 2020, Entity A, a public entity, and Entity B, a public entity, incorporated Entity C
which has its fiscal and operational autonomy. The contractual agreement of the incorporating
entities provided that the decisions on relevant activities of Entity C will require the unanimous
consent of both parties, Entity A and Entity B will have rights to the net assets of Entity C.

Entity A and Entity B invested P1,000,000 and P1,500,000, respectively, equivalent to 40:60 capital
interest of Entity C. The financial statements of Entity C provided the following data for its two-year
operation:
Net income (loss) Dividends declared
2020 200,000 100,000
2021 (2,000,000) -

Question 1: What is the balance of Investment in Entity C to be reported by Entity A in its Statement
of Financial Position on December 31, 2021?
a. P1,080,000 c. P240,000
b. P1,040,000 d. P200,000
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 Question 2: What is the balance of Investment in Entity C to be reported by Entity B in its Statement
of Financial Position on December 31, 2021?
a. P1,500,000 c. P360,000
b. P1,620,000 d. P900,000

2. On January 1, 2020, Honelyn Inc. invested P2M cash in a joint venture for 50% interest. For the
years ended December 31, 2020, 2021 and 2022, the joint venture reported the following net incomes
and dividend distributions:
Year Net Income/(Net Loss) Dividend Distribution
2020 P1,000,000 P300,000
2021 (P6,000,000) -
2022 P7,000,000 P500,000

Question 1: What is the share in net loss or investment loss to be reported by the company for the
year ended December 31, 2021?
a. P3,000,000 c. P2,350,000
b. P2,500,000 d. P2,000,000

Question 2: What is the book value of Investment in Joint Venture to be reported by the company as
of December 31, 2022?
a. P1,600,000 c. P1,250,000
b. P2,600,000 d. P1,450,000

3. Entity A and Entity B incorporated Entity C to manufacture a microchip to be used by the

incorporating entities as component for their final products of cellular phones and tablets. The
contractual agreement of the incorporating entities provided that the decisions on relevant activities
of Entity C will require the unanimous consent of both entities.

Entity A and Entity B have rights to the assets, and obligations for the liabilities, relating to the
arrangement. The ordinary shares of Entity C will be owned by Entity A and Entity B in the ratio of
60:40. At the end of first operation of Entity C, the financial statements provided the following data:

Inventory 1,000,000 Accounts payable 2,000,000

Land 3,000,000 Note payable 1,000,000
Building 5,000,000 Loan payable 4,000,000
Share capital 1,000,000
Retained earnings 1,000,000
Sales revenue 5,000,000

The contractual agreement of Entity A and Entity B also provided for the following concerning the
assets and liabilities of Entity C:
● Entity A owns the land and incurs the loan payable of Entity C.
● Entity B owns the building and incurs the note payable of Entity C.

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 ● The other assets and liabilities are owned or owed by Entity A and Entity B on the basis of
their capital interest in Entity C.
● The sales revenue of Entity C includes sales to Entity A and Entity B in the amount of
P1,000,000 and P2,000,000, respectively. As of the end of the first year, Entity A and Entity
B were able to resell 30% and 60% of the inventory coming from Entity C to third persons.

Question 1: What is the amount of total assets to be reported by Entity A concerning its interest in
Entity C?
a. P5,400,000 c. P3,600,000
b. P3,000,000 d. P5,000,000
Question 2: What is the amount of total liabilities to be reported by Entity B concerning its interest
in Entity C?
a. P1,800,000 c. P2,800,000
b. P2,200,000 d. P2,400,000

Question 3: What is the amount of sales revenue to be reported by Entity A concerning its interest
in Entity C?
a. P2,300,000 c. P3,000,000
b. P2,100,000 d. P2,500,000

4. On January 1, 2021, Dancia Inc., a small and medium enterprise (SME), invested P500,000 cash in
a joint venture for 50% interest. For the year ended December 31, 2021, the joint venture reported
net income of P200,000 and distributed cash dividend in the amount of P60,000. As of December
31, 2021, the fair value of the investment in joint venture is P600,000 and the estimated cost of
disposal is 10% of fair value. The value in use of the investment is estimated at P550,000.

Question 1: Under IFRS for SMEs, what is the book value of Investment in Joint Venture to be
reported by the company as of December 31, 2021 if the SME elects equity method?
a. P550,000 c. P570,000
b. P540,000 d. P600,000

Question 2: Under IFRS for SMEs, what is the book value of Investment in Joint Venture to be
reported by the company as of December 31, 2021 if the SME elects cost method?
a. P550,000 c. P570,000
b. P540,000 d. P500,000

Question 3: Under IFRS for SMEs, what is the book value of Investment in Joint Venture to be
reported by the company as of December 31, 2021 if the SME elects fair value method?
a. P550,000 c. P570,000
b. P600,000 d. P500,000

- - End - -

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 NON-PROFIT ORGANIZATIONS (NPOs) • Unrestricted net assets usually are those in the
unrestricted (or general) fund.
• Include civic organizations, colleges and universities,
cultural institutions, hospitals, labor unions, private • Temporarily restricted net assets generally are those in
foundations, professional organizations, religious restricted funds, loan funds and plant funds. These are
organizations, cooperatives and social and country expected to be released from restriction due to passage
clubs. of time or the performance of some act by the NPO.

• They do not include governmental units. • Permanently restricted net assets ordinarily arise from
permanent endowments funds.
Accounting Standards for NPOs
• The accounting standards applicable to NPOs are Key Points:
adopted from the guidelines issued by American • The statements must distinguish between assets,
Institute of Certified Public Accountant (AICPA) liabilities, revenues, and expenses that are unrestricted,
applicable to all NPOs. temporarily restricted and permanently restricted. Such
restrictions are donor-imposed.
Financial Statements of NPOs • Expenses should be reported by their functional
• Financial statements of NPOs vary in forms and classification such as major classes of program activities
contents. For uniformity in financial reporting, the and supporting activities.
Financial Accounting Standards Boards of the AICPA ✓ Program activities are goods and services
issued FASB Statement No. 117, Financial Statements of provided to beneficiaries or customers that fulfill
Not-for-Profit Organizations. the purpose of the organization.
✓ Supporting services are general and
• Financial statements of nonprofit organizations shall be administrative expenses, and fund-raising costs.
✓ Statement of Financial Position
✓ Statement of Activities Unrestricted fund
✓ Statement of Cash Flows • This fund includes all the assets of a NPOs that are
✓ Notes to the financial statements available for use as authorized by the board of directors
and not restricted for specific purposes.
▪ The Statement of Financial Position shall
report the following: • Revenues and gains of unrestricted fund are derived
✓ Amounts of the organization’s total from a number of sources. For example, a hospital
assets, total liabilities and total net derives unrestricted fund revenues from patient
assets. services, unrestricted donations, and unrestricted
✓ Amounts for each of the three classes income from endowment funds.
of the organization’s net assets:
o Permanently restricted net • College and university’s sources of unrestricted fund
assets revenue include student tuition fees, government
o Temporarily restricted net assets grants, donations and private grants, and unrestricted
o Unrestricted net assets income from endowment fund.

▪ The Statement of Activities shall report the • Revenues of unrestricted fund may also include
following: membership dues, interest, dividends and gains from
✓ Gross amounts of revenues and investments in debt and equity securities.
expenses of the organization, except
that investment revenues may be Revenues from Services
reported net of expenses and gains or • A nonprofit organization’s total revenues are reported
losses on disposal of plant assets. in the period in which services are rendered, even
though part or all of the revenues is to be waived or
✓ Expenses by functional classifications reduced.
such as program services and
supporting services. • The Contractual Adjustments show the unique feature
of nonprofit hospitals. Usually, for hospitals, accounts
✓ Amount of the change in the receivables are collectible from a third-party payor,
organization’s net assets for the rather than from the patient. Among the third-party
period with a caption such as changes payors are the Philippine Health, Medicare and private
in net assets or change in equity. medical insurance companies. For colleges and
universities, the comparable tuition adjustment is
✓ Amount of the changes in each of the debited to Expenditures – Student Aid account.
three classes of the organization’s net
assets: permanently restricted, • In the Statement of Activities, the balances of the
temporarily restricted, and Contractual Adjustments account for hospital and the
unrestricted. Expenditures - Student Aid account for colleges and
universities are to be deducted from the total service
▪ The Statement of Cash Flows shall be similar revenues to compute the net service revenue for the
in format – direct method or indirect month.
method – to one that is used by business
enterprises. • The balance of Allowance for Doubtful Accounts is
treated the usual manner, that is, as a deduction from
the Accounts Receivable in the balance sheet. Write-
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 offs of accounts receivable if any, are also recorded in Assets and Liabilities of Unrestricted Fund
the customary manner. • Cash, investments, accounts receivable, inventories and
prepaid expense are typical assets of an unrestricted
Contributed Materials, Services and Facilities fund.
• Aside from cash contributions, NPOs often receive • NPOs that use fund accounting generally account for
contributions of materials, services, and facilities. For fixed assets in a property and equipment fund.
example, a hospital may receive free drugs, or a • The liabilities of an unrestricted fund include payables,
university may receive supplies. accrued expenses, and deferred revenues similar to
those of a business enterprise.
• The contributed material is recorded in the Inventories
account at its current fair value, with a corresponding Restricted Fund
credit to a revenue account in an unrestricted fund, as • NPOs establish restricted fund to account for assets
shown in the following proforma entry. received from donors. These assets are available for
current use but expendable only as authorized by the
Inventories xx donor of the assets.
Contributions Revenue xx
To record contributed materials at current fair value • Restricted funds are classified into temporarily
restricted and permanently restricted.
• Contributed services and facilities are debited to an ✓ Temporarily restricted funds are (1) specific-
unrestricted fund as Salary Expense for contributed purpose funds, (2) time-restricted funds, and (3)
services and Rent Expense for contributed facilities, plant replacement and expansion funds.
with a corresponding credit to Contributions Revenue ✓ Permanently restricted funds are assets that are
account. to be held for an indefinite period of time and
generally are included in an endowment fund.
Salary expense/Rent expense xx
Contributions Revenue xx Endowment Fund
To record contributed services/ • A permanent endowment fund is one in which the
facilities at current fair value principal must be maintained indefinitely in revenue-
producing investments.
Other Operating Revenues • Only the revenues from a permanent endowment
• These represent income derived from other related fund’s investment may be expenses by the NPOs.
activities, other than service revenues of nonprofit • The principal of the endowment fund may be expended
organizations. after the passage of time of the occurrence of an event
• Examples are proceeds from gift shops, cafeterias, specified by the donor or the endowment principal.
snack bars, newsstands and parking lots, are all • The revenues derived from the endowment funds are
recorded as other operating revenues. These are accounted in accordance with the instruction of the
recorded to unrestricted fund by the following entry: donor to the board of directors. If there are no
restrictions in the use of the endowment fund income,
Cash (or accounts receivable) xx it is transferred of the unrestricted fund. Otherwise, the
Other operating revenue xx revenues are transferred to an appropriate restricted
To record other operating revenue fund.

Pledges (promise to give) Statement of Cash Flows

• A commitment by a prospective donor to contribute a • The Statement of Cash Flows for a nonprofit
specific amount of cash or property to an NPO on a organization is similar to that of a for-profit business.
future date or in installments. • It reports the organization's change in its cash and cash
• Under the accrual basis of accounting, unconditional equivalents during the accounting period.
pledges are recorded as receivables and revenues in the
unrestricted fund, with appropriate provisions for The Statement of Cash Flows consists of three sections:
doubtful pledges. • Net cash from operating activities
✓ Pledges due in future accounting periods or ✓ All unrestricted donations are presented under
having restrictions as to their use are accounted operating activities.
for in a restricted fund. ✓ Program and support expenses are reported under
operating activities.
Expenses of Unrestricted Fund
• A nonprofit organization usually recognizes all expenses • Net cash from investing activities
in its unrestricted fund. ✓ Reports the amounts spent to purchase long-term
• Program services are the organization’s activities that assets such as equipment, vehicles, and long-term
result in the distribution of goods and services to fulfill investments.
the purposes of the organization. ✓ Reports the amount received from the sale of long-
• Supporting services are all activities of the organization term assets.
other than the program services, such as administrative
expenses and fund-raising costs. • Net cash from financing activities
✓ All temporarily or permanently restricted
Depreciation Expense donations are presented under financing activities.
• Depreciation is required on all the property and ✓ Reports the amounts received from borrowings
equipment of nonprofit organizations, except for and any repayments.
individual works of art or historical treasures having
extraordinary long economic lives. - - End - -
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 NON-PROFIT ORGANIZATIONS (NPOs)

THEORY

1. A private, not-for-profit university should prepare which of the following financial statements?
I. Statement of Financial Position IV. Statement of Cash Flows
II. Statement of Activities V. Statement of Changes in Financial Position
III. Statement of Changes in Fund Balances
a. I, II, and III c. I, II, and IV
b. II, III, and IV d. II, III, and V

2. What are the three categories of net assets required by the FASB in reporting a not-for-profit organization?
a. Unrestricted, Temporarily Restricted, and Permanently Restricted
b. Unrestricted, Restricted, and Fund Balance
c. Restricted, Permanently Restricted, and Fund Balance
d. Unrestricted, Temporarily Restricted, and Fund Balance

3. Net assets restricted as to time or purpose should be classified as:

I. Temporarily restricted
II. Permanently restricted
a. I only c. Both I and II
b. II only d. Neither I nor II

4. Unrestricted current funds of a private university designated by the governing board for a specific future
purpose should be reported as part of:
a. Unrestricted net assets c. Board-restricted net assets
b. Temporarily restricted net assets d. Term endowments

5. For the year ended June 30, 2021, a university assessed its students a total of P4,000,000 for tuition and
fees. Included in this amount was P300,000 of tuition remissions awarded to graduate teaching assistants,
and P150,000 of scholarships awarded to undergraduate students. Tuition and fees totaling P3,550,000
were collected during the year ended June 30, 2021. What amount should be reported in the unrestricted
fund as net revenue from tuition and fees for the year ended June 30, 2021?
a. P4,000,000 c. P3,700,000
b. P3,550,000 d. P3,850,000

6. For the year ended June 30, 2021, a private college received contributions from alumni which were
restricted for faculty research stipends to be awarded during the next fiscal year. For the year ended June
30, 2021, these contributions should be disclosed on the statement of activities of the private college as an
increase in
a. The fund balance of the restricted current fund
b. Temporarily restricted net assets
c. Deferred revenues
d. Temporarily restricted fund balance

7. X Hospital, which is operated by a religious organization, received contributions of P1,000,000 from donors
who stipulated that the cash be used to construct an addition to the hospital. As of the balance sheet date,
none of the contributions had been expended for construction. On the hospital's balance sheet, the cash
contributions would be disclosed in which of the following classes of net assets?
a. Temporarily restricted net assets c. Assets whose use is limited
b. Donor restricted net assets d. Permanently restricted net assets

8. A private, not-for-profit hospital received contributions of P50,000 from donors on June 15, 2021. The
donors stipulated that their contributions be used to purchase equipment for the hospital. As of June 30,
2021, the end of the hospital's fiscal year, P12,000 of the contributions had been spent on equipment
acquisitions. In the hospital's general fund, what account would be credited to recognize the release of the
restrictions on the temporarily restricted contributions used to acquire equipment?
a. Revenue released from equipment acquisition restriction
b. Other financing sources
c. Net assets released from equipment acquisition restriction
d. Unrestricted net assets released from equipment acquisition restriction

Final answer: D (Unrestricted net assets released from equipment acquisition restriction)

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 9. On the statement of activities for a private, not-for-profit literary society, expenses decrease which of the
following classes of net assets?
I. Temporarily restricted net assets
II. Unrestricted net assets
a. I only c. Either I or II
b. II only d. Neither I nor II

10. A voluntary health and welfare organization received a P300,000 contribution on April 15, 2021, from a
donor who stipulated the donation be invested permanently in stocks and bonds. The donor further
stipulated earnings from the investments be spent according to the wishes of the governing board of the
voluntary health and welfare organization. Earnings from the investments for the year ended June 30, 2021,
amounted to P6,000. How would the voluntary health and welfare organization report this information for
the year ended June 30, 2021?
a. Increase in permanently restricted net assets of P306,000
b. Increase in permanently restricted net assets of P300,000, and in temporarily restricted net assets
of P6,000
c. Increase in permanently restricted net assets of P300,000, and in unrestricted net assets of P6,000
d. Increase in permanently restricted net assets of P300,000, and in board-designated net assets of
P6,000

11. The disclosure, "net assets released from restrictions," is reported on which of the following financial
statements for a voluntary health and welfare organization?
I. The statement of cash flows
II. The statement of activities
a. I only c. Both I and II
b. II only d. Neither I nor II

12. X Hospital, which is operated by a religious organization, provides charity care for the indigent living in the
region served by the hospital. How should it report the amount of its charity care on its financial
statements?
a. In the notes to the financial statements only
b. As unrestricted revenues on the statement of activities
c. As net patient service revenue and as an expense, equal to the net patient service revenue, on the
statement of activities
d. As temporarily restricted revenue on the statement of activities

13. A private college received an offer from a CPA who is an alumnus to teach a one-semester advanced
accounting course at no cost. FASB 116 prescribes that this contribution of service
a. Need only be disclosed in the footnotes to the financial statements
b. Be recorded as an asset with an equivalent amount recorded in the unrestricted fund balance
c. Be recorded as a revenue with an equivalent amount recorded as an expense
d. Need not be recorded if the service is for a period less than one academic year

14. In accordance with FASB 116, contributions of services are recognized as increases in unrestricted net assets
by a private, not for profit entity if which of the following criteria are satisfied?
I. The services received create or enhance nonfinancial assets
II. The services require specialized skills, are provided by individuals possessing those skills, and
would typically need to be purchased if not provided by donations
III. The services will be performed within the current fiscal year
a. I or II c. II or III
b. I or III d. I, II, III

15. A voluntary health and welfare organization had the following classes of net assets on July 1, 2020, the
beginning of its fiscal year:
Unrestricted P500,000
Temporarily restricted P100,000
Permanently restricted P1,000,000

During the year ended June 30, 2021, the following events occurred:

It purchased equipment, costing P100,000, with contributions restricted for this purpose. The contributions
had been received from donors during June of 2020.
● It received P130,000 of cash donations which were restricted for research activities. During the year
ended June 30, 2021, P90,000 of the contributions were expended on research.
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 ● It sold investments classified in the permanently restricted class for a loss of P40,000. Dividends and
interest income earned on the investments amounted to P70,000. There were no restrictions on how
investment income was to be used.
● It received cash contributions of P200,000 from donors who did not place either time or use restrictions
upon their donations.
● Expenses, excluding depreciation expense, for program services and supporting services incurred
during the year ended June 30, 2021, amounted to P260,000.
● Depreciation expense for the year ended June 30, 2021, was P80,000.

Question 1: On June 30, 2021, the amount of permanently restricted net assets reported on the statement
of financial position would be
a. P1,070,000 c. P1,000,000
b. P1,030,000 d. P960,000

Question 2: On the statement of activities for the year ended June 30, 2021, temporarily restricted net assets
a. Increased P130,000 c. Decreased P100,000
b. Increased P40,000 d. Decreased P60,000

Question 3: On the statement of activities for the year ended June 30, 2021, reclassifications would be
reported at
a. P190,000 c. P90,000
b. P100,000 d. P230,000

Question 4: Which of the following statements is (are) correct about the program and supporting expenses
that would be reported on the statement of activities for the year ended June 30, 2021
I. Program and supporting expenses should be reported at P340,000.
II. All of the program and supporting expenses should be reported as a deduction from unrestricted
revenues and other support.
a. I only c. I and II
b. II only d. Neither I nor II

16. During the fiscal year ended June 30, 2021, X Charities, a voluntary health and welfare organization, received
unrestricted cash contributions of P500,000 and temporarily restricted cash contributions of P300,000. All
of the temporarily restricted contributions were restricted by the donors for equipment acquisitions. During
the year ended June 30, 2021, equipment costing P250,000 was acquired with the restricted contributions.
As a result of these two contributions, the statement of cash flows, prepared for the year ended June 30,
2021, would report an increase in net cash provided by operating activities of
a. P500,000 c. P750,000
b. P800,000 d. P550,000

17. In 2021, a private not-for-profit hospital received a P200,000 cash contribution to its endowment fund.
During the year, hospital administration invested P150,000 of the funds. Which of the following statements
regarding the effect of these transactions on the preparation of the hospital's statement of cash flow is
true?
a. The P200,000 contribution will appear in the investing activities section of the cash flow statement
as a cash inflow
b. The P200,000 contribution will appear in the financing activities section of the cash flow statement
as a cash inflow
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 c. The P150,000 investment will appear in the investing activities section of the cash flow statement
as a cash inflow
d. The P150,000 contribution will appear in the financing activities section of the cash flow statement
as a cash inflow

18. A private, not-for-profit geographic society received cash contributions which were restricted by the donors
for the acquisition of fixed assets. In which section of the statement of cash flows would these cash
contributions be reported?
a. Financing activities c. Operating activities
b. Investing activities d. Capital and related financing activities

19. Which one of the following is a voluntary health and welfare organization?
a. Charity raising money for underprivileged children
b. Nursing home
c. Clinic
d. Hospital
20. Which of the following statements is required for voluntary health and welfare organizations, but not for
other not-for-profit organizations?
a. Statement of Activities and Changes in Net Assets
b. Statement of Functional Expenses
c. Statement of Financial Position
d. Statement of Cash Flows

21. On a Statement of Functional Expenses for a voluntary health and welfare organization, how are expenses
classified?
a. health services expenses and operating expenses
b. program services expenses and administrative services expenses
c. program services expenses and supporting services expenses
d. operating expenses and supporting services expenses

22. On the Statement of Activities prepared for a private, not-for-profit hospital, patient service revenue earned
during the year is reported net of amounts for which of the following items?
I. Contractual adjustments
II. Bad debts expense
a. I only c. I and II
b. II only d. Neither I nor II

23. X Hospital, operated by a religious organization, billed patients P4,000,000 for services rendered during the
year ended June 30, 2021. The hospital realized cash of P3,500,000 from the patient billings because of the
following reductions:
● Contractual adjustments of P140,000 granted to private insurance companies and to the federal
government; and
● Uncollectible accounts receivable of P360,000.

On the Statement of Activities prepared for the year ended June 30, 2021, the hospital should report net
patient service revenue of
a. P3,500,000 c. P4,000,000
b. P3,860,000 d. P3,640,000

- - End - -

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 GOVERNMENT ACCOUNTING year. The formulation and eventual utilization of the
national budget are summarized in the budget cycle.
• Government accounting encompasses the
processes of analyzing, recording, classifying, The Budget Cycle
summarizing, and communicating all transactions ✓ Budget Preparation
involving the receipt and disposition of ✓ Budget Legislation
government funds and property, and interpreting ✓ Budget Execution
the results thereof. ✓ Budget Accountability

Accounting responsibility Budget Preparation

• The following offices are charged with government • Budget call – the budget preparation starts when
accounting responsibility: the Department of Budget and Management
(DBM) issues a Budget Call to all government
✓ Commission on Audit (COA) agencies. The budget call contains, among other
things, the next fiscal year’s targets, the agency’s
✓ Department of Budget and Management budget ceiling and other guidelines in the
(DBM) completion and submission of agency budget
proposals.
✓ Bureau of Treasury (BTr)
• Budget hearing – The DBM deliberates on the
✓ Other government agencies budget proposals, makes recommendations, and
consolidates the deliberated proposals into the
Commission on Audit National Expenditure Program (NEP) and Budget of
• The Commission on Audit (COA) has the exclusive Expenditures and Sources of Financing (BESF). The
authority to promulgate accounting and auditing DBM then submits the proposed budget to the
rules and regulations. President.

• The Commission on Audit keeps the general • Preparation to the Office of the President – After
accounts of the government, supporting vouchers, the President approves the proposed budget, the
and other documents. DBM finalizes the budget documents to be
submitted to the Congress. At this point, the
• The Commission on Audit submits financial reports proposed budget is referred to as the President’s
to the president and congress. Budget.

Department of Budget and Management (DBM) Budget Legislation

• The Department of Budget and Management • House deliberations – the house of
(DBM) is responsible for the formulation and representatives conducts hearings to scrutinize the
implementation of the national budget with the various agencies’ respective proposed programs
goal of attaining the nation’s socio-economic and expenditures. Thereafter, the HOR will prepare
objectives. General Appropriation Bill (GAB).

Bureau of Treasury • Senate deliberation – The senate conducts its own

• The Bureau of Treasury act as cash custodian of the deliberations on the GAB.
government.
• Bicameral deliberations – this is formed to
• The BTr is authorized to receive and keep national harmonize any conflicts between the
funds and manage and control the disbursements representatives and senate versions of GAB.
thereof; and Thereafter, final GAB is submitted to the President
for enactment.
• The BTr maintains accounts of financial
transactions of all national government offices, • President’s enactment – the president enacts the
agencies and instrumentalities. GAB and will now known as General Appropriations
Act (GAA). The president, however, may exercise
Government Agencies - refers to any department, his veto power before his enactment of the bill.
bureau or office of the national government, or any of
its branches and instrumentalities, or any political Budget Execution
subdivision, as well as any government owned or • Release guidelines and BEDs - the DBM issues
controlled corporation (GOCC), including its guidelines on the release and utilization of funds
subsidiaries, or other self-government board or while the various agencies submit their Budget
commission of the government. Execution Documents (BEDs).

National Budget – is the government’s estimate of the

sources and uses of government funds within a fiscal
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 • Allotment – is an authorization issued by the DBM • Registries of appropriations and allotments
to government agencies to incur obligations for (RAPAL) – used to monitor appropriations and
specified amounts contained in a legislative allotments. This is to ensure that allotments will
appropriation in the form of budget release not exceed appropriations.
documents.
• Registries of allotments, obligations and
• Incurrence of obligations – government agencies disbursements (RAOD) – used to monitor the
incur obligations which will be paid by the allotments received, obligations incurred against
government. the corresponding allotment, and the actual
disbursements made.

• Disbursement authority – the DBM issues Object of Expenditures

disbursement authority to the government ✓ Personnel Services (PS) – pertain to all types
agencies. of employee benefits.
✓ Appropriation – authorization by a
legislative body to allocate funds for ✓ Maintenance and other operating expenses
specified purposes. (MOOE) – pertain to various operating
expenses other than employee benefits and
✓ Allotment – authorization to agencies to financial expenses.
incur obligations.
✓ Financial Expenses (FE) – pertain to finance
✓ Obligation – amount contracted by an costs.
authorized officer for which the government
is held liable. ✓ Capital Outlays (CO) – pertain to capitalizable
expenditures.
✓ Disbursement – actual amount paid out of
the budgeted amount. • Registries of budget, utilization, and
disbursement (RBUD) – used to record the
Budget Accountability approved special budget and the corresponding
• Budget accountability reports – it is required by utilizations and disbursements charged to retained
the government agencies to submit. income.

• Performance reviews – the DBM and COA perform • The Government Accounting Cycle (with sample
periodic reviews of the agencies’ performance and journal entries)
budget accountability and report to the president. ✓ Appropriation
✓ Allotment
• Audit – the COA audits the agencies. ✓ Incurrence of obligation
✓ Disbursement authority – Notice of cash
BOOKS OF ACCOUNTS AND REGISTRIES allocation (NCA)
1) Journals ✓ Disbursements
✓ General journal ✓ Billings, collections & remittances
✓ Cash receipts journal ✓ Unadjusted trial balance
✓ Cash disbursements journal ✓ Adjusting entries
✓ Check disbursement journal ✓ Closing entries
✓ Preparation of financial statements
2) Ledgers
✓ General ledgers • Appropriation
✓ Subsidiary ledgers ▪ The appropriation is posted in the Registry of
Appropriations and Allotments (RAPAL).
3) Registries
✓ Registries of revenue and other receipts • Allotment
(RROR) ▪ The allotment is posted in the Registry of
✓ Registries of appropriations and allotment Appropriations and Allotments (RAPAL) and
(RAPAL) Registries of Allotments, Obligations, and
✓ Registries of allotments, obligations and Disbursements (RAOD).
disbursements (RAOD)
✓ Registries of budget, utilization, and • Incurrence of obligation
disbursements (RBUD) ▪ The obligations are recorded in the Obligation
Request and Status (ORS) documents and
Budget Registries Registries of Allotments, Obligations, and
• Registries of revenue and other receipts (RROR) – Disbursements (RAOD).
used to monitor the budgeted amounts, actual
collections and remittances of revenue and other
receipts.
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 • Disbursement authority – NCA • Adjusting entries

Cash – Modified Disbursement System (MDS), Regular xx Subsidy from national government xx
Subsidy from National Government xx Cash – modified disbursement system
(MDS), regular xx
• Disbursements (to recognize reversion of unused NCA)
✓ Personnel Services (PS)
• Closing entries
Salaries and wages, regular xx
Personal economic relief allowance xx
Due to BIR xx
Subsidy from national government xx
Due to GSIS xx Revenue and expense summary xx
Due to Pag-IBIG xx
Due to PhilHealth xx - - End - -
Due to Officers and Employees xx

Due to Officers and Employees xx

Cash – Modified Disbursement
xx
System (MDS), Regular

✓ Maintenance and other Operating Expenses

(MOOE)

Water Expenses xx
Electricity Expenses xx
Telephone Expenses xx
Janitorial Expenses xx
Security Expenses xx
Due to BIR xx
Cash – Modified Disbursement
xx
System (MDS), Regular

✓ Capital Outlays

Office Equipment xx
Accounts payable xx

✓ Remittances of amounts withheld

Cash-tax remittance advice xx

Subsidy from National
xx
Government

Due to BIR xx
Cash-tax remittance advice xx

Due to GSIS xx
Due to Pag-IBIG xx
Due to PhilHealth xx
Cash-modified disbursement
xx
system (MDS), regular

• Billings, Collections & Remittance

Accounts receivable xx
Service fees xx

Cash – collecting officers xx

Accounts receivable xx

Cash – treasury/agency deposit, regular xx

Cash – collecting officers xx

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 GOVERNMENT ACCOUNTING

IDENTIFICATION

1. ___________________________ has the exclusive authority to promulgate accounting and auditing rules
and regulations. It keeps the general accounts of the government, supporting vouchers, and other
documents. It submits financial reports to the President and Congress.

2. ___________________________ responsible for the formulation and implementation of the national

budget with the goal of attaining the nation’s socio-economic objectives.

3. ___________________________ functions under the Department of Finance and is the cash custodian of
the government. It is authorized to received and keep national funds and manage and control the
disbursements thereof; and maintain accounts of financial transactions of all national government offices,
agencies and instrumentalities.

4. ___________________________ any department, bureau or office of the national government, or any of

its branches and instrumentalities, or any political subdivision, as well as any government owned and
controlled corporation (GOCC).

5. ___________________________ the authorization made by a legislative body to allocate funds for

purposes specified by the legislative or similar authority.

6. ___________________________ authorization issued by the DBM to government agencies to incur

obligations for specified amounts contained in a legislative appropriation in the form of budget release
documents. It is also referred to as Obligational Authority.

7. ___________________________ an act of duly authorized official which binds the government to the
immediate or eventual payment of a sum of money. Obligation maybe referred to as a commitment that
encompasses possible future liabilities based on current contractual agreement.

8. ___________________________ refers to the actual amount paid out of the budgeted amount. This is the
point where the government agencies obtain access to the government funds.

9. ___________________________ pertains to the document needed upon incurrence of obligations. The

Requesting Office shall prepare this document, supported by a valid claim documents like disbursement
vouchers, payroll, purchase/job orders, itinerary of travel, etc.

10. ___________________________ authority issued by the DBM to central, regional and provincial offices and
operating units to cover their cash requirements. It specifies the maximum amount of cash that can be
withdrawn from a government servicing bank in a certain period.

11. ___________________________ used to monitor the balance of NCA and to determine the amount of
allotments not covered by NCA.

12. ___________________________ used to monitor the budgeted amounts, actual collections and
remittances of revenue and other receipts.

13. ___________________________ used to monitor appropriations and allotments. This is to ensure that
allotments will not exceed appropriations.

14. ___________________________ used to monitor the allotments received, obligations incurred against the
corresponding allotment, and the actual disbursements made. This is to ensure that obligations incurred
will not exceed allotments while actual disbursements will not exceed the obligations incurred.

15. ___________________________ used to record the approved special budget and the corresponding
utilizations and disbursements.

16. ___________________________ pertain to all types of employee benefits, e.g., salaries, bonuses,
allowances, cash gifts, etc.

17. ___________________________ pertain to various operating expenses other than employee benefits and
financial expenses, e.g., travel, utilities, supplies, etc.
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 18. ___________________________ pertain to finance costs, e.g., interest expense, bank charges, losses on
foreign exchange transactions, etc.

19. ___________________________ pertain to capitalizable expenditures, e.g., expenditures on the

construction of public infrastructures, acquisition costs of equipment, etc.
20. ___________________________ used to recognize in the books of government agencies, the constructive
remittance of taxes withheld to the Bureau of Internal Revenue (BIR) or customs duties withheld to the
Bureau of Customs (BOC), and the constructive receipt of NCA for those taxes and customs duties.

THEORY

1. It encompasses the processes of analyzing, recording, classifying, summarizing and communicating all
transactions involving the receipt and disposition of government funds and property, interpreting the results
thereof
a. Government auditing c. Government accounting
b. Government reporting d. Government analyzing

2. What is the title of the revised government accounting system for national government agencies which will
be effective January 1, 2016?
a. Government Accounting Manual (GAM)
b. New Government Accounting System (NGAS)
c. Philippine Government Accounting System (PGAS)
d. National Government Accounting Manual (NGAM)

3. Which government body keeps the general account of government, promulgates accounting rules and
regulation, and submits to the President and Congress an annual financial report of the government?
a. Commission on Audit c. Bureau of Treasury
b. Department of Budget and Management d. Department of Finance

4. Which is responsible for the design, preparation and approval of accounting systems of government
agencies?
a. Department of Budget and Management c. Commission on Audit
b. Bureau of Treasury d. The government agency concerned

5. No money shall be paid out of the National Treasury except in pursuance of

a. Appropriation c. Obligation
b. Allotment d. Special executive order

6. It is the authorization from the Department of Budget and Management to any agency to incur obligation
up to a specified amount that must be within the legislative appropriation
a. Obligation c. Allotment
b. Appropriation d. Fund release

7. What is the role of the Bureau of Treasury in relation to government accounting responsibility?
a. To receive and keep national funds and manage or control disbursements thereof
b. To design, prepare, and approve the accounting systems of government agencies
c. To keep the general accounts of the national government
d. To prepare the annual financial report of the national government, its instrumentalities and
government-owned or controlled corporations

8. It refers to the first step in the government budgetary process wherein the President, through the assistance
of the Department of Budget and Management shall prepare and submit to the Congress within 30 days
from the opening of regular session of Congress a budget of expenditures and sources of financing, including
receipts from existing and proposed revenue measures
a. Budget Preparation c. Budget Execution
b. Budget Legislation d. Budget Accountability

9. It refers to the second step in the government budgetary process which involves the enactment by the
Congress of the General Appropriation Act (GAA) based on the budget submitted by the President which
cannot be increased by the Congress. The initiative for the enactment of the appropriation law shall come
from the House of Representatives
a. Budget Preparation c. Budget Execution
b. Budget Legislation d. Budget Accountability

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 10. It refers to the third step in the government budgetary process which involves the implementation of the
general appropriation act which includes the release of revenue allotment under the supervision of
Department of Budget and Management
a. Budget Preparation c. Budget Execution
b. Budget Legislation d. Budget Accountability

11. It refers to the final step in the government budgetary process which involves the submission of property
documentary reports by responsible officer, liquidation of expenditures and audit conducted by Commission
on Audit to ensure the public funds are spent in accordance with the appropriation act
a. Budget Preparation c. Budget Execution
b. Budget Legislation d. Budget Accountability

12. The books of accounts of National Government Agencies under the GAM shall consists of the following,
except
a. General Journal e. General Ledgers
b. Cash Receipts Journal f. Subsidiary Ledgers
c. Cash Disbursement Journal g. Regular Agency and National Government Books
d. Check Disbursements Journal

13. The registries of National Government Agencies under the GAM shall consist of the following, except
a. Registries of Revenue and Other Receipts (RROR)
b. Registry of Appropriation and Allotments (RAPAL)
c. Registries of Allotments, Obligations and Disbursements (RAOD)
d. Registries of Budget, Utilization and Disbursements (RBUD)
e. Registries of Priority Development Assistant Program (RPDAP)

14. The following are the classifications of different RAPAL, RAOD and RBUD, except
a. RAPAL/RAOD/RBUD – Personal Services
b. RAPAL/RAOD/RBUD – Maintenance and Other Operating Expenses
c. RAPAL/RAOD/RBUD – Financial Expenses
d. RAPAL/RAOD/RBUD – Capital Outlays
e. RAPAL/RAOD/RBUD – Noncash Expenses

15. On January 1, 2020, the collecting officer of Bureau of Customs collected P450,000 import duties plus fines
of P50,000 on the goods of an importer. On February 1, 2020, the Bureau of Customs remitted the P500,000
to the Bureau of Treasury.

Question 1: What is the journal entry to record the collecting of the import duties and fines?
a. Debit Cash-Treasury/Agency Deposit, Regular P500,000 and Credit Cash-Collecting Officer P500,000
b. Debit Cash-Collecting Officer P500,000 and Credit Import Duties P450,000 and Fines/Penalties
P50,000
c. Debit Cash-Treasury/Agency Deposit, Regular P500,000 and Credit Import Duties P450,000 and
Fines/Penalties P50,000
d. None of the above

Question 2: Using the same data, but assuming the importer directly deposited the P450,000 import duties
and P50,000 fines through Authorized Agent Banks instead of collection by a customer collecting officer,
what is the journal entry to record the collection/remittance of import duties to Bureau of Treasury?
a. Debit Cash-Treasury/Agency Deposit, Regular P500,000 and Credit Cash-Collecting Officer P500,000
b. Debit Cash-Treasury/Agency Deposit, Regular P500,000 and Credit Import Duties P450,000 and
Fines/Penalties P50,000
c. Debit Cash-Collecting Officer P500,000 and Credit Import Duties P450,000 and Fines/Penalties
P50,000
d. None of the above

16. On December 31, 2019, the Department of Finance billed its lessee on one of its buildings in the amount of
P100,000. On January 31,2020, the Department of Finance collected all of the accounts receivable. On
February 28, 2020, the Department of Finance remitted the entire collected amount to the Bureau of
Treasury. What is the journal entry to record the remittance by the Department of Finance to the Bureau of
Treasury?
a. Debit – Accounts Receivable P100,000 and Credit – Rent Income P100,000
b. Debit – Cash Collecting Officers P100,000 and Credit – Accounts Receivable P100,000
c. Debit – Cash – Treasury/Agency Deposit, Regular – P10,000 and Credit Cash – Collecting Officer –
P100,000
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 d. Debit – Accounts Receivable P100,000 and Credit – Retained Earnings P100,000

17. Department of Health (DOH) received Notice of Cash Allocation in the amount of P200,000 from Department
of Budget and Management. DOH made total cash disbursements in the amount of P195,000. What is the
journal entry to recognize reversion of unused Notice of Cash Allocation by DOH in its books?
a. Debit Expenses P5,000 and credit Cash-MDS, Regular P5,000
b. Debit Investment P5,000 and credit Cash-MDS, Regular P5,000
c. Debit Retained Earnings P5,000 and credit Cash-MDS, Regular P5,000
d. Debit Subsidy from National Government P5,000 and credit Cash-MDS, Regular P5,000

18. The Bureau of Treasury received P100,000 cash remittance from Department of Agrarian Reform (DAR) from
its miscellaneous income. What is the journal entry of the Bureau of Treasury in its accounting books to
record the receipt of cash remittance from the income of a national government agency?
a. Debit Cash in Bank, Local Bank P100,000 and Credit Miscellaneous Income of DA P100,000
b. Debit Cash in Bank, Local Bank P100,000 and Credit Savings of DA, Regular P100,000
c. Debit Cash in Bank, Local Bank P100,000 and Credit Cash-Treasury/Agency Deposit, Regular
P100,000
d. Debit Cash in Bank, Local Bank P100,000 and Credit Cash-Collecting Officer, DA P100,000

JOURNAL ENTRIES

Prepare the journal entries for the following transactions:

1. Department of Science and Technology (DOST) receives its General Appropriations Act (GAA) amounting to
P10,000,000.

2. DOST receives its allotment from DBM amounting to P8,000,000.

3. DOST incurs obligations by entering the following contracts:

a. Hiring employee contracts amounting to P1,000,000
b. Entered into a contract for purchase of office supplies P500,000
c. Entered into a contract for purchase of office equipment worth P2,500,000

4. DOST receives Notice of Cash Allocation (NCA) from DBM amounting to P7,000,000, net of tax.

5. Employees have rendered services for the period. The following payroll computations were approved, and
cash advances were granted:

Salaries and wages P400,000

Personal Economic Relief Allowance (PERA) 50,000
Gross Compensation P450,000
Deductions:
Withholding tax (80,000)
GSIS (30,000)
PAGIBIG (10,000)
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 PhilHealth (20,000)
Total (P140,000)
Net Compensation P310,000

6. DOST pays for the following expenses:

Water P 15,000
Electricity 70,000
Telephone 20,000
Janitorial 30,000
Security 40,000
Total P175,000
Less: Withholding taxes (17,500)
Net P157,500

7. Remittance of Withholding Tax

Books of DOST Books of BIR Books of BTr

8. Remittance to GSIS, Pag-IBIG and Philhealth

9. Billings, collections and remittances

a. DOST bills revenue of P1,000,000 from permits and licenses.

b. DOST collects P100,000 from the billed revenue

c. Remittance to the Bureau of Treasury (BTr)

10. Reversion of Unused Notice of Cash Allocation

- - End - -
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 IFRS 15: REVENUE FROM CONTRACTS WITH CUSTOMERS

IFRS 15

1. Under IFRS 15, what is the recognition principle of revenue arising from contracts with customers?
a. The revenue shall be recognized by the entity when the contract price has already been received
and the period of refund has already expired
b. The revenue shall be recognized by the entity when it is probable that there will be inflow of future
economic benefits to the entity and the revenue can be measured reliably
c. The revenue shall be recognized by the entity at the time of perfection of the contract with the
customer
d. The revenue shall be recognized by the entity when or as the entity satisfies the performance
obligation by transferring the promised goods or services to the customer

2. According to IFRS 15, what is the accounting treatment of the transaction price when a contract with a
customer has multiple performance obligations?
a. The transaction price shall be recognized as revenue of the most important performance obligation

b. The transaction price shall be allocated equally to the different performance obligations
c. The transaction price shall be recognized as revenue only at the end of completion of all
performance obligations
d. The transaction price shall be allocated to the different performance obligations by reference to
their relative standalone selling prices

3. Under PFRS 15, the good or service is considered distinct if

Statement 1: The customer can benefit from it, either on its own or together with other resource that are
readily available to the customer
Statement 2: The good or service is separately identifiable from other goods or services
a. Only Statement 1 is correct
b. Only Statement 2 is correct
c. Both statements are correct
d. Both statements are incorrect

4. Which of the following situations would not allow the performance obligations to be satisfied over time?
a. The customer simultaneously receives and consumes the benefits provided by the performance of
the entity
b. The performance of the entity does not create an asset with alternative use to the entity and the
entity has an enforceable right to payment for performance completed to date
c. The performance of the entity creates or enhances an asset that the customer controls as the asset
is created or enhanced
d. The performance of the entity creates an asset with alternative use to the entity and the entity may
not be able to enforce the right to payment for performance completed to date

5. According to IFRS 15, in which of the following instances will the revenue from contracts with customers be
recognized at a point in time instead of over time?
a. When the customer simultaneously receives and consumes all of the benefits provided by the entity
as the entity performs
b. When the entity’s performance creates or enhances an asset that the customer controls as the asset
is created
c. When 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
d. When the entity has transferred physical possession and legal title to the asset to the customer

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 Long-Term Construction Contracts (LTCC)

1. It is a contract specifically negotiated for the construction of an asset or a combination of assets that are
closely interrelated or interdependent in terms of their design, technology and function or their ultimate
purpose or use.
a. Construction contract
b. Construction in progress
c. Progress billing
d. Negotiated contract

2. Contract revenue in construction contract comprises

a. The initial amount of revenue agreed in the contract
b. Variation in contract work, claim and incentive payment
c. Both a and b
d. Neither a nor b

3. In selecting an accounting method for a newly contracted long-term construction project, the principal
factor to be considered should be
a. The terms of payment in the contract
b. The degree to which a reliable estimate of the costs to complete and extent of progress toward
completion is practicable
c. The method commonly used by the contractor to account for other long-term construction contracts
d. The inherent nature of the contractor's technical facilities used in construction

4. When work to be done and costs to be incurred on a long-term contract can be estimated reliably, which of
the following methods of revenue recognition is preferable?
a. Installment method c. Completed-contract method
b. Percentage of completion method d. None of these

5. Which statement is incorrect when the outcome of the construction contract cannot be estimated reliably?
a. Contract revenue and contract cost shall be recognized by reference to the stage of completion of
the contract activity at the end of the reporting period
b. Revenue shall be recognized only to the extent of the contract costs incurred that is probable and
will be recoverable
c. Contract costs shall be recognized in the period which they are incurred
d. An expected loss on the construction contract shall be recognized as a provision immediately

6. Contract costs of a construction contract comprise all of the following, except

a. Costs that can directly relate to the specific contract
b. Costs that are attributable to contract activity in general and can be allocated in the contract
c. General administration costs for which reimbursement is not specified in the contract
d. Such other costs that are specifically chargeable to the customer under the terms of the contract

7. It is an entity’s right to consideration in exchange for goods and services that the entity has transferred to a
customer when that right is conditioned on something other than passage of time
a. Contract receivable
b. Construction in progress
c. Contract asset
d. Contract liability

8. It is an entity’s obligation to transfer goods or services to customer for which the entity received
consideration from the customer.
a. Progress billings
b. Advances from customers
c. Contract liability
d. Contract asset

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 9. Company X faced with an impending loss on a long-term construction project and has asked for advice on
how to book the impending loss. Assuming that the company employs the percentage of completion
method, when should the loss be taken up in the company’s books?
a. Immediately
b. Over the period of the project
c. Upon completion of the project
d. When progress billings exceed contract costs incurred

10. On January 1, 2022, Company X was contracted to build an office building for Company Y for a total contract
price of P11,800,000. Estimated total contract costs are P10,400,000. Costs incurred to date related to the
project are as follows:

Cost of direct materials used P800,000

Cost of direct labor, including supervision of P200,000 600,000
Cost of indirect materials used 220,000
Cost incurred in obtaining the contract previously written off 280,000
Depreciation of equipment used on the project 480,000
Payroll of design and technical department
allocated to the contract 320,000
Insurance cost (1/3 for the project) 720,000
Costs of contracted research and development 420,000
Depreciation of idle equipment not used on a particular contract 240,000
Selling costs 180,000
General and administrative expenses specifically
included under the term of the contract (chargeable to customer) 120,000
Borrowing cost incurred during the construction period 520,000
Advanced made to subcontractors 400,000

Using the cost-to-cost method, what is the realized gross profit to be recognized in 2022?
a. P538,440
b. P417,340
c. P500,769
d. P444,220

11. On January 1, 2021, Company X entered into a contract to construct a building for a customer. Company X
identified its performance obligation to be satisfied over time. The company uses the input method based
on costs to measure its progress on the contract. The contract price is P9,000,000. Information on the
construction is provided below:

2021 2022 2023

Contract costs incurred per year P2,760,000 P3,540,000 P500,000
Billings per year 50% 30% 20%
Collections on billings per year 90% 90% balance
Estimated costs to complete 4,140,000 700,000 -

Requirement: Compute for the revenue, cost of construction and gross profits in 2021, 2022 and 2023,
under:
a. Percentage of completion method
b. Zero profit method

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 12. In 2021, DC Builders started work on a P1,000,000 fixed price contract. Information on the construction is
shown below:

2021 2022 2023

Costs incurred to date P200,000 P825,000 P1,020,000
Estimated costs to complete 600,000 275,000 -

The contract was completed in 2023.

Requirement: Compute for the revenue, cost of construction and gross profits in 2021, 2022 and 2023,
under:
a. Percentage of completion method
b. Zero profit method

13. On April 1, 2022, Company X obtained a contract to construct a building. The building was estimated to be
built at a total cost of P17,500,000, but that amount will be reduced depending on when construction of
building is completed and is scheduled for completion on October 2024. The contract contains a penalty
clause to the effect that the other party was to deduct P35,000 from the contract price for each week of
delay.

On December 31, 2022 and 2023, Company X cannot predict the variable consideration regarding the
completion of the project on time because of the different outcomes possible based on the company’s
construction schedule and its experiences with past projects.

On year 2024, due to bad weather conditions, the company does not expect that it can finish the building
on time. The completion of the project was delayed for 5 weeks. Below are the following data pertaining to
the construction periods.
2022 2023 2024
Cost incurred P1,750,000 6,440,000 1,085,000
Estimated cost to complete 7,000,000 910,000
Progress billings 1,400,000 15,225,000 4,200,000

Question 1:
Using the percentage of completion method, what is the realized gross profit (loss) in 2023?
a. P8,260,000
b. P8,400,000
c. P11,725,000
d. P10,150,000

Question 2:
Using the percentage of completion method, what is the realized gross profit (loss) in 2024?
a. (P35,000)
b. (P122,500)
c. P822,500
d. P840,000

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 14. On January 1, 2021, a contractor enters into a construction contract which includes a fixed contract price of
P144,000,000 to build a bridge. The contract has a December 31 year-end.

On December 31, 2021, the contractor’s estimate of the total contract cost is still P96,000,000. However, by
the end of 2022, the contractor’s estimate of contract cost increased to P120,000,000, excluding the
variation below. In 2022, the customer and the contractor agreed to a variation resulting in an increase in
contract revenue of P2,400,000 and estimated additional contract costs of P1,800,000.

Actual cumulative costs incurred to the end of 2021, 2022 and 2023 (the end of the contract) including the
costs of the variation are P36,000,000, P85,260,000 and P120,600,000, respectively.

The contractor determines the stage of completion of the contract costs incurred for a work performed to
date bear to the latest estimated total contract costs.

Determine the profit (loss) for each year

2021 2022 2023
a. P18,000,000 (P780,000) P8,580,000
b. P18,000,000 P17,220,000 P25,800,000
c. P18,900,000 (P1,680,000) P8,580,000
d. P18,000,000 (P2,460,000) P10,260,000

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 Franchise

1. Under PFRS 15, how shall revenue from contracts with customers such as revenue from initial franchise fee
be recognized by the franchisor?
a. Upon receipt of the initial franchise fee by the franchisor
b. Upon signing of the franchise agreement
c. When the franchisor satisfies the performance obligation under the franchise agreement
d. Applying the legality over the substance of the transaction

2. The franchise revenue is satisfied over time when

a. The franchise fee is payable upon signing of contract
b. The performance obligations regarding the franchise rights are completed when the franchise opens
c. Franchise rights are transferred at a point in time
d. The franchisor provides right to access rather than transferring the control

3. Which of the following indicator shows that the initial franchise fee shall be recognized as sales revenue at
a point in time instead over time?
a. When the franchisee simultaneously receives and consumes the benefits provided by the franchisor’s
performance as the franchisor performs
b. When the franchisor’s performance creates or enhances an asset that the franchisee controls as the
asset is created or enhanced
c. When the franchisor’s performance does not create an asset with alternative use to the franchisor
and the franchisor has an enforceable right to payment for performance completed to date
d. When the franchisee has legal title to the franchise and has the significant risks and rewards of
ownership of the franchise

4. What is the measurement of franchise revenue recognized from franchise agreement?

a. Fair value of the consideration received or receivable
b. Book value of the consideration received or receivable
c. Carrying amount of the consideration received or receivable
d. Nominal amount of the consideration received or receivable

5. Under PFRS 15, when shall a franchisor recognize revenue from contingent franchise fee or revenue for a
sales-based royalty?
a. When the sales of the franchisee occur
b. When the performance obligation to which some or all of the contingent franchise fees or sales-
based royalty has been satisfied or partially satisfied
c. When both A and B events occur
d. When either A or B event occurs

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 6. On January 1, 2021, Company X granted a franchisee the right to operate a restaurant in a specific location
using Company X’s trade name, concept and menu over a 10-year period. The franchise agreement states
an upfront fee of P1,200,000, which includes P200,000 for kitchen equipment that the company will
purchase for the franchisee, plus 10% royalty based on the franchisee’s sales. The P200,000 amount reflects
the stand-along selling price of the equipment.

Company X regularly undertakes activities such as marketing research, product development, advertising,
campaigns, and implementing operational efficiencies and pricing strategies to support the franchise name.

Company X delivered the equipment on February 1, 2021. The restaurant opened on April 1, 2021, at which
date the license period starts to run. The franchisee reports sales of P9,000,000 for the year.

Company X has determined that the license provides right to access the Intellectual Property.

Requirement: Provide the journal entries.

7. On January 1, 2021, Company X sells computer software to Mr. Y for a five year term. The agreement provide
that Mr. Y shall pay P2,000,000 upfront fee, P500,000 upon signing the contract and the balance in two
equal annual payments starting December 31, 2021. The present value factor at 8% is 1.78326 for 2 periods.
The upfront fee paid by Mr. Y is for the following performance obligations:

• Training services with stand-alone selling price of P400,000.

• Equipment with stand-alone selling price of P1,000,000.
• Computer software with stand-alone selling price of P600,000.

Mr. Y commenced its business operations on October 1, 2021. The entity determined that the performance
obligations are distinct.

Question 1: Assume that Mr. Y has the right to use the intellectual property, the journal entry on January
1, 2021 would include
a. A debit of Notes receivable of P2,000,000
b. A credit of Unearned Service Revenue of P367,489
c. A credit of Sales Revenue – Equipment of P1,000,000
d. A credit of Unearned Franchise Revenue – Software of P918,772.50

Question 2: Assume that Mr. Y has the right to use the intellectual property, the journal entry on October
1, 2021 would include
a. Debit to Cash of P500,000
b. Debit to Franchise Revenue – Software of P551,233.50
c. Credit to Unearned Interest Income of P162,555
d. Credit to Sales Revenue – Equipment of P918,722.50

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 Question 3: Assume that Mr. Y has the right to use the intellectual property, on December 31, 2021, how
much is the total revenue from license contract?
a. P0
b. P1,286,211.50
c. P1,837,445
d. P2,000,000

Question 4: Assume that Mr. Y has the right to access the intellectual property, the journal entry on October
1, 2021, would include
a. Debit to Unearned Franchise Revenue – Tradename of P27,562
b. Credit Service Revenue – Training of P367,489
c. Debit to Sales Revenue – Equipment of P918,722.50
d. Credit Notes Receivable of P1,500,000

Question 5: Assume that Mr. Y has the right to access the intellectual property on December 31, 2021, how
much is the total revenue from license contract?
a. P1,286,211.50
b. P1,313,773.18
c. P1,396,458.20
d. P1,837,445

8. On January 1, 2022, an entity granted a franchise to a franchisee. The franchise agreement required the
franchisee to pay a nonrefundable upfront fee in the amount of P800,000 and ongoing payment of royalties
equivalent to 5% of the sales of the franchisee. The franchisee paid the nonrefundable upfront fee on
January 1, 2022.

In relation to the nonrefundable upfront fee, the franchise agreement required the entity to render the
following performance obligations:
• Training services with stand-alone selling price of P400,000.
• To deliver 20,000 units of raw materials to the franchisee with stand-alone selling price of P500,000.
• To allow the franchisee to use the entity’s tradename for a period of 10 years starting January 1,
2022 with stand-alone selling price of P100,000. The entity has determined that the license provides
right to access the Intellectual Property.

On January 31, 2022, the entity completed the training services. On December 31, 2022, the entity was able
to deliver 6,000 units of raw materials to the franchisee. For the year ended December 31, 2022, the
franchisee reported sales revenue amounting to P200,000. The entity had determined that the performance
obligations are separate and distinct from one another.

Question 1: What is the amount of the nonrefundable upfront fee to be allocated to the training services?
a. P240,000
b. P320,000
c. P400,000
d. P500,000

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 Question 2: What is the amount of revenue to be recognized in relation to the use of delivery of raw
materials for the year ended December 31, 2022?
a. P120,000
b. P150,000
c. P200,000
d. P400,000

Question 3:
What is the amount of revenue to be recognized in relation to the use of entity’s tradename for the year
ended December 31, 2022?
a. P8,000
b. P10,000
c. P20,000
d. P100,000

Question 4:
Assume the customer has right to use the intellectual property, what is the amount of total revenue from
franchise contract to be recognized on December 31, 2022?
a. P448,000
b. P458,000
c. P520,000
d. P530,000

9. On January 1, 2021, Company X signed an agreement to grant a license over a patented technology to
Company Y for an initial contract fee of P500,000 for 4 years. Of this amount, P100,000 was paid when the
agreement was signed and the balance payable in four annual payments beginning on December 31, 2021.
Company X signed a non-interest bearing note for the balance. Company X’s rating indicates that he can
borrow money at 16% for the loan of this type. Assume that substantial services amounting to P150,000 had
already been rendered by Company X and that additional indirect cost of P12,000 was also incurred. PV
factor is 2.80.

On January 15, 2021, the license is transferred to Company Y. The license agreement provides that Company
Y has the right to use the entity’s intellectual property as it exists at the point in time at which the license is
granted.

Question 1: The net income to be reported on December 31, 2021 is

a. P218,000
b. P230,000
c. P262,800
d. P274,800

Question 2: Assuming the license provides Company Y the right to access the entity’s intellectual property
as it exists throughout the license period. The net income to be reported on December 31, 2021 is
a. (P22,200)
b. P45,500
c. P90,300
d. P262,800

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 Consignment Sales

1. A shipment of inventory by the manufacturer or wholesaler to a dealer to be sold by him on a commission

basis on the risk and account of the manufacturer or wholesaler is called
a. Arrangement
b. Contract
c. Agreement
d. Consignment

2. The person who sends the goods to the agent to be sold by him on commission is known as
a. Consignor
b. Consignee
c. Buyer
d. Seller

3. The person to whom goods are sent for sale on commission is

a. Merchant
b. Wholesaler
c. Retailer
d. Consignee

4. The consignee is the

a. Principal
b. Agent
c. Buyer
d. Seller

5. The risk of stock on consignment lies with

a. Consignee
b. Consignor
c. Buyer
d. Seller

6. In the books of the consignor, the balance of the consigned goods inventory account would be shown
a. As an asset in the Statement of Financial Position of the consignee
b. As liability in the Statement of Financial Position of the consignee
c. As an asset in the Statement of Financial Position of the consignor
d. As liability in the Statement of Financial Position of the consignor

7. The sales revenue and cost of goods sold should be recognized by the consignor
a. When the cash is received from the consignee
b. When the goods are shipped to the consignee
c. When the goods are shipped by the consignee to the third party (customer)
d. When the consignor receives the notification from consignee that the merchandise have been sold
to a third party (customer)

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 8. ABC Corporation consigned ten (10) bags to XYZ Inc. These bags had a cost of P10,800 each. Freight on the
shipments amounting to P7,200 was paid by ABC Corp. XYZ submitted an accounting of sales stating that it
has sold six (6) bags and remitted cash amounting to P81,900 to ABC Corp. after deducting the following:

Commission, 15% of sales ?

Selling expenses 5,400
Delivery and installation of items sold 3,600
Cartage cost upon receipt of consigned goods 900

Compute the following:

Question 1:
The total consignment sales
a. P64,800
b. P69,120
c. P91,800
d. P108,000

Question 2:
The commission earned on the sale of the six (6) bags by XYZ Inc.
a. P9,720
b. P10,800
c. P15,000
d. P16,200

Question 3:
The consignor net profit
a. P13,140
b. P17,100
c. P19,800
d. P36,000

Question 4:
The cost of inventory on consignment to be reported by ABC Corporation at the end of the period
a. P43,200
b. P46,080
c. P46,440
d. P66,600

9. Company X consigned 25 shirts to Company Y. The cost of the shirt is P310 each. Company X paid the freight
cost amounting to P500. The shirt is to be sold at P500 each payable P100 in the month of purchase and P20
per month thereafter. Company Y’s commission on consigned goods is 20%.

Company Y was able to sell 15 shirts in July and 5 shirts in August. The regular monthly collections by
Company Y and the appropriate cash remittances have been made to Company X at the end of each month.
The parties agreed that Company Y is allowed only to deduct a commission based on the amount collected
from consignment.

Question 1:
The cost of inventory on consignment in the hands of Company Y
a. P1,550
b. P1,650
c. P1,750
d. P2,450

Question 2:
Company X’s net profit
a. P1,400
b. P1,500
c. P2,000
d. P2,940
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 Question 3:
Total remittance by Company Y
a. P460
b. P1,650
c. P1,840
d. P2,000

10. Company X consigned 12 cabinets, which costs P960 each, to Company Y, which was to sell it for a 15%
commission based on selling price.

Company X paid freight cost amounting to P240 and reimbursed Company Y P250 for its delivery to
customers. On August 30, 2020, Company Y reported that it had sold 8 cabinets, 6 for cash at P1,800 and 2
for credit basis at P2,160 of which it had collected 20% as down payment.

Question 1: The cost of inventory in the hands of Company Y

a. P3,840
b. P3,920
c. P4,003
d. P4,080

Question 2: The net profit of Company X on consignment sales

a. P4,006
b. P4,682
c. P4,762
d. P4,845

Question 3: The amount remitted by Company Y to Company X

a. P9,146
b. P9,229
c. P9,396
d. P11,664

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 Installment Sales

1. An acceptable method for recognizing profit when the collection of cash is in doubt is the
a. Percentage of completion method
b. Zero-profit method
c. Installment method
d. Consignment method

2. Under the Installment method, the gross profit rate based on sale may be computed as
a. Sales divided by the gross profit
b. Gross profit divided by the cost of sales
c. Deferred gross profit divided by the Installment Accounts Receivable
d. All of the above

3. The excess of fair value of traded-in merchandise over the trade-in value in an installment sale is known as
a. Over allowance
b. Under allowance
c. Net realizable value
d. Realized gross profit

4. Income is recognized using the Installment Method of accounting generally equals cash collected multiplied
by the
a. Net operating percentage
b. Gross profit percentage
c. Net operating percentage adjusted for expected uncollectible accounts
d. Gross profit percentage adjusted for expected uncollectible accounts

5. In installment sales, how shall the seller classify and present deferred gross profit account on its Statement
of Financial Position?
a. Equity account
b. Income account
c. Unearned revenue account
d. Asset valuation allowance or contra-receivable account

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 6. ABC Company accounts for its sales on the installment sales basis. At the beginning of 2022, the ledger
accounts include the following account balances:

Installment accounts receivable, 2020 P180,000

Installment accounts receivable, 2021 576,000
Deferred gross profit, 2020 75,600
Deferred gross profit, 2021 216,000

At the end of 2022, account balances before adjustment for unrealized gross profit on installment sales are:

Installment accounts receivable, 2020 P0

Installment accounts receivable, 2021 144,000
Installment accounts receivable, 2022 780,000
Deferred gross profit, 2020 75,600
Deferred gross profit, 2021 206,100
Deferred gross profit, 2022 360,000

Installment sales in 2022 are made at 25% above cost of merchandise sold; cash sales amounting to
P1,400,000 were made at mark-up of 30% of sales and credit sales of P400,000 at a mark-up of 32%.

During 2022, upon default in payment by the customer, the company repossessed the merchandise with a
net realizable value (fair market value) of P12,000. The sale was made in 2021 for P64,800 and P38,400 had
been collected prior to repossession.

Question 1:
Total realized gross profit before gain or loss on repossession in 2022
a. P204,000
b. P227,700
c. P431,700
d. P979,700

Question 2:
Realized gross profit in installment sales in 2022
a. P204,000
b. P227,850
c. P431,700
d. P979,700

Question 3:
The realized gross profit on installment sales in 2022 for 2021 sales
a. P75,600
b. P152,100
c. P204,000
d. P267,700

Question 4:
The gain or loss on repossession is
a. P4,500 loss
b. P4,500 gain
c. P14,400 loss
d. P14,400 gain

Question 5:
Assuming that ABC wants to improve the salability of the repossessed merchandise, the company incurred
P1,000 for reconditioning. After which, the company was able to sell the merchandise to another customer
for P16,250 at a downpayment of 40%. Compute the realized gross profit on the subsequent sale.
a. P1,040
b. P1,300
c. P1,624
d. P1,700

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 7. Company X sells home theater set both on installment and cash basis. Mr. Y purchased a set from Company
X on March 30, 2021, for P367,500 which has a cost of P289,800.

A used set is accepted as down payment, P89,600 being allowed on the trade in. The used set can be resold
for P112,140 after reconditioning cost of P5,362. The company expects to make a 20% gross profit on the
sale of used set. The balance of the sale is to be paid on a 10-month installment basis starting May 1, 2021.

Mr. Y defaulted payment starting November 1, 2021, and the set was immediately repossessed. The
repossessed merchandise was appraised at a fair market value of P65,625 at the time of repossession.

Company X had to incur additional cost of repairs amounting to P6,475 before the car was subsequently
resold on December 1, 2021, for P90,125 cash to Mr. W.

Compute for the net income to be recognized for the year 2021.
a. P44,940
b. P51,415
c. P68,243
d. P69,293

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