Method

1. Excel Outline
2. Index Card Summary
3. Practice Questions

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Problem 10

01. TOPIC
01. INTRODUCTION

02. ACCOUNTS IN PARTNERHSIP

03. CAPITAL INTEREST VS. PROFIT INTEREST

04. PARTNERSHIP FORMATION

05. MEASUREMENT

06. PARTNERSHIP OPERATIONS

07. COMPUTATION OF NET INCOME

08. DIFFERENT PROFIT ALLOCATIONS

09. WEIGHTED AVERAGE CAPITAL

10. ADJUSTMENT TO PARTNER'S RESPECTIVE CAPITALS

01. INTRODUCTION

Very essence of Partnerships

to create profit
General professional partnerships
for the practice of profession
UNDERLYING EQUITY THEORIES

Proprietary Theory
partnership and partners are one

Entity Theory
partnership and partners are separate
entities
 02. ACCOUNTS

Y THEORIES

ers are one Regular Drawi

closed to capital

ers are separate Why input reg

account when
to capital acco
For the purpose
(WAC)
WAC → transact
02. ACCOUNTS IN PARTNERHSIP

Regular Drawings (Net Dr. bal.)

closed to capital account at the end

Why input regular drawiings to a separate drawing

account when the amounts will inevitably be closed
to capital account?
For the purpose of computing the weighted average capital
(WAC)
WAC → transactions that only affect capital accounts
Temporary Drawings
closed to capital account at the end

Withdrawal of Non-cash Asset

First update from BV to FV at the date
of withdrawal
Advances to partner
A receivable
May bear interest (interest income)
03. CAPITAL INTEREST VS. PROFIT INTEREST

Other term for capital interest

Capital ratio

Other term for profit interest

Profit ratio
FIT INTEREST 04. PARTNERSHIP FORM
04. PARTNERSHIP FORMATION
05. MEASUREMENT

AFACO About agreed value:

If the price is unreasonable, the court will
intervene to fix the price
If measurement of non-cash asset has no
CV/BV as last basis
refer ot original cost

AFL

What happened?
Non-cash contribution converted into cash

Note:
Original cost = 25,000
Sold on same day of formation = 50,000
FV on formation date: 50,000

What if land was sold @ 50K 3 years later?

Capital of Ely = 25K
value:
nreasonable, the court will
the price
of non-cash asset has no
basis
al cost

Liabilities assumed
Liabilities prior to formation are brought to
the partnership
Liabilities NOT assumed
Liabilities prior to formation are NOT brought
converted into cash to the partnership. The owner pays them
personally before forming the partnership.

If assumption of liab. is SILENT?

rmation = 50,000 Civil Code (not assumed if silent)
50,000 → "Novation is NEVER presumed"
HOWEVER: assume the liability if the answer
is not among the choices.
@ 50K 3 years later?
 Upward Revaluation
A SPECIFIC ASSET will increase its value
Goodwill Method
The goodwill account increases; not any
other speciic asset

Note: Goodwill Method (TCC < AC)

Not included in partnership (generally)
Revaluation
IC ASSET will increase its value
Method
will account increases; not any
ciic asset
Problem I
Increase in Bad Debts Unused office supplies
BDE xxx → decrease in capital Asset method (update current bal. of the as
ABD xxx
Office supplies 32.4K
Cash/AP 32.4K
Accrued Income
Income earned but NOT YET received Office Sup. Exp. 8.4K
Receivable Office Supplies 8.4K

Entries:
Accrued Income xxx
Income xxx Equipment BV
= Cost - Accumulated Depreciation

Accrued Salaries
An expense incurred but NOT YET PAID Interest on Notes Payable
Jul. 1 → Oct. 1 = 3 months/12 months
Entries: 0.12 x 60K x 3/12 = 1.8K int. payable
Salaries Expense xxx Entries:
Salaries Payable xxx Int. Exp. 1.8K
Int. Pay. 1.8K
Accrued Salaries
An expense incurred but NOT YET PAID Interest on Notes Payable
Jul. 1 → Oct. 1 = 3 months/12 months
Entries: 0.12 x 60K x 3/12 = 1.8K int. payable
Salaries Expense xxx Entries:
Salaries Payable xxx Int. Exp. 1.8K
Int. Pay. 1.8K

Interest on Notes Receivable

Income
Entries:
Int. Rec. 1.2K
Int. Income 1.2K
 "K is to invest add. cash"
Implies that J's adj. capital is fixed at 40%
348,600 = 0.40(TAC)
TAC = 871,500
871,500 x 0.60 = 522,900

office supplies
ethod (update current bal. of the asset)

pplies 32.4K Accumulated Depreciation

AP 32.4K Never carried over to the new partnership

up. Exp. 8.4K Allowance for Bad Debts

Supplies 8.4K Still carried over in the new partnership

ent BV
Accumulated Depreciation

t on Notes Payable
Oct. 1 = 3 months/12 months
0K x 3/12 = 1.8K int. payable

1.8K
y. 1.8K
t on Notes Payable
Oct. 1 = 3 months/12 months
0K x 3/12 = 1.8K int. payable

1.8K
y. 1.8K

t on Notes Receivable

1.2K
come 1.2K
 Problem 2

ash"
ital is fixed at 40%

900

iation
he new partnership

ebts
new partnership
Problem 2
Problem 4
Problem 3
06. PARTNERSHIP OPERATIONS
07. COMPUTATION OF NET INCOME

Original capital
Original capita contribution
Basis of allocation of net income in
absence of profit agreement
Absence of loss agreement:
Allocate the same way profit is shared
 Profit of industrial partner
In absence of profit agreement, resort to
just and equitable share decided by the
parties or the court
Loss of industrial partner
They may share in losses if agreed to
(not required)

NOTE:
A partner cannot be excluded from profit
However, a partner may be excluded from
LOSSES (industrial partner)
ndustrial partner
of profit agreement, resort to
uitable share decided by the
he court
dustrial partner
share in losses if agreed to
ed)
08. DIFFERENT PROFIT ALLOCATIONS
Original capital Profit basis subj. to manipulation
Capital bal. at the beginning of the first Based on either (1) beg. and (2) ending
year of the operating period capital
Beginning capital → the partner can add to increase profit
Beg. capital at the beginning of the year of basis allocation
the operating period
Profit basis NOT subj. to
Original capital vs. Beg. capital manipulation
They are only equal at the very first year AVE. capital
of the operating period.
Beginning capital changes each year.

Why ending capital before closing?

because profit has yet to be allocated
capital after closing means profit (credit) has
been closed to the capital account
 Time proportioned
Proportion to the calendar year (If began
March 1, then 10/12 vice versa)

basis subj. to manipulation

on either (1) beg. and (2) ending

partner can add to increase profit

location
basis NOT subj. to
ulation
pital
dar year (If began
e versa)
09. WEIGHTED AVERAGE CAPITAL

Problem 4
 Number of months unchang
Multiplicand (capital) is based on
amount of the capital (orig. c
decreases in capital)
Multiplier is based on the no. of
capital has been stagnant before
Note: WEIGHTED AVERAGE CAPITAL increase/decrease added
Date 1-15 = assume start of the month (1st day) Multiplier total should equal to t
Date 1-30 or 31 = assume end of the month (30
or 31)
Number of months unchanged (long method) Alternative approach
Multiplicand (capital) is based on current carrying Increments are the multiplicand (the specific
amount of the capital (orig. capital + increase - amounts added or deducted to capital)
decreases in capital) The multipliers are fractions based on → months
Multiplier is based on the no. of months the current remaining/twelve
capital has been stagnant before the next
increase/decrease added e.g., drawing of 5K on May 1
Multiplier total should equal to twelve → (5K) x 8/12
→ May 1 to Dec. 31 = 8 months
Problem 5
Note: WEIGHTED AVERAGE CAPITAL
Date 1-15 = assume start of the month (1st d
Date 1-30 or 31 = assume end of the month (
or 31)
IGHTED AVERAGE CAPITAL
= assume start of the month (1st day)
or 31 = assume end of the month (30
Interest on average capital
SAME regardless if accounting period is less than or equal to 12
months.

WAC if accounting period is less than 12 months using WAC

method
Step 1: get the WAC (where total period is less than 12
months):
[increment 1 x months remaining/total period] + [increment 1 x
months remaining/total period] + etc.

Step 2: get the interest on WAC

→ WAC x interest rate x total period/12 = int. on WAC

WAC if accounting period is less than 12 months using

AWAC method
Step 1: get the WAC (where total period is less than 12
months):
[increment 1 x months remaining/12] + [increment 1 x months
remaining/12] + etc.

Step 2: get the interest on WAC

→ WAC x interest rate = int. on WAC
Problem 6
Problem 7
Problem 7
Order of priority implemented; excess not
sufficient
Step 1:
Allocate the excess using the amounts they
would have received had there been sufficient
NI
ss not Problem 8

unts they
been sufficient
Problem 8
SIB as partnership exp. (OpEx)
15K = NI after B but before deducting IS
Bonus basis = 20% of NI before IS (assum
before B as well unless otherwise stated;
not state after B)
NI before S & I = NI before S,I, & B
partnership exp. (OpEx)
NI after B but before deducting IS
basis = 20% of NI before IS (assumed
B as well unless otherwise stated; did
te after B)
ore S & I = NI before S,I, & B
 Problem 9

Should be answer to No. 2.

If BIS = OpEx, then BIS is NOT an

allocation of profit.

If NOT in choices, treat BIS as

allocation of profit
Remedy:
add 833 to required profit

RECONSTRUCTIVE AP
 833 cannot be shouldered by DD, EE, and FF
since the min. 6,250 of DD would decrease.

DD cannot be excluded from shouldering the

missing required capital. All other partners hould
quired profit be involved.

RECONSTRUCTIVE APPROACH: NI NOT GIVEN

Note:
Add to NI only if NI is not given
 RECONSTRUCTIVE
Excess amounts requ
added to the NI bal.
Partners CANNOT sh
satisfy the minimum

CONSTRUCTIVE A
Excess amounts requ
added to the NI bal.
Partners CAN should
the minimum

Note:
Do not add to NI since NI is already
given and adding the amount would
change the given of the NI
RECONSTRUCTIVE APPROACH: NI NOT GIVEN
Excess amounts required to satisfy the minimum are
added to the NI bal.
Partners CANNOT shoulder the excess requirement to
satisfy the minimum

CONSTRUCTIVE APPROACH: NI IS GIVEN

Excess amounts required to satisfy the minimum are NOT
added to the NI bal.
Partners CAN shoulder the excess requirement to satisfy
the minimum
10. ADJUSTMENT TO PARTNER'S RESPECTIVE CAPITALS
Problem 10
Regular/temporary drawings or p
withdrawals (agreement of 375
WAC unless amount drawn is eit
agreed or an irregular amount
Regular/temporary drawings or personal
withdrawals (agreement of 375) will NOT affet
WAC unless amount drawn is either diff. from
agreed or an irregular amount
Problem 10

Withdrawals other than salary allowa

permanent withdrawals
directly deducted from capital BEFORE clos
rawals other than salary allowances
nent withdrawals
deducted from capital BEFORE closing
Problem 11
20x5 Income
250K including 40K from prior period
Income purely 20x5
250K - 40K = 210K
Distribution of overstated/understated amount
will follow the ratio of the year it was supposed
to be distributed (therefore ignoring the new
agreement in 20x5)

Error (over or understatement) discovered

in the subsequent period:
Must be allocated based on the year of the
agreement where it wa ssupposed to be
allocated
Understated income from prior period = add in
subsequent year following original year rulings
and vice versa.
01. PARTNERSHIP DISSOLUTION

02. ADMISSION: BY PURCHASE

03. ADMISSION: BY INVESTMENT

04. WITHDRAWAL OR RETIREMENT OF A PARTNER

05. PARTNERSHIP LIQUIDATION

01. PARTNERSHIP DISSOLUTION

Note: Steps for incorporation

Withdrawal and death of a partner Step 1:
have the same accounting update the FV of assets and liab.
procedures Step 2:
close the capital accounts and transfer to a
Incorporation of a partnership: share capital account
from partnership to corporation

Capital interest
includes adj. capital - loans to partner/s
+ loans from partner/s
Capital
excludes loans to and from the partners
+ loans from partner/s
Capital
excludes loans to and from the partners
02. ADMISSION: BY PURCHASE

By purchase
regardless of amount paid, capital Revaluation can occur
transferred is based on the interest whether by purchase or by investment
purchased and not the amount paid. Revaluation thorugh PURCHASE
Amount paid to purchase the interest Revalued amount is based on amount paid
= personal transaction (personal gain or vs. interest acquired by the new partner
loss not recorded in the books)
Gain or loss from the purchase of interest
is always zero (unless personal gain or loss
is being asked).
Problem 01 Problem 02

Loans TO and
IGNORED in pro
admission of a n
Have bearing in
or retirement of
Problem 02

Loans TO and FROM partners

IGNORED in problem solving during
admission of a new partner
Have bearing in problem solving during death
or retirement of a partner
 Purpose of revalua
Amount invested is N
interest acquired bas
therefore assets sho

Amount during Rev

Based on excess pa

FORMULA for amoun

Amount paid
- Interest acquired
= difference
/ interest acquired
= amount to revalue

"goes to original partners"

implies by purchase of interest

Admission: BV METHOD
amount paid is IGNORED; interest acquired
ignores amount paid.
Basis of PERSONAL GAIN
Interest acquired vs. amount paid
 When does revalu
It can occur during p
and admission by inv

Purpose of revaluation Steps during REVALUATION BY PURCHASE

Amount invested is NOT EQUAL to the Step 1:
interest acquired based on market, Revalue the amount based on excess payment to the
therefore assets should be revalued old partners (amount paid - int. acquired)
BEFORE distribution to new partner
Amount during Revaluation Step 2:
Based on excess payment made Distribute the revalued amounts to the old partners
then distribute to the new partner based on interest
FORMULA for amount revalued: acquired
Amount paid Step 3:
- Interest acquired Amt. paid by new partner = capital of new partner
= difference after admission
/ interest acquired
= amount to revalue Capital after revaluation BY PURCHASE
Formula:
Amount paid / interest acquired
Represents the market value of the investment
made to the partnership.
When does revaluation occur?
It can occur during purchase of interest
and admission by investment

Steps during REVA

Step 1:
Revalue the amount
old partners (amoun
BEFORE distribution
Step 2:
Distribute the revalu
then distribute to the
acquired
Step 3:
Amt. paid by new pa
after admission
Steps during REVALUATION BY PURCHASE Revaluation can occur
Step 1: whether by purchase or by investment
Revalue the amount based on excess payment to the Revaluation thorugh PURCHASE
old partners (amount paid - int. acquired) Revalued amount is based on amount paid vs.
BEFORE distribution to new partner interest acquired by the new partner
Step 2:
Distribute the revalued amounts to the old partners
then distribute to the new partner based on interest
Capital interest of new partner by purchase
acquired
with revaluation
Step 3:
Capital of new partner is based on:
Amt. paid by new partner = capital of new partner
capital AFTER revaluation x interest rate
after admission
acquired
Capital of new partner by purchase with
Capital after revaluation BY PURCHASE
reval is usally = amount paid by new
Formula:
partner
Amount paid / interest acquired
Represents the market value of the investment
made to the partnership.
03. ADMISSION: BY INVESTMENT

If silent:
bonus method assumed
Revaluation automatically involved
when TCC =/= TAC
Note: When TAC is not given where TCC
Revaluation amount only affects old =/= TAC
partners Step 1:
Bonus is involved in revaluation when new New partner CC/interest = TAC1
partner interest =/= contributed capital Step 2:
Old partners/new interest = TAC2
Step 3
Choose which TAC complies with what is
being asked (refer to P-2 situation 8)
Bonus
has no effect on TCC and TAC
assumes TCC = TAC
Can occur AFTER revaluation between
OLD PARTNERS but should not affect TCC
and TAC
has no effect on TCC and TAC
assumes TCC = TAC
Can occur AFTER revaluation between
OLD PARTNERS but should not affect TCC
and TAC
Revaluation a
when TCC =/=
Note:
Revaluation amo
partners
Bonus is involve
partner interest
Revaluation automatically involved
when TCC =/= TAC
Note:
Revaluation amount only affects old
partners
Bonus is involved in revaluation when new
partner interest =/= contributed capital
 Bonus
has no effect on TCC
assumes TCC = TAC
Can occur AFTER rev
OLD PARTNERS but
and TAC

When TAC is not given where TCC

=/= TAC
Step 1:
New partner CC/interest = TAC1
Step 2:
Old partners/new interest = TAC2
Step 3
Choose which TAC complies with what is
being asked (refer to P-2 situation 8)
Goodwill method → TCC < TAC
In the trial and error (T&E) approach,
choose which gives TCC < TAC
Bonus
has no effect on TCC and TAC
assumes TCC = TAC
Can occur AFTER revaluation between
OLD PARTNERS but should not affect TCC
and TAC

Not goodwill
since GW = old part
affected
If one partner is affe
withdrawal
GW can never be ne
 Problem 02

Not goodwill
since GW = old partners are both
affected
If one partner is affected, treat as
withdrawal
GW can never be negative

Problem 03
Problem 02 Problem 04

Capital interest of
purchase with rev
Capital of new partn
(1) Amount paid by
(2) Capital AFTER
interest rate acqu

Problem 03
Problem 04 Problem 05

Capital interest of new partner by

purchase with revaluation
Capital of new partner is based on:
(1) Amount paid by new partner; OR
(2) Capital AFTER revaluation x
interest rate acquired
Problem 05 Problem 06
Problem 06 Problem 07

Capital interest of new partner by purchase

with revaluation
Capital of new partner is based on:
capital AFTER revaluation x interest rate
acquired
Capital of new partner by purchase with reval is
usally = amount paid by new partner
Problem 07 Problem 08

Impairment of GW
occurs to all existing
long run
Problem 08

Impairment of GW
occurs to all existing partners in the
long run
 04. WITHDRA

if PL ratio = capital ratio, bonus

and GW method have the same
effect
04. WITHDRAWAL OR RETIREMENT OF A PARTNER
Problem 10

Capital interest
includes adj. capital
- loans from partner
Capital
excludes loans to an
Problem 10

Capital interest
includes adj. capital + loans to partner/s
- loans from partner/s
Capital
excludes loans to and from the partners
Payment to retitin
their BV
Capital of existing pa
AFFECTED by the p
= BV of retiting part
PARTIAL GOODWI
Excess payment to r
partner is the total G
Capital of existing pa
AFFECTED by the g
retiring or withdrawi
Similar to SPECIFIC
METHOD
Payment to retiting partner equal to
their BV
Capital of existing partners ARE NOT
AFFECTED by the payment since cash paid
= BV of retiting partner
PARTIAL GOODWILL TOTAL / IMPLIED GOODWILL
Excess payment to retiring or withdrawing Excess payment to retiring or withdrawing
partner is the total GW incurred partner is A PORTION OF TOTAL GW
Capital of existing partners ARE NOT Capital of existing partners ARE
AFFECTED by the goodwill. Only the AFFECTED by the goodwill before
retiring or withdrawing partner retirement of retiring partner
Similar to SPECIFIC ADJ. IN ASSETS
METHOD

SPECIFIC ADJ. IN
Excess payment to r
partner is the total r
Capital of existing pa
AFFECTED by the g
retiring or withdrawi
Similar to PARTIAL

Note:
Partner FF capital = 33K
Partner FF capital interest = 36K
 Admission of part
CAPITAL only is invo
ignore loans to and
Retirement/Withd
CAPITAL INTEREST
loans to and from pa

SPECIFIC ADJ. IN ASSETS

Excess payment to retiring or withdrawing
partner is the total revaluation incurred
Capital of existing partners ARE NOT
AFFECTED by the goodwill. Only the
retiring or withdrawing partner
ASSETS WRITE-DO
Similar to PARTIAL GW METHOD
ENTIRE ENTITY
Basically just revalua
upward or downward
 05. PARTNERS

Admission of partner
CAPITAL only is involved
ignore loans to and from partners
Retirement/Withdrawal of partner
CAPITAL INTEREST is involved
loans to and from partners are involved

ASSETS WRITE-DOWN TRACEABLE TO

ENTIRE ENTITY
Basically just revaluation (may either be
upward or downward)
05. PARTNERSHIP LIQUIDATION

Lumpsum Liquida

Installment Liquid

"Actual payment o
parties"
Full payment of ALL
creditors
If partial payment is
creditors, always wit
the portion not yet p

SSP & CPP yield the

Lumpsum Liquidation Schedule of Safe P

Cash Priority Prog

Installment Liquidation

"Actual payment of liab. to third- Lumpsum liquidation

parties" cash available is automatically distributed
Full payment of ALL liabilities to to partners
creditors Installment liquidation
If partial payment is made to same process as lumpsum except that
creditors, always withhold cash for cash available is given to has priority first
the portion not yet paid.

SSP & CPP yield the same results

Schedule of Safe Payemnts (SSP) Doctrine of Marsh

Cash Priority Program (CPP)

General Partnersh
Maximum Absorption Capacity CPP Guide capital is distributed
The maximum amount of losses a Step 1: profit
partner can absorb before becoming Compute the CAPITAL INTEREST Limited Partnersh
deficit Step 2: profit is distributed b
Compute the MAX. ABSORPTION CAPACITY
Capital = CAPITAL INT. / P&L RATIO
excludes loans to and from the partner Step 3:
Capital interest Deduct from highest to lowest (see ex.)
includes loans to and from the partner Step 4:
Compute cash to be received
(Amount deducted x P/L RATIO = cash to receive by
that partner)
Step 5:
Last priority after CPP = based on P/L ratio
that partner)
Step 5:
Last priority after CPP = based on P/L ratio
Doctrine of Marshalling of Assets (DMA) Problem XI

General Partnership
capital is distributed to partners before
profit
Limited Partnership
profit is distributed before capital Liquidation expen
always first deducted
liquidation
Note on deficit cap
Partners may invest
offset their deficit, b
may incur loss on re
is preferable that the
Problem XI

CASH AVAILABLE
+ Cash beg.
+ Proceeds from rea
Liquidation expenses - Payment of liab. (a
always first deducted during - Unpaid liab.
liquidation - Actual liq. exp. pa
Note on deficit capital - Unpaid liq. expens
Partners may invest add. non-cash assets to - Cash withheld
offset their deficit, but the non-cash asset
may incur loss on realization when sold, so it
is preferable that they invest cash instead.
 SHORTCUT:
Step 1:
Compute CAPITAL INTEREST
Step 2:
Compute CASH AVAILABLE
Step 3:
SHORTCUT:
Capital interest - cash availabe =
Step 1:
Step 4:
Compute CAPITAL INTEREST
Distribute total loss to compute c
Step 2:
Step 5:
Compute CASH AVAILABLE
Solvent partners must re-invest t
Step 3:
Capital interest - cash availabe = TOTAL LOSS
Step 4: CASH AVAILABLE FORMULA:
Distribute total loss to compute cash do distribute + Cash beg.
Step 5: + Proceeds from real.
Solvent partners must re-invest to cover their deficit - Payment of liab. (actual)
- Unpaid liab.
- Actual liq. exp. paid
CASH AVAILABLE FORMULA: TOTAL LOSS includes:
- Unpaid liq. expense
+ Cash beg. Loss on realization
- Cash withheld
+ Proceeds from real. + Liquidation exp. paid
- Payment of liab. (actual) + Future liquidation expenses
- Unpaid liab.
- Actual liq. exp. paid
- Unpaid liq. expense
- Cash withheld
 Problem XII

SHORTCUT: Note:
Step 1: shortcut on liquidation is not advisable
Compute CAPITAL INTEREST when multiple months are given
Step 2: When multiple months are given, use CPP
Compute CASH AVAILABLE
Step 3:
Capital interest - cash availabe = TOTAL LOSS
Step 4:
Distribute total loss to compute cash do distribute
Step 5:
Solvent partners must re-invest to cover their deficit

CASH AVAILABLE FORMULA: TOTAL LOSS includes:

+ Cash beg. Loss on realization
+ Proceeds from real. + Liquidation exp. paid
- Payment of liab. (actual) + Future liquidation expenses
- Unpaid liab.
- Actual liq. exp. paid
- Unpaid liq. expense
- Cash withheld
Problem XII Problem XIII
Problem XIII Problem IV

Distribution of capital deficits

Only absorb by positive-balanced
Do not let other partners with ca
deficits absorb.
Problem IV Problem XV

Negative bal. after deducting

losses from capital
implies that there are liabilities
to be paid.

"After exhausting partnersh

assets including profit"
means after deducting losses fro
realization and liquidation expen
only (TOTAL LOSSES)

Distribution of capital deficits CAPITAL BAL. after cash distribution

Only absorb by positive-balanced partners. Capital bal.
Do not let other partners with capital - Share in loss
deficits absorb. - cash received

Note: Capital deficits absorbed from deficit

partners have NO EFFECT on capital bal. since
the absorbed amounts are expected to be
reimbursed by the deficit partners
Cash received is a deduction to capital
because:
Capital xx
Cash xx
→ payment of capital = return of cash
reimbursed by the deficit partners
Cash received is a deduction to capital
because:
Capital xx
Cash xx
→ payment of capital = return of cash
Problem XV Cash Priority Program: Proble

Negative bal. after deducting

losses from capital
implies that there are liabilities yet
to be paid.

"After exhausting partnership

assets including profit"
Loan from Partner
means after deducting losses from
add to capital interest
realization and liquidation expenses
Loan to Partner (receivable)
only (TOTAL LOSSES)
deduct from capital interest

Last month of liquidation

there should be no cash
withheld

Shortcut during CPP

Update the capital interest per
month when using the shortcut
 Cash Priority Program: Problem XVI

Loan from Partner CPP Guide

add to capital interest Step 1:
Loan to Partner (receivable) Compute the CAPITAL INTEREST
deduct from capital interest Step 2:
Compute the MAX. ABSORPTION CAPACITY
= CAPITAL INT. / P&L RATIO
Last month of liquidation
Step 3:
there should be no cash
Deduct from highest to lowest (see ex.)
withheld
Step 4:
Compute cash to be received
Shortcut during CPP (Amount deducted x P/L RATIO = cash to receive by
Update the capital interest per that partner)
month when using the shortcut Step 5:
excess cash available is distributed based on P/L
ratio

NOTE:
If cash available for month A is negative, no cash
should be distributed
NOTE:
cash withheld in prior month becomes cash beg. in the
next month and vice cersa
should be distributed
NOTE:
cash withheld in prior month becomes cash beg. in the
next month and vice cersa
Problem XVII

Unrecorded Liab.
Must reflect capital interest
Problem XVII Problem XVIII

Unrecorded Liab. 20.5K paid to liquidate liab.

Must reflect capital interest represents liab. paid and NOT liquidation
expense

Receivables collected
Part of proceeds
Receivables collected
Part of proceeds

Solvency is silent
Assume insolvent (absorbed by
solvent partners)
Problem XVIII Problem XIX

Receivables collected CPP applicable but...

Part of proceeds SSP applicable when few months are given
CPP and SSP yild the same answers
Receivables collected CPP applicable but...
Part of proceeds SSP applicable when few months are given
CPP and SSP yild the same answers
Solvency is silent
Assume insolvent (absorbed by
solvent partners)
Problem XIX
Problem XX
 Problem XXI
Problem XX

RECONSTRUCTIVE APPROAC
received from the other partn
Cash received from partner is giv
Cash available is asked to compu
Additional cash investment for de
ADDED to CASH AVAILABLE;
partners with positive capital bala
Problem XXI CONSTRUCTIVE APPROACH (
cash available can be computed f
given)
Cash available is given
Cash received by the partners is
compute

RECONSTRUCTIVE APPROACH (where cash

received from the other partner is NEGATIVE)
Cash received from partner is given
Cash available is asked to compute
Additional cash investment for deficit balance is
ADDED to CASH AVAILABLE; NOT ABSORBED by
partners with positive capital balances RECONSTRUCTIVE APPROAC
Cash received from partner is giv
Cash available is asked to compu

CONSTRUCTIVE APPROACH
Cash available is given
Cash received by the partners is
compute

RECONSTRUCTIVE APPROAC
received from the other partn
NEGATIVE
Additional cash investment for de
ADDED to CASH AVAILABLE; N
ABSORBED by partners with po
balances
CONSTRUCTIVE APPROACH (assuming 30K Problem XXII
cash available can be computed from the
given)
Cash available is given
Cash received by the partners is asked to
compute

Negative capital interest AFTER

Compute the minimum amou
DISTRIBUTION OF LOSS:
assets should be sold for X pa
In the scenario where a partner has a
to receive cash
negative AFTER DISTRIBUTION OF LOSSES
Assume X partner receives no cas
→ add to capital; DO NOT let it be
to get the minimum amount
absorbed by partners with positive bal.

RECONSTRUCTIVE APPROACH
Cash received from partner is given
Cash available is asked to compute

CONSTRUCTIVE APPROACH
Cash available is given
Cash received by the partners is asked to
compute

RECONSTRUCTIVE APPROACH where cash

received from the other partner is
NEGATIVE
Additional cash investment for deficit balance is
ADDED to CASH AVAILABLE; NOT
ABSORBED by partners with positive capital
balances
Problem XXII Problem XXIII

Compute the minimum amount

assets should be sold for X partner
to receive cash
Assume X partner receives no cash at all
to get the minimum amount

There is no loss on realization

indicated, so shortcut assuming
losses 62.5K contains loss on
realization is not applicable
Assume X partner receives no cash at all
to get the minimum amount
Problem XXIII Problem XXIV

Uncollectible receivables
Proceeds from sale only matter, n
theportion of uncollectible receiv
Portion uncollectible has no effec
capital interest (?)
Problem XXIV

Uncollectible receivables
Proceeds from sale only matter, not
theportion of uncollectible receivables
Portion uncollectible has no effect on
capital interest (?)
Clinton: When a partner withdraw
Withdrew from capital when the BV of the asset when they are not priorit
changed from 2K to 5K Update the proceeds to its F
Share the change in FV to th
Effect: Total cash available goes to t
Disrupted the CPP when accepting the asset should receive cash but hasn
(since Bill should also receive increase in capital received their share yet
and not just Clinton). Let the partner withdraw wh
they should not receive their
Revised CPP required due to changes in available that month.
capital, but shortcut may apply (see next photo)

Cash available for August (2K) should go to

Barney instead while Clinton keeps his 5K
withdrawal
 Change in FV of an asset newly acquired
DURING LIQUIDATION:
The change is shared among the partners (P/L
ratio)

When a partner withdraws (receives cash) The shortcut when multiple months are
when they are not priority: involved requires updating the capital
Update the proceeds to its FV interest each month
Share the change in FV to the partners
Total cash available goes to the partner that
should receive cash but hasn't withdrawn or
received their share yet
Let the partner withdraw what they withdrew, but
they should not receive their share from cash
available that month.
Problem XXV
Problem XXV
01. STATEMENT OF AFFAIRS

02. STATEMENT OF REALIZATION AND LIQUIDATION

03. STATEMENT OF ESTATE DEFICIT

 SOA
acts as balance
going into liquid
Equity: DEBT RESTRUCTURING SORAL
Ask the creditors to extend the maturity of acts as income
the loan liquidation
Bankruptcy: LIQUIDATION SED
Liquidation is always the last resort before acts as stateme
administering rehabilitation and equity of the de
reorganization. SRD
Liquidation → great economic impact acts as cash flow
(employees and dependent businesses corporation
affected when a corporation liquidates)

SOA
Estimates
SORAL
Actually occurrin
 01. STATEMEN

SOA Why called "estate deficit"?

acts as balance sheet of a corporation Corporation = artificial being
going into liquidation Man = natural being
SORAL
acts as income statement going into Assets when a being ceases to live
liquidation or operate
SED → estate
acts as statement of changes in owner's SOA
equity of the debtor corporation shows the ESTI
SRD creditors would
acts as cash flow statement of the debtor liquidated NOW
corporation

SOA
Estimates
SORAL Quitting Conc
Actually occurring ASSET BV becom
01. STATEMENT OF AFFAIRS

CLASSIFICATION

APFSC
RV of the asset cove
a liability (w/ or w/o
SOA OFA
shows the ESTIMATES the Assets with no pledg
creditors would received if TFA
liquidated NOW Used to pay ULWP
APWFSC
Assets tied to partial
liability (no excess v
after realization)

Quitting Concern
ASSET BV becomes irrelevant.

When TFA < ULW

Refer to the Prefere
Code)

When TFA < ULW

Code)
Priority:
01. Admin. Exp.
→ since trustee man
process
02. Salaries
03. Taxes

Refer to US Bankru
board exam
CLASSIFICATION OF ASSETS CLASSIFICATION OF LIAB.

APFSC FSC
RV of the asset covers full amount of Liabilities fully-covered
a liability (w/ or w/o excess) Includes accrued interest tied to
OFA the liab.
Assets with no pledged liabilities OFA
TFA Assets with no pledged liabilities
Used to pay ULWP ULWP
APWFSC Liab. w/ priority but no pledged
Assets tied to partially shoulder a creditors
liability (no excess value from asset Administrative Expenses
after realization) Salaries/Wages Why are admin. exp. a
Taxes priority?
PSC Includes payments to the
Creditors whose full liability can TRUSTEE who incurs expenses
only be partially paid by certain tied to the liquidation process
pledged assets Why are salaries a priority?
Labor Code
Unsecured Portion
always exists when a PSC
exists (unlike "free portion if
When TFA < ULWP
any"
Refer to the Preference of Credit (PH Civil
Code)

When TFA < ULWP (US Bankruptcy

Code)
Priority:
01. Admin. Exp.
→ since trustee manages the liquidation
process
02. Salaries
03. Taxes

Refer to US Bankruptcy Code during

board exam
Problem 01
Problem 01

PREPAID EXPENS
By default: no reali
If with realizable va

GOODWILL
Never realizable
Only acquired throug
PREPAID EXPENSE
By default: no realizable value
If with realizable value, realize it.

GOODWILL
Never realizable
Only acquired through BUSCOM

Shortcut: total payments to creditors =

TOTAL RV of assets

Note: only applicable when

= NRV assets < CV Liab.

Estimated Deficien
= SHE, end. (after a
= NFA - TULWOP
= SHE - Net Loss on

Net loss on liquida

+ Loss (Gain) on Re
+ Unrecorded Liabili
+ Unrecorded Expen
 Problem 02

AP
Note that is is not al
unsecured

Estimated Deficiency
= SHE, end. (after adjustments)
= NFA - TULWOP
= SHE - Net Loss on liquidation

Net loss on liquidation

+ Loss (Gain) on Real.
+ Unrecorded Liabilities
+ Unrecorded Expenses
Problem 02

Estimated loss (ga

= net loss (gain) on
Estimated loss on
= loss on real.
→ exclude gains
Estimated gain on
= gains on real.
→ exclude losses

AP
Note that is is not always fully
unsecured
 Problem 03

Estimated loss (gain) on real.

= net loss (gain) on real.
Estimated loss on real.
= loss on real.
→ exclude gains
Estimated gain on real.
= gains on real.
→ exclude losses
Problem 03

Net loss
244K since there ar
unrecorded liabilities
expenses
 02. STATEMEN

Net loss
244K since there are no
unrecorded liabilities and
expenses
02. STATEMENT OF REALIZATION AND LIQUIDATION

Why exclude cash

Cash is already realiz
Items in SORAL have
realized
 Why exclude gain
liab. settlements,
and write-offs?
These are already in
realized" and "liabilit
amounts

Total debits vs. to

= Net loss/gain in

Why exclude cash in SORAL? "Assets acquired" during corp.

Cash is already realized liquidation
Items in SORAL have yet to be The trustee can acquire assets to
realized continue the operations
 03. STATEMEN

Why exclude gains on asset real.,

liab. settlements, and asset losses
and write-offs?
These are already included in the "assets
realized" and "liabilities liquidated"
amounts

Total debits vs. total credits

= Net loss/gain in SORAL
03. STATEMENT OF ESTATE DEFICIT

Estimated Deficiency
= SHE, end. (after adjustments)
= NFA - TULWOP
= SHE - Net Loss on liquidation

Net loss on liquidation

+ Loss (Gain) on Real.
+ Unrecorded Liabilities
+ Unrecorded Expenses
 Problem 04

When Cash, beg. and

Cash, end. is missing
Problem 04 For liabilities incurred and pa
the period
Entries:
Expenses xx
Payable xx

Payable xx
Cash xx

Only supplemental credits are

affected when a liability or expen
incurred and paid in the period o
liquidation

If admin. exp. was not yet

paid?
still no effect on SORAL since liab.
assumed and liabilities not
liquidated will counterbalance

TD > TC
Net loss on real. & liquidation
 For liabilities incurred and paid in
the period
Entries:
Expenses xx
Payable xx

Payable xx
Cash xx

Only supplemental credits are

affected when a liability or expense is
incurred and paid in the period of
liquidation

was not yet

SORAL since liab.

ilities not
unterbalance

& liquidation
Estimated Deficiency
= SHE, end. (after adjustments)
= NFA - TULWOP
= SHE - Net Loss on liquidation

Net loss on liquidation

+ Loss (Gain) on Real.
+ Unrecorded Liabilities
+ Unrecorded Expenses

Net loss on real.

the change in SHE beg. and
ending
01. CONSTRUCTION CONTRACTS

02. REVENUE RECOGNITION

03. PERCENTAGE OF COMPLETION

04. POINT IN TIME

05. JOURNAL ENTRIES

06. OTHER ISSUES

01. CONSTRUCTION CONTRACTS

Variations
variations made
Incentive payme
Bonuses made i
on time
Claims
Increase in cont
work made.

Fixed-Price Contract (FCP)

Not always fixed; may be subject to
cost-escalation clauses (change in FMV
of materials used), but it is fixed by nature
nonetheless.

Cost-plus Contract
Calculate the cost and mark-up
Fixed-price Contract
A fixed price is set
 01. Directly Attrib

Variations
variations made to the project itself
Incentive payments
Bonuses made in finishing the project
on time
Claims
Increase in contract price for additional
work made.

02. Indirectly Attr

Cost to obtain
Step 1:
recognized as asset
Step 2:
amortized over the useful life of the
asset (expensed if UL is less than one
year)
 Depreciation o
Depreciation oc
tear, but PPE no
01. Directly Attributable Costs is excluded from
Advances to s
Additional contr
for supplies etc.
Materials not
Excluded
Special mater
INCLUDED

Cost of materials
Should be USED—not
UNUSED

02. Indirectly Attributable Costs

Probability-W
Transaction Pric
[Summation of
considerations x
consideration

Most-likely Appr
Most probable o
consideration
Depreciation of idle PPE
Depreciation occurs through wear and
tear, but PPE not related to the contract
is excluded from the construciton cost.
Advances to subcontracted
Additional contractor/party reached out
for supplies etc.
Materials not yet used
Excluded
Special materials not yet used
INCLUDED

"Variable Considerations"

Probability-Weighted Approach
Transaction Price
[Summation of Cash flow of variable
considerations x probability] + fixed
consideration

Most-likely Approach
Most probable outcome + fixed
consideration
02. REVENUE RECOGNITION

OVER TIME

Manner of payment
does not affect whether i
point in time
The determinant of wh
PIT is the measuremen
towards completion
OVER TIME POINT IN TIME

Manner of payment
does not affect whether it is over time or
point in time
The determinant of whether it is OT or
PIT is the measurement of the progress TIPS
towards completion Determine when control, ownersh
of the asset is obtained

Control obtained even before com

= OVER TIME
Control obtained during enhancem
partially complete)
= OVER TIME
Control obtained only when comp
= POINT IN TIME
POINT IN TIME Problem 01

"Proportion of time"
Opposite to "point in time" where it is
done in a proportion (over) rather than
a single point.

TIPS
Determine when control, ownership, or possession
of the asset is obtained
"Customer would own the partially
completed bldg. and hire another
Control obtained even before completion
company"
= OVER TIME
Customer will gain control while it is
Control obtained during enhancement (when it is
still being created or enhanced
partially complete)
= OVER TIME
Control obtained only when complete
= POINT IN TIME

Note:
only at least one criteria of over time or PoC
should be present to be considered as "over
time" revenue recognition
 Ownership
transferred upon completion
Not transferred when cancelled even
before completion or when partially
on of time" Manner of payment complete
o "point in time" where it is does not affect whether it is over time or
proportion (over) rather than point in time
int. The determinant of whether it is OT or
PIT is the measurement of the progress
towards completion

Ownership
transferred upon completion
Not transferred when cancelled even
before completion or when partially
would own the partially complete
bldg. and hire another

will gain control while it is

g created or enhanced

ast one criteria of over time or PoC

present to be considered as "over
nue recognition
 Performance Obligations

If a performance can stand alone on its

own
Considered as: separate performance
obligation
If a performance is implicitly stapled or
connected to another performance
p obligation
upon completion Considered as: single performance
erred when cancelled even obligation together with related performance
mpletion or when partially obligations

Example:
Fries & burger: separate PO
→ each item can be bought without the other
Ketchup: single PO
→ the item CANNOT be bought without anoth
item

p
upon completion
erred when cancelled even
mpletion or when partially
 nce Obligations

rmance can stand alone on its

d as: separate performance

n
ormance is implicitly stapled or
d to another performance
n Note:
d as: single performance PO's for construction projects are
n together with related performance usually (but not always) one PO since
one cannot be complete without the
other.

ger: separate PO
m can be bought without the other
ingle PO
m CANNOT be bought without another

"integral to operations"
mean that all PO's are integral to each other
(single PO)
Problem 02

Probability-Weighted Approach IFRS 15 on variable considerations

Transaction Price Variable considerations should be distributed
→ based on past experience (probability of
Fixed consideration + Summation of completion) with the customer
(Cash flow of variable considerations
x probability)
50K bonus & 10K reduction
Most-likely Approach
= variable conisderation
Most probable outcome + fixed
850K
consideration
= fixed consideration
 Multiple Probabilities
= probability weighted approach

Steps:
Cash flow of variable consideration x
probability of occurence

iderations
ld be distributed
robability of
er

If the most-likely approach was

used:
Most probable outcome: 50K (65%
probability of occurence)
Fixed consideration: 850K

Transaction Price (Most-Likely

Approach): 900,000
03. PERCENTAGE OF COMPLETION

Can the outcome of the contract be

measured or estimated reliably?
If yes, use PoC or OVER TIME

INPUT MEASURES
COST TO COST METHOD
Expected Cost: 400M
Actual Cost incurred: 100M
100M/400M = 25% complete
EFFORTS EXPENDED METHOD
Expected Hrs.: 500K hrs.
Actual Hrs.: 100K hrs.
100K/500K = 20% complete
Output Measures: PHYSICAL PROGRESS
Usually done by architects and engineers
04. POINT IN TIME

Point in time
Profit → only reognized when contract
is complete
Revenue → up to the extent of cost
incurred

If revenue = cost, then

xx Revenue
(xx) Cost
ZERO Profit
05. JOURNAL ENTRIES

CIP = Construction in Progress

Contract Asset = CIP

→ same account
 2

Purpose of "Progress Billings to Progress Billings or Contract

Customer" account Liability
Billing for unprecedented extra A contra-CIP account
charges to the customer in case extra
costs will incur during the project's
period.

Contract Liability
Same account as "Progress Billings"
Construction in Progress
Debited (Dr.) for
- Cost
- Revenue Profit = zero in PIT or Cost
Recovery unless final year
Revnue - Cost = Zero

CIP: Cost Recovery (PIT)

Debited for profit recognition only
during the final year (year of
completion)
 3

Percentage of Completion (OT)

Reliable estimate of the outcome
Recognizes profit when incurred

Cost Recovery (PiT)

No reliable estimate of the outcome
Does not recognize profit until the
final term where it can be estimated
reliably CIP contains Why is building
Revenue is still recognized (revenue Cost contractor does no
=/= profit) Profit

Revenue: derived from contract price

Goal: CIP = contract price

By end of the contract

CIP = contract price
Progress billings = contract price
Why is building credited?
contractor does not own the building
Cost incurred to date
Present and past cost
Interpretation: CIP = Contract Pric
CIP = progress of the project PB = Contract Price
If PB > CIP
Cash billed to customer > work done for By year of completi
project, so liability is incurred in such case CIP = PB
 Why should CIP be offset by PB?

CIP → acts as "inventory" in progress

PB → acts as sale of the "inventory" or CIP when
finished

Sale Entires:
AR xx PB incurred:
Sales xx AR xx
PB xx
CGS xx
Invty. xx PB acts as "sales"
gives rise to AR when "invento
sold

If PB acts as sales, then:

CIP ("inventory") should be dere
the sale has already occurred. Ho
During OT (PoC) and PiT (CR), C
is still in progress and will be disp
Presented to the Notes to FS complete, so the CIP account is o
Net balance of CIP or CA derecognized at the year of comp
CIP - PB = Net CIP

CIP = Contract Price

PB = Contract Price

By year of completion:
CIP = PB
?

ss
or CIP when

PB incurred:
AR xx
PB xx

PB acts as "sales" Multiple Contracts

gives rise to AR when "inventory" is Segregate—not offset
sold Contract assets: segregated in the
notes to FS
If PB acts as sales, then: Contract Liabs: segregated in the
CIP ("inventory") should be derecognized when notes to FS
the sale has already occurred. However...
During OT (PoC) and PiT (CR), CIP (invnetory)
is still in progress and will be disposed when
complete, so the CIP account is offset or
derecognized at the year of completion.
06. OTHER ISSUES

Purpose for contract retention

Cash set aside by customer upon
payment of contract price to SECURE
that the project is made completely
before full payment.
Similar to "Factors' Holdback" in
recevable financing

Contract Retention
No effect on CIP (revenue, cost, and
profit)
Only affects collections (CASH)
Mobilization Fee
Advances from customer
Treated as liability rather than progress
billings (PB)
Affects collection of AR when Progress
Billings are incurred
Problem 03

Costs to date
Present and past cost
(cumulative)

2020
"Causes additional costs of 5K"
→ included in the costs incurred in
2020.
Cost to complete in FINAL YEAR
always ZERO
PoC in FINAL YEAR
always 100%
SHORTCUT: PERCENTAGE OF COMPLETION

Shortcut Steps:
Step 1:
Compute for the RCG
1. Revenue
2. Costs (total estimated)
3. Gross Profit

Step 2:
Compute for the PoC
= costs to date/total estimated costs
where costs to date:
• costs incurred this year exclude unused materials or assets
• previous costs incurred (include if final year already)

Step 3: Total estimated costs

Multiply the PoC to RCG + Costs incurred this year
• Revenue x PoC → excluding unused costs
• Costs x PoC + Costs incurred previous year
• Gross Profit x PoC = Costs to date
→ to get the gross profit TO DATE
+ Costs to date
Step 4: + Costs yet to incur
Deduct each RCG by the RCG in the prior year → add unused costs to costs yet to
("current" during the PRIOR YEAR) to get the incur
RCG for the CURRENT YEAR = total estimated costs
 Assuming PiT or Cost Recovery

PiT/CR
CIP → debited for the full cumulative GP

de unused materials or assets

de if final year already)

estimated costs
ts incurred this year
cluding unused costs
ts incurred previous year
ts to date

ts to date
ts yet to incur
d unused costs to costs yet to

al estimated costs
SHORTCUT: COST RECOVERY

Cost Recovery Revenue

Based on costs incurred to date
Excluding estimated costs to complete
or costs yet to incur
Completed Contract Method
Old method before IFRS 15 introduced
1. Over Time (PoC)
2. Point in Time (CR)

Revenue and cost is not recognized until

contract is complete
Problem 04
Percentage of Comple
Formula 1:
Total costs to date/total
Formula 2:
CIP/Contract Price
 GP Rate
Revenue 100%
Costs xx
GP xx

GP rate = GP/Revenue o

Percentage of Completion
Formula 1:
Total costs to date/total est. costs
Formula 2:
CIP/Contract Price xx Revenue
(xx) Costs
xx GP
Revenue = Cost to date +

Revenue = 187.2K + 72.8

GP Rate
Revenue 100%
Costs xx
GP xx

GP rate = GP/Revenue or Sales

xx Revenue
(xx) Costs
xx GP
Revenue = Cost to date + Profit to date

Revenue = 187.2K + 72.8K

Problem 05
Problem 05

Dead end
2020 cannot be completed—so,
proceed to 2021

During last year of project

PoC = 100%
Cost yet to incur = 0
Dead end
2020 cannot be completed—so,
proceed to 2021

During last year of project

PoC = 100%
Cost yet to incur = 0
Problem 06

Est. costs to complete

Lowers over the years as the
project becomes complete
Problem 06 Problem 07

Est. costs to complete

Lowers over the years as the
project becomes complete
Problem 07

CIP includes:
Costs to date (cumulative
bal.)
GP to date (cumulative
bal.)

Progress Billings
To date (cumulative)
 Proportional Cost Approach

CIP includes:
Costs to date (cumulative
bal.)
GP to date (cumulative
bal.)

Progress Billings
To date (cumulative)
Proportional Cost Approach

Proportional Cost Approach

Actual Cost incurred is NOT presented in FS
Cost to date is proportional to output (pro-
rated)

Revenue: different from CIP uner PCA

Actual Cost Approach

Actual Cost incurred IS presented in FS
Cost to date is proportional to output (pro-
rated)

Revenue: same to CIP uner PCA

 Actual Cost applied to REVENUE
ONLY REVENUE is pro-rated to output.

Actual Cost applied to GROSS PROFIT

ONLY GP is pro-rated to output measure.

st Approach
t incurred IS presented in FS
e is proportional to output (pro-

same to CIP uner PCA

st applied to REVENUE Actual Cost SILENT? Problem 08
ENUE is pro-rated to output. ONLY REVENUE is pro-rated to output.

st applied to GROSS PROFIT

s pro-rated to output measure.
Cost recovery
Zero costs yet to incur (unreliable) unless
otherise stated
 very When costs yet to incur can be estimated
yet to incur (unreliable) unless under COST RECOVERY, it converts to
stated PERCENTAGE OF COMPLETION
01. LICENSES & ROYALTIES

02. FRANCHISE

03. NON-REFUNDABLE FRANCHISE FEES

04. CONSIGNMENT
01. LICENSES & ROYALTIES

Why single PO?

The PO's are distinct BUT interralated to each
other
02. FRANCHISE
IFF
Liability at date of signing
(UNEARNED REVENUE)
Revenue at date of opening
Revenue at DoS if DoO not given

CFF
Revenue at year-end

TRANSACTION PRICE
Cash paid + PV of note
ALWAYS includes payment for
RIGHT TO OPERATE the franchise
(RTO) whether stated or not.
Comprises ALL PERFORMANCE
OBLIGATIONS (material
right)

When to compute @PV?

Amounts that have significant financing
component
Significant financing component: more
than 1 year
 Royalty payments, sales-based,
or usage-based payments
Not a PO because sales cannot be
determined at date of inception.

PO for franchise, trainings, and eqp.

ALREADY SATISFIED
Already satisfied = subject for
revenue recognition (PiT)

compute @PV?
that have significant financing
nt
t financing component: more
ar
 ayments, sales-based, Material Right
based payments Obligation to purchase is considered as separate
ecause sales cannot be PO ONLY when purchase price to sell is less
d at date of inception. than original SP

chise, trainings, and eqp. IFF

SATISFIED Liability at date of signing
tisfied = subject for (UNEARNED REVENUE)
cognition (PiT) Revenue at date of opening
Revenue at DoS if DOO not given

CFF
Revenue at year-end
Problem 02

RTO
Right to open
IFF
Initial Franchise Fee
DOS
Date of Signing
DOO
Date of Opening
Interest Income from
Notes
Addition to net income
 TRANSACTION PRICE
open Cash paid + PV of note
ALWAYS includes payment for
nchise Fee RIGHT TO OPERATE the
franchise (RTO)
igning

Opening
Problem 03
"to maintain the value"
Right of access

Distribution of revenue not beginning

Jan. 1 (OVER TIME)
The count begins during the DATE OF
SIGNING if not beginning Jan. 12; never
the date of opening even when stated.
 Problem 05

ntain the value"

access

tion of revenue not beginning

OVER TIME)
nt begins during the DATE OF
G if not beginning Jan. 12; never
of opening even when stated.
 Problem 06

No ongoing activities stated

for IFF
Assume: PiT for 50K

Distribution of revenue not beginning

Jan. 1 (OT)
The count begins during the DATE OF
SIGNING if not beginning Jan. 12; never the
date of opening even when stated.
57.6K should also be liab. Material Right
Obligation to purchase is considered as separa
Purpose of problem is just to show PO ONLY when purchase price to sell is less
when a CFF hasa special purpose than original SP
Unearned Revenue UNTIL EXERCISED

Indicated Profit or MATERIAL RIGHT

= OSP - Offered price
Allocated amount of TP to the material right o
bargain purchase order.
Profit to be earned by customer when original
SP is greater than price offerred

TRANSACTION PRICE
Cash paid + PV of note
ALWAYS includes payment for
RIGHT TO OPERATE the franchise
(RTO) whether stated or not.
Comprises ALL PERFORMANCE
OBLIGATIONS (material
right)

Old term for revenue containing

material right from customer for
BPO
Co-mingled revenue (?)
Right When BPO is exercised/not
to purchase is considered as separate exercised (EXPIRED)
when purchase price to sell is less
nal SP Lesson: exercised or not, Unearned
Revenue UNTIL EXERCISED Rev. from BPO becomes revenue

Profit or MATERIAL RIGHT

fered price
mount of TP to the material right or
rchase order.
e earned by customer when original
er than price offerred

TION PRICE
+ PV of note
cludes payment for
OPERATE the franchise
ther stated or not.
ALL PERFORMANCE
IONS (material BPO exercised
Recognize cash; derecognize UFR.
No cash recognized if not exercised.

for revenue containing When there is a MATERIAL RIGHT

right from customer for (bargain purhase offer)
Get the material right
d revenue (?) = Market Price - Option Price

Material Price → allocated amount from

TRANSACTION PRICE
Why no loss recognized when BPO was
exercised and original SP was less than
offered?
Cash was recognized in full when 48K UFR
When CFF has a special purpose
was iniitally recognized.
Recognized as liability (Unearned
Franchise Revenue)
 03. NON-REFUNDABLE FRANCHISE F

Same as downpayment

CFF has a special purpose

ized as liability (Unearned
se Revenue)
REFUNDABLE FRANCHISE FEES 04. CONSIGNMENT

downpayment

Consignment (gist)
Physical transfer, but not
ownership/title.

Revenue not recognized

until amount is paid
 IGNMENT

ment (gist)
ansfer, but not Inventoriable Costs
/title. CAPITALIZABLE
Allocated between sold and unsold
units
Spent to bring goods to consignee
Sold: part of COGS
Unsold: part of EI

Non-inventoriable Costs
Expenses made: consignee to buyer
Expenses not related to the product
itself
Includes commission fees to the
consignee

Freight and Cartage (NOR TO NEE)

Allocated based on units sold
 Cartage on consigned goods
NOR to NEE
Cartage on sold goods
NEE to BUYER

able Costs "freight on units returned are Cartage-In

ABLE considered expense" "freight-in" within the Freight on RETURNED UNITS
etween sold and unsold Reason: department Freight is capitalized INITIALLY
Goods sent to consignee: when returned, said cost is PART OF OPE
ring goods to consignee capitalize freight to products from
of COGS consignor to consignee
Example:
rt of EI When goods are returned to
Units sold: 6
consignor:
Units returned: 1
Consignee delivers the goods back
on the fault of the consignor (fault
ntoriable Costs + Cost from sold units (6 units)
for defective goods). Consignor
made: consignee to buyer + Cost on freight (7 units including
shoulders delivery of defective
not related to the product returned)
goods from consignee to consignor.
+ Cartage on consigned goods (7 un
When goods are returned to
ommission fees to the including returned units): NOR TO N
consignor:
Part of OpEx

nd Cartage (NOR TO NEE)

based on units sold
 Purpose of cash advance from
consignee
To secure safety on the goods sent to
the consignee
Usually pro-rated based on the no.
t on RETURNED UNITS Commission Expense is recognized of goods sent to consignee
is capitalized INITIALLY using
eturned, said cost is PART OF OPEX Accrual Method (recognized when sale is How cash adv. from consignee are
incurred OFFSET
NOR:
xample: Cash xx
nits sold: 6 Adv. from NEE xx
nits returned: 1 Amount remitted
Revenue from consignment NEE:
- Non-inventorial Costs AR xx
Cost from sold units (6 units) Cash xx
Cost on freight (7 units including - Advancements from NEE
eturned) → when goods are sold, security of
Cartage on consigned goods (7 units P/L from consignment
Revenue from consignment goods held are cleared
cluding returned units): NOR TO NEE
- COGS (excluding returned units)
- Freight to NEE (incl. units ret.)
- Cartage to NEE (incl. units ret.)
- Other non-inventoriable costs

Advancements from NEE returned

Only affect amount remitted; not P/L on
consignment
of cash advance from
e Cartage on consigned goods
safety on the goods sent to NOR to NEE
nee Cartage on sold goods
o-rated based on the no. NEE to BUYER
sent to consignee

adv. from consignee are

xx
NEE xx

x
xx

oods are sold, security of NEE (sold goods consigned)

are cleared Cash xx
AP - Nor (?) xx
NOR
Adv. from NEE xx
Cash xx
 Freight on RETURNED UNITS
Freight is capitalized INITIALLY
Freight on returned units when returned, said cost is PART OF OPEX
Becomes part of OpEx when a
unit is returned Example:
Units sold: 6
Units returned: 1

+ Cost from sold units (6 units)

+ Cost on freight (7 units including
returned)
+ Cartage on consigned goods (7 units
including returned units): NOR TO NEE
ED UNITS Commission Expense is recognized
NITIALLY using
ost is PART OF OPEX Accrual Method (recognized when sale is
incurred

units (6 units)
(7 units including

signed goods (7 units

d units): NOR TO NEE
Amount remitted Amount remitted
Revenue from consignment Revenue from consignment
- Non-inventorial Costs - Non-inventorial Costs
- Advancements from NEE - Advancements from NEE

P/L from consignment P/L from consignment

Revenue from consignment Revenue from consignment
- COGS (excluding returned units) - COGS (excluding returned units)
- Freight to NEE (incl. units ret.) - Freight to NEE (incl. units ret.)
- Cartage to NEE (incl. units ret.) - Cartage to NEE (incl. units ret.)
- Other non-inventoriable costs - Other non-inventoriable costs

Advancements from NEE returned

Only affect amount remitted; not P/L on
consignment
01. CORE PRINCIPLES OF REVENUE RECOGNITION UNDER PFRS 15

02. SCOPE OF IFRS 15

03. FIVE-STEP MODEL

04. PRESENTATION AND DISCLOSURE

05. OTHER REVENUE RECOGNITION ISSUES

01. CORE PRINCIPLES OF REVENUE RECOGNITION UNDER PFRS 15
02. SCOPE OF IFRS 15

PFRS 16
03. FIVE-STEP MODEL

Step 01
Step 01

When is something an enforceable right?

Depends upon the jurisdiction of a country (Civil Code)

Note:
Only applicable to W

Wholly unperformed

When either perform

and not a wholly unp
 Consideration rec
treated as LIABILITY
refundable.

Note: Making a performance or creating a payment forms a contract.

Only applicable to WHOLLY UNPERFORMED CONTRACTS

Wholly unperformed contracts = EXECUTORY CONTRACT (performance and payment not yet made)

When either performance or payment is made before the other, it bcomes a PARTIALLY executed contract
and not a wholly unperformed contract anymore.

When performance is made before payment, or when payment is made before perform
estoppel in denying the existence of the contract
 Consideration received
treated as LIABILITY until obligations have been performed or when the consideration itself is non-
refundable.

s a contract.

en payment is made before performance, it creates an

ract
 Example: TV (to watch; single commercial ojective)

Example (NEW CONTRACT) Example (MODIFICATION)

Construction of two buildings: Building A and Constructing
Building B of two extra floors after 10 floors

Bldg. A → 3M Two extra floors added to the ten floors initially made = MODIFICATION of an already existing
Bldg. B → 4M

Buildings can be built without the other (SEPARATE OR DISTINCT)

 Step 02

ODIFICATION of an already existing contract.

Step 02 Step 03

TV and remote
One PO (cannot use one w/o the other)
TV and PC
Two PO's (can enjoy one without the other)

Sales taxes
same as VAT
Step 03

Sales taxes
same as VAT
Constraint on VARIABLE CONSIDERATION
Must not include revenue that has a high probability of not satisf

Probability-Weighted Approach
Transaction Price
→
Fixed consideration + Summation of (Cash flow of variable consid

Most-likely Approach
Transaction Price
→
Most probable outcome + fixed consideration
DERATION
high probability of not satisfying its PO (reversal of revenue)

f (Cash flow of variable considerations x probability)

sideration
Scenario: Paid customer for their own extra service

Paid amount is = or less than FV

Treat as separate normal transaction
Paid amount > FV of customer's service
Deduct the excess over FV paid to the customer from the amount paid
made
FV of customer's service cannot be determined
Entire payment made is deducted from the transaction price of services
 Step 04

own extra service

V
n
service
he customer from the amount paid by customer for your own service

be determined
om the transaction price of services rendered to them
Step 05
04. PRESENTATION AND DISCLOSURE
OSURE
Problem 01
Revenue recognized on March 1
Product was delivered immediately
Recognize revenue when PO is performed
ormed
Conditional AR = Contract Asset
Since the iPhone is tied to the on-going 1.2K monthly service, CA is recognized instead of AR.
CA amount is transferred to AR based on the portion of AR due when PO is PERFORMED.
Problem 02
C
Correct for contract liability

Partial satisfaction of PO
conditional until fully satisfied (AR)
Problem 04
Problem 05
Problem 06

z`
Problem 07
Problem 08

Scales and Software

Can be sold separately, but are very interrelated to each other (one cannot functio

Calibration
can be provided from other vendors, implying that it is separately identifiable.
 (Assuming separate PO's)

d to each other (one cannot function w/o the other), so 1 PO PO1 & PO2 is performed
revenue recognized outright (POINT IN TIME)
PO3 is to be done continuously over a period
hat it is separately identifiable. revenue is recognized over the term (OVER TIME)
ME)
eriod
TIME)

When no delivery or service rendered yet

Zero PO

PO is only recognized when it is performed

Note:
25% discount given to BIONIC
5% discount given to ALL OTHER CUSTOMERS
Material right
When the customer can purchase at a price lower than standard selling / market pri

When a discount given to a customer is same for ALL customers, there is no separat
offered is unique to the standard disc.)
r than standard selling / market price

ALL customers, there is no separate PO (unless discount

"alternative use"
Can be sold to another party

Should it make a profit for it to be considered as "alternative use"?

 Problem 09

as "alternative use"?

Variable cons. as "most likely amount"

only use the amount with highest probability
Variable cons. as "expected value"
use the probability weighted average
 likely amount"
h highest probability
cted value"
hted average
Problem 10
05. OTHER REVENUE RECOGNITION ISSUES
01. RIGHT OF RETURN

Why does Right of Return not Sales during Refund Liability

create PO? Sales should be net of refund liability
Unsuccesful products should not be
encouraged in practice.
y
Cash sales w/ refund liab. Credit sales w/ refund liab.
Credit REFUND LIAB. Credit ALLOWANCE FOR SR
02. BILL AND HOLD SALES ARRANGEMENTS

"substantive reason"
due to calamities or other events beyond company's
control

B&H ARRANGEMENT
Revenue is recognized even when it not yet shipped
as long as cutomer RECEIVES CONTROL. Typically,
control is given upon DELIVERY

B&H ARRANGEMENT
A valid sale even when it is not yet shipped out
03. PRINCIPAL AND AGENT RELATIONSHIP

PRINCIPAL recognizes:
→ GROSS CONSIDERATION
AGENT recognizes:
→ NET CONSIDERATION
"Pays whether sold or not"
Will take control over the bike
04. WARRANTIES

QUALITY ASSURANCE WARRANTY

Never separate PO

SERVICE-TYPE WARRANTY
Always a seprate PO
Service Warranties should be OPTIONAL to be considered a
SEPARATE PO
05. REPURCHASE AGREEMENT
06. GIFT CARDS

Gist:
Deferred revenue incurred by
seller until the gift card is
redeemed
1:53