Afar Notes
Afar Notes
Afar Notes
1. Close the nominal accounts of all A stipulation which excludes one or more
the sole proprietorship business. partners from any share in the profits or
2. Revalue the assets contributed. losses is VOID (Art. 1799)
3. Adjust the capital account of all
In addition to P/L sharing:
the sole proprietors.
4. Close the books of all the sole Salaries - addition to the share in profits as
proprietors. compensation for his services to the
5. Open the books of the Partnership. partnership.
PARTNERSHIP OPERATIONS
PARTNERSHIP DISSOLUTION
Division of profit and losses (Art.
1797) Dissolution - change in the relation of the
partners caused by any partner being
1. In accordance with their
disassociated from the business.
partnership agreement
2. Only share in profits has been Liquidation - termination of business
agreed; share in losses shall be the operations or winding up of business
same: affairs.
> As for the losses, industrial
partner shall not be liable. Major considerations in the accounting
for partnership dissolutions.
1. Admission of partner
> Purchase of interest It is adjusted for the following:
-Purchase of part or all of interest
> Share of any profit or loss.
of one.
-Consideration paid is not > Share of any revaluation gains or losses
recorded in the books.
-Total capital remains the same. 3. Incorporation of the Partnership
Only transfer within equity to a) Adjust the partner’s capital
establish the new partner's balance for their share in
account. profit or loss and for
> Investment in the partnership revaluation gains or losses as
-Admitted by investing directly to at the date of the
the business. incorporation.
-Transaction with the partnership. b) Close the books of the
-Consideration paid is recorded in Partnership.
the books. c) Convert their capital accounts
-Total capital is increased. into their respective number of
-No gain or loss is recognized by shares.
the partnership. d) Open the new books of the
corporation.
Scenarios that may occur for the
investment in the partnership
Procedure:
services.
The stand-alone selling price us Cost to cost method- refers to the
the price at which a promised estimation of stage of completion by
good or service can be sold reference to the proportion that contract
separately to a customer. costs incurred or work performed to date
Step 5: Recognize revenue when or as a bear to the estimated total contract cost.
performance obligation is satisfied Percentage of completion- is determined
For a performance obligation as the ratio of total cost incurred to date
satisfied over time, revenue is over the estimated total contract costs.
recognized as the entity > Total cost incurred to date represents the
progresses towards the complete cumulative costs incurred from contract
satisfaction of the performance inception up to the current reporting date.
obligation. > Estimated total contract costs pertain to
For a performance obligation is the forecasted total cost of completing the
satisfied at a point in time contract. This can also be determined as
revenue is recognized when the the sum of total cost incurred to date and
entity completely satisfies the estimated cost to complete.
performance obligation.
> Estimated cost to complete pertain to the Record cash collection
anticipated additional cost required to fully Cash XX
complete the contract. Contract retention (if any) XX
Formula #1 A/R XX
POC= Total costs incurred to date
Estimated total contract costs Efforts-expended method
Formula #2 The percentage of completion is based on
POC= Total costs incurred to date efforts-expended in completing the
Total costs incurred to date + Estimated contract - normally in direct labor hours,
total contract costs rather than on cost.
Contact costs
Formula #1
1. Incremental Costs of obtaining a
POC= Total labors to date
contract
Estimated total contract labor hours
2. Cost to fulfill a contract
Formula #2
POC= Total labors hours to date Incremental costs of obtaining a contract
Total labor hours to date + Estimated - Costs incurred in obtaining a
total labor hours contract with a customer that the
General Formula entity would not have incurred had
Contract Price XX the contract not been obtained.
Less: Estimated Total Construction Cost -asset if recoverable.
XX - expense if costs would have been
*Prior period cost incurred incurred regardless of whether the
*Current period cost incurred contract was obtained.
*Estimated cots to complete
Costs to fulfill a contract
Estimated Gross Profit
Multiply by Percent of Completion XX - Costs incurred in fulfilling a
% contract that are within the scope
Realized gross profit (RGP) to date of other standards.
Less: RGP in prior period XX - If costs are outside the scope of
RGP(L) for the current period those standards, it will be
classified as asset if costs are:
Pro Forma Entries a. Directly related to a contract
Incurrence/Payment of construction or specifically identifiable
cost anticipated contract.
b. Generate or enhance resources
CIP XX
that will be used in satisfying
Cash XX
performance obligations in the
Construction revenue recognition
future.
Construction cost XX
c. Expected to be recovered
CIP (If RGP) XX
Amortization and impairment
Construction XX
revenue - Contract costs recognized as asset
CIP (If RGL XX are amortized on a systematic
Record progress billing basis that is consistent with the
A/R XX transfer of the related goods or
PB XX services to the customer.
- Impairment loss is recognized to • Receivable- is an entity's right to
the extent that the carrying amount consideration that is unconditional.
of the asset exceeds: *Construction in progress XX
a. The remaining amount of Less: Progress billings (XX)
consideration that the entity Contract asset (liability) XX(XX)
expects to receive in exchange *Cost incurred XX
for the goods or services to Add: RGP XX
which the asset relates; less Less: RGL XX
b. The costs that relate directly CIP XX
to providing those goods or CIP>PB (Contact Asset or Due
services and that have not from customer)
been recognized as expenses.
CIP<PB (Contract Liability or Due
When using the cost-to-cost method, an
to customer)
entity excludes the following when
Changes in measure of progress
measuring its progress on a contract:
• The measure of progress shall be
a. Costs that do not contribute to the
updated as circumstances change over
entity’s progress in satisfying the
time to reflect any changes in the outcome
performance obligation.
of the performance obligation. Such
b. Costs incurred that are not
changes are accounted for prospectively as
proportionate to the entity’s
a change in accounting estimate in
progress in satisfying the
accordance with PAS 8 Accounting
performance obligation.
Policies. Changes in Accounting Estimates
Note: The entity may adjust the input
and Errors.
method to recognize revenue only to the
extent of that costs incurred if the entity Cost recovery approach
expects at contract inception. • If the outcome of a performance
obligation that is satisfied over time
cannot be measured reasonably, revenue
shall be recognized only to the extent of
Presentation
costs incurred that are expected to be
A contract where either party has
recovered (ie. zero profit" method).
performed is presented in the statement of
Onerous contract
financial position as a contract liability,
•A construction contract becomes
contract asset or receivable.
onerous if the expected costs in fulfilling
•Contract liability- is an entity's
the performance obligation exceed the
obligation to transfer goods or services to
transaction price.
a customer for which the entity has
•The entity recognizes and
received consideration (or the amount is
measures the present obligation under an
due) from the customer.
onerous contract as a provision in
• Contract asset- is an entity's
accordance with PAS 37 Provisions,
right to consideration in exchange for
Contingent Liabilities and Contingent
goods or services that the entity has
Assets.
transferred to a customer when that right is
Variable consideration
conditioned on something other than the
• If the consideration includes a
passage of time.
variable amount. the entity shall estimate
the amount to which it will be entitled in the stand-alone selling prices of those
exchange for transferring the promised additional goods or services.
goods or services to the customer. The balance of the transaction
• "Constraining estimates of price from the original contract +
variable consideration" principle— The consideration from the modification =
estimated amount of variable allocated to the remaining performance
consideration will be included in the obligations
transaction price only to the extent that it •As if the modification is part of
is highly probable that a significant the existing contract — if the additional
reversal in the amount of cumulative goods or services are not distinct
revenue recognize° will not occur when The effect of the modification is
the uncertainty associated with the accounted for as a prospective catch-up
variable consideration is subsequently adjustment to revenue.
resolved. Claims for reimbursements on tie
Examples of contract stipulations that contract
could make the consideration in a •A claim is an amount that the
construction contract to be variable: contractor seeks to collect from the
1. Penalties customer or another party as
2.Incentive payments reimbursement for costs not included in
3.Cost escalations the contract price.
Contract modification • If the entity has an enforceable
•A contract modification is a right on the claim, the entity shall account
change in the scope and/or price of a for the claim as a contract modification
contract that is approved by the using the principles in PFRS 15.
contracting parties, in writing, orally or Significant financing composition in a
implied by customary business practices. contract
Similar terms are "change order," • Promised consideration is
"variation" and "amendment." discounted if the timing of the agreed
Contract modification: it is accounted payments provides the customer or the
for: entity with a significant benefit of
• As a separate contract- if the financing the transfer of goods and
modification results to additional goods or services. The difference between the
services that are distinct and the modified promised consideration and the present
contract price reflects the stand-alone value is recognized separately as interest
selling prices of those additional goods or revenue or interest expense.
services. Uncertainty in the collectability of
Account for the existing contract contract revenue
as is and the accounts • If the uncertainty in the
for the modification as a new and separate collectability of contract revenue arises at
contract. contact inception, the entity does not
• As if the modification is a recognize any revenue from the contract.
termination of an existing contract and the Any consideration received is recognized
creation of a new contract — if the as a liability.
additional goods or service are distinct but • If the uncertainty in the
the modified contract price does not reflect collectability of contract revenue arises
subsequent to contract inception, the software and technology
collectability is accounted for as motion pictures, music and other
impairment of trade receivable and/or forms of media and entertainment
contract asset.
franchises
Non-cash considerations
patents, trademarks and copyrights
• The contributed goods and
Franchise
services are treated as non-cash
consideration and included in the A franchise is a contractual
transaction price if the entity obtains agreement under which the franchisor
control over them. Non-cash consideration grants the franchisee the right to sell
is measured: certain products or services, to use certain
At fair value or Selling Price of the good trademarks or trade names or to perform
or serviced promised in exchange for the certain functions usually within a
consideration. designated geographical area
ACCOUNTING FOR FRANCHISE
OPERATIONS - FRANCHISOR Franchises are two types
1. Contractual arrangement between
An entity applies PFRS 15 revenue from two private entities or individuals
contracts with customers to account for - The franchisor having developed
revenue from contracts with customers. a unique concept of product
PFRS 15 supersedes PAS 18 Revenue. protects the concept or product
Core principle under PFRS 15 through a patent copyright or
An entity recognizes revenue to depict the trademark or trade name
transfer of promised goods or services to 2. Contractual arrangement between
customers in an amount that reflects the a private entity or an individual
consideration to which the entity expects and the government - a
to be entitled in exchange for those goods governmental body allows a
or services. private entity to use public
Revenue recognition principles under property in performing its services
PFRS 15 Promise to grant license is:
Not distinct Distinct
Step 1: Identify the contract with the
The promises are The promise to grant
customer. accounted for the license is treated
Step 2: Identify the performance together as a single as a separate
obligations in the contract. performance performance
Step 3: Determine the transaction price obligation. obligation
Step 4: Allocate the transaction price to Use general Use specific
the performance of obligations. principles to principles:
Step 5: Recognize revenue when or as a determine whether Right to access - the
performance obligation is satisfied the performance entity's intellectual
obligation is property as it exists
Licensing
satisfied over time throughout the
PFRS15 defines a license as one or at a period in license period, the
that “establishes a customer’s right to the time. performance of
intellectual property of an entity”. obligation is
Example of licenses of intellectual satisfied over time.
property include: Right to use - the
entities intellectual Continuing franchise fees- these are the
property as it exists periodic payments made by the franchisee
at the point in time to the franchisor for the ongoing
at which the license franchisee support. Continuing franchise
is granted, the
fees are also referred to as a royalty fees
performance of
obligation is and are usually based on a certain
satisfied at a point percentage of the franchisee’s sales, but
in time. can also be set up as fixed amount or on a
sliding scale and are payable periodically.
The customer The customer can Sale of equipment and other tangible
cannot detect the detect the use of and assets- in most franchise agreements the
use of and obtain all obtain all the
franchisor provides equipment and other
the remaining remaining benefits
tangible assets to the franchisee for a
benefits from the from the license at
license at the time it the time it was
separate fee.
was granted. granted. Option to Purchase
Intellectual property Intellectual property When the franchise agreement includes the
changes throughout does not change provision that the franchisor has an option
the license period. throughout the to purchase the franchise business, the
a. The entity license period. initial franchise fee must be deferred and
continues to be when the option is exercise, the deferred
involved with the
revenue from initial franchise fee is treated
intellectual property.
as reduction from the investment.
b. The entity
undertakes activity
that significantly
affect the
intellectual property.
May be evidenced
by a sales-based
royalty agreement
between the entity
and the customer.
Franchise fees
Franchise fees refer to the fees that the
franchisee agrees to pay to the franchisor CONSIGNMENT SALES
in a franchise agreement. An entity (called the consignor)
delivers goods to another party
(called the consignee).
Franchise fees come into the form of: The consignor recognizes revenue
Initial franchise fee- this is the one of only when the consignee sells the
payment made by the franchisee to the consigned goods to end
franchisor to obtain the franchise right. customers.
This is normally paid at the signing of the Consigned goods – inventory of
agreement and are normally non- consignor; consignee records
refundable. memo entries.
Freight and other incidental costs Principal vs agent
– capitalized as cost of the
consigned goods
Typical consignment, the
consignee is entitled to a
commission.
Commission – recognized as
expense by the consignor but
income of the consignee.
When the consigned goods are
sold to end customers.
- The consignor recognized
revenue at gross amounts of
consideration INSTALLMENT SALES METHOD
- The consignee recognized
revenue at the commission or Installment sales method is a special case
fee to which it is entitled. of revenue recognition that deviates from
- Pro forma entries revenue recognition principles of PFRS15.
Consignor Books Consignee Books This method may be used for taxation
Consignment of Goods purposes or when the entity is a micro
Memo Entry Memo Entry entity and has opted to use the income tax
Sale of Goods basis of accounting.
No Entry Cash XX Under the installment sales method the
Principal AgentCI XX
gross profit from an installment sale is
Payable to XX
initially deferred and subsequently
It controls the Remittance of Sale
good Its performance
realize on a piecemeal basis as the
or service
Cash before the XX obligation
Payableisto to
XX
installment payments are received using
good CEor service isXX arrange Cash theXX
Revenue XX the formula below:
transferred to the provision of
Collection on a sale
customer.
COGS XX goods or services
x Gross profit rate
Inventory XXby another party
Realize gross profit
May personally Recognized as
satisfy a performance revenue at the Deferred gross profit
Installment account receivable
obligation. commission or
fee to which it is
Realized Gross Profit
entitled
Amount Collected
It may engage
another party to DGP beg. – DGP, end.
satisfy some or all of
the performance Gross profit
obligation on its Sales
behalf. Sales 100
Cost of sales 60
Recognized as
Gross profit 40
revenue at the gross
amount
consideration.
GPR 40% Inventory @ FV XX
Formula for determination of Collections Deferred gross profit @ CA XX
Installment AR beg. Loss on repossession XX
Less: Installment AR end Installment receivable @ CA XX
Amount of collections Gain on repossession XX
Accounting Procedures to record
Realized Gross Profit repossession
Gross Profit Rate 1. Record the repossessed
DGP, beg. /GPR merchandise in an appropriate
Less: DGP, end/ GPR inventory account at its fair value
Amount of collections (Estimated Selling Price less
Note: The amount of collection must be Reconditioning Cost and normal
multiplied by GPR must be the principal profit margin) at the date of
amount and do not include the interest repossession.
collections. In case there is collection from 2. Cancel the uncollected installment
customer who issued a non-interest- account receivable balance related
bearing note, the amount to be multiplied the account defaulted only.
must be present value of the amount 3. Write-off the balance of the
collected. Hence, exclude the interest deferred gross relating to the
compound. above receivable.
Repossession 4. Recognize the resulting gain or
loss on repossession.
The seller may repossess the good sold in Note: If the given is the FV and silent if it
case of default by the buyer. On is after or before reconditioning cost, then
repossession date: it is construed as before reconditioning
a. The repossessed good is debited to cost and no need to deduct the
an inventory account at “fair reconditioning cost from its FV. But if the
value”. For purposes of applying given is the selling price, then you have to
the installment sales method, “fair deduct the reconditioning cost and normal
value” is either: profit margin even if it is not stated the
i. The appraised value, or selling price is after or before
ii. The estimated resale price of reconditioning costs. Another tip is if the
the repossessed good less given is selling price then deduct the
reconditioning costs and normal profit margin while if the given is
normal profit margin FV whether after or before reconditioning
b. The carrying amounts of the cost then ignore the normal profit margin.
related installment receivable and Trade-ins
deferred gross profit are A seller may accept from a buyer a trade-
derecognized in of old merchandise. Trade-ins under the
c. The difference between (a) and (b) “installment sales method” are accounted
is recognized as gain or loss on for as follows:
repossession a. The trade-in merchandise is
debited to inventory at fair value.
Pro-forma Entry: For purposes of applying the
installment sales method, “fair
value is either:
i. The appraised value of the
traded-in merchandize
ii. The estimated resale price
of the traded-in
merchandise less
reconditioning costs and
normal profit margin.
b. The seller gives the buyer a trade-
in value for the old merchandise.
The trade-in value is the amount
that is treated as part payment of
the new merchandize being sold.
Note:
Trade-in value > FV (debited to
over allowance and deducted from
the sale price when computing for
the GPR.
Trade-in value < FV (credited to
under allowance and added to the
sale price when computing for the
GPR.
When there is under or over
allowance arising from trade in,
GPR may be changed.
Pro-forma Entry:
Inventory @ FV XX
Over Allowance XX
Installment receivable XX
Installment sale XX
Under allowance XX