CHAPTER 1 - PARTNERSHIP A partnership is defined as an association of two or more persons who contributes money, property, or industry to a common fund with the intention of dividing the profits among themselves. “The right to be associated with the person/s that I like.”
Distinctions:
Right of Succession Liability for Debt
PARTNERSHIP Mere agreement of the parties. Two or more persons. Civil Code Upon execution of the contract of partnership. Authorized by the partners, as long as not contrary to law, etc. Managing partner, if none, every partner is an agent. None. Partners are subsidiarily liable.
Power to sue
Partner may sue another partner.
Based on Life
Delectus personam. Stipulation on the contract and at the will of the parties. Anytime.
Created by Organized by Governed by Juridical personality commences
May exercise power Management of business
May be dissolved
Classification: 1. as to object: a. universal partnership universal partnership of all present property universal partnership of profits b. particular partnership 2. as to liability: A. general partnership B. limited partnership 3. as to its duration: A. partnership at will B. partnership with a fixed period
CORPORATION Operation of law. Requires at least 5 incorporators. Corporation Code Upon issuance of Certificate of Incorporation by the SEC. Granted by law or incident to its existence. Vested upon the Board of Directors/Trustees. Existing Shareholders are liable up to the extent of their subscribed share. BOD authorization needed and suit must be in the corporation’s name. Not based. Not exceeding 50 years but may be renewable for another 50 years. With consent of the State.
4.
as to the legality of existence: A. de jure partnership B. de facto partnership 5. as to representation: A. ordinary/real partnership B. ostensible/partnership by estoppel 6. as to publicity: A. secret partnership B. notorious/open partnership 7. as to purpose: A. commercial/trading B. professional/non-trading Principle of Delectus Personam - a rule inherent in every partnership wherein no one can become a member of the partnership association without the consent of all the partners. Contract of Sub-partnership - one formed between a member of a partnership and a third person for a division of profits coming to him from the partnership enterprise; a partnership within a partnership distinct and separate from the main or principal partnership. Distribution of profits and losses: 1. According to agreement 2. In the absence of such: A. capitalist partner - in proportion to his contribution B. industrial partner - what is just and equitable under the circumstances but he shall not be liable for losses Property rights of a partner: 1. Right to specific partnership property 2. Interest in the partnership (his share in the profits and surplus) 3. Right to participate in the management. Rights of a partner in specific partnership property 1. has an equal right with other partners to possess specific partnership property for partnership purposes; 2. not assignable, except in connection with the assignment or rights of all partners in the same property; 3. not subject to attachment or execution, except on a claim against the partnership; and 4. not subject to legal support.
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Partner by Estoppel - a person who represents himself, or consents to another/others representing him to anyone, as a partner either in an existing partnership or in one that is fictitious or apparent. Effects of conveyance by a partner of his interest in the partnership: 1. conveyance of his whole interest-partnership may either remain or be dissolved; 2. assignee does not necessarily become a partner; 3. assignee cannot interfere in the management or administration of the partnership business or affairs; 4. assignee cannot also demand information, accounting and inspection of the partnership books. Dissolution – the change in the relation of the partners caused by any partner ceasing to be associated in carrying on the business (art. 1828) Winding Up - the process of settling the business or partnership affairs under dissolution. Termination- the point in time when all partnership affairs are wound up or completed and is the end of the partnership life Order of payment in the winding up of partnership liabilities: 1. General partnership: a. those owing to creditors other than partners; b. those owing to partners other than for capital or profits; c. those owing to partners in respect of capital; d. those owing to partners in respect of profits. 2. Limited partnership a. those owing to creditors, except those to limited partners on account of their contribution, and to general partners; b. those to limited partners in respect to their share of the profits and other compensation by way of income in their contributions; c. those to limited partners in respect of their capital contributions; d. those to general partners other than for capital and profits; e. those to general partners in respect to profits; f. those to general partners in respect to capital. PARTNERSHIP ACCOUNTING: Formation 1. All assets contributed to the partnership are recorded at their agreed values. 2. In the absence of agreed values, the ff: valuation are used for: Cash Investments – face value of initial cash outlay, Non –cash Investments – at FV less any liabilities/mortgage/encumbrance assumed by the partnership. Division of Profit and Loss 1. As a rule, profit and loss are allocated based on agreement of the parties. Various methods exist for division of partnership profits and losses include but not limited to the ff: a. Equally, b. Arbitrary ratio, c. Capital contribution ratio: i. Original capital or initial investment ii. Beginning capital of each year iii. Average capital iv. Ending capital of each year d. Interest on capital balance and/or loan balances and the balance on agreed ratio, e. Salaries to partners and the balance on agreed ratio, f. Bonus to partners and the balance on agreed ratio, and i. Bonus as an “expense” in computing the bonus amount. Bonus is computed based on net income after bonus. ii. Bonus as distribution of “profit”. Bonus is computed based on net income before deducting the bonus. g. Interest on capitals and /or loan balances, salaries to partners, and bonus to partner and the balance on agreed ratio. 2. If there is no agreement, the division is according to: a. Capital contribution, and b. Equally. Dissolution 1. Admission of a New Partner
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A new partner may be admitted to the partnership by purchasing the interest of one or more of the existing partners or by contributing cash or other assets. The situations are: a. Purchase of Interest i. The purchase price is not recorded in the partnership books. ii. The admission is recorded by merely transferring the interest of the old partner to the new partner. b. Admission of Investment of Additional Assets The computation of the capital balances after the admission will depend on whether: i. Partnership assets are revalued, ii. Recognize goodwill, or iii. Partnership assets are not revalued (Bonus method). 1. Compute the new partner’s proportion of the partnership’s BV (Agreed capital) as follows: Agreed capital = [capital of old partners + investment of new partner] x capital % of new partner 2. Compare the new partner’s investment with his assigned agreed capital Investment = Agreed Capital No revaluation of assets, no goodwill, no bonus. Investment > Agreed Capital 1. Revalue NA up to FV and allocate to old partners. 2. Record unrecognized goodwill and allocate to old partners. 3. Allocate bonus to old partners. Investment < Agreed Capital 1. Revalue NA down to FV and allocate to old partners. 2. Recognize goodwill brought by new partner. 3. Assign bonus to old partners. 2. Retirement/Withdrawal of a Partner On the retirement/withdrawal date: a. Compute and distribute the profit/loss of the partners. b. Adjust the asset and liabilities to their current FV. Adjustments are made to the partner’s capital in their profit and loss ratio, Loans to/from partnership, Drawing accounts, and capital interests/accounts. c. Cash settlement to retiring/withdrawing partner. Settlement may be: CS = Partners capital after distribution of P/L No bonus and no goodwill CS > Partners capital after distribution of P/L Bonus to retiring/withdrawing partner CS < Partners capital after distribution of P/L Bonus to remaining partners 3. Incorporation of a partnership a. Compute and distribute the profit/loss of the partners. b. Adjust the asset and liabilities to their current FV. Adjustments are made to the partner’s capital in their profit and loss ratio. c. Allocate the partners respective capital to the shares to be distributed to them. Reclassification
may be: Subscribed Share = Net Assets Subscribed Share < Net Assets
No APIC/Share Premium Recognize APIC/Share Premium
Liquidation Liquidation is the process of converting partnership assets into cash and distributing the cash to creditors and partners. Frequently, the sale of assets will not provide sufficient cash to pay both creditors and partners. The creditors have priority on any distribution. The basic rule is that no distribution is made to any partner until all possible losses and liquidation expenses have been paid or provided for. The Liquidation Process: 1. Sell all NCAs and allocate the resulting gain or loss to the partners’ capital accounts in accordance with their P/L ratio. 2. Satisfy liabilities owing to creditors other than partners. 3. Satisfy liabilities owing to partners other than capital and profits. 4. Distribute remaining cash to the partners for capital and finally profits. Any deficiency in a solvent partner’s capital will require that partner to contribute cash equal to the debit balance. If the deficient partner is insolvent, that partner’s loan should first be used (right of offset doctrine) and then the remaining distributed among the other partners usually in accordance with their P/L ratio. Types of Liquidation and Schedule used: 1. Lump Sum Distribution - Liquidation Schedule 2. Installment Distribution - Liquidation Schedule in conjunction with Schedule of Safe Payments/Cash Priority Program
CHAPTER 2 - CORPORATE LIQUIDATION 3
LIQUIDATION Process by which all the assets of the corporation are converted into liquid assets (cash) in order to facilitate the payment of obligations to creditors, and the remaining balance if any is to be distributed to the SH or members. Three Modes of Liquidation: 1. By BOD/Trustee 2. Conveyance to a trustee made within three year period 3. By management committee or rehabilitation receiver RECEIVERSHIP – management of a business or property that is involved in a legal process such as bankruptcy. Effects of Non-Use of Corporate Charter and Continuous Inoperation of Corporation: 1. NON-USER FOR 2 YEARS – when the corporation does not fully organize and commence the transaction of its business or the construction of its works within 2 years from the date of its incorporation, its corporate powers cease and the corporation shall be deemed dissolved. Suspension or cancellation of corporate franchise is not automatic. 2. NON-USER FOR 5 YEARS – when the corporation has commenced the transaction of its business but subsequently becomes continuously inoperative for a period of at least 5 years EXCEPT if reason for non-use or inoperation is beyond the control of the corporation. DISSOLUTION OF A CORPORATION – extinguishment of the franchise of a corporation and the termination of its corporate existence. MODES OF DISSOLUTION OF A CORPORATION: 1. VOLUNTARY DISSOLUTION A. By shortening corporate term B. Expiration of corporate term 2. INVOLUNTARY DISSOLUTION Grounds: A. Failure to organize and commence business within 2 years from incorporation; B. Continuously inoperative for 5 years; C. May be dissolved by SEC – on grounds provided by existing laws, rules and regulations: Failure to file by-laws within 30 days from issue of certificate of incorporation. Continuance of business not feasible as found by Management Committee or Rehabilitation Receiver. Fraud in procuring Certificate of Registration. Serious Misrepresentation Failure to file required reports GROUNDS FOR SUSPENSION OR CANCELLATION OF CERTIFICATE OF REGISTRATION: 1. fraud in procuring registration; 2. serious misrepresentation as to objectives of corporation; 3. refusal to comply with lawful order of SEC; 4. continuous inoperation for at least 5 years; 5. failure to file by-laws within required period; 6. failure to file reports; and 7. other similar grounds.
ACCOUNTING AND REPORTING FOR LIQUIDATION
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The basic focus of accounting for liquidation is that of a “quitting concern” rather than “going concern” which is the usual assumption in accounting. Statement of Affairs
Is statement of financial condition that emphasizes liquidation values and provides relevant information for the trustee in liquidating the debtor corporation. Assets are measured at their expected NRV/FV and classified on the basis of their availability to Fully Secured, Partially Secured, with Priority, and the Unsecured Creditors. Book Values P
XXX XXX XXX
Total Asset Book Values P
XXX XXX XXX XXX XXX XXX (XXX) Total Liab. & SHE
ASSETS Assets pledged to Fully Secured Creditors: (Asset pledged > Secured Liability) Assets pledged to Partially Secured Creditors: (Asset pledged < Secured Liability) Free Assets: (Remaining Assets) Estimated amount available Less: Creditors with priority Net Free Assets Estimated deficiency to unsecured creditors Total Unsecured Creditors LIABILITIES and STOCKHOLDER’S EQUITY Fully Secured Creditors: (Assets pledged = Liability) Partially Secured Creditors: (Assets pledged < Liability) Creditors with priority: Liquidation expenses Accrued wages Taxes payable (Total CWP = Free Assets) Remaining Unsecured Creditors: Stockholders’ Equity (Deficit)
Fair Values P
XXX
Free Assets Difference
XXX XXX
Claims P
Assets not pledged Total Assets not pledged XXX XXX (NFA – TUC) P XXX EUC
XXX XXX
Difference
XXX XXX XXX XXX TUC
Statement of Realization and Liquidation Is an activity statement that is intended to show progress toward liquidation of a debtor’s estate. Its original purpose was to inform the bankruptcy court and interested creditors of the accomplishment of the trustee. ASSETS Assets to be Realized:(BV) Assets Realized: (FV/NRV) Assets Acquired (new)(BV) Assets not Realized (BV) LIABILITIES Liabilities Liquidated: (BV) Liabilities to be Liquidated: (BV) Liabilities not Liquidated (BV) Liabilities Incurred (new) (BV) INCOME (LOSS) and SUPPLEMENTARY ITEMS Supplementary Expenses Supplementary Revenues < Net gain on realization of assets Net loss on realization Estate Equity (Deficit) is computed when assets are realized. The Estate Equity, beg. Is the excess of the BV of Assets over the BV of the Liabilities taken over by the trustee or receivership. Estate equity, beg. PXXX Net gain (loss) on realization of assets XXX (XXX) Administrative expenses (XXX) Estate equity (deficit), end. P(XXX)
CHAPTER 3 - JOINT VENTURES 5
Introduction According to PAS 31 Financial Reporting of Interests in Joint Venture, a joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to a joint control. Joint control is the contractually agreed sharing of control over an economic activity, and exists only when the strategic financial and operating decisions relating to the activity require the unanimous consent of the parties sharing control (the venturers). A venturer is a party to a joint venture and has joint control over that venture. A joint venture can be entered into by individuals, partnerships or companies. One common example in practice is when a Filipino company wants to start operations in an overseas country. Rather than build up a new company on its own from scratch, the Filipino company can enter into a joint venture with a local company which is already operating in the overseas country. The local company should be able to contribute local expertise to the venture to increase its chances for success. However, PAS 31 does not apply where the venture is a venture capital organization or where the joint venture interest is owned by a mutual fund or unit trust (similar structure entity) and such investments have been accounted for under PAS 39, Financial Instruments: Recognition and Measurement. Definition The term “joint venture” has two basic meanings. It can refer to a joint project or to an entity set up to carry out the joint project. Hence, a joint venture can be: A contractual arrangement. An entity, is jointly controlled by the reporting entity and other venturers. In both cases, joint control is the determining factor. The Contract establishes the following matters: Activity and duration of the venture Voting rights of venturers Capital contributions Profit-sharing arrangements Appointment of managers and operators Policy decisions which require the consent of all venturers Basic types of Joint Venture Jointly controlled operations Involves the use of assets and other resources of the venturers rather than the establishment of an entity which is separate from the venturers themselves. Each venture uses its own assets and incurs its own expenses and liabilities. Profits are shared among the venturers in accordance with the contractual agreement. Jointly controlled asset Is a joint venture in which the ventures control jointly an asset contributing to or acquired for the purpose of the joint venture. The venturers each take a share of the profit or income from the asset and each bears a share of the expenses involved. Jointly controlled entities Involves the establishment of a company, a partnership, or other entity in which each venture has an interest. The agreement between the venturers provides for their joint control over the entity. Otherwise, a jointly controlled entity operates in the same way as any other enterprise. Each venture is entitled to a share of the entity’s results. In the consolidated FS, a venture should report its interest in a jointly controlled entity using: 1. Proportionate consolidation, or 2. Equity method. Accounting for Joint Ventures Separate Records A full set of accounting records may be kept for the joint venture so that the venturers can assess the performance of the venture. The venturers, may maintain separate records for transactions affecting them thru Investment in Joint Venture
account. The account is opened in the individual books of the venturers and used as follows: Investment in Joint Venture Debit
Credit
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Original and additional investment Services rendered to JV/compensatory basis Share in profits
Capital withdrawal/s Share in losses Cash settlement
In theory, this is possible but rarely applied in practice. No Separate Records Due to the short life, time or size of the joint venture, it is not considered worthwhile opening a new set of records for what may only be a few transactions on behalf of the venture.
An account called Joint Venture is maintained to take the place of all nominal accounts. The following transactions that affect the account would be as follows: Joint Venture
Debit Merchandise contribution Purchases Freight-in SRA SD Expenses
Credit Merchandise withdrawals Merchandise returns PRA PD Sales Other income
If the JV is completed, the balance represents the profit and loss. If the JV is uncompleted, meaning there is still unsold merchandise. P/L is the balancing figure between the balance of the JV account before P/L distribution and the cost of unsold merchandise. Cash Settlement Cash settlement may also be represented by the venturer’s account balance after recording investments, withdrawals, and share in venture gain (loss). Upon termination of a completed venture, cash settlement may be computed as follows: Investments …………………………………… PXX Add: Share in venture gain (loss) ……………………. XX (XX) Less: Withdrawals …………………………………... (XX) Cash settlement …………………………………… PXX A debit balance represents cash to paid in final settlement while a credit balance represents cash to be received. The recording of cash settlement on the books of each venture requires that: 1. All accounts, except personal accounts, be brought to zero balance, and 2. Any debit or credit is cash to be received or paid.
CHAPTER 4 - HOME OFFICE, BRANCH and AGENCY Introduction As a means of achieving marketing objective, selling units in form of agency or a branch may be established. The distinction between an agency and a branch is based upon the functions assigned to the organization as well as the
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degree of independence that it assumes in the exercise of its functions. An organization that merely takes orders for goods, carries no stock other than samples, and that operates under the direct supervision of the Home Office is called an Agency; while an organization that sells goods out of a stock that it maintains and that possesses the authority to engage in transactions as an independent business is called a Branch. The branches of an enterprise are not separate legal entities, they are separate economic and accounting entities whose special features necessitate accounting procedures tailored for those features, such as the reciprocal accounts. On the other hand, sales agency is also not a separate business entity. In this set-up, one location referred to as the home office is usually the base of operations wherein branches and agencies are maintained on different business locations depending on the function and mode of operation. The Reciprocal Accounts In recording inter-office transactions, two reciprocal accounts are used, namely, the Investment in Branch account used by the Home Office which is classified as an asset and the Home Office account used by the branch which
is classified as a liability.
Home Office Books Investment in Branch XX
Branch Books Home Office Assets to branch Assets from branch Branch profit Branch loss
XX XX
XX
XX XX XX
XX
The Reconciliation Statement Investment in Branch = Home Office. If the balances are not equal before the preparation of the separate balance sheets. This is done to determine the causes of inequality. The following are usual causes of inequality: 1. Transactions have been recorded by the Branch but not by the Home Office. 2. Transactions have been recorded by the Home Office but not by the Branch. 3. Transactions have not yet been recorded on either set of books. 4. Errors in recording have occurred in one or both books. Branch Inventory at Cost The formula if: 1. Branch Inventory are all acquired from H.O. Branch Inventory at billed price 100% + Mark-up%* 2.
100% + Mark-up%*= Shipments from H.O. Shipments to Branch
Branch Inventory includes merchandise acquired from outsiders.
Overview: Total Cost Beg. Inventory Add: Purchases Freight-in Shipments from H.O. Less: PRA/Discounts Cost of Sales End. Inventory Actual Branch Profit Branch Profit (Loss) Add: Overvaluation Actual Branch Profit
XX XX XX XX XX XX XX
Shipments to Branch Billed Price - Allow. For O.V. Actual Cost XX XX XX
XX
XX
XX
XX
XX*
XX XX
Creditors Purchase P XX XX XX XX XX XX
PXX XX PXX
Preparation of Combined Financial Statements The FS of the H.O. and the Branch must be combined for external reporting purposes. Working papers are usually prepared to eliminate accounts: 1. Eliminate reciprocal accounts. 2. Eliminate inter-company transfer accounts.
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3.
a. Shipment to Branch and Shipment from H.O. accounts b. Allowance for Overvaluation of Branch Inventory Eliminate the overvaluation in branch’s beginning and ending inventory.
Combined Income Statement The merchandise inventories, beginning and ending inventories are presented at cost. The Shipment to Branch and Shipment from Home Office accounts are not presented. Combined Balance Sheet The reciprocal accounts “Investment in Branch” and “Home Office” accounts are not presented as well as the Allowance for Overvaluation account. Transactions between Branches Occasionally, branch operations require that merchandise or other assets be transferred from one branch to another. The transfer of merchandise from one branch to another does not increase the cost of inventories by the freight costs incurred because of indirect routing. The amount of freight costs properly included in inventories at a branch is limited to the cost of shipping the merchandise directly from the Home Office to its present location. Excess freight costs are recognized, as expenses of the H.O. Accounting System for Sales Agencies An imprest system is usually adopted by the H.O. for the working fund of the sales agency.
CHAPTER 5 - FRANCHISE ACCOUNTING Introduction Franchises are rights to sell a specific brand of product or services in a certain geographic area. There are two parties involve in franchising, namely the franchisor who grants the right to sell his brand of product or services to another party called the franchisee. Each party contributes resources.
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The franchisor contributes his trade name, products, and company’s reputation. He also imparts his expertise and on continuing basis provides guidance and duties on the manner in which the franchisee must operate his establishment. The franchisee on the other hand, provides operating capital for the operation of the franchised business. Franchising is a system whereby one company grants business rights to another company or individual thru a contract to operate a franchised business for a specified period of time. The company granting the business right is called the franchisor, and the company receiving the business rights is called the franchisee. Under PAS No. 18 it states that: “Franchise fees cover the supply of initial and subsequent services, equipment and other tangible assets, and know-how. Accordingly, franchise fees are recognized as revenue on a basis that reflects the purpose for which the fees were charged”. Franchise Fees Franchise agreement usually requires the franchise to make payments, called the franchise fees to the franchisor in consideration for the reputation, skill, products and services contributed by the franchisor. There are two types of franchise fees, the initial franchise fees and the continuing franchise fee. Initial Franchise Fee Before a franchise is granted, an initial franchise fee is paid by the franchisee to the franchisor. Usually the initial franchise fee is paid by the franchisee via down payment with the balance evidenced by a note payable in installment. The determination of revenue earned on the initial franchise fees lies on the following factors: a. The point at which fee is to be considered earned; and Recognition of Initial Franchise Fee: 1. When all material services or conditions of the agreement have been substantially performed. There is substantial performance when the following conditions are met: a. The franchisor is not obliged in any way to refund cash already received or forgive unpaid debt. b. The initial services required of the franchisor have been substantially performed. c. No other material conditions or obligations exist. 2. There is no option to purchase. b.
The assurance of collectability of the unpaid portion of the fee, if the initial franchise fee is not paid in full.
Cost of Services Direct franchise cost of initial franchise services shall be deferred until related revenue is recognized. Indirect costs that occur on a regular basis should be expensed when incurred. Continuing Franchise Fee This is usually based on a certain percentage of the periodic sales of the franchise. Continuing Franchise fees are recognized when actually received. All direct and indirect costs related to CFF are recognized as expense. Option to Purchase The franchise agreement may include a provision to the effect that the franchisor has an option to purchase the franchise business. If the option is granted at the time the agreement is signed, the initial franchise fee is to be deferred. When the option is exercised, the deferred revenue is treated as reduction from the franchisor’s investment.
Revenue Recognition Table Conditions Initial services substantially performed No option to purchase
WITH DIRECT COST Cash collections Earned Unearned Franchise Fee Franchise
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WITHOUT DIRECT COST Balance of the Note Earned Unearned Franchise Fee Franchise
Collectability of the unpaid portion is assured
Fee
Fee
CHAPTER 6 - LONG TERM CONSTRUCTION CONTRACTS Introduction The objective of PAS No. 11 is to prescribe the accounting treatment of revenue and costs associated with construction contracts. Because of the nature and activity undertaken in construction contracts, the date at which the contract activity is entered into and date when the activity is completed usually fall into different accounting
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periods. Therefore, the primary issue in accounting for construction contracts is the allocation of contract revenue and contracts costs to the accounting periods in which the construction work is performed. Further, PAS No. 11 establishes the standards for determining when contract revenue and contract costs should be recognized as revenue and expenses in the income statement. It also provides practical guidance on the application of these standards. Construction Contract/Contract Price 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. The ff: are types of Construction Contracts: 1. 2.
Fixed Price contract is where the contractor agrees to a fixed contract price, or a fixed rate per unit of output, which in some cases is subject to cost escalation clauses. Cost Plus contract is where the contractor is reimbursed for allowable or otherwise defined costs, plus a percentage of these costs or a fixed fee.
Contract Revenue should comprise of the: a. Initial amount of revenue; and b. Variations, claims and incentive payments: Is probable that it will result in revenue; and Capable of being reliably measured. Contract Costs should comprise of costs that: a. Relate directly to the specific contract; b. Attributable and can be allocated to the contract; and c. Specifically chargeable to the customer under the terms of the contract. Methods of Construction Accounting: A. Percentage of Completion method When the outcome of the construction contract can be reliably estimated, contract revenue and contract costs should be recognized as revenue and expense, by reference to the stage of completion of the contract activity at the balance sheet date. The stage of completion may be determined in a variety of ways. The enterprise uses the method that measures reliably the work performed. Depending on the nature of the contract, the methods may include: 1.
Input Measures are made in relation to cost of efforts devoted to a contract. They are based on established or assumed relationship between a unit of input and productivity. a. Cost-to-cost method. The proportion that contract costs incurred for work performed to date bear to the estimated total contract costs; b. Efforts-expended method is based on surveys of work performed.
2.
Output Measures are made in terms of results achieved. This is based on the completion of a physical proportion of the contract work. Architects and engineers are sometimes asked to evaluate jobs and estimate what percentage of a job is complete.
Progress payments and advances received from customers often do not reflect the work performed.
Formula: CONTRACT PRICE Less: a. TOTAL ESTIMATED COST/ESTIMATED COST AT COMPLETION b. Cost incurred to date c. Estimated cost to complete ESTIMATED GROSS PROFIT
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P XX XX
XX
XX XX
Multiply : Percentage of Completion (b/c) GROSS PROFIT EARNED TO DATE Less: Gross Profit earned in prior year(s) GROSS PROFIT EARNED THIS YEAR
% XX XX XX
B. Cost Recovery/Hybrid/Zero-Profit method When the outcome of a contract cannot be measured reliably: a. Revenue should be recognized only to the extent of contract costs incurred that is probable to be recoverable; and b. Contract cot should be recognized as an expense in the period in which they are incurred. Recognition of Expected or Anticipated Losses When it is probable that total costs will exceed the total revenue, the expected loss is recognized as expense immediately, irrespective: Whether or not the work has commenced; The stage of completion of the contract; or The amount of profits expected to arise from other contracts not treated as a single construction contract. Changes in Estimates are changes in estimates of current revenue and contract costs and are treated as change in accounting estimate. Contract Retentions are progress billings which are not paid until the satisfaction of conditions for payment of such amounts or until defects are rectified. Progress billings are amounts billed for work performed whether or not they have been paid by the customer or not. Advances are amounts received by the contractor before the related work is performed. Financial Statement Presentation An enterprise should present: a.
[Cost incurred plus recognized profits] Less: [sum of recognized losses and progress billings] Gross amount due from customers from contract work is an Asset. Condition: Cost incurred plus net recognized profit (loss) > progress billings
b.
[Cost incurred plus recognized profits] Less: [sum of recognized losses and progress billings] Gross amount due to customers from contract work is a Liability Condition: Cost incurred plus net recognized profit (loss) < progress billings
Or Progress Billings < Collections = Billings in Excess of Cost; Liability Progress Billings > Collections = Cost in Excess of Billings; Asset Note: PAS 11 does not allow completed-contract method. CHAPTER 7 - CONSIGNMENT Introduction From a legal point of view, the transfer of goods represents a bailment, with the consignee (the party who undertakes to sell the goods) possessing the goods for the purpose of sale as specified in the agreement between the consignor (the party who owns the goods) and the consignee. The consignor holds the consignee accountable for goods transferred to the latter’s care until the goods are sold to a third party. Until such sale, the consignor recognizes a transfer of title and also revenue from the sale. The consignee, on the other hand, cannot regard consigned goods as his/her property; nor is there any liability to the consignor other than the accountability for the consigned goods. The relationship between them is that of a principal and an agent, and the law of agency governs
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the determination of rights and obligations of the two parties. Therefore, any unsold goods (including the proportionate share of the inventoriable costs incurred in the transfer of goods from the consigner to the consignee) must be included in the consignor’s inventory. Accounting for Consignment The factors that distinguish the consignment from a sale must recognized when the transfer of goods and subsequent transactions are recorded. Consignment sales revenue should be recognized by the consignor when the consignee sells the goods to the ultimate customer. Therefore, no revenue is recognized at the time the consignor ships the goods to the consignee. The accounting procedures followed by the consignor and the consignee depend upon the ff: 1.
a. b. c.
2.
a. b.
Consignment Profits are Separately Determined CONSIGNEE The consignee maintains a Consignment–In account for each consignment. The account is charged for all expenses absorbed by the consignor, and credited for the full proceeds of the sale. The commission/profit is transferred from the Consignment–In account to a separate revenue account.
a. b.
c.
CONSIGNOR The consignor maintains a Consignment-Out account for each consignment. The account is debited for the cost of the merchandise and for all expenses related to the consignment, and credited for sales made by the consignee. Profit/Loss is transferred from the ConsignmentOut account to an income summary account.
Consignment Profits are NOT Separately Determined CONSIGNEE Consignment transactions are combined with regular transactions. Expenses to be absorbed by the consignor are debited to the consignors account.
a.
CONSIGNOR The consignor records consignment revenues and expenses in the accounts that summarize regular operations.
CHAPTER 8 - INSTALLMENT SALES Introduction Generally, the point of sale is the point of revenue recognition. And among the exceptions to the point of sale realization concept is the installment method. Under this method, income is recognized when collections are made, because the uncertainty of collecting accounts to be receive over an extended period of time may suggest the postponement of revenue recognition until the probability of collection can be reasonably estimated. When a sale is made on installment basis, the buyer makes a down payment and promises to pay the balance in regular installment over a specified period of time. Profit is recognized only when earned.
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Installment Sales Method Under this method, income is recognized only when collections are made. The following are typical problems often encountered: 1. Computation of the Gross Profit Rate for each year of sales 2. Computation of Realized Gross Profit for each year of sales 3. Computation of Deferred Gross Profit account balance at the end of the year 4. Computation on Gain or Loss on Repossessions Computation of the Gross Profit Rate Current Year Sales: GPR = Gross Profit Installment Sales Prior Year Sales: GPR =
DGP, beg. – Prior Year Sales Installment Sales AR, beg. – Prior Year Sales
Computation of Realized Gross Profit If GPR is known, use this formula: RGP = Collections excluding interest x GPR If there are Missing Factors, use this formula: Current Year Sales
Prior Year Sales
Installment AR, beg.
xx
xx
Installment AR, end
(xx)
(xx)
Total Credits
XX
XX
Credit for Repossession (Unpaid Balances)
(xx)
(xx)
Credit for Installment A/C written off
(xx)
(xx)
Credit representing collections
XX
XX
Computation of Deferred Gross Profit account balance at the end of the year Installment AR, end. X GPR = DGP, end. Or DGP (before adjustment) Less: RGP DGP, end.
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Defaults and Repossession If at the time of the repossession: FV > Installments Receivable less Gross Profit = Gain from Repossession; and, if FV < Installments Receivable less Gross Profit = Loss from Repossession CHAPTER 9 - INSURANCE CONTRACTS Background The Board issued PFRS 4 because it saw the urgent need for improved disclosures for insurance contracts, and modest improvements to recognition and measurement practices, in time for the adoption of IFRS by listed companies throughout Europe and elsewhere in 2005. The improvements to recognition and measurement are ones that will not likely have to be reversed when the IASB completes the second phase of the project. PFRS 4 is the first guidance from the IASB on accounting for insurance contracts. A second phase of the of the IASB’s Insurance Project in under way. Definition
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Insurance Contract is a contract under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder. Scope PFRS 4 applies to: Virtually all insurance contracts; Reinsurance contracts; Does not apply to other assets and liabilities of an insurer, such as financial assets and financial liabilities within the scope of PAS 39; and Does not address accounting by policyholders. Accounting Policies PFRS exempts an insurer temporarily (until completion of Phase II) from some requirements of other PFRS. However, the PFRS: Prohibits provisions for possible claims that are not in existence at the reporting date (such as catastrophe and equalization provisions); Requires a test for adequacy of recognized insurance liabilities and an impairment test for reinsurance assets; and Requires an insurer to keep insurance liabilities in its balance sheet until they are discharged/cancelled/expire, and prohibits offsetting insurance liabilities against related reinsurance assets. Changes in Accounting Policies PFRS 4 permits an insurer to change its accounting policies only if; as a result, its financial statements present information that is more relevant and no less reliable, or more reliable and no less relevant. In particular, an insurer cannot introduce any of the ff: practices, although it may continue using accounting policies that involve them: Measuring insurance liabilities on an undiscounted basis; Measuring insurance liabilities on an undiscounted basis; Measuring contractual rights to future investment management fees at an amount that exceeds their fair values as implied by a comparison with current market-based fees for similar services; Using non-uniform policies for insurance liabilities of subsidiaries. Re-measuring Insurance Liabilities PFRS permits re-measuring designated insurance liabilities consistently in each period to reflect current market interest rates (if insurer so elects, other current estimates and assumptions.) Prudence An insurer need not change its accounting policies for insurance contracts to eliminate excessive prudence. However, if an insurer already measures with sufficient prudence, it should not introduce additional prudence. Future Investment Margins There is a rebuttable presumption that insurer’s FS will become less relevant and reliable. Asset Classifications Changes in accounting policies for insurance liabilities, insurers may reclassify some or all financial assets as at FV thru profit or loss. Other Issues The PFRS: Clarifies that an insurer need not account for an embedded derivative separately at FV if the embedded derivative meets the definition of an insurance contract; Requires an insurer to unbundle deposit components of some insurance contracts, to avoid the omission of assets and liabilities from the BS; Clarifies the applicability of the practice sometimes known as shadow accounting; Permits an expanded presentation for insurance contracts acquired in a business combination or portfolio transfer;
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Addresses limited aspects of discretionary participation features contained in insurance contracts or financial instruments.
REFERENCES
Practical Accounting 2 (2005 Edition) By Angelito R. Punzalan, CPA, MBA
Practical Accounting 2 (2008 Edition) By Pedro P. Guerrero, CPA
Practical Accounting 2 (2009 Edition) By Angelito R. Punzalan, CPA, MBA
Practical Accounting 2 (2009 Edition) By Antonio J. Dayag, CPA, MBA 17
Practical Accounting 2 (2010 Edition) By Antonio J. Dayag, CPA, MBA
Practical Accounting 2 (2011 Edition) By Antonio J. Dayag, CPA, MBA
Intermediate Accounting By Carlos Alindada, BBA, MBA, CPA; Ester F. Ledesma, BBA, CPA, MAT; Ma. Concepcion Y. Lupisan, BSC, MSA, CPA
Financial Accounting, Volume 1, (2010 Edition) By Atty. Conrado T. Valix, CPA; Jose F. Peralta, CPA, MBA, DBA; Christian Aris M. Valix, CPA, BSME
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