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.

Article 1767 of the Civil Code of the Philippines defines Partnership as a contract whereby two or more persons
bind themselves to contribute money, property, or industry into a common fund with the intention of dividing the
profits among themselves.

Two or more persons may also form a partnership for the exercise of a profession. (General Professional Partnership,
Art. 1767, par. 2, CC)

DELECTUS PERSONARUM - The right to be associated with the person/s that I like.

Elements:
There shall be a partnership whenever:
1. There is a meeting of the minds;
2. To form a common fund;
3. With intention that profits (and losses) will be divided among the contracting parties.

Essential Features:
1. There must be a VALID CONTRACT.
2. The parties must have LEGAL CAPACITY to enter into the contract.
3. There must be a mutual contribution of money, property, or industry to a COMMON FUND.
4. There must be a LAWFUL OBJECT.
5. The purpose or primary purpose must be to obtain PROFITS and DIVIDE the same among the parties.

Characteristics:
Essentially contractual in nature Co-ownership of contributed assets
Separate juridical personality Personal liability of partners for partnership
Delectus personae debts
Mutual Agency Limited Life
Income Taxation (32%)

ADVANTAGES DISADVANTAGES
Easy and inexpensive to organize Less stable and easy to dissolve
Unlimited liability of partners (Credit Reliability) Personal liability deters investors
Combination of capital and credit offers better Partner may be subject to liability for the acts of
opportunity for partners other partners
Closer supervision of business activities Divided authority may cause constant dissension
Direct gain of managing partner/s and disagreement
Personal element of the partners is retained

Distinctions:
PARTNERSHIP CORPORATION
Created by Mere agreement of the parties. Operation of law.
Organized by Two or more persons. Requires at least 5 incorporators.
Governed by Civil Code Corporation Code
Juridical personality commences Upon execution of the contract of Upon issuance of Certificate of
partnership. Incorporation by the SEC.
May exercise power Authorized by the partners, as long Granted by law or incident to its
as not contrary to law, etc. existence.
Management of business Managing partner, if none, every Vested upon the Board of
partner is an agent. Directors/Trustees.
Right of Succession None. Existing
Liability for Debt Partners are subsidiarily liable. Shareholders are liable up to the
extent of their subscribed share.
Power to sue Partner may sue another partner. BOD authorization needed and suit
must be in the corporations name.
Based on Delectus personam. Not based.
Life Stipulation on the contract and at Not exceeding 50 years but may be
the will of the parties. renewable for another 50 years.
May be dissolved Anytime. With consent of the State.
Classification:
1. as to activity: A. partnership at will
A. trading partnership B. partnership with a fixed period
B. non-trading partnership 4. as to the legality of existence:
2. as to object: A. de jure partnership
a. universal partnership B. de facto partnership
universal partnership of all present 5. as to representation:
property A. ordinary/real partnership
universal partnership of profits B. ostensible/partnership by estoppel
b. particular partnership 6. as to publicity:
2. as to liability: A. secret partnership
C. general partnership B. notorious/open partnership
D. limited partnership 7. as to purpose:
3. as to its duration: A. commercial/trading
B. professional/non-trading

Kinds of Partner:
1. CAPITALISTone who contributes money or property to the common fund
2. INDUSTRIALone who contributes only his industry or personal service
3. GENERALone whose liability to 3rd persons extends to his separate property
4. LIMITEDone whose liability to 3rd persons is limited to his capital contribution
5. MANAGINGone who manages the affairs
6. LIQUIDATINGone who takes charge of the winding up of partnership affairs upon dissolution
7. PARTNERS BY ESTOPPELone who is not really a partner but is liable as a partner for the protection of
innocent 3rd parties
8. CONTINUING PARTNERone who continues the business of a partnership after it has been dissolved by
reason of the admission of a new partner, retirement, death or expulsion of one of the partners
9. SURVIVING PARTNERone who remains after a partnership has been dissolved by death of any partner
10. SUBPARTNERone who is not a member of the partnership who contracts with a partner with reference
to the latter's share in the partnership
11. OSTENSIBLEone who takes active part and known to the public as partner in the business
12. SECRETone who takes active part in the business but is not known to be a partner by outside parties
13. SILENTone who does not take any active part in the business although he may be known to be a partner
14. DORMANTone who does not take active part in the business and is not known or held out as a partner

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.

FORM OF PARTNERSHIP CONTRACT:

GENERAL RULE: No special form is required for the validity of a contract. (Art. 1356)
EXCEPTIONS:
1. Where immovable property/real rights are contributed (Art. 1771)
a. Public instrument is necessary.
b. Inventory of the property contributed must be made; signed by the parties and attached to the public
instrument otherwise it is VOID.
2. When the contract falls under the coverage of the Statute of Frauds (Art. 1409)
3. Where capital is P3,000 or more, in money or property (Art. 1772)
a. Public instrument is necessary
b. b. Must be registered with SEC

NOTE:
SEC Opinion, 1 June 1960: For purposes of convenience in dealing with government offices and financial
institutions, registration of partnership having a capital of less than Php 3,000 is recommended.

REGISTRATION:
 Agency Requirements Certificate/s Issued
SEC Articles of Co-Partnership SEC Certificate
SEC Registration Form
DTI SEC Certificate Certificate of Registration of Business
Articles of Co-Partnership Name
City/Municipal Hall Certificate of Registration of Business Mayors Permit
Name License to Operate
BIR SEC Certificate BIR Registration No.
Articles of Co-Partnership VAT Certificate No.
Partnership Tax Account No. Registration of Books, Invoices, and
Official Receipts
SSS Filled SSS Application Form SSS Certificate of Membership
List Employees SSS Employer ID No.

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.

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)

CAUSES OF DISSOLUTION
1. Without violation of the agreement between the partners.
a. By termination of the definite term/particular undertaking specified in the agreement
b. By the express will of any partner, who must act in good faith, when no definite term or particular
undertaking is specified
c. By the express will of all the partners who have not assigned their interest/charged them for their
separate debts, either before or after the termination of any specified term or particular
undertaking
d. By the bona fide expulsion of any partner from the business in accordance with power conferred by the
agreement
2. In contravention of the agreement between the partners, where the circumstances do not permit a
dissolution under any other provision of this article, by the express will of any partner at any time.
3. By any event which makes it unlawful for business to be carried on/for the members to carry it on for the
partnership.
4. Loss of specific thing promised by partner before its delivery.
5. Death of any partner
6. Insolvency of a partner/partnership
7. Civil interdiction of any partner
8. Decree of court under Art. 1831

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:

The PARTNERSHIP CAPITAL Account

Debit Credit
Permanent Withdrawal Original Investment
Share in Partnership Loss Additional Investment
Closing the Drawing/Withdrawal Account Share in Partnership Profits

The PARTNERS DRAWING/WITHDRAWAL Account

Debit Credit
Personal Withdrawal Share in Partnership Profits
Share in Partnership Loss

The PARTNERS LOAN Accounts - immediately paid usually with interest

Debit Credit
Loans Receivable Payable
Due from Partner Due to Partner

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.

Scenario A: Two or More Persons form a Partnership

Scenario B: One Person form a Partnership with a Sole Proprietor
a. Retained Books
b. New Books
Scenario C: Two or More Sole Proprietor
a. Retained Books
b. New Books

Assume: (Scenario A)
Talong, Mani and Tiwala will be forming a partnership. Talong and Mani has the following properties, while Tiwala
will be the industrial partner:
Talong Mani
Book Value Fair Value Book Value Fair Value
Cash P10000* P10000 P20000* P20000
Inventories 5000 5000
Equipment 20000 25000
Accounts Payable 1000 15000

If Cash only is contributed.* If Cash and NCA are contributed.

Cash 30000 Cash 30000
Talong, Capital 10000 Inventories 5000
Mani, Capital 20000 Equipment 25000
Accounts Payable 16000
Talong, Capital 14000
Mani, Capital 25000

Tiwalas entry into the partnership will be only a Memorandum Entry.

Assume: (Scenario B)
Talong, a sole proprietor, and Mani will be forming a partnership.
Talong Agreed Valuations:
Debit Credit 5% Allowance for Doubtful Accounts
Cash P10000 P- Inventories should be valued at P10000
Accounts Receivable 5000 Equipment is to be Depreciated
Inventories 5000 Mani is to invest Cash equal to Talongs
Equipment 20000 Capital
Accounts Payable 10000
Talongs Books will be used. New Set of Books will be used
Adjustments
Adjustments:
Talong, capital 250 Journal Entry for Investment:
Allowance for Doubtful Accounts 250 Cash 39750
Inventories 5000 Accounts Receivable 5000
Talong, capital 5000 Inventories 10000
Talong, capital 5000 Equipment 15000
Accumulated Depreciation 5000 Allowance for Doubtful Accounts 250
Accounts Payable 10000
Cash Investment of Mani: Talong, capital 29750
Cash 29750 Mani, capital 29750
Mani, Capital 29750

Assume: (Scenario C)
Both proprietors agree to form a partnership
Talong Mani
Debit Credit Debit Credit
Cash P10000 P- P5000
Accounts Receivable 5000 10000
Inventories 5000 5000
Equipment 20000 40000
Land 100000
Accounts Payable 10000 10000
Mortgage Payable 50000

Agreed Valuations:
5% Allowance for Doubtful Accounts
Inventories should be valued at P10000
Equipment is to be Depreciated

Talongs Books will be used. New Set of Books will be used

Adjustments
Talong Adjustments:
Talong, capital 250 Journal Entry for Investment:
Allowance for Doubtful Accounts 250 Cash 15000
Inventories 5000 Accounts Receivable 15000
Talong, capital 5000 Inventories 20000
Talong, capital 5000 Equipment 45000
Accumulated Depreciation 5000 Land 100000
Allowance for Doubtful Accounts 750
Mani Adjustments: Accounts Payable 10000
Mani, capital 500 Mortgage Payable 50000
Allowance for Doubtful Accounts 500 Talong, capital 29750
Mani, capital 84500
Inventories 5000
Mani, capital 5000
Mani, capital 10000
Accumulated Depreciation 10000

Investment of Mani:
Cash 5000
Accounts Receivable 10000
Inventories 10000
Equipment 30000
Land 100000
Allowance for Doubtful Accounts 500
Accounts Payable 10000
Mortgage Payable 50000
Mani, capital 84500

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
Examine the table
Date Capital Balance No. of Months Unchanged Peso Months
1/1 P50,000 3 P150,000
4/1 55,000 1 55,000 Average Capital
5/1 53,000 5 265,000
10/1 63,000 3 189,000
P659,000/12 P54,917
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.

Assuming:
Net Income = 18461; Bonus = 20%; Income Tax = 18461 x 35% or 6461
- If Bonus is based on NI after deducting Bonus but before deducting Income Tax
B = 20% (18461-6461)
- If Bonus is based on NI before deducting Bonus but after deducting Income Tax
B = 20% (18461 T); T = 35% (18461)
B = 20% [(18461 35% (18461)]
B = 20% (18461 6461)
B = 20% (12000)
B = 2400
- If Bonus is based on NI after deducting Bonus and Income Tax
B = 20% (18461 B - T); T = 35% (18461)
B = 20% [18461 B - 35% (18461)]
B = 20% [18461 B - 6461]
B = 20% (12000 - B)
120B% = 2400
B = 2400/120%
B = 2000
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 of profits, the division is according to:
a. Capital contribution - referred to as original capital/beginning capital, and
b. Equally.
3. If the agreement specifies how profits are shared but is silent as to losses, losses are to be shared in the same
manner as profits.
Division of Profit/Loss:
Kawawang Puso Partnership is composed of Aida, Lorna and Pe. They agreed that they distribute partnership
profit/loss 5:3:2, respectively. They also agreed on the ff:
a. Aida and Lorna shall receive Salary of P1,500 and P3,000 per month.
b. 10% Interest shall be paid based on the Capital (Beginning/Average/Ending) Balances of the Partners,
100T, 100T, 50T, respectively.
c. Bonus of P2,400 shall be given to Pe.

Scenario 1: Assuming that Net Income for the Year amounted to P120T, how much will be distributed to the
partners?

Aida 5 Lorna 3 Pe 2 Total 10

Salary P18,000 P36,000 P0 P54,000
Interest 10,000 10,000 5,000 25,000
Bonus 0 0 2,400 2,400
Remaining Bal. 19,300 11,580 7,720 38,600
TOTAL P47,300 P57,580 P15,120 P120,000

Scenario 2: Assuming that Net Loss for the Year amounted to P120T, how much will be distributed to the partners?

Aida 5 Lorna 3 Pe 2 Total 10

Salary P18,000 P36,000 P0 P54,000
Interest 10,000 10,000 5,000 25,000
Bonus 0 0 2,400 2,400
Remaining Bal. (100,700) (60,420) (40,280) (201,400)
TOTAL (P72,700) (P14,420) (P32,880) (P120,000)

Scenario 3:
Kawawang Puso Partnership is composed of Aida, Lorna and Pe. They agreed that they distribute partnership
profit/loss 5:3:2, respectively. They also agreed on the ff:
a. Aida and Lorna shall receive Salary of P15,000 and P30,000 per month.
b. 10% Interest shall be paid based on the Capital (Beginning/Average/Ending) Balances of the Partners,
100T, 100T, 50T, respectively.
c. Bonus of P2,400 shall be given to Pe.
d. Net Income is P120,000.

Aida 5 Lorna 3 Pe 2 Total 10

Salary P180,000 P360,000 P0 P540,000
Interest 10,000 10,000 5,000 25,000
Bonus 0 0 2,400 2,400
Remaining Bal. (223,700) (134,220) (89480) (447400)
TOTAL (P33,700) P235,780 (82,080) P120,000

Journal Entries:

Scenario 1 Scenario 2 Scenario 3

Income Summary P120,000 Aida, capital P72,700 Aida, capital P33,700

Aida, capital P47,300 Lorna, capital 14,420 Pe, capital 82,080
Lorna, capital 57,580 Pe, capital 32,880 Income Summary 120,000
Pe, capital 15,120 Income Summary P120,000 Lorna, capital P235,780

Conditions Resulting to Partnership Dissolution

1. Admission of a New Partner
2. Retirement or Withdrawal of a Partner
3. Death, Incapacity or Bankruptcy of a Partner
4. Incorporation of a Partnership

A Retiring Partners Interest

Initial Investment
 Added Deducted
Additional investment Withdrawal of investment
Share in profits Share in losses
Loans and advances to Loans and advances from
Revaluation increase of asset Revaluation decrease of asset

Dissolution
1. Admission of a New Partner
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 partners proportion of the partnerships BV (Agreed capital) as follows:
Agreed capital = [capital of old partners + investment of new partner] x capital % of new partner
2. Compare the new partners 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 partners 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

*PFRS No. 3 outlawed the use of goodwill method in partnership accounting particularly admission and
retirement of a partner because there is no business involved. The excess of the cost of the business
combination over the FV of the identifiable net assets obtained. Therefore, the standard provides that goodwill
attaches only to a business as a whole and is recognized only when a business is acquired.
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 partners 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 No APIC/Share Premium
Subscribed Share < Net Assets Recognize APIC/Share Premium

Partnership Dissolution

Agreed Capital is the amount of new capital set by the partners for the partnership.
Total Contributed Capital is the investment of all partners, old and new, to the partnership.
Capital Credit is the interest or equity of a partner in a firm.
Goodwill is an advantage that increases earnings over what is normal.
Bonus is the transfer of capital from one partner to another.

ADMISSION

Assume that KJ Partnership will be admitting a new partner. Kill 50% and Joy 50% the partners have the following
capital balances, P400,000 and P200,000, respectively. Ka, the new partner will have share.

Purchase Investment
Purchase from 1 partner only. No goodwill, no bonus.
Ka contributes P200T, AC of P800T
 From Joy:
Joy, capital (P200,000x1/4) P50,000 Cash P200,000
Ka, capital P50,000 Ka, capital P200,000

Purchase from both partners.* No bonus, goodwill contributed by old partners.

Ka contributes P200T (1/5), AC of P1M
Kill, capital (P400,000x1/4) P100,000
Joy, capital 50,000 Cash P200,000
Ka, capital P150,000 Goodwill 200,000
Kill, capital(P200,000x1/2) P100,000
Purchase at less than BV. Ka paid P100,000. Joy, capital 100,000
Same as *. The difference is personal loss to old Ka, capital 200,000
partners.
No bonus, goodwill contributed by new partner.
Purchase at more than BV. Ka paid P200,000. Ka contributes P150T (1/4), AC of P800T

Implied Goodwill is NOT recognized: Cash P150,000

Same as *. The difference is personal gain to old Goodwill 50,000
partners. Ka, capital P200,000

Implied Goodwill is recognized: No goodwill, bonus to old partners.

Ka contributes P250T (1/4), AC of P800T
New Capital P200,0001/4 = P800,000
Old Partners Capital 600,000 Investment:
Goodwill to Old Partners P200,000 Cash P250,000
Ka, capital P250,000
Goodwill P200,000 Payment of Bonus:
Kill, capital(P200,000x1/2) P100,000 Ka, capital P50,000
Joy, capital 100,000 Kill, capital(P50,000x1/2) P25,000
Joy, capital 25,000
Kill, capital(P500,000x1/4)P125,000
Joy, capital(P300,000x1/4) 75,000 No goodwill, bonus to new partner.
Ka, capital P200,000 Ka contributes P150T (1/4), AC of P800T

Investment:
Cash P150,000
Ka, capital P150,000
Payment of Bonus:
Kill, capital(P50,000x1/2)P25,000
Joy, capital 25,000
Ka, capital P50,000

Goodwill and Bonus to old partners. Goodwill and Bonus to new partner.
Ka contributes P250T (1/5), AC of P1M Ka contributes P50T (1/5), AC of P700T

Investment: Investment:
Cash P250,000 Cash P50,000
Ka, capital P250,000 Ka, capital P50,000

Recognition of Goodwill: Recognition of Goodwill:

Goodwill (P1M-P800T) P200,000 (P700T/5-P50T-P40T)
Kill, capital(P100,000x1/2) P50,000 Goodwill P50,000
Joy, capital 50,000 Ka, capital P50,000

Payment of Bonus: Payment of Bonus:

Ka, capital P50,000 (P700Tx4/5-P600T/2)
Kill, capital(P50,000x1/2) P25,000 Kill, capital P20,000
Joy, capital 25,000 Joy, capital 20,000
Ka, capital P40,000

Goodwill to new partner and bonus to old partners or Goodwill to all partners.
Ka contributes P50T (1/5), AC of P1M
 Cash P50,000
Goodwill 350,000
Kill, capital(P800T-P600T2) P100,000
Joy, capital 100,000
Ka, capital(P1Mx1/5) 200,000

Formula:
AC CC Goodwill/Bonus
Old Agreed Capital Actual Contribution If:
New Agreed Capital Actual Contribution AC<CC=Bonus
TOTAL Legal Capital Total AC AC>CC=GW

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 partners
capital will require that partner to contribute cash equal to the debit balance. If the deficient partner is
insolvent, that partners 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 with Schedule of Cash Distribution to Partners

Assuming:
The Other assets were sold for P34,000, additional cash investment by deficient partner is to be made as second
cash distribution to partners. All available cash is immediately distributed to partners requiring a schedule to
accompany the statement of liquidation in order to determine amounts to be paid to partners. (Loss on realization,
capital deficiency, right of offset, and 2 cash distributions.)

Aida, Lorna and Fe

Statement of Liquidation
December 1-31, 2011

Loan Capital
Other
Cash Liabilities Aida Lorna Fe
Assets Lorna Fe
(40%) (40%) (20%)
Bal. before liquidation P4,000 P68,000 P22,400 P1,000 P1,600 P19,000 P12,000 P16,000
Sale of Assets and
34,000 (68,000) (13,600) (13,600) (6,800)
distribution of loss
Balances 38,000 0 22,400 1,000 1,600 5,400 (1,600) 9,200
Payment of liabilities (22,400) (22,400)
Balances 15,600 0 1,000 1,600 5,400 (1,600) 9,200
Offset of Loan (1,000) 1,000
Balances 15,600 0 1,600 5,400 (600) 9,200
Payment per schedule (15,600) (1,600) (5,000) (9,000)
Balances 0 0 400 (600) 200
Additional investment 600 600
Balances 600 400 0 200

Aida, Lorna and Fe

Statement of Cash Distribution to Partners
December 1-31, 2011
 Aida Lorna Fe
Capital Balance before cash distribution 5,400 (600) 9,200
Add: Loan balance 1,600
Total partners interest 5,400 (600) 10,800
Possible Loss only to Aida and Fe 2:1 (400) 600 (200)
Payment per schedule 5,000 0 10,600

2. Installment Distribution - Liquidation Schedule in conjunction with Schedule of Safe Payments/Cash

Priority Program

Same assumption with additional information:

Months Book Value Cash Proceeds
January P38,000 P30,000
February 30,000 45,000

Aida, Lorna and Fe

Statement of Liquidation
January to February 2011

Loan Capital
Other
Cash Liabilities Aida Lorna Fe
Assets Lorna Fe
(40%) (40%) (20%)
Bal. before liquidation P4,000 P68,000 P22,400 P1,000 P1,600 P19,000 P12,000 P16,000
Sale of Assets and
30,000 (38,000) (3,200) (3,200) (1,600)
distribution of loss
Balances 34,000 0 22,400 1,000 1,600 15,800 8,800 14,400
Payment of liabilities (22,400) (22,400)
Balances 11,600 0 1,000 1,600 15,800 8,800 14,400
Payment per schedule (11,600) (1,960) (560) (9,080)
Balances 0 30,000 1,000 1,600 13,840 8,240 5,320
Division of Profit 45,000 (30,000) 6,000 6,000 3,000
Balances 45,000 0 1,000 1,600 19,840 14,240 8,320

Aida, Lorna and Fe

Cash Priority Program
January 1, 2011

Payments to
Aida Lorna Fe
Aida Lorna Fe
Capital balances before liquidation P15,800 P8,800 P14,400
Add: Loans 1,000 1,600
Total partners interest 15,800 9,800 16,000
Divided by P:L Ratio 40% 40% 20%
Allocation I: Cash to Fe reducing loss 39,500 24,500 80,000
absorption balance to amount reported
for Aida; reduction of P40,500 requires (40,500) 8,100
payment of 20% of P40,500.
39,500 24,500 39,500
Allocation II: Cash to Aida and Fe
reducing loss absorption balance to
amount reported for Lorna; reduction of
(15,000) (15,000) 6,000 3,000
P15,000 require payments as follows:
To Aida, P15,000 x 40%
To Fe, P15,000 x 20%
24,500 24,500 24,500 6,000 11,100
Allocation III: P:L Ratio

Aida, Lorna and Fe

Installment Distribution
January 1, 2011
 Aida Lorna Fe Total
Cash available P11,600
Allocation I: Pay to Fe P8,100 (8,100)
Allocation II: Pay to Aida and Fe
Aida P3,500 X 40% P1,400 700 (2,100)
Fe P3,500 X 20%
Allocation III:
Aida P1,400 X 40%
560 560 280 (1,400)
Lorna P1,400 X 40%
Fe P1,400 X 20%
P1,960 P560 P9,080 P0

The Doctrine of Marshalling

When a party has two funds by which his debt is secured, and another creditor has a claim only on one
of these funds, a court of equity will compel the creditor having a double security to resort to that fund
which will leave the other creditor his security, this is called marshalling assets.

Marshalling of assets respects two different funds, and two different sets of parties, where one set can
resort to either fund, the other only to one. It is grounded on an obvious equity. It does no prejudice to
anybody, and it effectuates the testator's intent. It takes place in favor of simple contract creditors, and
of legatees, devisees and heirs, and in a few other cases, but not in favor of the next of kin.

The cases in which a court of equity marshals real and personal assets for the payment of simple
contract debts and legacies, may be classed as follows:

Where there are specialty and simple contract debts and legacies and lands left to descend. In this case if
the specialty creditors take a satisfaction for their debts out of the personal estate, the simple contract
creditors first, and then the legatees, shall stand in the place of the specialty creditors, for obtaining
satisfaction out of the lands, to the amount of so much as was received by the specialty creditors out of
the personal estate.

Where there are specialty and simple contract debts, and lands are specifically devised. In this case if the
creditors take a satisfaction for their debts out of the personal estate, the simple contract creditors shall
stand in the place of the specialty creditors for obtaining a satisfaction out of the lands to the amount of
so much as was received by the specialty creditors out of the personal estate, but then there can be no
relief for the legatees, because there is as much equity to support the, specific devise of the lands, as to
support the bequest of the legatees.

Where the debts are charged upon the lands. Here the legatees shall have the personal estate towards
their satisfaction, and if the creditors take it in payment or towards the discharge of their debts, the
legatees shall stand in their place pro tanto to have a discharge out of the lands. When simple contract
debts and legacies are both charged on the land. In this case the land shall be sold and all paid equally.

CORPORATE LIQUIDATION
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

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 ASSETS Fair Values Free Assets
Assets pledged to Fully Secured Creditors:
P XXX (Asset pledged > Secured Liability) P XXX Difference
Assets pledged to Partially Secured Creditors:
XXX (Asset pledged < Secured Liability) XXX
Free Assets:
XXX (Remaining Assets) XXX Assets not pledged
Estimated amount available Total Assets not pledged
Less: Creditors with priority XXX
Net Free Assets XXX
Estimated deficiency to unsecured creditors (NFA TUC)
Total Asset Total Unsecured Creditors P XXX
Book Values LIABILITIES and STOCKHOLDERS EQUITY Claims EUC
Fully Secured Creditors:
P XXX (Assets pledged = Liability) P XXX
Partially Secured Creditors:
XXX (Assets pledged < Liability) XXX Difference
Creditors with priority:
Liquidation expenses XXX
XXX Accrued wages XXX
XXX Taxes payable XXX
(Total CWP = Free Assets)
XXX Remaining Unsecured Creditors: XXX
XXX (XXX) Stockholders Equity (Deficit)
Total Liab. & SHE TUC

Statement of Realization and Liquidation

Is an activity statement that is intended to show progress toward liquidation of a debtors 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)
 JOINT VENTURES

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 entitys 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
Original and additional investment Capital withdrawal/s
Services rendered to JV/compensatory basis Share in losses
Share in profits 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 Credit
Merchandise contribution Merchandise withdrawals
Purchases Merchandise returns
Freight-in PRA
SRA PD
SD Sales
Expenses 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 venturers 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.

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
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 Branch Books
Investment in Branch Home Office
XX Assets to branch XX
XX Assets from branch XX
XX Branch profit XX
XX Branch loss 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. 100% + Mark-up%*= Shipments from H.O.
Branch Inventory at billed price Shipments to Branch
100% + Mark-up%*

2. Branch Inventory includes merchandise acquired from outsiders.

Overview:
Shipments to Branch Creditors
Total Cost
Billed Price - Allow. For O.V. Actual Cost Purchase P
Beg. Inventory XX XX XX XX XX
Add: Purchases XX XX
Freight-in XX XX
Shipments from H.O. XX XX XX XX
Less: PRA/Discounts XX XX
Cost of Sales XX XX XX* XX XX
End. Inventory XX XX XX

Actual Branch Profit

Branch Profit (Loss) PXX
Add: Overvaluation XX
Actual Branch Profit 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.
a. Shipment to Branch and Shipment from H.O. accounts
b. Allowance for Overvaluation of Branch Inventory
3. Eliminate the overvaluation in branchs 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.

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.

The franchisor contributes his trade name, products, and companys 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 franchisors
investment.

Revenue Recognition Table

 Conditions WITH DIRECT COST WITHOUT DIRECT COST
Cash collections Balance of the Note
Initial services substantially performed Earned Unearned Earned Unearned
No option to purchase Franchise Fee Franchise Franchise Fee Franchise
Collectability of the unpaid portion is Fee Fee
assured

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
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. 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.
2. 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:

c. Initial amount of revenue; and
d. 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 P XX
Less: a. TOTAL ESTIMATED COST/ESTIMATED COST AT COMPLETION
b. Cost incurred to date XX
c. Estimated cost to complete XX XX
ESTIMATED GROSS PROFIT XX
Multiply : Percentage of Completion (b/c) %
GROSS PROFIT EARNED TO DATE XX
Less: Gross Profit earned in prior year(s) XX
GROSS PROFIT EARNED THIS YEAR 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.

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 latters 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
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 consignors 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. Consignment Profits are Separately Determined

CONSIGNEE CONSIGNOR
a. The consignee maintains a ConsignmentIn a. The consignor maintains a Consignment-Out
account for each consignment. account for each consignment.
b. The account is charged for all expenses absorbed by b. The account is debited for the cost of the
the consignor, and credited for the full proceeds of merchandise and for all expenses related to the
the sale. consignment, and credited for sales made by the
c. The commission/profit is transferred from the consignee.
ConsignmentIn account to a separate revenue c. Profit/Loss is transferred from the Consignment-
account. Out account to an income summary account.

2. Consignment Profits are NOT Separately Determined

CONSIGNEE CONSIGNOR
a. Consignment transactions are combined with a. The consignor records consignment revenues and
regular transactions. expenses in the accounts that summarize regular
b. Expenses to be absorbed by the consignor are operations.
debited to the consignors account.

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.

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 (xx) (xx)

Balances)

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) xx

Less: RGP xx
DGP, end. xx

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

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
IASBs Insurance Project in under way.

Definition

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 insurers 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;
Addresses limited aspects of discretionary participation features contained in insurance contracts or financial
instruments.