ACT130: ACCOUNTING FOR SPECIAL TRANSACTIONS

PRELIM EXAM
S.Y 2020-2021

On January 1, 2018, A, B, and C formed ABC Partnership with original capital contribution of
P300,000. P500,000, and P200,000, respectively. A is appointed as managing partner.

During 2018, A, B, and C made additional investment of P500,000, P200,000 and P300,000,
respectively. At the end of 2018, A, B, and C made drawings of P200,000, P100,000, and
P400,000, respectively. At the end of 2018, the capital balance of C is reported at P320,000.
The profit or loss agreement of the partners are as follows:
 10% interest on original capital contribution of the partners
 Quarterly salary of P40,000 and P10,000 for A and B, respectively.
 Bonus to A equivalent to 20% of Net Income after interest and salary to all partners
 Remainder is to be distributed equally among the partners.

1. What is the profit or loss of the partnership for the year ended December 31, 2018?
2. What is the share of A in the partnership profit or loss for 2018?
3. What is the share of B in the partnership profit or loss for 2018?

4. On January 1, 2020, K and J formed KJ Partnership and the articles of co-partnership

provides the profit or loss shall be distributed accordingly:
 10% interest on average capital balance
 P50,000 and P100,000 quarterly salary for K and J, respectively.
 The remainder shall be distributed in the ratio of 3:2 for K and J, respectively.
The following transactions regarding the capital balances of the partners for year 2020 are
provided:
Year 2020 K, Capital J, Capital
Jan. 1 investment P1,000,000 P500,000
Mar. 31 investment 100,000
July 1 withdrawal 200,000
Sept. 30 withdrawal 200,000
Oct. 1 investment 700,000

The chief accountant of the partnership reported net income of P1,000,000 for year 2020.
What is the capital balance of K on December 31, 2020?

5. On July 1, 2020, K and J formed a partnership with initial investment of P1M and P2M,
respectively. K is appointed as the managing partner.

The articles of co-partnership provide that profit and loss shall be distributed accordingly:
 30% interest on the original capital contribution.
 Monthly salary of P20,000 and P10,000, respectively for K and J.
 K shall be entitled to bonus equivalent to 20% of net income after salary, interest
and bonus.
 The remainder shall be distributed in the ratio of 3:2, respectively.
  The partnership reported a P750,000 net income
What is the share in net income of K for the year ended December 31, 2020?

6. K and J have just formed a partnership. K contributed cash of P920,000 and office
equipment that costs P422,000. The equipment had been used in her sole proprietorship
and had been 70% depreciated. The current value of the equipment is P295,000. K also
contributed a note payable of P87,000 to be assumed by the partnership. The partners
agreed on a profit and loss ratio of 50% each. K is to have a 70% interest in the
partnership. J contributed only the merchandise inventory from his sole proprietorship
carried at P550,000 of a FIFO basis. The current fair value of the merchandise is
P525,000. To consummate the formation of the partnership, K should make additional
investment of?

7. On March 1, 2018, K and J formed a partnership with each contributing the following
assets:
K J
Cash 300,000 700,000
Machinery & Equipment 250,000 750,000
Building - 2,250,000
Furnitures & Fixtures 100,000 -

The building is subject to a mortgage loan of P800,000, which is to be assumed by the

partnership. Agreement provides that K and J share profits and losses 30% and 70%,
respectively. On march 1, 2018, the balance in J’s capital account should be?

8. On April 30, 2008, JJ, KK, and LL formed a partnership by combining their separate
business proprietorship. JJ contributed cash of P75,000. KK contributed property with a
P54,000 carrying amount, a P60,000 original cost, and P120,000 fair value. The
partnership accepted the responsibility for the P52,500 mortgage attached to the
property. LL contributed equipment with a P45,000 carrying amount, P112,500 original
cost, and P82,500 fair value. The partnership agreement specifies that profits and losses
are to be shared equally but is silent regarding capital contributions. Which part has the
largest April 30, 2008 capital balance?

A summary balance sheet for the J, K, and L partnership appears below. The partners share
profits and losses in a ratio of 2:3:5, respectively.
Assets
Cash 50,000
Inventory 62,500
Marketable securities 100,000
Land 50,000
Building-net 250,000
Total assets 512,500

Equities
J, capital 212,500
K, capital 200,000
L, capital 100,000
Total equities 512,500

9. The partners agree to admit M for a one-fifth interest. The fair market value of
partnership land is appraised at $100,000 and the fair market value of inventory is
$87,500. The assets are to be revalued prior to the admission of M. How much cash
must M invest to acquire a one-fifth interest?

10. What will the profit and loss sharing ratio (in percentage) of K after M’s investment?

J has decided to retire from the partnership of J, K, and L. The partnership will pay J
$200,000. Bonus is to be recorded in the transaction as implied by the excess payment to
J. A summary balance sheet for the partnership appears below. The partners share profits
and losses in a ratio of 1:1:3, respectively.

Assets
Cash 75,000
Inventory 82,000
Marketable securities 38,000
Land 150,000
Building-net 255,000
Total assets 600,000

Equities
J, capital 160,000
K, capital 140,000
L, capital 300,000
Total equities 600,000

11. What partnership capital will K have after J retires?

12. What partnership capital will L have after J retires?

The partnership of J, K, and L was dissolved, and by July 1, 2006, all assets had been
converted into cash and all partnership liabilities were paid. The partnership balance sheet
on July 1, 2006 (with partner residual profit and loss sharing percentages) was as follows:

Cash 10,000
J, capital (30%) 40,000
K, capital (40%) (20,000)
L, capital (30%) (10,000)

The value of partners' personal assets and liabilities on July 1, 2006 were as follows:

K L J
Personal assets 45,000 30,000 25,000
Personal liabilities 30,000 20,000 10,000
13. How much will L receive after the liquidation?
14. How much will J receive after liquidation?
15. How much will K receive after liquidation?

The balance sheet of the Omar, Paolo, and Quek partnership on November 1, 2006 (before
commencement of partnership liquidation) was as follows:

Cash $58,000
Inventory 60,000
Loan to Omar 8,000
Loan to Quek 14,000
Plant assets-net 70,000
Total assets $210,000

Accounts payable $34,000

Notes payable 62,000
Omar, capital(40%) 24,000
Paolo, capital(25%) 26,000
Quek, capital (35%) 64,000
Total liab./equity $210,000

Liquidation events in November were as follows:

 The inventory was sold for $10,000 above book value;
 Plant assets with a book value of $60,000 were sold for $34,000.

16. How much will Omar receive after the liquidation?

17. How much will Paolo receive after liquidation?
18. How much will Quek receive after liquidation?

Partners Roger, Sergio, and Tito, who share profit and loss in the ratio of 3:5:2, respectively
have decided to liquidate their partnership. The statement of Financial Position of the
partnership at the time of liquidation is shown below:

Cash 120,000
Other Assets 360,000

Accounts payable 93,000

Loan from Sergio 30,000
Roger, Capital 108,000
Sergio, Capital 120,000
Tito, Capital 129,000

19. The partners desire to prepare an installment distribution schedule showing how cash
would be distributed to partners as assets are realized. In the schedule of maximum
absorbable loss, the maximum absorbable loss of Sergio is?
20. The schedule of possible losses on capital balances would indicate the cash distribution.
After the payment to outside creditors, what amount would be distributed to Tito?

21. Assuming the first sale of other assets having book value of P150,000, realized P45,000
and all available cash is distributed. Roger would receive what amount of cash?

22. Killua Corporation is undergoing liquidation since August 1, 2011. Five months later, on
December 31, 2011, its condensed realization and liquidation statement shows the
following:
ASSETS:
To be realized P1,375,000
Acquired 750,000
Realized 1,200,000
Not Realized 1,375,000

LIABILITIES:
Liquidated 1,875,000
Not Liquidated 1,700,000
To be Liquidated 2,250,000
Assumed 1,625,000

Supplementary:
Charges 3,125,000
Credits 2,800,000
The net gain/loss for the five-month period is?

The following date were taken from the statement of affairs of Gon Corporation:
Assets pledged for fully secured liabilities (ERNV: P75,000) P90,000
Assets pledged for partially secured liabilities (ERNV: P52,000) 74,000
Free Assets (current fair value, P40,000) 70,000
Unsecured liabilities with priority 7,000
Fully secured liabilities 30,000
Partially secured liability 60,000
Unsecured liabilities without priority 112,000

23. The amount that would be paid to creditors with priority is?
24. The amount to be paid to fully secured creditors is?
25. The amount to be paid to partially secured creditors is?
26. The amount to be paid to unsecured creditors is?

27. Netero Company sells some equipment, the cash price of which is P100,000, for
P140,000 with a commitment to service the equipment for a period of two years, with no
further charges. Revenue to be recognized upon sale is?

28. Meruem Corporation provides service contracts for maintenance of their electrical
systems. On October 1, 2018 it agrees a four-year contract with a major customer for
 P154,000. Cost over the period of the contract are reliably estimated at P51,333. Under
PFRS 15, how much revenue should the company recognize in 2018?

29. On July 1, 2018, Hisoka Company handed over to a client a new computer system. The
contract price for the supply of the system and after-sales support for 12 months was
P800,000 and Hisoka estimates the cost of the after-sales support at P120,000.
It normally marks up such cost by 50% when tendering for support contracts

The revenue Hisoka should recognize in its financial year ended December 31, 2018 is?

30. Silva has arrangements with its customers that, in any 12-month period ending March
31, if they purchase goods for a value of at least P1 million, they will receive a
retrospective discount of 2%. Silva’s year-end is December 31, and it has made sales to
a customer during the period April 1 to December 31 of P900,000.
How much revenue should Silva recognize?

THEORIES:
1. PFRS 15 does not apply to contracts for insurance and reinsurance.
2. Per PFRS 15, it is the amount of consideration in a contract to which an entity expects to
be entitled in exchange for transferring promised goods to services to a customer.
3. Per PFRS 15, revenue is recognized once risk and rewards are transferred to the buyer
or purchaser.
4. Per PFRS 15, if the stand-alone selling price is not available, the entity cannot estimate
it since they are not allowed to do so, because estimates are sometimes, misleading.
5. Revenue from an artistic performance is recognized once
a. The audience register for the event online
b. The tickets for the concert are sold
c. Cash has been received from the tickets sales
d. The event takes place

6. Which of the following is an advantage of a partnership?

a. mutual agency
b. limited life
c. unlimited liability
d. none of these

7. The first step in the liquidation process is to

a. convert noncash assets into cash.
b. pay partnership creditors
c. compute any net income (loss) up to the date of dissolution.
d. allocate any gains or losses to the partners.

8. Offsetting a partner's loan balance against his debit capital balance is referred to as the.
9. Which of the following statements is correct?
1. Personal creditors have first claim on partnership assets.
2. Partnership creditors have first claim on partnership assets.
3. Partnership creditors have first claim on personal assets.
 a. 1
b. 2
c. 3
d. Both 2 and 3

10. Bob and Fred form a partnership and agree to share profits in a 2 to 1 ratio. During the
first year of operation, the partnership incurs a $20,000 loss. The partners should share
the losses
a. based on their average capital balances.
b. in a 2 to 1 ratio.
c. equally.
d. based on their ending capital balances.

11. In a liquidation proceeding, if the proceeds on the realization of an asset exceed the lien
against that asset, the excess is assigned to:
a. The holder of the lien
b. Other lien holders whose assets will not realize a sufficient amount to cover liens
c. Meet the claims of the unsecured creditors
d. The stockholders

12. An accounting statement of affairs of a corporation in financial difficulty indicates that

unsecured creditors would receive P0.40 on the peso. Which one of the following assets
is most likely to realize the smallest percentage of its book value?
a. Accounts receivable
b. Inventories
c. Plant and equipment
d. Goodwill

13. In corporate liquidation, these are the assets that have not been pledged and hence are
not related to individual liability items.

14. It is a statement of position from a quitting concern point of view.

15. The computation of a safe installment payment for the XYZ partnership resulted in only
partner Z receiving cash. Which of the following statements is correct?
I. Partner Z lent the partnership cash, and the partnership had to pay back the
loan to Z before distributing cash to X and Y.
II. After assuming all noncash assets were potentially worthless and that
assumed capital deficits created in X's and Y's capital balances were losses to
be allocated to Z; Z's capital balance was the only capital balance left with a
credit.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
ESSAY
1. Explain briefly the distinction between PAS 18 and PFRS 15.

2. Discuss the 5-step method introduced by PFRS 15.

3. How does liquidation differ from rehabilitation of financially troubled corporation.

4. Explain the purpose or purposes of a cash priority program or cash safe payment schedule in
partnership liquidation. Why is it beneficial?

5. Why should assets and liabilities be updated to current values prior to accounting for
dissolution?