Advance Financial Accounting and Reporting 2 Notes

Accountancy

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 AFAR 2 NOTES
FORMATION OF PARTNERSHIP:
1. Cash Investments: invested capital is equal to initial cash investments
2. Noncash Investments: invested capital is equal to assets current fair value
less any liabilities to be assumed by partnership.
ADMISSION OF NEW PARTNER:
1. By Purchase
2. By Investment:
(a) Assets are revalued
(b) Bonus Method
HOW TO ACCOUNT FOR NEW PARTNER INSTEREST AFTER ADMISSION?
1. Compute the new partner’s proportion of partnership book value (agreed

caputal).
AGREED CAPITAL= Capital of Old partners + Investment of new partner x Percetage of
capital to new partner
2. Compare the new partner’s contributed capital with his agreed capital.
3. Determine the specific admission method.
INVESTMENT = AGREED CAPITAL (1) NO REVALUATION OF ASSETS
(2) NO BONUS
INVESTMENT > AGREED CAPITAL (1) REVALUE NET ASSETS UP TO FAIR

VALUE & ALLOCATE TO OLD

PARTNERS
(2) RECORD UNRECOGNIZED
GOODWILL & ALLOCATE TO
PARTNERS
(3) ALLOCATE BONUS TO OLD
PARTNERS
INVESTMENT < AGREED CAPITAL (1) REVALUE NET ASSETS DOWN TO
FAIR VALUE & ALLOCATE TO OLD
PARTNERS
(2) RECORD UNRECOGNIZED
GOODWILL & ALLOCATE TO

PARTNERS
(3) ALLOCATE BONUS TO OLD

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 PARTNERS

DIVISION OF PROFIT (LOSS)

1. Equally or in agreed ratio
2. According to capital ratio which may be:
(a) Beginning Capital Ratio
(b) Ending Capital Ratio
(c) Average Capital Ratio
3. By allowing salaries, interests, and bonuses to partners
REMEMBER:
1. Payment of salaries, interests, and bonus to partners should be treated as part of
profit distribution not as expense.
2. If there is no agreement regarding division of profits and losses, P/L should be
dicvided according to original capital ratios. If the original capital

contributions are not given, use the beginning capital ratios.

3. Bonus agreement is not applicable if there is a loss.
4. If agreement specifies how profits are to be divided but is silent as to losses,
losses are to be divided in the same manner as profits.
5. If partners agree to divide losses only , profits if any shall be divided according
to original capital contributions.

WITHDRAWAL OR RETIREMENT OF A PARTNER:

1. On date of withdrawal, compute and distribute P/L on the partners in their profit
and loss ratio.
2. Adjust the assets and liabilities to current FV. Adjustments are made to partners’
capital in their P/L ratio.
3. Make Cash Settlement to retiring partner. Settlement may be:
(a) equal to the interest (capital plus loan balances) of the retiring partner.
(b) Less than the interest of the retiring partner. The difference is treated as bonus
(c) More than the interest of retiring partner.
* Bonus to retiring partner.
* Goodwill to retiring partner. (partial goodwill method)
* Total implied goodwill of partnership.

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LIQUIDATION- process of converting partnership assets into cash and distributing rhe

cash to creditors and partners.

* Creditors have priority on any distribution.
* No distribution is made to any partner until all possible losses and liquidation
expenses have been paid or provided for.
* An individual prematurely distributing cash to a partner whose capital account later
shows a deficit maybe held personally liable if the insolvent partmer is unable to
repay such distribution.
TYPES OF DISTRIBUTION:
(1) LUMP SUM DISTRIBUTION
1. Sell all noncash assets and allocate the resulting gain or loss to the capital
accounts of the partner in accordance with their profit and loss sharing ratio.
2. Satisfy the liabilities owing to creditors other than partners.
3. Satisfy liabilities owing to partners other than for capital and profits.
4. Distribute any cash remaining to the partners for capital and finally for profits.
* Any deficiency in solvent partner’s capital will require that partner to contribute cash
equal to debit balance.
* If the deficient partner is insolvent, the debit balance must be absorbed by the
remaining partners.
* In order to achieve equitable distribution, a partner’s loan to the partnership will first
be used to offset a debit balance in his capital account. Therefore, under this so called
right of offset a partner’s loan to the partnership will have distribution priority only to

the extent it exceeds a debit balance in the partner’s capital account.

(2) INSTALLMENT LIQUIDATION

PROCEDURE
(a) realize assets and distribute gain or loss on realization among the partners
according to their P/L ratio.
(b) Pay liquidation expense, if any. This is absorbed by partners in P/L ratio.
(c) Pay all outside liabilities or teain sufficient cash (cash withheld) to insure their
total liquidation.
(d) Cash settlement to partners is now equal to partners’ capital balances after
possible future losses (unsold non-cash assets plus any cash withheld) have

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 been apportioned to the partners or in accordance with an advance cash

distribution plan.

CORPORATE LIQUIDATION
Financial Report:
1. Statement of Affairs- this initial report shows the available asset value and
debts of the corporation; normally at the start of liquidation and this is prepared
for the corporation to provide information about the current financial position of
the company.
A. Net realizable value of debtor’s assets;
B. Ultimate application of these proceeds to specific liabilities.
2. Statement of Realization and Liquidation- this shows how the “receiver”
managed the assets of the debtor corporation on behalf of creditors.

CLASSIFICATION OF ASSETS IN STATEMENT OF AFFAIRS:

1. Assets pledged to fully secured - these assets are expected to realize an
amount at least sufficient to satisfy the related debt.
Example:
FV of Land, secured to NP ` 95,000
NP: 87,500 + Interest 3,000: 90,500
Difference 4,500
Enough na macocover ng FV ng land yung Notes payable
2. Assets pledged to partially secured- these assets are expected to realize an
amount below the related debt.
Example:
FV of A/R, secured to NP Bank 15,000
NP: 17,500 + Interest 1,000 = 18,500

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Difference (3,500)
3. Free assets- assets not pledged and available to satisfy the claims of creditors.
(available na pangsettle sa kahit anong liability)
CLASSIFICATION OF LIABILITIES IN STATEMENT OF AFFAIRS:
1. Fully secured liabilities- liabilities expected to be paid in full as a result of
having sufficient collateral (pledged assets) to satisfy the indebtedness (fully
secured creditors)
2. Partially secured liabilities- liabilities expected not to be paid in full as a
result of having insufficient collateral (pledged assets) to satisfy the
indebtedness
3. Unsecured liabilities with priority- liabilities having priority under the law.
These liabilities, in order of priority are:
A. Debts due for personal service rendered to the insolvent by employees, laborers
or domestic helpers/servants. Unpaid employees’ salaries and wages, and

benefit plans.
B. Legal expenses, and expenses incurred in the administration of insolvent’s

estate for the common interest of creditors.

C. Debts, taxes and assessment due to national government.
3. Unsecured liabilities without priority- have no collateral (pledged assets)
relating to their indebtedness.

CORPORATION LIQUIDATION:
- corporation is experiencing insolvency.
1. Sell all noncash assets at net realizable value
2. Pay the creditors
 Fully secured creditors: Asset of 100K--liabilities of 10K
 Partially secured creditors: Asset of 60K, -- liabilities 80K
 Unsecured with priority: Asset O-- liab 50K
-Liabilities that are not secured but we are legally required to pay them: Salaries,
taxes, Liquidation expenses, Transfers’ fees
 Unsecured without priority: asset 0-- liab 40K

3. Compute for the Recovery percentage or percentage of recovery:

(amount to be received)

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 A. Compute the NRV of your assets (*during liquidation eliminate goodwill)
B. Compute the net free assets (available for unsecured creditors)
RECOVERY PERCENTAGE= NET FREE ASSETS/ NET OR TOTAL UNSECURED LIABILITIES
*NET FREE ASSETS:
Total Assets xx
Less: Fully secured liabilities (xx)
Partially secured (xx)
Unsecured w/ priority (xx)
Net free assets xx

OR
Free assets xx
+ Excess (FV of assets pledged to fully secured creditors to BV of fully secured
creditors)
- (unsecured creditors with priority)
Net free assets

*TOTAL UNSECURED LIABILITIES:

Unsecured without priority xx
Unsecured portion of partially securedxx
Total unsecured liabilities xx

OR
Unsecured without priority xx
Excess of BV of Liability xx
BV of partially secured creditors xx
Net unsecured creditors xx

REQUIREMENT:
I. Estimated deficiency to unsecured creditors:
Total unsecured liabilities xx
Times by (1-recovery percentage) xx%
Estimated deficiency to unsecured creditors xx
OR

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Total NRV xx
Less: Total liabilities at settlement date (xx)
Estimated deficiency to unsecured creditors xx

II. Payment to partially secured creditors:

Example:
mortgage payable 400,000
360,000 will be collected (secured by building) 360,000
40,000 x 75.29% (recovery percentage) 30,116
Payment to partially secured 390,116

III. Payment to unsecured creditors with priority:

Example: salaries, taxes, liquidation expense, accrued employee benefits, etc. (100%)

IV. Payment to unsecured creditors without priority: (kung ano lang matira, yun lang
ang sakanila)
Example:
A/P
N/P
Total x Recovery percentage= Payment to unsecured creditors without priority

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 REVENUE RECOGNITION
Revenue- arises in the course of the ordinary regular activities and is referred to by
variety of different names including sales, fees, interest, dividends, royalties, and rent.

IFRS 15: REVENUE FROM CONTRACTS WITH CUSTOMERS (JAN 1, 2018)

4 INDUSTRIES THAT WILL FACE THE BIGGEST CHALLENGE:
1. Telecommunications- identifying individual performance and allocating
transaction price.
2. Manufacturers- contract modification
3. Software development and technology- splitting the contract into two
separate obligations
4. Real estate and property development- revenue over time/at the point of
time.
2 REQUIREMENTS BEFORE RECOGNIZING REVENUE: (old standard)
1. expect future economic benefits to flow to the entity
2. These benefits can be measured reliably
IFRS 15 WILL REPLACE THE FOLLOWING: (new standard before recognizing
revenue)
1. PAS 18 Revenue (Installment Sale method is not applicable anymore)
2. PAS 11 Contracts /IAS 11 Construction Contracts
3. SIC 31 Revenue- Barter Transactions involving advertising services.

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 4. PFRIC 13 Customer Loyalty Programs
5. PFRIC 15 Agreements for the Construction of real estate
6. PFRIC 18 Transfer of Assets from Customers

REVENUE FROM CONTRACTS WITH CUSTOMERS adopts ASSET-LIABILITY

APPROACH.
Companies:
1. Account for revenue based on the asset or liability arising from contracts with
customers.
2. Are required to analyze contracts with customers: (a) contracts indicate terms
and measurement of consideration; (b) without contracts, companies cannot

know whether promises will be met.

* IFRS 15, requires capitalizing them and recognizing them in profit or loss in

line with revenue recognition.

REVENUE RECOGNITION PRINCIPLE- recognize revenue to depict the transfer of goods

or services to customers in amount that reflects the consideration receives, or expects
to receive, in exchange for these goods or services.
*Recognize revenue in the accounting period when the performance obligation is
satisfied.
I. Revenue Recognition at a (Single) Point in Time
 We recognize revenue at a point in time when we don’t qualify for recognizing

revenue over time.

 The performance obligation is satisfied when control of the goods or services is

transferred from seller to customer.

 Usually transfer of control is obvious, and coincides with delivery.
 Other indicators of transfer of control, the customer has:
 Obligation to pay
 Legal title to the asset
 Physical possession of the asset
 Assumed the risks and rewards of stewardship
 Accepted the asset.
* These indicators indicates that control has been transferred from the seller to the

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customer.
* sellers should evaluate these indicators individually and in combination decide
whether control has been transferred and revenue can be recognized.

Ii. Revenue Recognition Over a Period of Time

 Revenue should be recognized over time if one of the following conditions hold:
 Customer consumes the benefit of the seller’s work as it is performed;
 Customer controls the asset as it is created, as when a contractor builds an

extensioninto a customer’s existing school building; or

 The seller is creating an asset that has no alternative use to the seller, and the

seller has the legal right to receive payment for progress to date, as when a

company manufactures customized product.

5 STEP PROCESS
1. When does a contract exist for purposes of Revenue Recognition?
Identify the contract- Revenue cannot be recognized without a contract.
 A contract is an agreement that creates legally enforceable rights and

obligations.
- can be explicit or implicit
- can be oral or written.
*enforceability-matter of law
*RFBT: Contract requires consent, cause, object
 A contract exists for purposes of revenue recognition only if all of the following

are true/
Criteria to be met in order for contract to exist for the purpose of revenue

recogniztion (PAS 9):

1. Has commercial substance, affecting the risk, timing or amount of the seller’s
future cash flows
*Commercial substance- IAS 16 PPE- if after the exchange of PPE, the cashflow we
expect to significant change.
2. Has been approved by both seller and customer, indicating commitment to
fulfilling their obligations. (in RFBT may consent, or meeting of minds between buyer
and seller)

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3. It specifies the seller’s and customer’s rights regarding the goods or services to
be transferred.
*Right of seller- to receive consideration.
*RIght of uyer- to receive goods/services.
4. It specifies payment terms. (whther may discount, installment, etc.)
5. It is probable that seller will collect the amount/ consideration it is entitled.
 A contract also does not exist if both the following are true:
 Neither the seller nor the customer has performed any obligations under the

contract. / Contract is unperformed.

 Both seller and customer can terminate the contract without penalty.
2. Identify the performance obligations. (separate performance

obligations)
A. Example of common parts of contracts that are performance obligations:
 Extended warranties ( a separate obligation distinct from delivering acceptable

goods or services). A warranty is an extended warranty if either:

(a) customer has the option to purchase warranty separately;
(b) Warranty provides a service to the customer beyond quality assurance.
 Options that provide a material right (a material right is something the

customer wouldn’t get otherwise, so the seller is obligated to provide it.

B. Example of common parts of contracts that are not performance
obligations:
 Prepayments (part of transaction price)
 Quality-assurance warranties (part of performance obligation to deliver good

or services that are free from defects)

 Right of return (part of performance obligation to deliver acceptable good and

services)

3. Determine the Transaction Price: Variable Consideration

 Occurs when some of contract price depends on the outcome of the future

event.
Examples:
 Incentive payments
 Royalties

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 Volume discounts
 Rebates
 Rights of return
 Estimate variable consideration using either:
(a) expected value
(b) Most likely amount
 Constraint: Sellers only include an estimate of variable consideration in the

transaction price to the extent it is probable that a significant revenue

reversal will not occur when the uncertainty associated with variable

consideration is resolved.
 Intended to avoid severe revenue overstatements
 Indicators that significant reversal could occur: poor evidence on which to base an

estimate, dependence on factors outside the seller’s control, history of the seller

changing payment terms of similar contracts, a broad range of outcomes that

could occur, and a ong delay before uncertainty resolves
 Seller should update estimates of variable consideration (and whether constraint is

required) prospectively, adjusting revenue and other accounts as necessary in the

period in which the estimate is revised.

4. Allocate the transaction price to performance obligations: estimating

stand-alone selling prices
3 Methods are recommended for estimating stand-alone selling prices that are not

observable:
I. Adjusted market assessment approach: seller considers what it could sell

the product or services for in the market in which it normally conducts business,
perhaps referencing prices charged by competitors.
II. Expected cost plus margin approach: seller estimates its costs satisfying a
performance obligation and then adds an appropriate profit margin.
III. Residual Approach: seller estimates an unknown (or highly uncertain) stand-
alone selling prices by subtracting the sum of the known or estimated stand0alone
selling price from total transaction price. Only allowed if the stand-alone SP is highly

uncertain, either because:

(a) seller hasn’t previously sold the goods or services and hasn’t yet determined a

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price for it;
(b) Because seller provides the same good or service to different customers at
substantially different prices.

5. Recognize Revenue when (or as) each performance obligation is satisfied.

STATEMENT OF FINANCIAL POSITION PRESENTATION

* Contract asset & Contract liability should be presented in statement of
financial position when either party has performed in contract:
CONTRACT ASSET CONTRACT LIABILITY
Alternative term: receivable and work Generally referred to as: Unearned
in progress Sales Revenue, or any appropriate
* No payment yet on point of buyer pero account titles
may rendering of services or dleivery of *Performance of buyer or nagbayad na
goods. bago makapagtransfer ng goods/services
si seller.
Rights received>Performance Obligations Rights received<Performance Obligations
An entity’s right to consideration in A company’s obligations to transfer
exchange for goods or services that goods or services to a customer for
the entity has transferred to the customer which the company has received
(i.e. entity performs before the customer consideration from customer or

pays) consideration is due from customer. (i.e.

*Receivable is entitys’ right to customer pays or owes payment before
consideration that is unconditional. the entity performs)
2 TYPES: If contract is loss making- there will be
(a) Unconditional a provision recorded to recognize the full
(b) Conditional Rights- loss under onerous contract, as per
EXAMPLE: required to deliver 100 phones, PAS 37. this can either be termed as: (a)
and buyer will only pay you after the contract liability. (b) provision
th
delivery of the 100 item
CONTRACT MODIFICATION- (a) creates
new contract, (b) modifies existing

contract
Example: change order, variation

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Conditions:
1. Scope of contract increase because
of addition of promised goods or
services that are distinct. (Distinct if
customer can benefit from

goods/services, Entity’s promise is

separately identifiable from other

prmoises in the contract)

2. Price of contract increases by the an

amount of consideration that

reflects the entity’s standing selling
prices of additional promised
goods/services
Revenue exceeds cash received- this If cash received exceeds Revenue
could be included within trade recognized to date- there will be contract

receivables. liability (acting effectively as deferred

Costs to Date exceeds Cost of Sales- this income)
could be included within inventory, as
WIP

OTHER ISSUES:
1. Right of Return- granted to customers due to dissatisfaction of customers;
comapny returning product receives: full or potential refund of any
condsideration paid, credit that can be applied agains amounts owed ot that will
be owed to seller, another product in exhange.
2. Bill and Hold arrangements- customer payurchases goods but requests that
seller not ship the product until later date
- control has not been transferred so revenue did not recognized until delivery
- sellers can recognize revenue prior to delivery

SPECIAL REVENUE RECOGNITION TOPICS

- difference recognition of revenue compare to normal recognition of revenue in acctg
I. INSTALLMENT SALES- has higher risk associated on collection of its receivables.
There may be customers that default in paying their purchases. Because of that,
the company urge to repossess the merchandise from the customers who are in
default.
II. LONG TERM CONSTRUCTION CONTRACTS
III. FRANCHISES

INSTALLMENT SALES

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 (PV of SELLER))
INSTALLMENT SALES REGULAR SALES
Series of collection One time collection
INSTALLMENT METHOD: ACCRUAL METHOD:
A/R xx
DATE OF SALE:
Sales xx
Installment A/R xx
COGS xx
Sales xx
Inventory xx
COGS xx
Upon collecion:
Inventory xx
Cash xx
YEAR-END: (close all income statement
A/R xx
accts)
Sales xx
COGS xx
*Hindi yan balance kasi may markup yung
sales tapos cogs at cost, so chinacharge

siya sa DGP.
Deferred Gross Profit (DGP)
- Current liability or parang unearned
sales

DATE OF COLLECTION:
Actual Cash Collection:
Cash xx
Installment A/R xx
*Everytime na magmomove yung
installment AR mo dapat may movement
din yung DGP mo.
*So magrecognize ng revenue.
DGP xx
Realized Gross Profit
DGP= Cash Collection x Gross profit
rate (GPR)
Computation of GPR:
1A. GPR based on sales = Gross
profit/Sales
Sales xx
Less: COGS xx
Gross profit xx
Divided by Sales xx

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GPR xx
1.B GPR = DGP/Installment AR
*Nagmove GPR, kaya nagmove rin DGP
2. GPR based on cost= GP/COGS
Computation of Deferred Gross

Profit:
1. Total unrealized gross profit xx
Less: Realized gross profit (xx)
DGP xx
2. DGP, end= Installment AR, end x GPR

EXAMPLE: TWO PERIODS

ABC Co. Uses the installment sales method. Information on ABC’s transactions during
2022 is shown below:
2021 2022
Installment sales 1,000,000 1,200,000
Cost of sales 600,000 660,000
Gross profit 400,000 540,000
Cash collections from 2021 sales: 400,000 200,000
Cash collections from 2022 sales: 480,000
Compute total realized gross profit.
Gross profit rate
2021: 400,000/1M 40%
2022: 540,000/1.2M 45%
Collections in 2022 from:
2021 sales (200,000 x 40%) 80,000
2022 sales (480,000 x 45%) 216,000
Total realized GP in 2022 296,000

REPOSSESSION
- nakabayad si buyer for first few months, tapos hindi na nakabayad. So pwede
marepossess ni seller.
- The repossessed merchandise will become part in computing the COGS and
be brought back to inventory account.
Following procedures to record repossession may be used:
1. Record the repossessed merchandise in an appropriate inventory account at its

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 fair value.
ESTIMATED SELLING PRICE
LESS: RECONDITIONING COSTS
NORMAL PROFIT MARGIN
FAIR VALUE OF REPOSSESSED MRCHANDISE
2. Cancel the uncollected installment receivable balance of the defaulted contract.
3. Write-off the balance of the deferred gross profit relating to the above
receivable.
4. Recognize the resulting gain or loss on repossession.

JOURNAL ENTRY:
DATE OF REPOSSESSION: (POV of seller)
1. Repossessed Inventory xx (FV or NRV before reconditioning costs & profit
margin)
DGP xx
Loss on repossession xx
Installment AR xx

*Kapag hindi given yung FV/NRV nung repossessed inventory. Magwoworkback.

Resale Value/ New Selling Price once repossessed xx
Less: Reconditioning costs (xx)
Less: Profit margin (make the inventoy at cost) (xx)
FMV/NRV of Repossessed inventory xx

OR
FMV of repossessed merchandise xx
Less: Unrecovered cost
Installment AR, ending xx
Less: Deferred GP (Installment AR x GPR) (xx) (xx)
Gain/loss on repossessed inventory xx

TIPS:
* If given is FV and no information stated if it is after or before reconditioning
cost, then it is construed as BEFORE RECONDITIONING COST. No need to deduct

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the reconditioning cost from FMV.
* But if given is the SELLING PRICE, then DEDUCT the reconditioning cost and
normal profit margin. * If the given is the Selling price and no information stated if it

is after or before reconditioning cost, then DEDUCT normal profit margin.

EXAMPLE PROBLEM:
The following selected accounts were taken from trial balance of Pinnacle Company of
Dec 31, 2020.
Accounts Receivable 750,000
Installment Receivable-2018 150,000
Installment Receivable-2019 450,000
Installment Receivable-2020 2,700,000
Beginning inventory 525,000
Purchases 3,900,000
Freight in 30,000
Repossessed Merchandise Inventory 150,000
Repoosession Loss 240,000
Cash sales (Regular sales) 900,000
Credit sales (Regular sales) 1,800,000
Installment sales 4,460,000
Deferred gross profit-2018 222,000
Deferred gross profit-2019 393,600
Operating expenses 150,000
Cost of installment sales 2,787,500

Additonal information:
A. Gross profit rates for 2018 and 2019 installment sales were 30% and 32%
respectively.
B. The entry for repossessed goods was:
Repossessed merchandise 150,000
Repossessed loss 240,000
Installment Receivable-2018 180,000
Installment Receivable-2019 210,000
C. Merchandise on hand at the end of 2020 (new & repossed) was 282,000)

Compute for the following:

I. Total Realized Gross Profit
Cash Collection x GPR= Realized Gross Profit

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1. How much is the collection for 2018,2019 & 2020. (use T-account)
Installment AR, 2018
DEBIT CREDIT
740,000 (beginning) 180,000
*Given DGP
/Unadjusted/GPR
= 222,000/30%=
740,000

410,000 (collection)
*(150K+180K-740K)
150,000 (ending)
Collection 2018: 410,000 x 30% GPR= 123,000 realized GP from installment sale in
2018
Installment AR, 2019
DEBIT CREDIT
1,230,000 (beginning) 210,000
*Given DGP
/Unadjusted/GPR
= 393,600/32%=
1,230,000

570,000 (collection)
*(450K+210K-1.23M)
450,000 (ending)
Collection 2019: 570,000 x 32% GPR= 182,400 Realized GP from installment sale in
2019
2020:
Installment sales 4,460,000
Installment receivable 2,700,000
Collected installement sales 1,760,000
X GPR (GP/sales) 37.5%
Collection, 2020 660,000

*GPR:
Installment sales 4,460,000

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price for it;
(b) Because seller provides the same good or service to different customers a
substantially different prices.

5. Recognize Revenue when (or as) each performance obligation is satisfied.

STATEMENT OF FINANCIAL POSITION PRESENTATION

* Contract asset & Contract liability should be presented in statement o
financial position when either party has performed in contract:
CONTRACT ASSET CONTRACT LIABILITY
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Alternative term: receivable and work Generally referred to as: Unearne
in progress Sales Revenue, or any appropriate
* No payment yet on point of buyer pero account titles
may rendering of services or dleivery of *Performance of buyer or nagbayad na
goods. bago makapagtransfer ng goods/services
si seller.
Rights received>Performance Obligations Rights received<Performance Obligations
An entity’s right to consideration in A company’s obligations to transfe

exchange for goods or services that goods or services to a customer fo

the entity has transferred to the customer which the company has received
(i.e. entity performs before the customer consideration from customer o
pays) consideration is due from customer. (i.e
*Receivable is entitys’ right to customer pays or owes payment before
consideration that is unconditional. the entity performs)
2 TYPES: If contract is loss making- there will be
(a) Unconditional a provision recorded to recognize the ful
(b) Conditional Rights- loss under onerous contract, as pe
EXAMPLE: required to deliver 100 phones, PAS 37. this can either be termed as: (a
and buyer will only pay you after the contract liability. (b) provision
delivery of the 100th item
CONTRACT MODIFICATION- (a) creates
new contract, (b) modifies existing

contract
Example: change order, variation

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Conditions:
1. Scope of contract increase because
of addition of promised goods or
services that are distinct. (Distinct if
customer can benefit from
goods/services, Entity’s promise is
separately identifiable from other
prmoises in the contract)
2. Price of contract increases by the an

amount of consideration that

reflects the entity’s standing selling
prices of additional promised

goods/services
Revenue exceeds cash received- this If cash received exceeds Revenue
could be included within trade recognized to date- there will be contract

receivables. liability (acting effectively as deferred

Costs to Date exceeds Cost of Sales- this income)
could be included within inventory, as
WIP

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OTHER ISSUES:
1. Right of Return- granted to customers due to dissatisfaction of customers
 comapny returning product receives: full or potential refund of any
condsideration paid, credit that can be applied agains amounts owed ot that will
be owed to seller, another product in exhange.
2. Bill and Hold arrangements- customer payurchases goods but requests that
seller not ship the product until later date
- control has not been transferred so revenue did not recognized until delivery
- sellers can recognize revenue prior to delivery

SPECIAL REVENUE RECOGNITION TOPICS

- difference recognition of revenue compare to normal recognition of revenue in acctg
I. INSTALLMENT SALES- has higher risk associated on collection of its receivables
There may be customers that default in paying their purchases. Because of that,
the company urge to repossess the merchandise from the customers who are in
default.
II. LONG TERM CONSTRUCTION CONTRACTS
III. FRANCHISES

INSTALLMENT SALES

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 (PV of SELLER))
INSTALLMENT SALES REGULAR SALES
Series of collection One time collection
INSTALLMENT METHOD: ACCRUAL METHOD:
A/R xx
DATE OF SALE:
Sales xx
Installment A/R xx
COGS xx
Sales xx
Inventory xx
COGS xx
Upon collecion:
Inventory xx
Cash xx
YEAR-END: (close all income statement
A/R xx
accts)
Sales xx
COGS xx
*Hindi yan balance kasi may markup yung
sales tapos cogs at cost, so chinacharge
siya sa DGP.
Deferred Gross Profit (DGP)
- Current liability or parang unearned
sales

DATE OF COLLECTION:
Actual Cash Collection:
Cash xx
Installment A/R xx
*Everytime na magmomove yung
installment AR mo dapat may movement
din yung DGP mo.
*So magrecognize ng revenue.
DGP xx
Realized Gross Profit
DGP= Cash Collection x Gross profit
rate (GPR)
Computation of GPR:
1A. GPR based on sales = Gross
profit/Sales 0 0

Sales xx
Less: COGS xx
Gross profit xx
Divided by Sales xx

GPR xx
1.B GPR = DGP/Installment AR
*Nagmove GPR, kaya nagmove rin DGP
2. GPR based on cost= GP/COGS
Computation of Deferred Gross
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Profit:
 1. Total unrealized gross profit xx
Less: Realized gross profit (xx)
DGP xx
2. DGP, end= Installment AR, end x GPR

EXAMPLE: TWO PERIODS

ABC Co. Uses the installment sales method. Information on ABC’s transactions during

2022 is shown below:

2021 2022
Installment sales 1,000,000 1,200,000
Cost of sales 600,000 660,000
Gross profit 400,000 540,000
Cash collections from 2021 sales: 400,000 200,000
Cash collections from 2022 sales: 480,000
Compute total realized gross profit.
Gross profit rate
2021: 400,000/1M 40%
2022: 540,000/1.2M 45%
Collections in 2022 from:
2021 sales (200,000 x 40%) 80,000
2022 sales (480,000 x 45%) 216,000
Total realized GP in 2022 296,000

REPOSSESSION
- nakabayad si buyer for first few months, tapos hindi na nakabayad. So pwede
marepossess ni seller.
- The repossessed merchandise will become part in computing the COGS and
be brought back to inventory account.
Following procedures to record repossession may be used:
1. Record the repossessed merchandise in an appropriate inventory account at its

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 fair value.
ESTIMATED SELLING PRICE
LESS: RECONDITIONING COSTS
NORMAL PROFIT MARGIN
FAIR VALUE OF REPOSSESSED MRCHANDISE
2. Cancel the uncollected installment receivable balance of the defaulted contract.
3. Write-off the balance of the deferred gross profit relating to the above
receivable.
4. Recognize the resulting gain or loss on repossession.

JOURNAL ENTRY:
DATE OF REPOSSESSION: (POV of seller)
1. Repossessed Inventory xx (FV or NRV before reconditioning costs & profit
margin)
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DGP xx
Loss on repossession xx
 Installment AR xx

*Kapag hindi given yung FV/NRV nung repossessed inventory. Magwoworkback.

Resale Value/ New Selling Price once repossessed xx
Less: Reconditioning costs (xx)
Less: Profit margin (make the inventoy at cost) (xx)
FMV/NRV of Repossessed inventory xx

OR
FMV of repossessed merchandise xx
Less: Unrecovered cost
Installment AR, ending xx
Less: Deferred GP (Installment AR x GPR) (xx) (xx)
Gain/loss on repossessed inventory xx

TIPS:
* If given is FV and no information stated if it is after or before reconditioning
cost, then it is construed as BEFORE RECONDITIONING COST. No need to deduc

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the reconditioning cost from FMV.
* But if given is the SELLING PRICE, then DEDUCT the reconditioning cost and
normal profit margin. * If the given is the Selling price and no information stated if it

is after or before reconditioning cost, then DEDUCT normal profit margin.

EXAMPLE PROBLEM:
The following selected accounts were taken from trial balance of Pinnacle Company of

Dec 31, 2020.

Accounts Receivable 750,000
Installment Receivable-2018 150,000
Installment Receivable-2019 450,000
Installment Receivable-2020 2,700,000
Beginning inventory 525,000
Purchases 3,900,000
Freight in 30,000
Repossessed Merchandise Inventory 150,000
Repoosession Loss 240,000
Cash sales (Regular sales) 900,000
Credit sales (Regular sales) 1,800,000
Installment sales 4,460,000
Deferred gross profit-2018 222,000
Deferred gross profit-2019 393,600
Operating expenses 150,000
Cost of installment sales 2,787,500

Additonal information:
A. Gross profit rates for 2018 and 2019 installment sales were 30% and 32%

respectively.
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B. The entry for repossessed goods was: 0

Repossessed merchandise 150,000

Repossessed loss 240,000
Installment Receivable-2018 180,000
Installment Receivable-2019 210,000
C. Merchandise on hand at the end of 2020 (new & repossed) was 282,000)

Compute for the following:

I. Total Realized Gross Profit
Cash Collection x GPR= Realized Gross Profit

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1. How much is the collection for 2018,2019 & 2020. (use T account)
Installment AR, 2018
DEBIT CREDIT
740,000 (beginning) 180,000
*Given DGP
/Unadjusted/GPR
= 222,000/30%=
740,000

410,000 (collection)
*(150K+180K-740K)
150,000 (ending)
Collection 2018: 410,000 x 30% GPR= 123,000 realized GP from installment sale in
2018
Installment AR, 2019
DEBIT CREDIT
1,230,000 (beginning) 210,000
*Given DGP
/Unadjusted/GPR
= 393,600/32%=
1,230,000

570,000 (collection)
*(450K+210K-1.23M)
450,000 (ending)
Collection 2019: 570,000 x 32% GPR= 182,400 Realized GP from installment sale in
2019
2020:
Installment sales 4,460,000
Installment receivable 2,700,000
Collected installement sales 1,760,000
X GPR (GP/sales) 37.5%
Collection, 2020 660,000

*GPR:
Installment sales 4,460,000
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Cost of installment sales (2,787,500)
Gross profit 1,672,500
Divided by sales 4,460,000
GPR 37.5%

COMPUTATION FOR TOTAL RGP:

Regular Sales:
Sales (Cash sales 900K +Credit sales 1.8M) 2,700,000
Less: COGS 0 0

Beg Inventory 525,000

 Purchases 3,900,000
Freight in 30,000
TGAFS 4,455,000
Ending inventory (132,000)
COGS for both regular sales and installment sales 4,323,000
Less: Cost of installment sales (2,787,500)
COGS of regular sales (1,535,500)
Gross Profit from regular sales

1,164,500
*Ending inventory should not include the repossessed inventory(282K-150K)

Collection 2018 123,000

Collection, 2019 182,400
Collection, 2020 660,000
Sales from Installment sales 965,400

TOTAL REALIZED GROSS PROFIT: (965,400+1,164,500) = 2,129,900

II. Net Income in 2020

Realized gross profit 2,129,000
OPEX (150,000)
Repossessed Loss (118,800)
Net income 1,861,100

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Adjustment for Repossession Loss:
Repossessed merchandise 150,000
Repossessed loss 240,000
Installment Receivable-2018 180,000
Installment Receivable-2019 210,000
Adjusting entry:
Repossessed merchandise 150,000
DGP,2018 54,000
DGP,2019 67,200
Repossessed Loss 118,800
Installment Receivable-2018 180,000
Installment Receivable-2019 210,000
*DGP,2018: Installemnt AR 180,000 x GPR 30% = 54,000
*DGP,2019: Installement AR 210,000 x 32%= 67,200
*Repossessed loss: (180K+210K) - (150K+54K+67.2K) = 118,800

EXAMPLE2:
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