AFAR NOTES

PARTNERSHIP Stages:

 Civil Code (Art. 1767); Partnership Law 1. Formation – Creation

 IFRS/PFRS 2. Operation – allocation of Net Income/Loss
Oral Admission
Contract  Agreement Written 3. Dissolution Withdrawal
2 or more persons (partners  owners)
Lump-sum
PARTNERSHIP Money (Cash) 4. Liquidation Installment
Bind themselves to contribute Property (NCA)
Industry (Services/Skills)
Dividing profits

Characteristics of Partnership Types of Partnership

 Ease of formation  General Partnership
 Limited life  Each partner is personally liable to the partnership’s
 Mutual agency creditors if the partnership assets are not enough to
 Separate legal entity pay such creditors.
 Sharing of profit and losses  There is at least one general partner in each
 Unlimited liability partnership.
 Limited Partnership
 Partners are liable only up to the extent of their capital
contributions.
Accounting for Partnership Activities

 Capital Account (normal balance: credit)

 Increases
 Initial investment
 Additional investment
 Share in net income
 Decreases
 Permanent withdrawal
 Drawings in excess of a specific amount
 Share in net loss

 Drawing Account (normal balance: debit)

 Increases
 Regular drawings

Loan Accounts

 Transactions between the partners and the partnership.

 Must be reported as separate balance sheet items.
 Loan from partners – presented as a liability.
 Loan to partners – presented as other receivable (current asset).

 The capital ratio is a claim against the net asset of the partnership as shown by the balance in the partner’s capital
account.
 The profit and loss ratio (P&L ratio) determines how much will the income or loss be distributed among the partners.

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

FORMATION

Cash  Face Value

1. Agreed Value
Valuation Noncash Assets 2. FMV If silent: EQUAL
3. Carrying Value
Liabilities

Example: XY Partnership

JE: Cash 1,000 Land 5,000

X, Capital 1,000 Y, Capital 5,000

Y, Capital 2,000
MP 2,000

 Cash investment
 Local currency is valued at face value.
 Foreign currency is valued at the current exchange rate

 Liabilities assumed by the partnership should be value at the present value (fair value) of the remaining cash
flows.

 If partner’s initial investment  partner’s agreed capital  Bonus Method

Bonus Method Pro-forma Entry

A, Capital xx
B, Capital xx

Total agreed capital xx

x Capital interest xx %
Partner’s individual capital interest xx
Less: B, capital interest (xx)
Bonus to B xx

OPERATIONS

 Allocation of NI/L
 Generate revenues
 Incur expenses Dec. 31  NI/L

Rule: Allocate based on the partnership agreement (Art. of Partnership)

 (P/L Ratio)

Cash
Capitalist Noncash Assets
Types
Industrialist  Services/Skills

Typical Terms:

1. Salaries  Industrial Partners

Managing Partner
2. Bonuses Based on % on NI
If NL, no bonus
Original (formation)
Capitalist Partner
3. Interest Beginning
Based on % of Capital Balances
End Simple
Average Weighted (if silent)

* Salaries, Bonuses, Interest are not recorded as expense of the partnership

* Salaries and Interest are pro-rated.

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

Partner Capital:

Beginning Balance xx
Share in NI/L xx Regular  will not affect WACC balance
Additional Investment xx Drawings
Permanent (withdrawal)
Withdrawal (xx)
Ending Balance xx

Division of Profits and Losses (in order)

1. By Agreement
2. Original Capital Contribution
3. If Profit agreement only  losses shall be divided in the same manner.
4. If Loss agreement only  use original capital contribution
5. Equally

DISSOLUTION Admission
 Change in the interest of the partnership Withdrawal / Retirement
 addition/reduction in the # of partners Incorporation of a Partnership

Private/Personal Transaction (outside)

Purchase of Interest No change in partnership capital
1. Admission
Investment in Partnership  ↑ Capital, ↑ Asset

Bonus
CC = AC Ø
Scenarios
CC > AC Old Partner

CC < AC New Partner

TCC > TAC  Overstatement of the asset or diminution in partner’s capital.

TCC < TAC  Unrecorded net assets or the required additional investment in partner’s capital.

Total agreed capital xx

Less: Total contributed capital xx
Difference xx

* Capital Ratio  used to know agreed capital

* P/L Ratio  used to allocate NI / Bonuses

Purchase of Interest (ex. B buys interest of C)

2. Withdrawal / Retirement
 same rules w/ admission Settlement by partnership

Advantages:
3. Incorporation of a Partnership
Limited Liability
Partnership  Corporation Ease of raising additional capital
(Partners) (Shareholders) Unlimited Life
Easy transfer of ownership

Note: Whenever there’s dissolution, update the capital balances

1. Allocate NI/L to the partners
2. Revalue Assets or Liabilities

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

LIQUIDATION

 Termination phase of the partnership’s activities

 Liquidation Process
1. Sell all NCA @ NRV (NCA  Cash)
2. Pay the Creditors
3. Distribute remaining cash to partners

Order of Priority (Partnership Assets)

1. Partnership’s Creditors  if insufficient, can run after personal assets

2. Internal Creditors (Partner’s Loan)
3. Partner’s Capital Balance

Order of Priority (Personal Assets)

1. Personal Creditors
2. Partnership Creditors

Lump-sum  liquidation process is completed at a short period of time

Types Liquidation process takes time to complete
Installment
To determine how much cash can be safely distributed to the partners

Maximum Possible Loss: Worst case scenario

1. Estimated Liquidation Expense

2. Cash withheld for future use
3. Remaining BV of NCA

Basic Principles in Installment Liquidation

 Schedule of Safe Payments

 Method of computing the amount of safe payments and preventing excessive payments to any partners.

 Assume total loss on all remaining noncash assets. Provide all possible losses, including potential
liquidation cost and unrecorded liabilities.  Maximum Possible Loss

 Assume that partners with a potential capital deficit will be unable to pay anything to the partnership
(assumed to be personally insolvent).
 Hypothetical or assumed deficit balance is allocated to the partners who have credit balances
using profit and loss ratio.
 This portion is the maximum potential loss on noncash assets.

 Cash Priority Program (Cash Distribution Program)

 Ranking of the partners’ vulnerability level.

 Total interest (equity) account = balance of the capital account +/- loans from (to) the partners

 Loss Absorption Ability = Total interest account/Profit and Loss assigned ratio

 Vulnerability Rankings
 The partner with the lowest absorption ability is the most vulnerable to partnership losses.

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

CORPORATE LIQUIDATION
 A financial condition in which the sum of all debts is greater than all of its assets at a fair valuation.
 A bankruptcy filing can be voluntary or involuntary.
 A petition to liquidate a company can be made to the applicable court by creditors who have not been paid by the
company; if granted, the business will involuntarily enter bankruptcy.
 Liquidation Process
1. Sell all NCA @ NRV (NCA  Cash)
2. Pay the Creditors
3. Distribute remaining cash to partners

Reports (FS)

1. Statement of Affairs (B/S)

 financial condition prepared for a corporation entering into the stage of liquidation or bankruptcy.

 ASSETS (@ NRV)
i. Assets pledged to Fully Secured Creditors  Assets > Liabilities
ii. Assets pledged to Partially Secured Creditors  Assets < Liabilities
iii. Free Assets
 Not pledged to any liabilities
 Includes the excess of assets pledged to fully secured liabilities

 LIABILITIES  at settlement amounts; usually = to BV

i. Fully Secured Liabilities  NRV of Assets > Liabilities
ii. Partially Secured Liabilities  NRV of Assets < Liabilities
iii. Unsecured Creditors w/ Priority
 Salaries & Wages
 Taxes
 Legal fees
 Employee benefits
iv. Unsecured Creditors w/o Priority
 No assets securing these liabilities
 Includes unsecured portion of partially secured creditors

 EQUITY  Deficit = Liabilities > Assets

Formula:

NRV of Cash & NCA xx PSC (unsecured portion) xx

FSC (xx) Liabilities w/o Priority (xx)
PSC (xx) Total Unsecured Liabilities xx
Liabilities w/ Priority (xx)
𝑁𝑒𝑡 𝐹𝑟𝑒𝑒 𝐴𝑠𝑠𝑒𝑡𝑠
Net Free Assets xx Recovery Percentage =
𝑇𝑜𝑡𝑎𝑙 𝑈𝑛𝑠𝑒𝑐𝑢𝑟𝑒𝑑 𝐶𝑟𝑒𝑑𝑖𝑡𝑜𝑟𝑠

Estimated Deficiency = Net Free Assets – Total Unsecured Liabilities

2. Statement of Realization & Liquidation (I/S)

 An activity statement which shows the progress of the liquidation.
 Shows the actual transactions that transpired during the period covered
To be realized  Total NCA to be sold as of Jan. 1
Acquired  Additional assets during liquidation (ex. interest receivable)
Assets
Realized  Actual Net Proceeds
Not Realized  Unsold NCA as of Jan. 31

To be liquidated  Total liabilities to be settled as of Jan. 1

Liabilities Assumed  Additional liabilities during liquidation (ex. interest payable)
Liquidated  Actual payment or settlement
Not Liquidated  Unpaid liabilities as of Jan. 31

Income & Expense arose during liquidation

Supplementary Items Income  Dividend Income
Expense  Admin Expense

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

 Statement of Realization & Liquidation
Assets to be realized Assets realized
Assets acquired Assets not realized

Liabilities liquidated Liabilities to be liquidated

Liabilities not liquidated Liabilities assumed

Supplementary Charges Supplementary Credits

Gain Loss

STATEMENT OF AFFAIRS
DATE

Book Estimated
Value Assets Realizable Value Free Assets
Pxx Assets Pledged to Fully Secured Creditors: P xx
Less: Liabilities to Fully Secured Creditors xx P xx
xx Assets Pledged to Partially Secured Creditors: P xx
xx Free Assets: P xx xx
Total Free Assets P xx
Less: Unsecured Liabilities with Priority xx
Pxx Net Free Assets P xx
Estimated deficiency to Unsecured Creditors xx
Total P xx

Book Unsecured
Value Liabilities and Equity Creditor’s Claim Liabilities
Pxx Fully Secured Creditors P xx
xx Partial Secured Creditors P xx
Less: Value of Pledged Assets xx P xx
xx Unsecured Creditors with Priority P xx
xx Unsecured Creditors without Priority: xx
xx Stockholder’s Equity P xx
Pxx Total P xx

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

HOME OFFICE AND BRANCH ACCOUNTING
 Branches are established to decentralize operations or to expand into new markets.
 Branches are with regulated autonomy to operate as an independent entity.
 The branch has its own complete set of accounting records, all its transactions including those with the home
office are recorded in its books.
 It also presents its own set of financial statements called separate financial statements.
 A branch and its home office represent two accounting systems but just one accounting and reporting entity.

Ex. Macao Milk Tea

100
20 120

At the end of the year, prepare Combined FS

HO Cash, Inventory, Br 1 Br 2 Br 3
Equipment + Working Paper Eliminating Entries (WPEE)
FS + FS + FS + FS = Combined FS
 Eliminates reciprocal Accounts
1/1 Investment in Branch Cash Home Office AOI
Cash Ship from HO 120 IIB Ship to Br
Ship to Branch 100 Equipment
Ship from HO
AOI 200 Home Office
Equipment  does not reflect in the separate FS of HO & Br
Cash
Sales Note:
COGS
 The Branch do not know how much was the
Inventory
mark-up applied by the Home Office
OPEX  Allowance for Overvaluation of Inventory (AOI)
Cash  Mark-up
 Reciprocal account
12/31 Investment in Branch Sales
Income from Br COGS
OPEX
I/S Agency

I/S  Acts on behalf of the HO

HO  Not a separate entity
 No reciprocal accounts
 No need to prepare combined FS
 Investment in Branch / Branch Current  asset account  Normal NI computation
 Home Office Account  equity account
 If silent
o GP / Mark-up  based on sales
o Exc: HOBA  based on costs

Sir Brad’s Magic Table: (should only contain transactions between the HO and Branch)

Cost Billed AOI

BI xx xx xx Outside:
Ship xx xx xx BI xx
GAS xx xx xx Purchases xx
EI (xx) (xx) (xx) EI (xx)
COGS xx xx xx COGS xx

Formulas:

NI by Branch NI by HO Beginning Inventory

Purchases
Sales Sales
+ Ship to Branch
Less: COGS (from HO & Outside) COGS
Expenses Expenses GAS
Net Income Net Income Ending Inventory
COGS
True NI Combined NI
NI of Branch NI - HO
+ Realized Income (AOI) NI – Br (True NI)
True NI of Branch Combined NI
Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM
ILLUSTRATIVE JOURNAL ENTRIES:

 Cost = Billed price ÷ 100% + % markup on cost = Markup on cost / % markup on cost.
 The amount of allowance considered realized will be the allowance carried by the cost of goods sold.

 When a company is composed of a home office and more than one branch, the home office records include a
separate investment in branch account and a separate allowance for overvaluation account for each branch.
Separate worksheet adjustments are made for each branch.

 When assets are transferred from one branch to another branch, the home office account on each branch’s records
is used to record the transfers. The transferring branch reverses the entry to record the transfer from the home
office, and the receiving branch enters a transfer as if it comes from the home office.

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

COST ACCOUNTING
 Involves the measuring, recording, and reporting of product costs.
Total
Goal: to determine the product cost Unit
Unit Cost  basis of SP = Unit Cost + Markup
↑ SP, ↓ Demand
Selling Price (SP)  influences the demand of the product Costing
↓ SP, not profitable

Cost Accounting Systems

Small volume
1. Job Order Unique / distinct products Ex. buildings, aircrafts, personalized jewelries
Heterogenous

Large volume
2. Process Costing Similar / identical products Mass Production (Ex. markers, paper, calculator, automobile)
Homogenous

RM/DM
RM/DM 𝑊𝐼𝑃
Inventory WIP UNIT COST =
DL # 𝑜𝑓 𝐺𝑜𝑜𝑑 𝑈𝑛𝑖𝑡𝑠
FG
OH

JOB ORDER COSTING

1. RM Inventory FORMULA: COGM / COGS

Upon purchase
Accounts Payable
DM Used
RM
2. Work-in-Process + DL
usage + OH
RM Inventory
TMC
3. Salaries Expense + WIP, beg
DL (AR x AH)
Salaries Payable - WIP, end
DL COGM
4. Work-in-Process + FG, beg
Salaries Expense - FG, end
COGS
5. Depreciation Expense
Utilities Expense
Rent Expense
Accumulated Depreciation Actual OH OH-A < OH-C  Underapplied (+)
Utilities Payable
Rent Payable OH-A > OH-C  Overapplied (-)
OH
6. OH Control
Depreciation Expense
Utilities Expense Actual OH
Rent Expense

7. Work-in-Process Standard Cost

OH Applied (SR x SH)
Normal Costing
8. Dec. 31
OH Applied
OH Control Immaterial / Insignificant  COGS
Difference
WIP
Material / Significant FG
COGS
Actual
Costing Normal (if silent)

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

Spoiled Units

 Cannot be sold at original price

 No longer good units Unit Cost

Specific  WIP ↑
 due to exacting specification from customer
Normal  charged to customer
 w/n expectations
Common  OH-C No effect
Spoilage  internal failure
 charged to all units

Abnormal  Loss No effect

 outside expectations

SPOILED GOODS

NRV of spoiled xx Total units xx

Cost of spoiled (xx) Spoiled units (xx)
Loss xx Good units xx

CASE 1: If the rework costs are charged to the entity/to all production/internal failure.

Total Cost of Goods* xx  * include allowance to cost

Cost of Spoiled (xx)
Cost transferred to FG xx
Divide: Good units xx
Cost per unit xx

Note: Loss will be charged to manufacturing overhead

(MOH) and will be an actual overhead (OH).

CASE 2: Charged to customer/ “exacting specification”/specific job

Total Cost of Goods xx

NRV of Spoiled (xx)
Cost transferred to FG xx
Divide: Good units xx
Cost per unit xx

Note: Loss will be included in the costs

transferred to FG.

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

Defective Units

 Can be sold at original SP

 Still good units
 Incur rework cost

Unit Cost
Specific  WIP ↑
Normal
Defective / Rework Common  OH-C 
Abnormal  Loss 

Components of rework cost:

1. Direct material
2. Direct labor
3. Manufacturing overhead

CASE 1: If the rework costs are charged to the entity/to all production/internal failure.

Total cost of goods xx

Divide: Good units* xx  *Good units = Total units
Cost per unit xx

Note: Rework costs will be charged to manufacturing

overhead (MOH) and will be an actual overhead (OH).

CASE 2: Charged to customer/ “exacting specification”/specific job

Total cost of goods xx

Rework costs xx
Cost transferred to FG xx
Divide: Good units xx
Cost per unit xx

Note: Rework costs will be included in the costs

transferred to FG.

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

PROCESS COSTING
 High volume, similar, identical, homogenous products
 Assembly / Production line
 Ex. Pfizer, Unilab, Toyota, Lenovo, SMC

Objective: to determine the Unit Cost  SP  Demand

Cost of Production Report (CPR) JEs:

1. Units to Accounts For (UTAF) 0% 100% 1. Work-in-Process
2. Units Accounted For (UAF) Units
UTAF Various Accounts
3. Equivalent Units of Production (EUP) UAF
Total Units
4. Cost per EUP  Unit Cost 2. Finished Goods
@ the start
5. Cost Accounted For Work-in-Process

3. Cost of Goods Sold

0% 30% 100% Finished Goods

FIFO
WIP, beg
Methods
0% 30% 100%
WAVE
WIP, beg

Normal  increases UC Discrete  w/ inspection point

Spoilage Normal Spoilage
Abnormal  Loss Continuous  no inspection point
 method of neglect
Formulas:  as if the spoilage did not occur

1. UTAF N. Spoilage  0%
WIP, beg xx
Ab. Spoilage  100%  Loss
Started xx
UTAF xx

2. UAF
FIFO: Materials EUP Conversion Cost EUP
WIP, beg xx 0% Ø (1 – WIP, beg %) xx
Transferred-Out
Started xx 100% xx 100% xx
Normal Spoilage xx 100% xx 100% xx
Abnormal Spoilage xx 100% xx 100% xx
WIP, end xx 100% xx (WIP, end %) xx
UAF xx xx xx

WAVE: Materials EUP Conversion Cost EUP

TO xx 100% xx 100% xx
Normal Spoilage xx 100% xx 100% xx
Abnormal Spoilage xx 100% xx 100% xx
WIP, end xx 100% xx (WIP, end %) xx
UAF xx xx xx

Shortcut for EUP by Sir RMV

4. Cost per EUP
100% % Complete
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐶𝑜𝑠𝑡 Materials Conversion
FIFO = 𝐸𝑈𝑃 Completed / Transferred-out xx xx
EI EUP (EI units x % complete) xx xx
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐶𝑜𝑠𝑡+𝑊𝐼𝑃,𝑏𝑒𝑔 𝑐𝑜𝑠𝑡
WAVE = N. Spoilage xx xx
𝐸𝑈𝑃
Ab. Spoilage xx xx
5. Cost Accounted For Weighted Average EUP xx xx
EUP x Cost Per EUP (Materials) BI EUP LY (BI units x % Complete) (xx) (xx)
+ EUP x Cost Per EUP (Conversion) FIFO EUP xx xx
Cost Accounted For

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

Formula to compute completed/transferred-out units:

Beginning inventory in units xxx

Started/transferred-in units xxx
Ending inventory in units (xxx)
Lost units (normal + abnormal) (xxx)
Completed/transferred-out units xxx

Formulas to compute started and completed units:

Started/transferred-in units xxx Completed/transferred-out units xxx

Ending inventory in units (xxx) Beginning inventory in units (xxx)
Lost units (xxx) Started & completed units xxx
Started & completed units xxx

Lost units: EUP SCHEDULE

 Discrete: Normal/Abnormal
 Direct materials
 If the placement took place first, then 100%
 If the inspection took place first, then 0%

 Conversion costs
 Lost units x % of inspection

 Continuous Loss – method of neglect

 Normal loss = 0% as to materials and conversion costs

 Abnormal loss = 100% as to materials and conversion costs.

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

JOINT AND BY-PRODUCT COSTING
 two or more different products are manufactured in the same production process

Example:

Company X Chairs, Tables, Cabinets

Common to
all products A (Chairs)
B (Tables) Main Products
Joint Cost C (Cabinets)
DM, DL, OH (WIP) Separable Cost
0% 30% X (By-Product) 100%
(Further
 Saw dust Processing Cost)
 Relatively (FPC)
Split-off point small value

Issue #1: How to allocate Joint Cost to the main products?

1. Physical Measure (# of units, kg, meters)

2. Sales Value at Split-off (# of units x SP @ S.O.)
(MV)
3. NRV @ Split-off (# of units x SP – CTS) @ S.O
4. Approximated / Estimated / Hypothetical NRV (# of units x Final SP – CTS – FPC) @ S.O

Issue #2: How to report by-products?

S.O / Production Sale
 always measured at NRV
By-Product Invty Cash
Significant / Material  recognized @ point of production
WIP (↓ JC) By-P Invty
By-Product (inventory)

Insignificant / Immaterial recognized @ point of sale

no entry Cash
Other Inc.

Addition to sales revenue of the main product

Alternative Presentation for Other Income
Reduction from cost of sales

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

JUST-IN-TIME & BACKFLUSH COSTING
JIT  inventory management system; produce as needed
Traditional: manufacture  warehouse  order  deliver

 Benefits: reduces inventory storage cost & obsolescence

A JIT system requires an attitude that places emphasis on the following:

 Cooperation with a value chain perspective

 Respect for people at all levels
 Quality at the source
 Simplification or just enough resources
 Continuous improvement
 A long-term perspective

A JIT system also incorporates the following practices:

 Just-in-time purchasing
 Focused factories
 Cellular manufacturing
 Just-in-time production
 Just-in-time distribution
 Simplified accounting
 Process oriented performance measurements

Backflush Costing  simplified accounting

 trigger points (points wherein we make JEs)
Traditional JE (4 TP) Backflush (3 Trigger Points) 2 Trigger Points 1 Trigger Point

1. RM 1. MIP (RIP) V1 1. MIP 4. COGS

AP Purchase AP Purchase AP Purchase AP Sale
CC-Applied

2. WIP Production
3. FG 4. COGS
Var. Accts MIP Completion MIP Sale
CC-Applied CC-Applied

3. FG 4. COGS V2 3. FG
Completion Sale
WIP FG AP Purchase
CC-Applied

4. COGS Sale 4. COGS Dec. 31

Sale
FG FG CC-Applied
CC-Control
Diff  COGS

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

ACTIVITY-BASED COSTING
 allocates overhead to multiple activity cost pools and assigns the activity cost pools to products and services by
means of cost drivers.
 A cost driver is any factor or activity that has a direct cause-effect relationship with the resources consumed.

Recall: Manufacturing Cost

Factory
DM
✔
DL 5hrs
OH rent, dep’n, taxes, insurance A B
₱100,000
300 units

𝑇𝑜𝑡𝑎𝑙 𝑂𝐻
OH Rate = 𝐶𝑜𝑠𝑡 𝐷𝑟𝑖𝑣𝑒𝑟
(Units produced, MH, LH)
Example:

A B Total A B
Units Produced 100 200 300 DM 2,000 4,000
Machine Hours 40 60 100 DL 5,000 10,000
DM ₱2,000 ₱4,000 OH 24,000 36,000
DL ₱5,000 ₱10,000 31,000 50,000
OH ₱60,000 ÷ 100 ÷200
÷ 100 UC 310 250
600/hr
Traditional Costing
OH  Product
1 OH Rate
Activity-Based Costing  more accurate cost allocation method

Products  Activities  Resources (MH, LH)

Steps:

1. Identify Activities
2. Identify Cost Driver per activity
3. Compute OH rate per activity (multiple OH rate)
4. Allocate OH to proceeds

Activity-Based Management (ABM)

Process of identifying value-adding activities  necessary to produce a product; maximize ↓ Costs,

Nonvalue-adding activities  do not add value to products; minimize ↑ Profitability
Activity Levels:

1. Unit Level  activities performed for each unit of production.

2. Batch Level  activities performed for each batch of products rather than each unit.
3. Product Level  activities performed in support of an entire product line.
4. Factory/Facility Level  activities required to support an entire production process.
5. Organizational Level

Quality Cost: High-quality products; ↓ defects / spoilages; ↑ profitability

1. Prevention Cost - cost to avoid defects during production

- Ex. Training workers, proper maintenance

2. Appraisal Cost - identification of defects before shipment

- Ex. Inspection cost / point

3. Internal Failure Cost - actual removal of defects before shipment

- Rework Cost

4. External Failure Cost - already been shipped with defects

- Ex. warranty, replacement

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

FOREIGN EXCHANGE (FOREX)
Transactions  import/export
 IAS 21 Foreign Currency
Operations  branch/sub/associate

Example: Sales: Purchases:

JFC PH: Cash PHP 100k PH: Inventory
PHP 200k
3000+ shares (PH) Sales AP
200+ shares (Abroad) HK: Cash HKD 50k SG: Inventory
SGD 150k
HK, US, SG, UAE, JPN Sales AP

IAS 21:
1. What exchange rates to use?
2. How to report G/L from foreign exchange?
Choice?
1. Functional - currency of the primary economic environment in which the ✖ 1 currency
entity operates.
- dominant currency (PHP)
Types of
Currencies 2. Foreign - currency other than functional currency ✖ > 1 currency
(HKD, USD, SDG, JPY)

3. Presentation - currency in which financial statements are presented ✔ > 1 currency

- option of the entity

Jan. 1 Dec. 31
Foreign  Functional (Remeasurement)
Subsequent  temporal method; ∆s in Forex (G/L)  P/L
Initial
 spot rate Functional  Presentation (Translation)
 rate that day  closing/current rate method; ∆s in Forex G/L  OCI

Monetary  closing rate (Dec. 31 rate)

B/S Item Historical  date of transaction (Inventory, PPE, IA)
Temporal Non-monetary
FV  rate at the date when FV is determined (IP @ FV method)
Method
1. Date of Transaction
1. Quarterly
 If Inventory
I/S Item 2. Date of Purchase
2. Average Rate (practicable)

Is there a right or obligation Yes  Monetary (Cash, AR, AP, Debt Securities)
to deliver fixed or determinate
amount of currency? No  Nonmonetary – variable (Inventory, PPE, IA, Equity Securities)

Assets/Liabilities  Closing Rate (Dec. 31)

CS, APIC  Date of Transaction Bid Rate = Buying Rate  Seller
B/S
Closing/Current NI  average rate Offer Rate = Selling Rate  Buyer
RE
Rate Method Dividends  date of transactions
I/S  average rate

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

The primary economic environment is normally the one in which the entity primarily generates and expends the cash.
The following factors can be considered:

 What currency does mainly influence sales prices for goods and services?
 In what currency are the labor, material and other costs denominated and settled?
 In what currency are funds from financing activities generated (loans, issued equity instruments)?

An entity can decide to present its financial statements in a currency different from its functional currency
– for example, when preparing consolidation reporting package for its parent in a foreign country.

How to translate financial statements into a Presentation Currency?

 When an entity presents its financial in the presentation currency different from its functional currency, then the
rules depend on whether the entity operates in a non-hyperinflationary economy or not.

 Non-hyperinflationary economy
o When an entity’s functional currency is NOT the currency of a hyperinflationary economy, then an entity
should translate:
 Assets / Liabilities  closing rate; the same applies to goodwill & FV adjustments
 Income, Expenses, OCI  date of transactions
 PAS 21 permits using some period average rates for the practical reasons, but if the
exchange rates fluctuate a lot during the reporting period, then the use of averages is not
appropriate.

 All resulting exchange differences shall be recognized in other comprehensive income as a

separate component of equity.

 When an entity disposes the foreign operation, then the cumulative amount of exchange
differences relating to that foreign operation shall be reclassified from equity to profit or loss when
the gain or loss on disposal is recognized.

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

DERIVATIVES Stock price  PLDT shares @ ₱1k/ share
 Price Risk
 A financial instrument that derives its value from an underlying  Ex.
Interest Rate  BDO @ 10% Fixed Rate
 FVPL (Derivative Asset / Liabilities)  Interest Rate Risk
 Used for hedging (risk management)
Exchange Rate  import/export
1. Hedging Instrument / Derivatives  Forex Risk
 Hedge Accounting (IFRS 9)
2. Hedged Items Commodity Price  crude oil, fuel
 Price Risks
Jan. 1 ₱20/liter (fixed)

Agreement w/ a Buy @ ₱20

counterparty (banks)

Basic Types of Derivatives / Hedge Instrument

1. Forwards  over the counter (private) Obligation to buy/sell at a fixed price in the future
2. Futures  traded in futures exchange (public)
Call  option to buy
3. Options  right Pay option premium
Put  option to sell
S>X in the money ✔
Call  Intrinsic Value = Spot Price (S) – Exercise/Fixed/Strike Price (X) S=X at the money 
S<X out of the money ✖
S<X in the money ✔
Put  IV = X - S S=X at the money 
S>X out of the money ✖

Fair Value = Intrinsic Value - Time Value Table:

1/1 6/30 12/31
Notional amount / Depends on the spot price Balancing figure IV Ø xx xx
Principal (effective portion) Always decreasing TV xx xx Ø
(ineffective portion) FV xx xx xx

4. Swaps Fixed to floating (variable)

To hedge  you expect that the rate
 Interest rate swap (IRS)
interest rate will decrease
 Plain vanilla swap
risk of loan
 Series of forward contracts Floating to fixed
 you expect that the rate
will increase

Hedged Items
FV Hedge (Fixed CF) CF Hedge (Variable)
₱100/unit
Jan. 1 Dec. 31
1. Firm Commitment ✔
(Purchase Commitment) ₱50

Jan. 1 Dec. 31
2. Highly Probable ✔
Future Transaction (no commitment) ₱150
₱100

3. Fixed Interest Rate 10% Fixed Rate ✔

4. Floating Interest Rate Market in PDEX + 3% ✔

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

Hedge Accounting
Effective (IV)  OCI
FV Hedge CF Hedge
Ineffective (TV)  P/L
1. Hedged Instrument MTM  P&L (Gain) MTM  OCI

2. Hedged Item MTM  P&L (Loss) Normal Accounting

 Inventory  IAS 2 LCNRV
 PPE  IAS 16

3. Hedge of a net investment in a foreign operation (same as CF Hedge)

Loan
JFC JFC
(PH) Int Exp (HK)
 parent (HKD)  subsidiary

Objective: To minimize the fluctuations in P/L (I/S)

Instrument

Item

Financial risks are of four (4) types:

 Price risk – uncertainty in future price of an asset.

 Credit risk – uncertainty over whether a counterparty or the party on the other side of the contract will honor the
terms of the contract.

 Interest rate risk – uncertainty about future interest rates and their impact on cash flows and the fair value of the
financial instruments.

 Foreign exchange risk – uncertainty about future Philippine peso cash flows stemming from assets and liabilities
denominated in foreign currency.

Characteristics of a Derivative

 Its value changes in response to the change in an “underlying” variable.

 An underlying is a specified interest rate, commodity price, foreign exchange rate, index of prices or rates
and other variables.
 An underlying may be a price or rate of an asset or a liability but not the asset or liability itself.
 A derivative has a speculative amount of currency, number of shares, or number of units or volume.

 It requires either no initial net investment or a little initial net investment that would be required for other types of
contracts that have similar response to changes in market conditions.

 It is readily settled at a future date by a net cash payment.

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

BUSINESS COMBINATION (IFRS 3)
Accomplished through: Set of FS

Merger A (Acquirer) + B (Acquiree) = A or B Asset Acquisition 1

✔ ✖  surviving entity  acquires assets FS of A
Types  assume liabilities

Consolidation A (Parent) + B (Subsidiary) = C (new entity) Stock Acquisition 3

 shares FS of A, B, C
A (Parent) B (Sub)  >50% (control)
Separate Separate Conso
+ + WPEEs =
FS FS FS

Acquisition Method:

1. Identify the acquirer

 The entity that obtains control over the acquiree

2. Determine the acquisition date

 The date on which the acquirer obtains control
 Measure FV of assets & liabilities (acquiree)

3. Recognize and measure Goodwill or Gain on Bargain Purchase (GBP)

Formula:

1. Consideration Transferred (CT) (a)

+ Noncontrolling Interest (NCI) (b)
+ Previously Held Interest (PHI) (c)
Total

2. FV of Net Identifiable Assets (FVNIA) (d)

1>2  GW (B/S)
If
1<2  GBP (P/L)

a. Consideration Transferred (CT) EXCLUDES acquisition related cost

Cash  Finder’s Fee
Noncash Assets  Professional fee / due diligence fee
Expense
Equity (shares)  advisory / legal fees
Debt (Bonds)  General Admin Costs
Contingent Consideration  Cost of registering / issuing
 shares  APIC
 bonds  ↑ discount, ↓ premium
80%
b. Parent Subsidiary

Subsidiary 80% Parent (Controlling Interest)

20% Noncontrolling Interest
FV (must not be lower than the proportionate share)
NCI measured at or
Proportionate share in acquiree’s net asset

c. BC achieved in stages
15%
Year 1 P S
40%
Year 2 P S
55%

d. FVNIA
 Asset – Liabilities @ FV
 Not Book Value
 Excludes GW of acquiree

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

 Date of Acquisition (Jan. 1)
Consolidation Subsequent to date of acquisition (Dec. 31)
Intercompany transactions

Working Paper Eliminating Entries (WPPEs)

1. Common Stock xx
APIC xx Old SH
To eliminate the pre-acquisition
Retained Earnings xx
equity of subsidiary
Investment in Subsidiary xx
Noncontrolling Interest xx New

2. Inventory xx
FV > BV (Subsidiary)
Equipment xx To recognize excess of FV over
Notes Payable xx
BV (FVNIA)
Investment in Subsidiary xx
Noncontrolling Interest xx

3. Goodwill xx
Investment in Subsidiary xx
Noncontrolling Interest xx
To recognize Goodwill or
Or Gain on Bargain Purchase

Investment in Subsidiary xx
Gain on Bargain Purchase xx

4. Dividend Income xx
NCI xx To eliminate intercompany dividends
Retained Earnings xx

5. Gain xx
Land xx
Or

Land xx
Loss xx

6. Equipment Gain
Loss Equipment
or
Depreciation Expense Accumulated Depreciation
Accumulated Depreciation Depreciation Expense

7. Ending Inventory: Beginning Inventory:

Sales RE, beg
COGS or COGS
Inventory
 EI x GPR  BI x GPR

Measurement Period NCI or RE

Beg. Bal
 Within 12 months from the acquisition date (1/1/21 – 12/31/21) Dividends Net Income
 Provisional amounts
 Changes in FV is allowed; can affect computation of GW or GBP End Bal

At cost
Investment in Subsidiary IFRS 9 (FVPL, FVOCI)
Equity Method

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

Intercompany Transactions

 must be eliminated
Parent
Parent 100%
Downstream (P  S) D
NCI 0% U
Types
Upstream (S  P) Parent 80% Parent 80%
NCI 20% Subsidiary
NCI 20%

1. Sale of Non-Depreciable Assets (ex. Land)

Parent Subsidiary WPPE

Cash 100 Land 100 Gain

Land 80 Cash 100 Land
Gain 20

2. Sale of Depreciable Assets (ex. Equipment)

Parent Subsidiary WPPE
Cash 80 Equipment 80 Equipment
Loss 20 Cash 80 Loss
Equipment 100
Depreciation Expense Depreciation
Accumulated Depreciation Acc Depreciation

3. Sale of Inventory
Parent Subsidiary WPPE BI
Cash Inventory Sales RE, beg
Sales Cash COGS COGS
Inventory
COGS
Inventory

Control as the basis for consolidation (PFRS 10)

o The basic rule is:

 If an investor controls its investee, then investor must consolidate.
 If an investor does NOT control its investee, then investor does NOT consolidate.

o What is control?
 An investor controls an investee when the investor:
 Is exposed to, or has right to variable returns from its involvement with the investee.
 Has the ability to affect those returns.
 Through its power over the investee.
SMEs:

1. GW is amortized not exceeding 10 years

2. NCI is always measured at proportionate share
3. Acquisition related cost are included in the cost
4. FV of Consideration given vs Acquiree’s Interest in Net Asset
+ Acquisition related cost
= GW or Gain on Bargain Purchase
(Purchase Method)

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

Formulas Mostly Used in PFRS 3 & 10

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

JOINT ARRANGEMENT
 PFRS 11
 contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant
activities require the unanimous consent of the parties sharing control.
Objective: to establish principles for financial reporting by entities that have an interest in arrangements that are
controlled jointly.
To meet this objective, PFRS 11:

 Defines joint control;

 Requires determining the type of joint arrangement; and
 Account for the interest in a joint arrangement based on the type.

Example : Ayala Land Inc. (ALI)

 forming partnerships w/ landowners

ALI  expertise
Joint Arrangement
Land owners (ABC)  Land

Structure #1 (JV) Structure #2 (JO)

Dividend ALI ABC ALI ABC

A&L A&L
50% 50% cash, Land,
share share materials, mortgage
labor
Net Income XYZ Corp.
 Separate entity / vehicle Condo
 Separate purpose vehicle JEs:
Condo 1. Cash – JO 10M Land-JO 30M
Equip – JO 20M Land 30M
Cash 10M
Equip 20M
Elements of Joint Control:
2. LP 5M MP 7M
1. Contractual arrangement  written contract LP – JO 5M MP-JO 7M
2. Sharing of control  no single party can decide
3. Unanimous consent  all parties must agree 3. Cash 2M Cash 2M
before making a decision Rev – JO 2M Rev – JO 2M

4. Exp – JO 1M Exp – JO 1M
Cash 1M Cash 1M
Right to net asset
Joint Venture (JV)
Equity Method
Types
Right to assets & liabilities
Joint Operation (JO)
Proportionate share in assets, liabilities, revenues, expense

JV JO

Separate Vehicle ✔ ✔
Structure (if silent) ✔ ✖
w/o Separate Vehicle ✖ ✔

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

Accounting for SMEs

 Jointly controlled operations

 The venturer should recognize assets that it controls and liabilities it incurs as well as its share of income
earned and expenses that are incurred.

 Jointly controlled assets

 The venture should recognize its share of the assets and liabilities it incurs as well as income it earns and
expenses that are incurred.

 Jointly controlled entities

There is an option for the venture to use:

 Fair value model

 Cost model
 Equity method

FVPL Cost Method Equity Method

Initial Measurement Fair Value Historical Cost Historical Cost or FVNIA, higher
Transaction Cost Expensed Capitalizable Capitalizable
Subsequent Measurement Fair Value Cost – Impairment Book Value – Impairment
Gain or Loss on changes in
Yes, in P/L None None
fair value
Dividend Income from None (Deduction from investment
Yes Yes
Investee account)
Share in Net Income (Loss),
None None Yes
OCI of Investee
Impairment Loss None Yes, if BV > RA Yes, if BV > RA

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

NON-PROFIT ORGANIZATION (NPOs)
 Do not include governmental units
 They operate for purposes other than profits
 Ex. PH Red Cross, UNICEF, GK
 Funds  contributions or donations from the public
 No shareholders  no dividends
 FASB 116 & 117 + Applicable IFRS
 US GAAP  PPE (IAS 16)

Financial Statements

Assets  same accounting treatment

Donations / Contributions
1. SFP (B/S) Liabilities  same accounting treatment
Unrestricted Net Assets (URNA) No restriction  available
for immediate use
Net Assets
Temporarily Restricted Net Assets (TRNA) Time  1 year after
Purpose  Medical Mission
Permanently Restricted Net Assets (PRNA)  Cannot spend the principal

2. Statement of Activities
 I/S & Changes in Equity

URNA TRNA PRNA TOTAL

Revenues 40,000 30,000 10,000 80,000
Expenses (30,000) (30,000)
Reclassification 20,000 (20,000)
∆’s in Net Assets 30,000 10,000 10,000 50,000
Net Assets, beg 10,000 10,000 10,000 30,000
Net Assets, end 40,000 20,000 20,000 80,000

JEs:
1. Cash 3. Cash 5. TRNA 20,000
40,000 10,000
URCR PRCR URNA

URCR PRCR Unrestricted Contributions Revenue

40,000 10,000
URNA PRNA (URCR)

2. Cash 4. Expense Temporarily Restricted Contributions

30,000 30,000 Revenue (TRCR)
TRCR Cash

TRCR URNA Permanently Restricted Contributions

30,000 30,000 Revenue (PRCR)
TRNA Expense

Operating  unrestricted donations

3. Statement of Cashflows Investing  purchase & sale of PPE

Financing  restricted donations (whether temporary / permanent)

4. Notes to FS

FASB 116 & 117 Provisions

1. Healthcare organizations – Hospitals & Clinics

Gross patients service revenues
Less: Contractual Adjustments (Philhealth)
Less: Employee Discounts
Net patients service revenue

Charity Care  disclosed in FS

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

 2. Private non-profit colleges & universities
Gross Tuition Fees
Less: Scholarship Grants
Less: Refunds & cancellations / withdrawals
Net Revenue from tuition fees

3. Voluntary Health & Welfare Organizations

(ex. UNICEF) Program  medical missions; related to missions
 prepare Statement of Functional Expenses
Support  before program (fund raising)
 admin expenses; everyday expenses

Endowment Funds
1. Regular  spend only interest & dividends  Permanently Restricted
2. Term  can use a portion each period  Temporarily Restricted
3. Quasi  BOD / BOT  Unrestricted

Unconditional w/o restriction  UR

w/ restriction  TR
Pledge (Promise)
Conditional  Liability

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

GOVERNMENT ACCOUNTING
Objective: to provide information that is useful in making economic decisions

Sources & uses of government funds (ex. National Budget 2022 5 trillion)
Emphasis
Accountability of Government Agencies (GA)

Sources (Inflows) Uses (Outflows)  Programs / Projects

DepEd & CHED
1. Taxes
2. Tariffs & Duties 5 trillion DPWH
3. Fees & Licenses DILG
4. Borrowings DOTr, DSWD, DOH, DENR, DOLE

Involved Government Agencies

1. Commission on Audit (COA)  audits government agencies

 promulgates accounting & auditing rules & regulations
 submits annual reports to the President & Congress
 keeps the general accounts
 Recording

2. Department of Budget and Management  formulation & implementation of the National Budget
 Authentication

3. Bureau of Treasury  cash custodian

 under the Department of Finance
 Custody

4. Government Agencies  Execution

Departments  cabinet members

NGAs Offices  President, V. President
Others  CHED, MMDA
GAs Accounting
LGUs  provinces, cities, municipalities, barangay
Departments
GOCCs  functions related to the public needs
 LBP, Lung Center of the Phil., Heart Center, PDIC,
PCSO, NFA, PNR

Government Accounting Manual (GAM) for NGAs

 Accounting standards for Government Accounting

 Based on IPSAS (International Public Sector Accounting Standards)
 Philippines  PPSAS

Budget Cycle

Preparation
Legislation
Stages
Execution
Accountability

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

Stages

1. Budget Preparation
a. Budget Call
 DBM issues budget call to government agencies
 Government agencies prepare budget proposal

b. Budget Hearing
 Government agencies defend / justify before DBM
 DBM  deliberate, recommend, consolidate
 Submits proposal to the President

c. Presentation to the Office of the Philippines

 President & Cabinet Members review
 President’s Budget

2. Legislations
a. House Deliberation:
Upper House  Senate
Congress
Lower House  House of Representatives
 conducts hearings
 prepares the General Appropriation Bill (GAB)
 House Version

b. Senate Deliberation
 Conduct hearings
 Senate Versions

c. Bicameral Deliberation
 Bicameral conference committee
 Final Version  President

d. President’s Enactment
 GAB  General Appropriations Act (GAA)

3. Budget Execution
a. DBM releases guidelines to government agencies
 Government agencies submits Budget Execution Documents (BEDs)
 details, plans, timeline, costing
b. Allotment
 DBM formulates the Allotment Release Program (ARP)
 Sets the limit (control)

c. Incurrence of Obligations  hire, contracts, order

d. Disbursement  actual payment

 DBM issues Notice of Cash Allocation (NCA)
 Modified Disbursement Systems (MDS) checks  BTr

4. Budget Accountability
a. Budget Accountability Reports
 Government agencies submits monthly & quarterly reports

b. Performance reviews
 DBM & COA
 Budget vs Actual

c. Audit  COA
 Audit reports  President & Congress

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

Accounting / Recording Process

1. Journals  General Journal, Cash Receipts Journal, Cash Disbursement Journal, Check
Disbursement Journal
Recording
2. Ledgers  General Ledger, Subsidiary Ledger

3. Registries  monitoring purposes (logbook)

a. Registry of Revenue & Other Receipts (RROR) PS
b. Registry of Appropriation & Allotment (RAPAL) MOOE
c. Registry of Allotments Obligations & Disbursements (RAOD)) FE
d. Registry of Budget, Utilization & Disbursements (RBUD) CO

 Personnel Services (PS)

 Maintenance & Other Operating Expenses (MOOE)
 Financial Expenses (FE)
 Capital Outlays (CO)

Chart of Accounts (GAM)

1. Cash - Collecting Officer (CO)  Collections

2. Cash in Bank – Local Currency (LC)  Deposited to bank
3. Cash – Treasury/Agency Deposit, Regular (T/A)  Deposited to BTr (authorized agent banks)
4. Cash – MDS, Regular  Notice of Cash Allocations
5. Cash – Tax Remittance Advice (TRA)  Withholding of Taxes

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM
IFRS 15: REVENUE FROM CONTRACTS WITH CUSTOMERS
 Replaced IAS 18: Revenues, IAS 11: Contracts, SIC 31, IFRIC 13, 15, 18

5-Step Model Framework

Step 1: Identify the contract with the customer.

Step 2: Identify the performance obligations (PO) in the contract
Step 3: Determine the transaction price (TP)
Step 4: Allocate the TP to the PO  using stand-alone selling price
Step 5: Recognize revenue as the PO are fulfilled Over time
At a point in time (100%)
 offer bundle of products & services
 ex. Telecom

Ex. Globe Postpaid Plan Step 1: Postpaid Plan

iPhone 13 Step 2: Deliver iPhone 13
Data, unli calls & text Data, unli calls & text
₱2,500 / month Step 3: ₱2,500 x 24 = ₱60,000
24 months Step 4: PO Stand-Alone Allocation
iPhone 13 50,000 (50/74) 40,540 At a point in time
Data 24,000 (24/74) 19,460 Over time
Ex. IAS 18 74,000 60,000
Jan. 1 AR xx
Revenues xx Step 5: Jan. 31 40,540 + (19,460 ÷ 24) = 41,351

AR 41,351
Revenue 41,351

LONG-TERM CONSTRUCTION CONTRACTS (LTCC)

 Construction Period: more than 1 year

 POV: Contractor DC Builders Mr. X (Client)
(Contractor)  5-storey condo

1. Construction Contract  2 years

CP 100M
 ₱100M
Construct the condo building in 2 years Const. Cost (80M)
2. PO GP 20M Books
Design, construction, finishing
Building xx
3. TP  ₱100M (Contract Price) Cash xx
Directly attributable to the project
4. Allocate
2 years IAS 16  DM, DL, OH Dep’n Exp xx
5. Recognize
 chargeable & reimbursable Acc Dep’n xx

Cost incurred  cost to cost method

Input Measures Labor Hours
w/ reliable estimate  % of Completion Methods (POC) Machine Hours
(over time)
Methods Output Measures
w/o reliable estimate  Zero Profit Method (ZPM)
Estimates / Surveys
or Cost Recovery Method (CRM)
Milestones
(at a point in time)

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

FRANCHISE

 Under licensing topics

 POV: Franchisor

Franchise (License – IP) 10 years

Jollibee Mr. X
(Franchisor Cash (Franchise Fee) (Franchisee) ₱30M

1. Franchise Contract
Initial services (location, crew training, construction store)
2. PO Deliver equipment, inventory, supplies
Tradename
IFF ₱30M
3. TP
CFF Royalty  % of Sales
4. Allocate Overtime
5. Recognize At a point in time

 If license is distinct  separate performance obligation

Right to access  over time (Ex. Microsoft 365)

License  IP changes through the license period

Right to use  at a point in time

 IP does not change throughout the license period

CONSIGNMENT

Jan. 1 Jan. 31
Products Products
P&G 7-Eleven Customers
₱100 ₱120
(consignor) (consignee)
Jan. 31
Remittance Commission Cash
Mark-up

Consignor Consignee (no inventory & sales)

1. Shipment of Consigned Goods Inventory on Consignment Memo Entry

Inventory

2. Payment of expenses by consignor Inventory on Consignment No Entry

(Freight, Insurance) Cash

3. Payment of reimbursable expenses Inventory on Consignment Consignment Receivable

by consignee Consignment Payable Cash

4. Sale of inventory by the consignee No Entry Cash

Consignment Payable

5. Notification of sale to consignor & Consignment Payable Consignment Payable

remittance Commission Expense Cash
Cash Consignment Receivable
Consignment Revenue Commission Income

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

Formulas:

Percentage of Completion (Over time)

20x1 20x2 20x3

Total Cost xx xx xx  Cost incurred + Cost to Complete
POC xx xx xx  Cost incurred ÷ Total Cost
Billings xx xx xx
Collections xx xx xx

Sir Brad’s Magic Table

20x1 20x2 YTD 20x3 YTD 20x1 20x2 20x3

Revenue xx xx xx xx xx Contract Price xx xx xx
Cost (xx) (xx) (xx) (xx) (xx) Total Cost (xx) (xx) (xx)
Gross Profit xx xx (xx) xx (xx) Gross Profit xx (xx) xx

Difference  Provision for loss

Journal Entries:

1. Contract Costs xx
Actual cost incurred
Cash xx

2. Contract Asset xx
To recognize revenue
Contract Revenue xx

3. Cost of Construction xx
Contract Cost xx To recognize COGS

4. Loss on Construction Contract xx  Est. Loss on CC xx

Est. Loss on CC xx Gain on Reversal xx

Billings: Collections:

Receivables xx Cash xx
Contract Liability xx Receivables xx

Zero Profit Method (At a point in time)

20x1 20x2 YTD 20x3 YTD

Revenue xx xx xx xx xx
Cost (xx) (xx) (xx) (xx) (xx)
Gross Profit Ø Ø Ø xx xx  reflect the profit

20x1 20x2 20x3

Contract Price xx xx xx
Total Cost (xx) (xx) (xx)
Gross Profit xx (xx) xx

If w/ loss, recognize / record immediately.

Loss on CC xx
Est. Loss on CC xx

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

INSTALLMENT SALES

Cash 0 1 2 3 4 5
Types Credit Toyota Fortuner
Installment ✔✔✔ ✔✔
 risk of uncollectibility
 Installment method
 revenue is recognized in proportion to
Journal Entries: cash collections
Date of Sale

1. Installment AR xx
Sales xx

COGS xx
Inventory xx

Dec. 31
2. Sales xx
COGS xx
Deferred Gross Profit xx  contra-installment AR

Date of Collection
3. Cash xx
Installment AR xx Sales
- COGS
Deferred Gross Profit xx GP ÷ Sales = GPR
Cash collection x GP Rate
Realized Gross Profit xx
DGP ÷ IAR = GPR

Two Issues:
0 1 2 3 4 5
1. Repossession
✔✔ ✖
Toyota (seller): Resale Value (SP)
NRV / FMV ✔
Repossessed Inventory (@NRV) xx - Reconstruction Cost (Repair)
Deferred Gross Profit xx Resale Value
- Gross Profit Margin
Loss xx Net Realizable Value (NRV)
Installment AR xx

2. Trade-In SP (new car) – Trade In (old car)

Old car + Cash
Mr. X Toyota
New car

Toyota (Seller)
Scene 1: GPR 33%
SP 2M Cash 400k
600k; 30%
Cost 1.4M Inventory 600k
Trade-In 500k Inst. AR 1.1M [(2M x 80%) – 500k]
DP 20% Sales 2.1M  (2M + (600k – 500k))

Scene 1: FMV 600K COGS 1.4M

Scene 2: FMV 400K Inventory 1.4M

Scene 2: GPR 26%

Cash 400k Trade-In < FMV  Under allowance
Inventory 400k
Inst. AR 1.1M Trade-In > FMV  Over allowance
Sales 1.9M  (2M – (400k – 500k)

COGS 1.4M
Inventory 1.4M

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM