Solution Chapter 11

Chapter 11 Problem I 1. • Contributions of cash by the operators Cash KK Company Cerise Company Contribution by joint operators.

360,000 180,000 180,000

• Use of cash and loan to buy machinery & equipment and raw materials Machinery and equipment 96,000 Cash Loans payable – machinery and equipment Contribution by joint operators. Materials Accounts payable Acquisition of materials. • Labor incurrence Payroll Cash Accrued payroll Annual labor. • Loans from the bank Cash Bank loans payable Amount borrowed.

60,000 36,000

78,000 78,000

86,400 84,000 2,400

72,000 72,000

• Repayment of loan – machinery and equipment and other factory expenses Loan payable – machinery and equipment 12,000 Cash Partial payment of loan. Accounts payable Cash Payment of trade creditors. Factory overhead control – heat, light and power Cash Payment of manufacturing expenses such as heat, light and power. • Depreciation of machinery and equipment Factory overhead control – depreciation Accumulated depreciation Depreciation of equipment. • Transfer of materials, labor and overhead to Work-in-Process

12,000

50,400 50,400

156,000 156,000

9,600 9,600

Work-in-process Payroll Materials Factory overhead control – heat, light and power Factory overhead control – depreciation Allocation of costs to work-in-process • Transfer of Work-in-Process to Finished Goods Inventory. Finished goods Work-in-process Allocation to finished goods

309,600 86,400 57,600 156,000 9,600

216,000 216,000

• Transfer of Finished Goods Inventory to Joint Operators throughout the year KK Company 96,000 DD Company 96,000 Finished goods Delivery of output to joint operators.

192,000

2. Cash Contribution – Drei Contribution – Cerise Bank loan Balance, 12/31/x4

180,000 180,000 60,000

60,000 84,000 12,000 50,400 156,000

Machinery and equipment Labor Machinery and equipment Accounts payable Factory overhead control

57,600

Work-in-Process Labor 86,400 Materials 57,600 Factory Overhead – heat, etc. 156,000 Factory Overhead – depreciation 9,600 Balance, 12/31/x4 93,600

216,000

to Finished Goods

3. a. Total assets, P282,000 b. KK’s investment, P84,000 c. DD’s investment, P84,000 December 31, 20x4 Assets Current Assets Cash Finished goods inventory Work-in-Process inventory Materials inventory Total current assets Non-current Assets Equipment Less: Accumulated depreciation Total Assets

P 57,600 24,000 93,600 20,400 P 195,600 P 96,000 9,600

86,400 P282,000

Liabilities and Net Assets Current Liabilities Accrued payroll Accounts payable Non-current Liabilities Bank loan payable Loan payable – machinery and equipment Total Liabilities Net Assets Total Liabilities and Net Assets Joint Operator’s Equity KK Company: Contributions – January 1, 20x4 Cost of inventory distributed DD Company: Contributions – January 1, 20x4 Cost of inventory distributed Total Joint Operator’s Equity

P

2,400 27,600

P 60,000 24,000

P 180,000 ( 96,000) P 180,000 ( 96,000)

P 30,000 __84,000 P 114,000 168,000 P282,000

P 84,000 P 84,000 P168,000

Problem II 1. Ayala Corp. shall account for its interest in the joint operation as follows: Current assets (50% x P720,000) Property, plant and equipment (60% x P1,200,000) Expenses (60% x 720,000) Liabilities (75% x P960,000) Revenue (55% x P1,200,000) Interests in Joint Operation To recognize the share of Entity A in the assets, liabilities, revenues and expenses as follows:

360,000 720,000 432,000 720,000 660,000 132,000

2. The assets, liabilities, revenue and expenses are recognized and combined with those of Ayala’s own financial statements. The interest in joint operations at the end of the reporting period is reduced to P228,000, computed as follows: Interests in Joint Operation Less: Share in assets, liabilities, revenues and expenses Interest in operation, ending balance

P 360,000 132,000 P 228,000

Problem III 1. The joint operator, Entity A account for their interests in the joint operation as follows: Entity X—in 20x4 Profit or loss (construction costs) Cash/Accumulated depreciation/Trade payables To recognize the construction costs incurred in 20x4

4,800,000

Cash Profit or loss (construction revenue) To recognize the construction costs incurred in 20x4

8,400,000

4,800,000

8,400,000

Entity Y—in 20x4 Profit or loss (construction costs) Cash/Accumulated depreciation/Trade payables To recognize the construction costs incurred in 20x4

7,200,000

Cash Profit or loss (construction revenue) To recognize the construction costs incurred in 20x4

8,400,000

7,200,000

8,400,000

Problem IV The joint operator, Entity K account for their interests in the joint operation as follows: January 1, 20x4 (P12,000,000 / 5 = P2,400,000) Property, plant and equipment (interest in an aircraft) Cash To recognize the purchase of an ownership-interest in a jointly controlled aircraft.

2,400,000 2,400,000

In 20x4 Cash Profit or loss (rental income) To recognize income earned in renting to others the use of the aircraft in 20x4.

12,000 12,000

Profit or loss (aircraft operating expenses) Cash To recognize the costs of running an aircraft in 20x4.

180,000

Profit or loss (depreciation expense) Accumulated depreciation (interest in an aircraft To recognize depreciation of an ownership-interest in a jointly controlled aircraft in 20x4: P12,000,000/20 years = P600,000/5 operators = P120,000 share for each joint operator.

120,000

180,000

120,000

Problem V 1. The following are the summaries of the above transactions for a joint operation in the form of a partnership: Event a. b. c. d. e. f. *

Investment in Joint Operation Dr. Cr. P 12,000 120,000 6,000 180,000 P588,000 ________ P318,000

6,000 ___3,000 P597,000

AA Dr.

BB Cr. P12,000 120,000

Dr.

CC Cr.

Dr.

Cr. P 6,000

120,000 P204,000 3,600 ___3,000 P210,600

P60,000 P312,000 3,600

________ P252,000

________ P315,600

______ P 60,000

P72,000 3,600 6,000 _______ P81,600

10,800 _______ P 16,800

NI** Cash*** Settlement Totals

_297,000 P597,000

________ P597,000

________ P210,600

__112,200 P364,200

________ P315,600

_147,000 P195,000

_______ P81,600

31,800 P48,600

_______ P597,000

________ P597,000

_153,600 P364,200

________ P364,200

________ P315,600

_120,600 P315,600

_______ P81,600

_33,000 P81,600

* purchases, P300,000; cost of goods sold, P294,000; ending inventory P6,000 x 50% = P3,000. **NI – Net Income Allocation AA Allowance for cleaning-up operations Commission: Aljon: 40% of P204,000 Elerie: 40% of P312,000 Mac: 40% of P72,000 Balance (75%: 25%)

BB

CC P 3,000

P

P81,600

81,600 124,800 28,800 40,800

P124,800 30,600

10,200

Total 3,000

28,800 _______

Total P112,200 P135,000 P31,800 **Total credits of P597,000 – Total debits of P318,000 = P279,000, net income.

P279,000

2. The cash settlement entry (refer to No. 1 for the computation of settlement) would be as follows: AA, capital 153,600 BB, capital 120,600 CC, capital 33,000 Therefore, BB will pay P120,600 and CC will pay, P33,000 to AA as final settlement for the joint operations. Problem VI Schedule of Determination and Allocation of Excess Date of Acquisition – January 1, 20x4 Cost of investment Consideration transferred Less: Book value of stockholders’ equity of Son: Common stock (P3,600,000 x 30%) Retained earnings (P1,080,000 x 30%) Allocated excess (excess of cost over book value) Less: Over/under valuation of assets and liabilities: Increase in inventory (P240,000 x 30%) Increase in land (P960,000 x 30%) Increase in building (P600,000 x 30%) Decrease in equipment (P840,000 x 30%) Increase in bonds payable (P120,000 x 30%)

P2,016,000 P 1,080,000 324,000 P 72,000 288,000 180,000 ( 252,000) ( 360,000)

1,404,000 612,000

P

Positive excess: Goodwill (excess of cost over fair value) The over/under valuation of assets and liabilities are summarized as follows: Anton Co. Anton Co. Book value Fair value Inventories (sold in 20x4) P1,200,000 P1,440,000 Land 1,080,000 2,040,000 Buildings – net ( 10 year remaining life) 1,800,000 2,400,000

252,000 P 360,000 (Over) Under Valuation P 240,000 960,000 600,000

Equipment – net ( 7 year remaining life) Bonds payable (due January 1, 20x9) Net

1,440,000 ( 1,200,000) P4,320,000

600,000 (1,320,000) P5,160,000

A summary or depreciation and amortization adjustments is as follows: Over/ 30% Account Adjustments to be amortized Under thereof Inventories (sold in 20x4) P 240,000 P 72,000 Land 960,000 288,000 Buildings – net ( 10 year remaining life) 600,000 180,000 Equipment – net ( 7 year remaining life) ( 840,000) ( 252,000) Bonds payable (due January 1, 20x9) ( 120,000) ( 36,000) Net P 840,000 P 252,000

Life 1 10 7 5

( 840,000) ( 120,000) P 840,000 Current Year(20x4) P 72,000 18,000 (36,000) ( 7,200) P 46,800

The following are entries recorded by the parent in 20x4 in relation to its investment in joint venture: January 1, 20x4: (1) Investment in DD Company 2,016,000 Cash 2,016,000 Acquired 30% joint control in DD Company. January 1, 20x4 – December 31, 20x4: (2) Cash Investment in DD Company (P720,000 x 30%) Record dividends from DD Company.

216,000 216,000

December 31, 20x4: (3) Investment in DD Company Investment income (P1,440,000 x 30%) Record share in net income of DD Company.

432,000 432,000

December 31, 20x4: (4) Investment income Investment in DD Company……………………. Record amortization of allocated excess of inventory, equipment, buildings and bonds payable.

46,800 46,800

Thus, the investment balance and investment income in the books of TT Company is as follows: Investment in Joint Venture (DD Company) Cost, 1/1/x4 2,016,000 216,000 NI of Anton 46,800 (1,440,000 x 30%) 432,000 Balance, 12/31/x4 2,185,200 Investment Income Amortization

46,800 432,000 385,200

Dividends – Son (720,000x 80%) Amortization

NI of Son (P1,440,000 x 30%) Balance, 12/31/x4

To check the balance of Investment in Joint Venture (DD Company):

DD Company’s Stockholders’ Equity, 12/31/20x4: Common stock Retained earnings Retained earnings,1/1/20x4 Net income – 20x4 Dividends – 20x4 Book value of stockholders’ equity of DD Company,12/31/20x4 Multiplied by: Interest in Joint Venture Book value of Interest in Joint Venture Add: Unamortized allocated excess – 30% thereof P252,000 – P46,800, amortization) Goodwill Investment in Joint Venture (DD Company) – equity method Multiple Choice Problems 1. a Books of X Inv. in JO 4,000 6,500 2,500 Books of Y Inv. in JO 2,500 4,000

6,500

Books of Z Inv. in JO 2,500 4,000

X, capital 2,500

P3,600,000 P 1,080,000 1,440,000 ( 720,000)

1,800,000 P5,400,000 30% P1,620,000 205,200 360,000 P2,185,200

Journal entry for settlement should be: Z, capital……………………….. 6,500 X, capital…………………… 2,500 Y, capital…………………… 4,000

Y. capital 4,000

Z, capital 6,500

6,500 2. Total credits - Investment in Joint Operations…………………………………P 25,810 Total debits - Investment in Joint Operations…………………………………. 19,750 Net income or total gain (credit balance)…………………………………….P 6,060 3. d Jose, capital 8,500 investment 1,212 share in net income (P6,060 x 2/10) 9,712 4. a – The 20,000 shares should be valued at market value, thus, P800,000 (20,000 shares x P40 per share)

5. b Jose, capital P800,000 P 198,000 (4,500 x P44) – Sales 3,000 125,000 (5,000 x P25) 4,700 13,600* (13,600 x P1) - Cash dividend 168,000 (6,000 x P28) - Sales 266,000 (7,600 x P35) P807,700 P 770,600 P 37,100

20,000 shares at P40/share Expenses

Joint operation loss *

9/30 Shares issued (6,000 + 10,000 + 4,000) 10/20 Sold 11/ 1 Stock dividend (20,000 – 4,500) x 20% 11/15 Sold Balance of shares outstanding before cash dividend

20,000 (4,500) 3,100 (5,000) 13,600

Therefore, Roxas share would be P11,130 (P37,100 x 6,000/20,000 shares) 6. c Share in net loss P37,100 x (10,000/20,000)

Investment in Joint Operations P400,000 Investment (10,000 shares x P40) P18,550 P381,450

7. b Unrealized loss due to decline in the value of shares at the time of investment (P62 – P40) x 4,000 shares Share in joint operation (P37,100 x 4/20) Reduction of loss by cash dividend (P13,600 x 4/20)

P68,000 __7,420 P98,140

8. a before net income or loss

Investment in Joint Operations 15,000 25,000 ending inventory 10,000 net income

9. a (A- P10,000 x 50% = P5,000; B – P10,000 x 30% = P3,000; C – P10,000 x 20%) 10. a Purchases Contr/Invest Expenses

Joint Operations 20,000 77,000 Sales (?) 20,000 800 1,800 42,600

Anson, Capital Unsold merchandise 600 20,000 18,600 Profit(50%)

77,000 34,400 (P16,000+ P18,400) 2,800 (P600 + P2,200) Unsold merchandise 37,200 Net profit

600

38,600 38,000 to Alas

11. c – refer to No. 10 computation. 12. a Purchases Freight-in Freight-out

Investment in Joint Operations 10,000 7,200 sales 240 5,120 unsold 260 (P10,000 + P240) x 1/2 10,500 12,320 1,820

Santo, capital 10,000 Contribution/Invest 910 Share in NI 10,910

13. a – refer to No. 12 for computation 14. c Investment in Joint Operations 6,500 3,500 Sales 3,000

before sale Net loss N, capital 1,100 14,500 13,400

O, capital 1,100 6,500 5,400

Distribution of Loss: M 300 (1,100) P ( 900)

Salary Balance, equally

P

N P

(1,100) P(1,100)

O

Total 300 (3,300) P(3,000)

P

(1,100) P(1,100)

P

15. a – refer to No. 14 for computation 16. a

Purchases Interest expense

Investment in Joint Operations 45,000 48,700 Sales 18,000 16,800 80 40 Dividend 50 100 63,130 65,640 2,510 2,510 Net income

McKee, capital 48,700 45,000 40 80 1,225 share in NI 2,405

17. a – refer to No 16 for computation Nelson, capital McKee

Nelson, capital 16,800 18,000 100 50 1,225 share in NI 2,405

2,405 2,405

18. b Investment in Joint Operations 950 800 sales 150 600 1,100 1,400 300 Net income

Purchases Expenses

Bar, capital 800 950 270 800 1,220 420 due to

Due from

Car, capital 600 150 30 600 180 420

The entry for the settlement would be as follows (Car will pay Bar P420): Bar, capital 420 Car, capital 420 Distribution of net income Bar Commission on net purchases: 20% x P950 Commission on sales: 25% x P800 25% x P600 Balance, equally

Car

P190

P190

200 (120) P270

Total

P150 (120) P 30

200 150

(240) P300)

19. b – refer to No. 18 for computations. 20. c Investment in Joint Operations 15,000 before P/L 10,500 unsold merchandise Salary – Reyes 12,000 25,500 net income 13,500

unsold merch.

21. b Revenues Total cash receipts (P78,920 + P65,245) Less: Cash investments (P30,000 + P20,000) Cash sales Add: Proceeds from sale of remaining assets Total Revenue Less: Expenses (P62,275 + P70,695) Net income

Tan, capital 27,000 10,500 4,500 share in NI (1/3 x P13,500) 10,500 31,500 21,000

P144,345 50,000 P 94,345 60,000 P154,345 132,970 P 21,375

22. c Receipts

Benin, capital 78,920 30,000 Contribution 62,275 Disbursement 12,825 Share in NI (3/5) 78,920 105,100 26,180

Receipts

Sucat, capital 65,425 20,000 Contribution 70,695 Disbursement 8,550 Share in NI (2/5) 65,425 99,245 33,820

23. d N’s books: it shows P5,000 receivable from P, and P3,000 payable to O; thus, N should receive net cash of P2,000: O, capital 3,000 Cash 2,000 P, capital 5,000 O’s books: it shows P5,000 receivable from P, and P2,000 payable to N; thus, O should receive net cash of P3,000: N, capital 2,000 Cash 3,000 P, capital 5,000 P’s books: it shows P2,000 payable to N and P3,000 payable to O; thus, in final settlement, P should pay a total of P5,000; P2,000 and P3,000 to N and O, respectively: N, capital 2,000 O, capital 3,000 Cash 5,000 24. The Investment in Basket Co. as of December 31 is as follows: Acquisition cost, January 1, 2013 Add (deduct): Share in net income (P90,000 x 40%] Share in dividends (P30,000 x 40%) Amortization of allocated excess Investment balance on December 31 Cost of investment Less: Book value of interest acquired [40% x (P1,400,000 – P500,000)] Allocated excess Less: Over/undervaluation of assets and liabilities: Increase in building (P140,000 x 40%) Increase in trademark (P210,000 x 40) Amortization of allocated excess: Building: P56,000 / 7 years Trademark: P84,000 / 10 years

P 500,000 36,000 ( 12,000) ( 16,400) P 507,600 P 500,000 360,000 P 140,000 56,000 84,000 P

8,000 8,400

25. b The joint arrangement is a joint venture because it needs unanimous consent to all parties involved. The parties recognize their rights to the net assets of Harrison Company as investments and account for them using the equity method. The Investment in Basket Co. as of December 31 is as follows: Acquisition cost, January 1, 2013 Add (deduct): Share in net income (P90,000 x 40%]

P 500,000 36,000

Share in dividends (P30,000 x 40%) Amortization of allocated excess Investment balance on December 31

( 12,000) ( 16,400) P 507,600

Cost of investment Less: Book value of interest acquired [40% x (P1,400,000 – P500,000)] Allocated excess Less: Over/undervaluation of assets and liabilities: Increase in building (P140,000 x 40%) Increase in trademark (P210,000 x 40)

P 500,000 360,000 P 140,000

Amortization of allocated excess: Building: P56,000 / 7 years Trademark: P84,000 / 10 years Total 26. b – refer to No. 25 for further discussion. The Income from Investment in Basket Co. on December 31 is as follows: Share in net income (P90,000 x 40%] Amortization of allocated excess Income from Investment on December 31

56,000 84,000 P

8,000 8,400 P 16,400

P 36,000 ( 16,400) P 19,600

27. d The joint arrangement is a joint venture because it needs unanimous consent to all parties involved. The parties recognize their rights to the net assets of Harrison Company as investments and account for them using the equity method. The Investment in Goldman Co. as of December 31, 2015 is as follows: Acquisition cost, January 1, 2013 Add (deduct): Share in net income [(P140,000 x 3 years) x 40%] Share in dividends [(P50,000 x 3 years) x 40%] Amortization of allocated excess Investment balance on December 31 Cost of investment Less: Book value of interest acquired (40% x P1,200,000) Allocated excessP 120,000 Less: Over/undervaluation of assets and liabilities Goodwill

P 600,000 168,000 (60,000) ( 0) P 708,000 P 600,000 480,000 0 P 120,000

There is no indication as to impairment of goodwill. 28. d To determine whether a contractual arrangement gives parties control of an arrangement collectively, it is necessary first to identify the relevant activities of that arrangement. That is, what are the activities that significantly affect the returns of the arrangement? When identifying the relevant activities, consideration should be given to the purpose and design of the arrangement. In particular, consideration should be given to the risks to which the joint arrangement was designed to be exposed, the risks the joint arrangement was

designed to pass on to the parties involved with the joint arrangement, and whether the parties are exposed to some or all of those risks. In many cases, directing the strategic operating and financial policies of the arrangement will be the activity that most significantly affects returns. Often, the arrangement requires the parties to agree on both of these policies. However, in some cases, unanimous consent may be required to direct the operating policies, but not the financial policies (or vice versa). In such cases, since the activities are directed by different parties, the parties would need to assess which of those two activities (operating or financing) most significantly affects returns, and whether there is joint control over that activity. This would be the case whenever there is more than one activity that significantly affects returns of the arrangements, and those activities are directed by different parties. Based on the ownership structure, even though Wallace can block any decision, Wallace does not control the arrangement, because Wallace needs Zimmerman to agree — therefore joint control between Wallace and Zimmerman (since their votes and only their votes, together meet the requirement). Because they are the only combination of parties that collectively control the arrangement, it is clear that Wallace and Zimmerman must unanimously agree. The appropriate method for the joint venture is the equity method. Investment in Gold Co. on December 31, 2015 is as follows: Share in net income (P140,000 x 40%) Amortization of allocated excess Income from Investment on December 31, 2015

The Income from P 56,000 ( 0) P 56,000

29. d No joint control — multiple combinations of parties could be used to reach agreement and collectively control the arrangement (i.e., Wallace and Zimmerman or Wallace and American could vote together to meet the requirement). Since there are multiple combinations, and the contractual agreement does not specify which parties must agree, there is no unanimous consent. It should be noted that since there is no joint control as indicated per problem and the presence of 50% ownership holding is presumed to give significant influence of Wallace over Goldman, unless it can be clearly demonstrated that this is not the case. Therefore, Goldman Company is considered as an associate instead of a joint venture. The appropriate method for Investment in Associates is the equity method. The Income from Investment in Gold Co. on December 31, 2015 is as follows: Share in net income (P140,000 x 40%) P 56,000 Amortization of allocated excess ( 0) Income from Investment on December 31, 2015 P 56,000 30. d No joint control – multiple combinations could be used to reach agreement. It should be noted that since there is no joint control as indicated per problem and the presence of 35% ownership holding is presumed to give significant influence of Wallace over Goldman, unless it can be clearly demonstrated that this is not the case. Therefore, Goldman Company is considered as an associate instead of a joint venture.

The appropriate method for Investment in Associates is the equity method. The Income from Investment in Gold Co. on December 31, 2015 is as follows: Share in net income (P140,000 x 40%) P 56,000 Amortization of allocated excess ( 0) Income from Investment on December 31, 2015 P 56,000 31. a – downstream transaction (refer also to consolidation for corollary analysis) Gross Profit Markup: P36,000/P90,000 = 40% Inventory Remaining at Year-End P20,000 x: Markup 40% Unrealized profit in ending inventory P 8,000 x: Ownership 30% Intercompany Unrealized profit in ending inventory P 2,400 Multiple Choice Problems – SME for Joint Ventures 1. a 2. a 3. a 4. a 5. c 6. a 7. a 8. a 9. c 10. a 11. a 12. c 13. a 14. a 15. b 16. c Cost of investment in entity Z: Purchase price…………………………………………………………………….. P 28,000 Add: Transaction costs (1% x P28,000)……………………………………… 280 Costs…………………………………………………………………………………. P 28,280 Less: Fair value on December 31, 20x4……………………................................P 15,000 Less: Costs to sell (5% x P15,000)…………………………………………….. 750 14,250 Impairment loss……………………………………………………………………….. P 14,030

17. d

18. a

No entry required only the decrease or increase in fair value is recognized to profit and loss. Cost of investment in entity Z: Purchase price…………………………………………………………………….. P 28,000 Add: Transaction costs (1% x P28,000)……………………………………… 280 Initial costs………………………………………………………………………….. P 28,280 Less: SME A’s share of entity Z’s loss for the year (25% x P20,000)……...... 5,000 Costs of investment, December 31, 20x4……………………………………. P23,280 Less: Fair value on December 31, 20x4…………………….................................P 15,000 Less: Costs to sell (5% x P15,000)…………………………………………….. 750 14,250 Impairment loss……………………………………………………………………….. P 9,030

19. b

Cost of investment in entity Z………………. ……………………………………………… ..P 28,000 Less: Fair value on December 31, 20x4…………………..................................................... 15,000 Decrease in fair value on December 31, 20x4……………………………………………P 13,000

20. a Entity X:

Cost of investment in entity X………………. …………………………………………… P 10,000 Less: Fair value on December 31, 20x4…………………............................................... 13,000 Increase in fair value on December 31, 20x4………………………………………… P 13,000

Entity Y:

Cost of investment in entity Y………………. …………………………………………… P 15,000 Less: Fair value on December 31, 20x4…………………............................................... 29,000 Increase in fair value on December 31, 20x4………………………………………… P 14,000

21. d – refer to paragraphs PFRSs for SMEs paragraphs 15.10 and 15.11

20x4: P101,000 because recoverable amount – fair value less costs to sell of P98,000 is less than the cost of P101,000. 20x5: P101,000 because it is less than recoverable amount. 20x6: P86,000 because recoverable amount of P86,000 is less than cost of P101,000.

22. e – PFRSs for SMEs paragraphs 15.12, 15.14 and 15.15