Classification of Business Combination
1. Acquisition of Assets
a. Statutory Merger (merge-Retain one) => A+B=A; A+B=B
b. Statutory Consolidation (consolidatio-New corp.) => A+B=C
2. Stock Acquisition => Parent-Subsidiary Relationship
Matrix
*Less than 20% = Investment in Stocks (Cost Method)
*20% - 50% = Investment in Associate (Equity Method)
*More than 50% = Investment in Subsidiary
*1. Accounting for Acquisition of Assets
a. Measure Acquired Assets (and Liabilities) at Fair Value
b. Recognize Goodwill or Gain on Acquisition(Bargain Purchase)
If Consideration Transferred > Net Fair Value of Interest , GOODWILL
If Consideration Transferred < Net Fair Value of Interest, GAIN ON ACQUISITION
c. Expenses in Acquisition
Direct/Indirect Costs = Expense outright
Liability Issue Transaction = Liability (Bond Issue Costs)
Equity Issue Transaction = Deduct from Share Premium or APIC
*2. Accounting for Stock Acquisition(Investment in Subsidiary in Parent's Books)
a. Parent and Subsidiary maintain separate records
b. Recognize Goodwill or Gain on Acquisition(Bargain Purchase)
If Consideration Transferred > Net Fair Value of Interest , GOODWILL
If Consideration Transferred < Net Fair Value of Interest, GAIN ON ACQUISITION
*Partial Goodwill = Parent recognizes its share in the Goodwill only.
*Full Goodwill = Parent recognizes its share
plus non-controlling interest's share in Goodwill.
c. Expenses in Acquisition
Direct/Indirect Costs = Expense outright
Liability Issue Transaction = Liability (Bond Issue Costs)
Equity Issue Transaction = Deduct from Share Premium or APIC
d. Consolidation of Financial Statements
Eliminate INTERCOMPANY Transactions (Either downstream or upstream)
*Upstream/Downstream Sales
*Upstream/Downstream Cost of Sales
*Unrealized Gross Profit, year end (Adjust based on end inventory)
*Dividend Income from Subsidiary
*Gain/Loss on Upstream/Downstream Sale of Plant Assets
*Depreciation Expense (Adjust by eliminating gross profit from sale of plant assets)
*Consider: Consolidated = Interest of Parent (NIATOP) + Non-controlling Interest (NCINAS)
*Consolidated Accumulated Profits = Accumulated Profits of Parent + NCINAS (non-controlling)
*Consolidated Accumulated Profits on the Financial Statement = Accumulated Profits of Parent only
*Test Cash Generating Unit (CGU) for Impairment of Goodwill, but carrying value of an item in the CGU must not be below its recoverable amount.
Showing posts with label Practical Accounting 2. Show all posts
Showing posts with label Practical Accounting 2. Show all posts
Tuesday, February 4, 2014
Lesson 7 P2: Home Office/Branch/Agency - Notes
*Agency = maintains samples of inventory
= any cash receipt/disbursement accounted for like Petty Cash Fund
= does not maintain books
*Branch = have their own books
= capital accounts in books is called "Home Office - Current"
= Inventory includes Shipment from Home Office and Inventory from Outside Suppliers
*Home Office = accounts an "Investment in Branch" account using the equity method
*Investment in Branch = Home Office - Current
*Consolidation of Home Office and Branch Financial Statements:
Remove "home office - branch" transactions.
a. Cost of Shipment to Branch (like Cost of Sales to Branch)
b. Billings of Shipment to Branch (like Sales to Branch)
Billed Price = Cost of shipment to branch + Allowance for overvaluation of branch inventory
*Allowance for overvaluation of branch inventory (like Unrealized Gross Profit)
= mark-up of home office on inventory sent to branch.
= adjusted to match ending inventory of Shipments to branch/from home office
(adjustment is like the Realized Gross Profit)
= any cash receipt/disbursement accounted for like Petty Cash Fund
= does not maintain books
*Branch = have their own books
= capital accounts in books is called "Home Office - Current"
= Inventory includes Shipment from Home Office and Inventory from Outside Suppliers
*Home Office = accounts an "Investment in Branch" account using the equity method
*Investment in Branch = Home Office - Current
*Consolidation of Home Office and Branch Financial Statements:
Remove "home office - branch" transactions.
a. Cost of Shipment to Branch (like Cost of Sales to Branch)
b. Billings of Shipment to Branch (like Sales to Branch)
Billed Price = Cost of shipment to branch + Allowance for overvaluation of branch inventory
*Allowance for overvaluation of branch inventory (like Unrealized Gross Profit)
= mark-up of home office on inventory sent to branch.
= adjusted to match ending inventory of Shipments to branch/from home office
(adjustment is like the Realized Gross Profit)
Lesson 6 P2: Franchise Accounting - Notes
Franchisor Point of View
*Unearned Interest Income if note is non-interest bearing.
1. Reasonably Assured Collection = recognize Notes Receivable
a. Accrual Method
Unearned Franchise Revenue XX
Franchise Revenue XX
2. Doubtful Collection = Notes Receivable NOT recognized
a. Installment Method
b. Cost Recovery Method = Non-IFRS
A. Initial Franchise Fee = recognized when
a. Services are substantially performed (or when business commences)
b. Non-refundable initial payments
*Can partially recognize initial franchise fee for the partial services rendered as long as initial payments are non-refundable.
B. Continuing Franchise Fee = recognize revenue when earned, expense when incurred
*Unearned Interest Income if note is non-interest bearing.
1. Reasonably Assured Collection = recognize Notes Receivable
a. Accrual Method
Unearned Franchise Revenue XX
Franchise Revenue XX
2. Doubtful Collection = Notes Receivable NOT recognized
a. Installment Method
b. Cost Recovery Method = Non-IFRS
A. Initial Franchise Fee = recognized when
a. Services are substantially performed (or when business commences)
b. Non-refundable initial payments
*Can partially recognize initial franchise fee for the partial services rendered as long as initial payments are non-refundable.
B. Continuing Franchise Fee = recognize revenue when earned, expense when incurred
Lesson 5 P2: Construction Accounting - Notes
Construction Contracts
1. Fixed Price Contract
2. Cost Plus Contract = reimburse costs plus a percentage of profit
Methods of Construction Accounting
A. Percentage of Completion
*If computation for Estimated Gross Profit turns out to be a loss, recognize the loss 100% as a Loss earned this year.
B. Cost Recovery Method/Hybrid/Zero-Profit Approach = recognize all costs before any profit.
1. Fixed Price Contract
2. Cost Plus Contract = reimburse costs plus a percentage of profit
Methods of Construction Accounting
A. Percentage of Completion
B. Cost Recovery Method/Hybrid/Zero-Profit Approach = recognize all costs before any profit.
Monday, February 3, 2014
Lesson 4 P2: Installment Sales - Notes
1. Gross Profit Rate (GPR)
2. Realized Gross Profit (RGP)
RGP, end = Collections x GPR
*Collections does not include unpaid defaults.
3. Deferred Gross Profit (DGP)
DGP, end = Installment A/R, end x GPR
or;
DGP, end = DGP, beg - RGP
4. Repossession
*Fair Value/True Worth of Repo and Trade-in have the same computation.
*Cost Recovery Method = used when collectibility is highly uncertain.
Lesson 3 P2: Joint Arrangements - Notes
Joint Arrangements = 2 or more parties have joint control
Types of Joint Arrangements
1. Joint Operation = joint control over assets and liabilities
*Accounting for Joint Operation
a. Separate records = similar to equity method
b. No separate records = maintain a capital account
2. Joint Venture = joint control over net assets
*Accounting for Joint Venture = Equity Method
Types of Joint Arrangements
1. Joint Operation = joint control over assets and liabilities
*Accounting for Joint Operation
a. Separate records = similar to equity method
b. No separate records = maintain a capital account
*Accounting for Joint Venture = Equity Method
Lesson 2 P2: Corporate Liquidation - Notes
Formulas to remember and understand:
Priority of Payments
1. Unsecured creditors with priority
2. Fully secured creditors
3. Partially secured creditors (the secured amount)
4. Unsecured liabilities without priority
*Free Assets usually do not include prepayments because they are being used up during liquidation or are part of fixed contracts.
Priority of Payments
1. Unsecured creditors with priority
2. Fully secured creditors
3. Partially secured creditors (the secured amount)
4. Unsecured liabilities without priority
*Free Assets usually do not include prepayments because they are being used up during liquidation or are part of fixed contracts.
Lesson 1 P2: Partnership - Notes
Partnership Formation and Operation
Distribute:
1. Interest
2. Salaries
3. Bonus (only when there is excess/profit)
4. Residual
Partnership Dissolution
A. Admission of a New Partner
1. Purchase of Interest = assets and liabilities will not change
= reclassify old partner's account
= excess and deficiency within and among parties involved
2. Admission by Investment of Additional Assets
a. Bonus Method = given to old/new partner for excess/deficiency in percentage contribution
b. Goodwill Method = not used in practice; recognized in acquisition of business only
B. Withdrawal of a Partner = payment excess/deficiency means bonus to retiring/remaining partners
C. Incorporation of Partnership
1. Retain Books = close capital accounts, open a share capital account
2. New Books = close old books, open a new book
Partnership Liquidation
A. Lump Sum Distributions
1. Sell Non-cash Assets (NCA)
2. Satisfy Creditors
3. Distribute residue to partners
*right of offset doctrine = offset loans to/from partnership and capital balances
B. Installment Distribution = Cash Priority Program or Schedule of Safe Payments
Partners A B C
Balance before realization 30K 20K 10K
Divided by: P/L ratio 50% 25% 25%
Loss Absorption Capacity 60K 80K 40K
Priority 1 (20K)
Difference 60K = 60K ; 40K
Priority 2 (20K) (20K)
Difference 40K = 40K = 40K
Priority 1 = 20K*25% = 5K
*The first 5K realization must go to B.
Priority 2 = 20K*25% + 20K*50% = 5K + 10K = 15K
*The next 15K realization will be divided among A and B
*The total realization in excess of 5K until 20K will be divided by A and B according to their P/L ratio
Last Priority
*Anything in excess of 20K (5K+15K) will be divided among the partners according to their P/L
Distribute:
1. Interest
2. Salaries
3. Bonus (only when there is excess/profit)
4. Residual
Partnership Dissolution
A. Admission of a New Partner
1. Purchase of Interest = assets and liabilities will not change
= reclassify old partner's account
= excess and deficiency within and among parties involved
2. Admission by Investment of Additional Assets
a. Bonus Method = given to old/new partner for excess/deficiency in percentage contribution
b. Goodwill Method = not used in practice; recognized in acquisition of business only
B. Withdrawal of a Partner = payment excess/deficiency means bonus to retiring/remaining partners
C. Incorporation of Partnership
1. Retain Books = close capital accounts, open a share capital account
2. New Books = close old books, open a new book
Partnership Liquidation
A. Lump Sum Distributions
1. Sell Non-cash Assets (NCA)
2. Satisfy Creditors
3. Distribute residue to partners
*right of offset doctrine = offset loans to/from partnership and capital balances
B. Installment Distribution = Cash Priority Program or Schedule of Safe Payments
Partners A B C
Balance before realization 30K 20K 10K
Divided by: P/L ratio 50% 25% 25%
Loss Absorption Capacity 60K 80K 40K
Priority 1 (20K)
Difference 60K = 60K ; 40K
Priority 2 (20K) (20K)
Difference 40K = 40K = 40K
Priority 1 = 20K*25% = 5K
*The first 5K realization must go to B.
Priority 2 = 20K*25% + 20K*50% = 5K + 10K = 15K
*The next 15K realization will be divided among A and B
*The total realization in excess of 5K until 20K will be divided by A and B according to their P/L ratio
Last Priority
*Anything in excess of 20K (5K+15K) will be divided among the partners according to their P/L
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