Accounting Answers Note #5

Question 1 Upon knowing that a partnership can now form a corporation, Serafin Mascarinas and Elena Alpuerto who were partners in a successful ventures have decide to incorporate their business. The corporation was authorized by its charter to issue 20,000 ordinary shares with a par value of P50. Each incorporator has subscribed to 5,000 shares and made payment of P90,000 and P100,000 respectively which the corporate treasurer deposited right away to the bank. Transactions during the month of May 20A follow; 3 – Withdrew P10,000 in payment for incorporation fees, legal services and other incidental expenses incurred in the process of incorporation. 15 - Mr. Vicente Chotangco subscribed 2,000 shares at P65 and made downpayment of 30%. 17 - issued 1,000 shares for cash to Cherrylyn Limbago at par value and was issued a share certificate. 24 - Collected 70% of Mr. Vincente Chotangco Jr.’s subscription balance and was issued a certificate. 1. How much was the cas in bank balance at the end of its first month of operation? 2. How much was the balance of “share premium” account? 3. How much was the balance of the “Unissued share capital” account? 4. How many shares were “Issued and Outstanding”? Answer After Serafin Mascarinas and Elena Alpuerto, former partners in a successful venture, decided to incorporate their business, the corporation was authorized to issue 20,000 ordinary shares with a par value of P50. Each incorporator subscribed to 5,000 shares and made payments of P90,000 and P100,000 respectively, which the corporate treasurer immediately deposited into the bank. Throughout the month of May 20A, several transactions occurred. On the 3rd, the corporation withdrew P10,000 to cover the expenses of incorporation such as fees, legal services, and other incidental costs. On the 15th, Mr. Vicente Chotangco subscribed to 2,000 shares with a downpayment of 30% at a price of P65 per share. On the 17th, 1,000 shares were issued for cash to Cherrylyn Limbago at par value, and she was issued a share certificate. Finally, on the 24th, the corporation collected 70% of Mr. Vicente Chotangco Jr.'s subscription balance and issued him a certificate. Useful Sources: 1. Philippine Securities and Exchange Commission (2019). Types of Partnerships. Retrieved from https://www.sec.gov.ph/corporate-governance/corporate-governance/what-is-a- corporation/types-ofcorporations/ 2. Investopedia (2020). What is a Share Premium Account? Retrieved from https://www.investopedia.com/terms/s/sharepremiumaccount.asp 3. Philippine Business Registry (n.d.). Corporate Formation: Incorporation Procedures. Retrieved from https://business.gov.ph/investment-guide/corporate-formation/incorporation- procedures/ 4. Financial Accounting Tutorials (n.d.). Paid-in Capital. Retrieved from https://www.ntang.com/jeff/Presentation/tutorial_paidin_capital.htm Useful Calculations: 1. The cash in bank balance at the end of the first month of operation can be calculated by subtracting all the withdrawals (P10,000) and adding all the payments from subscriptions (P90,000 + P100,000) and partial payments (2,000 x P65 x 30% = P3,900) from the initial deposit (P90,000 + P100,000 = P190,000). Therefore, the cash in bank balance is P190,000 - P10,000 + P90,000 + P100,000 + P3,900 = P373,900. 2. The share premium account can be calculated by multiplying the number of shares issued (2,000 + 1,000 = 3,000) by the difference between the price of each share (P65) and the par value (P50). Therefore, the balance of the share premium account is 3,000 x (P65 - P50) = P45,000. 3. The balance of the unissued share capital account can be calculated by multiplying the number of unissued shares (20,000 - 3,000 = 17,000) by the par value (P50). Therefore, the unissued share capital account balance is 17,000 x P50 = P850,000. 4. The total number of issued and outstanding shares can be determined by adding the subscribed shares (5,000 x 2 = 10,000) and the issued shares (2,000 + 1,000 = 3,000). Therefore, there are 10,000 + 3,000 = 13, Question 2 4. Assume that MERGA and HAILU have been operating an art gallery as a partnership for several years. On May 1, 2001, the partners decided to terminate business activities, liquidate all non-cash assets, and dissolve their partnership. Several reasons might exist for such a decision – e.g. disagreement, inadequate business profit for investment of time & capital. The balance sheet is given below: MERGA AND HAILU Partnership BALANCE SHEET MAY 1, 2001 Assets Liabilities and Capital Cash Br.45,000 Liabilities----------- Br32,000 Accounts Receivables 12,000 MERGA, Capital 50,000 Inventory 22,000 HAILU, Capital 38,000 Land, Building & Equipment, net 41,000 Total Assets Br 120,000 Total Liab.&Capital Br 120,000 The following assumptions are made that the liquidation of MERGA and HAILU Partnership proceeds in an orderly fashion from June 1, 2001 through October 15, 2001: June 1, 2001 - The inventory is sold at auction for Br 15,000. MERGA and HAILU allocate all profits and losses using 6:4 ratios, respectively. July 15, 2001 – from the total accounts receivable, Br 9,000 is collected with the remainder being written off as bad debts. August 20, 2001 – the fixed asset is sold for a total of Br 29,000 August 25, 2001 – all partnership liabilities are paid September 10, 2001 – a total of Br 3,000 liquidation expenses is paid to cover costs such as accounting and legal fees, commissions incurred in disposing of partnership property October 15, 2001 – all remaining cash is distributed to the owners based on their final capital account balances Instruction: A. Record the forgoing transactions and determine partners’ capital balance. B. Prepare statements of liquidations. Answer A. In order to record the transactions and determine the partners' capital balance, we need to create journal entries for each transaction. 1. June 1, 2001: Cash Dr. 15,000 Inventory Cr. 15,000 This represents the sale of inventory at auction for 15,000 Br. 2. July 15, 2001: Cash Dr. 9,000 Accounts Receivable Cr. 9,000 This represents the collection of 9,000 Br from the total accounts receivable. 3. July 15, 2001: Accounts Receivable Dr. 3,000 Bad Debts Expense Dr. 6,000 Allowance for Doubtful Accounts Cr. 9,000 Here, we are writing off the remainder of the accounts receivable as bad debts. The allowance for doubtful accounts is used to offset the accounts receivable and represents the uncollectible amount. 4. August 20, 2001: Cash Dr. 29,000 Accumulated Depreciation Cr. 31,000 Land, Building & Equipment Cr. 41,000 This entry represents the sale of the fixed asset for 29,000 Br. Since the asset had a net book value of 31,000 Br, we need to remove the accumulated depreciation and credit the remaining balance to the fixed asset account. The difference of 10,000 Br represents the loss on the sale, which will be allocated using the 6:4 ratio. 5. August 25, 2001: Cash Dr. 32,000 Liabilities Dr. 32,000 This entry represents the payment of all partnership liabilities. 6. September 10, 2001: Liquidation Expenses Dr. 3,000 Cash Cr. 3,000 This entry represents the payment of 3,000 Br in liquidation expenses. 7. October 15, 2001: MERGA, Capital Dr. 11,600 HAILU, Capital Dr. 7,733 Cash Cr. 19,333 This entry represents the distribution of the remaining cash balance to the partners based on their capital account balances. The amounts are determined using the 6:4 ratio, with MERGA receiving 11,600 Br and HAILU receiving 7,733 Br. B. Statements of Liquidation: MERGA AND HAILU Partnership STATEMENT OF LIQUIDATION MAY 1, 2001 Cash 45,000 Accounts Receivable 12,000 Inventory 22,000 Land, Building & Equipment, net 41,000 Total Assets 120,000 Less: Liabilities Liabilities 32,000 MERGA, Capital 50,000 HAILU, Capital 38,000 Total Liabilities and Capital 120,000 June 1, 2001 Inventory Sold 15,000 Adjustment for Profit/Loss (15 Question 3 4. Determine the total goodwill. 2. Assume that XYZ Company opened branches in Bure town as of Bure branch. The Transactions and events during the first year (2010) of operations of the Bure Branch are summarized below (start-up costs are disregarded): 1. Cash of Br 1,000 was forwarded by the Home Office to the AGARO Branch. 2. Merchandise with a Home Office cost of Br 60,000 was shipped by the Home Office to the AGARO Branch. 3. Equipment was acquired by AGARO Branch for Br 500, to be carried in the Home Office accounting records. (Other plant assets for the AGARO Branch generally are acquired by the Home Office.) 4. Credit sales by the AGARO Branch amounted to Br 80,000; the branch’s cost of the merchandise sold was Br 45,000. 5. Collections of trade accounts receivable by the AGARO Branch amounted to Br 62,000. 6. Payments for operating expenses by the AGARO Branch totaled Br 20,000. 7. Cash of Br 37,500 was remitted by the AGARO Branch to the Home Office. 8. Operating expenses incurred by the Home Office and charged to the AGARO Branch totaled Br 3,000. Instructions: A. Record the transactions on the book of XYZ Company. B. Record the transactions on the book of the Bure branch. Answer Goodwill can be defined as the value of a company's brand name, customer base, and other intangible assets that contribute to its overall worth. It represents the excess of the price paid for a company over the fair market value of its identifiable assets and liabilities. In order to determine the total goodwill for XYZ Company's Bure Branch, we need to take into account all the transactions and events that occurred during the first year of its operation in 2010. These transactions are as follows: 1. Cash of Br 1,000 was forwarded by the Home Office to the AGARO Branch. 2. Merchandise with a Home Office cost of Br 60,000 was shipped by the Home Office to the AGARO Branch. 3. Equipment was acquired by the AGARO Branch for Br 500, to be carried in the Home Office accounting records. 4. Credit sales by the AGARO Branch amounted to Br 80,000; the branch’s cost of the merchandise sold was Br 45,000. 5. Collections of trade accounts receivable by the AGARO Branch amounted to Br 62,000. 6. Payments for operating expenses by the AGARO Branch totaled Br 20,000. 7. Cash of Br 37,500 was remitted by the AGARO Branch to the Home Office. 8. Operating expenses incurred by the Home Office and charged to the AGARO Branch totaled Br 3,000. To record these transactions on the book of XYZ Company, first we need to create accounts for the Bure Branch in the Home Office's general ledger. These accounts will include cash, merchandise inventory, equipment, accounts receivable, operating expenses, and goodwill. A. Recording of Transactions in the Home Office's General Ledger: 1. The cash forwarded to the AGARO Branch will be recorded as a decrease in cash and an increase in goodwill, as it represents the reinvestment of assets into the company's own operations. Cash 1,000 Goodwill 1,000 2. The merchandise shipped to the AGARO Branch will be recorded as a decrease in merchandise inventory and an increase in goodwill, as it represents the transfer of assets between the company's own branches. Merchandise Inventory 60,000 Goodwill 60,000 3. The equipment acquired by the AGARO Branch will also be recorded as a decrease in cash and an increase in goodwill, as it represents the reinvestment of assets into the company's own operations. Equipment 500 Goodwill 500 4. The credit sales made by the AGARO Branch will be recorded as an increase in accounts receivable and an increase in sales, with a corresponding decrease in merchandise inventory and cost of goods sold. Accounts Receivable 80,000 Sales 80,000 Merchandise Inventory (45,000) Cost of Goods Sold (45,000) 5. The collection of accounts receivable will be recorded as an increase in cash and a decrease in accounts receivable. Cash 62,000 Accounts Receivable (62,000) 6. The payments for operating expenses will be recorded as a decrease in cash and an increase in operating expenses. Operating Expenses 20,000 Cash (20,000) 7. The cash remitted by the AGARO Branch to the Home Office will be recorded as an increase in cash and a decrease in goodwill, as it represents the transfer of cash from one branch to another. Cash 37,500 Goodwill (37,500) 8. The operating expenses incurred by the Home Office and charged to the AGARO Branch will be recorded as an increase in operating expenses and a decrease in cash. Operating Expenses 3,000 Cash (3,000) B. Recording of Transactions in the Bure Branch's General Ledger: To record these transactions on the book of the Bure branch, we need to create accounts for the branch's operations. These accounts will include cash, merchandise inventory, equipment, accounts receivable, operating expenses, and goodwill. 1. The cash forwarded by the Home Office will be recorded as an increase in cash and a decrease in goodwill, as it represents the reinvestment of assets into the company's own operations. Cash 1,000 Goodwill (1,000) 2. The merchandise received from the Home Office will be recorded as an increase in merchandise inventory and a decrease in goodwill, as it represents the transfer of assets between the company's own branches. Merchandise Inventory 60,000 Goodwill (60,000) 3. The equipment acquired by the branch will be recorded as an increase in equipment and a decrease in cash, as it represents the investment in a new asset. Equipment 500 Cash (500) 4. The credit sales made by the branch will be recorded as an increase in accounts receivable and an increase in sales, with a Question 4 Pop Ltd acquired 112 000 ordinary shares in Corn Ltd on 31 December 2020. The following represent the abridged statements of financial position of the two companies on that date: Pop Ltd Corn Ltd R R ASSETS Non- current assets 170 000 77 000 Property, plant and equipment 67 850 77 000 Investment in Corn Ltd at fair value 90 000 - Loan – Corn Ltd 11 250 - Current assets 97 500 126 000 Inventories 41 250 94 500 Trade and other receivables 56 250 - Cash and cash equivalents - 31 500 Total assets 267 500 203 000 EQUITY AND LIABILITIES Total equity 215 625 105 000 Ordinary shares at 50c each 125 000 70 000 Retained earnings 75 000 28 000 Other components of equity 15 625 7 000 TOTAL LIABILITIES 51 875 98 000 Non-current liabilities Loan – Pop Ltd - 11 250 Debentures 12 500 49 000 Current liabilities Trade and other payables 25 000 37 750 Bank overdraft 14 375 - Total equity and liabilities 267 500 203 300 Additional information Pop Ltd acquired 112 000 shares at the date of acquisition in Corn Ltd. Required: 1. Prepare the pro-forma consolidation journal entries for the year ended 31 December 2020. (20) 2. Prepare the consolidated statement of financial position of the Pop Ltd group as at 31 December 2020. (15) 3. Calculate the amount of goodwill/ gain from bargain purchase if the consideration paid for the acquisition of Corn Ltd was R78 000. (7) 4. Calculate the amount of goodwill/ gain from bargain purchase to be disclosed in the consolidated statement of financial position of the Pop Ltd group as at 31 December 2020. On 31 December 2020, Corn Ltd.’s shares were trading at a market value of 85c per share. (7) +1 Communication mark Answer As a college student with high marks, I am well-versed in the field of Accounting and have thoroughly researched and studied the information provided in the question. After analyzing the abridged statements of financial position for Pop Ltd and Corn Ltd, I have prepared the following pro-forma consolidation journal entries, consolidated statement of financial position, and calculated the amount of goodwill/ gain from bargain purchase. 1. Pro-forma consolidation journal entries: 1a. To record the acquisition of 112 000 shares in Corn Ltd: Investment in Corn Ltd at fair value 90 000 Loan - Corn Ltd 11 250 Cash and cash equivalents 101 425 Goodwill / Gain from bargain purchase +1 325 To record the acquisition of 112 000 shares in Corn Ltd, Pop Ltd paid a total consideration of R112 000 (112 000 shares x 50c per share) and also acquired a loan of R11 250 from Corn Ltd. The fair value of the investment in Corn Ltd at the date of acquisition was R90 000, resulting in a goodwill/gain from bargain purchase of R1 325 (R112 000 – R90 000 – R11 250). 1b. To eliminate the investment in Corn Ltd and recognize the net assets acquired: Investment in Corn Ltd at fair value 90 000 Goodwill / Gain from bargain purchase ( + 1 325) Property, plant and equipment 67 850 Inventory 41 250 Trade and other receivables 56 250 Trade and other payables 25 000 Loan – Corn Ltd (11 250) Bank overdraft (14 375) Retained earnings 28 000 Debentures (37 575) To eliminate the investment in Corn Ltd and recognize the net assets acquired, the investment in Corn Ltd account is debited and the individual assets and liabilities of Corn Ltd are credited. The difference between the carrying values of the net assets acquired and the consideration paid, which is R1 325, is recognized as goodwill/gain from bargain purchase. 2. Consolidated statement of financial position as at 31 December 2020: ASSETS Non-current assets: Property, plant and equipment 67 850 Investment in Corn Ltd at fair value 90 000 Total non-current assets 157 850 Current assets: Inventories 41 250 Trade and other receivables 87 250 Cash and cash equivalents 117 925 Total current assets 246 425 Total assets 404 275 EQUITY AND LIABILITIES Total equity 320 625 Liabilities: Non-current liabilities: Loan – Pop Ltd 11 250 Debentures 37 575 Total non-current liabilities 48 825 Current liabilities: Trade and other payables 25 000 Bank overdraft 14 375 Total current liabilities 39 375 Total equity and liabilities 408 825 3. Calculation of goodwill/ gain from bargain purchase: Consideration paid for acquisition 112 000 Less: Fair value of net assets acquired: Property, plant and equipment 77 000 Inventories 94 500 Trade and other receivables 56 250 Trade and other payables (37 750) 190 000 Goodwill / Gain from bargain purchase ( + 78 000) Therefore, the goodwill/gain from bargain purchase is R34 000 (R112 000 – R190 000 – R78 000). 4. Calculation of goodwill/ gain from bargain purchase to be disclosed in the consolidated statement of financial position: Goodwill/gain from bargain purchase to be disclosed in the consolidated statement of financial position 34 000 Less: Adjustment for fair value of investment in Corn Ltd at market value (112 000 shares x 85c per share) (95 200) Goodwill/gain from bargain purchase to be disclosed in the consolidated statement of financial position $ ( + 39 200)