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SAINT VINCENT DE FERRER COLLEGE December 2019

BS ACCOUNTANCY (2nd semester SY 2020-2020) Part 2


ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA

AUDITING PROBLEMS
I. Topic(s):
AUDIT OF ASSETS

II. Learning Objective(s):


To learn how to obtain sufficient competent evidence about each significant financial assertion that
pertains to assets and related transactions and balances.

III. Rundown
Please watch and read the following

https://cpahalltalk.com/auditing-cash/
https://www.youtube.com/watch?v=DZKDAHgJlOg
https://smallbusiness.chron.com/complete-audit-cash-accounts-receivable-34527.html
https://www.youtube.com/watch?v=ea0dfHaObqA
http://www.summaryplanet.com/industrial-economics/Audit-of-Non-Current-Assets.html

IV. Recommended Reference(s):


1. Auditing problem books
2. Internet

Copyright of Prof. Hector U. Santos Jr., CPA, MBA


This online resource is intended solely to whom it is authorized to receive it. If you are not the intended recipient you are hereby notified that
any disclosure, copying, distribution or taking any action in reliance on the contents of this information is strictly prohibited and may be
unlawful.
SAINT VINCENT DE FERRER COLLEGE December 2019
BS ACCOUNTANCY (2nd semester SY 2020-2020) Part 2
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA

TAXATION
I. Topic(s):
Income Taxation

II. Learning Objective(s) (after studying the topic, you should be


able to):
To learn about income taxation

VII. Rundown
Please read and download
https://philippinecpareview.blogspot.com/p/business-law-and-taxation.html

VIII. Recommended Reference(s):


1. Local taxation books authored by Reyes, Tamayo, Litonjua etc.
2. BIR Website
3. Internet

Copyright of Prof. Hector U. Santos Jr., CPA, MBA


This online resource is intended solely to whom it is authorized to receive it. If you are not the intended recipient you are hereby notified that
any disclosure, copying, distribution or taking any action in reliance on the contents of this information is strictly prohibited and may be
unlawful.
SAINT VINCENT DE FERRER COLLEGE December 2019
BS ACCOUNTANCY (2nd semester SY 2020-2020) Part 2
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA

PRACTICAL ACCOUNTING 1
I. Topic(s):
Inventory, Investments, Property Plant and Equipment, Intangible Assets

II. Learning Objectives:


To learn about the practical accounting of inventory, investments, property plant and equipment,
intangible assets and other assets

III. Rundown
Watch below link
Financial Accounting for inventories and cost of goods sold
https://www.youtube.com/watch?v=HhfbPHN5j4M
https://www.youtube.com/watch?v=MeRusrAouA4
https://www.youtube.com/watch?v=-YdXrFUl_3k
Financial Accounting for Inventory Costing
https://www.youtube.com/watch?v=F387vC3jmmY
Financial Accounting for investments
https://www.youtube.com/watch?v=NGVgVirlhI8

Financial Accounting for property, plant and equipment (depreciation methods), and intangible assets
https://www.youtube.com/watch?v=VgP1kakxmB4
https://www.youtube.com/watch?v=lX6brQgxiMI
https://www.youtube.com/watch?v=q3DRIMb1rkM
https://www.youtube.com/watch?v=_hptGKCLWSY
https://www.youtube.com/watch?v=gCq33F0nzms
https://www.youtube.com/watch?v=oNXxrADGIGQ

IV. Recommended Reference(s):


Philippine Accounting Standards/Philippine Financial Reporting Standards
Internet

Copyright of Prof. Hector U. Santos Jr., CPA, MBA


This online resource is intended solely to whom it is authorized to receive it. If you are not the intended recipient you are hereby notified that
any disclosure, copying, distribution or taking any action in reliance on the contents of this information is strictly prohibited and may be
unlawful.
SAINT VINCENT DE FERRER COLLEGE December 2019
BS ACCOUNTANCY (2nd semester SY 2020-2020) Part 2
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA

PRACTICAL ACCOUNTING 2
I. Topic(s):
Corporate Liquidation
Joint Venture Accounting
Installment Sales
Construction Accounting
Franchise Accounting
Home Office and Branch Accounting

II. Learning Objective(s):

To learn about the following:

onstruction Accounting

III. Rundown

Corporate Liquidation
https://www.youtube.com/watch?v=-oW4M3vpuRM

I. Introduction

When the financial position of the debtor is such that it cannot resolve its financial difficulties it will have to resort
to liquidation. This process may be started by the debtor filing a voluntary petition or by creditor filing an
involuntary petition which entails the process of an orderly realization of the debtors assets and payment of the
debtor’s liabilities.

II. Accounting and Reporting for Liquidation

The basic focus of accounting for liquidation is that a “quitting concern” rather than a “going concern” which is
usual assumption in accounting. The statement of affairs is a statement that has been devised to address the issue of
liquidation. And in the process of liquidation, the trustee in bankruptcy must report periodically to those interested
parties regarding the progress of the liquidation process, and for this objective, a statement of realization and
liquidation must be prepared.

III. Statement of Affairs


Statement of Affairs is a statement of financial condition that emphasizes liquidation values and
provides relevant information for the trustee in liquidating the debtor corporation. This statement is
prepared as of a specific date or any given point in time and it shows balance sheet information with
assets measured at expected net realizable values and creditor. Liabilities are classified in the
statement of affairs as priority, fully secured, partially secured, and unsecured. Historical cost
valuations are included in the statement for reference purposes.

The following are captions commonly found in the statement of affairs:


1. Assets Pledged to Fully Secured Creditors. These are assets with realizable values equal to, or in
excess of the liabilities for which have been pledged as collateral.
2. Assets Pledged to Partially Secured Creditors. These are assets with realizable values that are less
than liabilities for which they have been pledge as security.

Copyright of Prof. Hector U. Santos Jr., CPA, MBA


This online resource is intended solely to whom it is authorized to receive it. If you are not the intended recipient you are hereby notified that
any disclosure, copying, distribution or taking any action in reliance on the contents of this information is strictly prohibited and may be
unlawful.
SAINT VINCENT DE FERRER COLLEGE December 2019
BS ACCOUNTANCY (2nd semester SY 2020-2020) Part 2
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA

3. Free Assets. These are assets not pledge to specific secured liabilities or pledged assets with a
realizable value in excess of the amount needed to satisfy claims at secured creditors.
4. Unsecured Liabilities with Priority. These are liabilities that must, by statue, be paid off before any
secured debts can be satisfied.
5. Fully Secured Creditors. These are liabilities covered by a pledge of specific assets of a realizable
value equal to or in excess of such liabilities.
6. Partially Secured Creditors. These are liabilities covered by a pledge of specific assets of a
realizable value that less than to such liabilities.
7. Unsecured Liabilities without Priority. These liabilities have no legal priority or a security interest
in specific property. They are paid off (pro-rated when there is an asset deficiency) after all priority
and secured liabilities have been satisfied.
8. Stockholder‟s Equity. The balances of the stockholders‟ equity accounts depend on the amount of
free assets available. If there is a deficiency of assets to satisfy unsecured creditors, all claims of
equity holders are extinguished. Only if there are free assets in excess of unsecured liabilities can
stockholders share in any distributions.

IV. Statement of Realization and Liquidation


A statement of realization and liquidation is an activity statement that is intended to show progress
toward the liquidation of a debtor‟s estate. Its original purpose was to inform the bankruptcy court
and interested creditors of the accomplishment of the trustee.

Joint Venture
https://www.youtube.com/watch?v=2KKB7Y1ksIc
https://www.youtube.com/watch?v=svMXneg_Dec
https://www.youtube.com/watch?v=MsKd2uTII3c
https://www.youtube.com/watch?v=Uiel697RR5c
https://www.youtube.com/watch?v=g5mrC7LjhhI
https://www.youtube.com/watch?v=-FznX2TgDdY
https://www.youtube.com/watch?v=wrAnV_bQh6Y

I. Introduction
Accounting for joint venture is regulated by PAS No. 31 Financial Reporting of Interest in Joint Venture.
This section deals with all aspects other than those relating to the inclusion of joint ventures in
consolidated financial statements, which is covered in Chapter 9.
A joint venture can be entered into individuals, partnership or companies. One common example of joint
venture in practise is when a Filipino company wants to start operations in an overseas country, rather
than build up a new company on its own from scratch, the Filipino company can enter into a joint venture
with a local company which is already operating in the overseas country. The local company should be
able to contribute local expertise to the venture to increase its chances of success.

II. Definition
A joint venture is contractual arrangement whereby two or more parties undertake an economic activity
which is subject to joint control. PAS No. 31. In practise, joint control means that none of the parties
alone can control the activity. All important decisions on financial and operating policy require each
venture‟s consent.
The term „joint venture‟ has two basic meanings. It can refer to a joint project or to an entity set up to
carry out the joint project. Hence a joint venture can be:
contractual arrangement whereby two or more parties undertake an economic activity which is
subject to joint control.
entity that, as a result of a contractual arrangement, is jointly controlled by the reporting entity and
other ventures.
In both cases, joint control is the determining factor.
In practise, joint control means that none of the parties alone can control the activity, but all together can
do so. Important decisions on financial and operating policy require each venture‟s consent. Control is the
power to govern the financial and operating policies of an economic activity (or an entity) so as to obtain
benefits from it.
The contract which establishes the joint venture usually deals with the following matters:

Copyright of Prof. Hector U. Santos Jr., CPA, MBA


This online resource is intended solely to whom it is authorized to receive it. If you are not the intended recipient you are hereby notified that
any disclosure, copying, distribution or taking any action in reliance on the contents of this information is strictly prohibited and may be
unlawful.
SAINT VINCENT DE FERRER COLLEGE December 2019
BS ACCOUNTANCY (2nd semester SY 2020-2020) Part 2
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA

The activity and duration of the venture


Voting rights of venturers
Capital contributions
Profit-sharing arrangements
The appointment of operators or managers
The policy decisions which require the consent of all venturers.

III. Type of Joint Venture


There are three basic types of joint venture:
1. Jointly controlled operations
2. Jointly controlled assets
3. Jointly controlled entities

Joint controlled operations


A joint controlled operation is a joint venture which involves the use of the assets and other resources to
the venturers rather than the establishment of an entity which is separate from the venturers themselves.
Each venture uses its own assets and incurs its own expenses and liabilities. Profits are shared among the
venturers in accordance with the contractual agreement.
For example, A and B decide to enter into a joint venture agreement to produce a new product. A
undertakes one manufacturing process and B undertakes the other. A and B each bear their own expenses
and take an agreed share of the sales revenue from the product.

Jointly controlled assets


A jointly controlled assets is a joint venture in which the ventures control jointly (and often own jointly)
an asset contributing to or acquired for the purpose of the joint venture. The venturers each take a share of
the profit or income from the asset and each bears a share of the expenses involved.
For example, C and D together buy a house which they let to tenants. C is responsible for the initial
refurbishment and maintenance of the house and D finds the tenants and collects the rents. C and D each
take an agreed share of the rental income from the house.

Jointly controlled entities


A joint controlled operation is a joint venture which involves the establishment of a company, partnership
or other entity in which venture has an interest. The agreement between the venturers provides for their
joint control over the entity. Otherwise, a jointly controlled entity operates in the same way as any other
enterprise. Each venture is entitled to a share of the entity‟s results.
For example, E and F enter into a joint venture agreement to manufacture and sell a new product. They
set up a company which carries out these activities. E and F each own 50% of the equity share capital of
the company and are its only directors. They share equally in major policy decisions and are each entitled
to 50% of the profits of the company.
In the consolidated financial statements, a venture should report its interest in a jointly controlled entity
using:
1. Proportionate consolidated, or
2. Equity method

If the venture ceases to have joint controlled entity, then the use of proportionate consolidation should be
discontinued.

Proportionate consolidation means that the consolidated balance sheet of the venture includes its share
of the assets that it controls jointly and its share of the liabilities for which it is jointly responsible. The
consolidated income statement of the venturer includes its share of the income and expenses of the jointly
controlled entity.
The use of the equity method is supported by those who agree that it is inappropriate to combine
controlled items with jointly controlled items and by those who believed that venturers have significant
influence, rather than joint control, in a jointly controlled entity. PAS No. 31 does not recommend the use
of the equity method because proportionate consolidation better reflects the substance and economic
reality of a venture‟s share of the future economic benefit.

IV. Accounting for Joint Ventures- Joint Controlled Operations

A. Separate records

Copyright of Prof. Hector U. Santos Jr., CPA, MBA


This online resource is intended solely to whom it is authorized to receive it. If you are not the intended recipient you are hereby notified that
any disclosure, copying, distribution or taking any action in reliance on the contents of this information is strictly prohibited and may be
unlawful.
SAINT VINCENT DE FERRER COLLEGE December 2019
BS ACCOUNTANCY (2nd semester SY 2020-2020) Part 2
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA

A full set of separate accounting records may be kept for the joint venture so that the venturers can assess
the performance of the venture (e.g. through regular management accounts).

Where the venture has a full set of accounting records, the transactions are recorded in exactly the same
way as for an ordinary business. A separate income statement can be extracted from which each venture
will be credited or debited with his agreed share of the profit or loss.

The venturers, may maintain separate records for transactions affecting them through Investment in Joint
Venture account.

The account is opened in the individual books of ventures and used as follows:

Debited for:
Original and additional investment
Services rendered to the venture or a compensatory basis
Share in joint venture profits.

Credited for:
Capital withdrawals from joint venture
Share in joint venture losses
Cash settlement

In the theory it is possible for jointly controlled operations to have a full set of records, but this is rare in
practice.

B. No separate records

Often (and certainly in examination questions), due to the short life time or size of the venture, it is not
considered worthwhile opening a new set of records for what may only be a few transactions. In this case
each venture will record transactions on behalf of the venture in his own records, alongside his other
business dealings.

An account called Joint Venture is maintained to take the place of all nominal accounts. The following
transactions that affect the account would be as follows:

Joint Venture
Merchandise contribution Merchandise withdrawals
Purchases Merchandise returns
Freight-in Purchase returns and allowances
Sales returns and allowances Purchase discounts
Sales discount sales
Expenses other income

If the Joint venture is completed, the balance of the Joint venture account represents the profit and loss.

Credit balance represents profit and a debit balance represents loss.

If Joint Venture is uncompleted, meaning there are still unsold merchandise, profit or loss is a balancing
figure between the balance of the Joint Venture account before profit distribution and the cost of the
unsold merchandise (the required debit balance of the Joint Venture account after profit or loss
distribution.)

C. Cash Settlement

Cash settlement may also be represented by the venturer‟s account balance after recording investments,
withdrawals, and share in venture gain. A debit balance represents cash to be paid in final settlement
while a credit balance represents cash to be received. The recording of cash settlement on the books of
each ventures requires that:

1. All accounts, except personal accounts, be brought to zero balance, and


2. Any unaccounted debit or credit is cash to be received or paid.

Copyright of Prof. Hector U. Santos Jr., CPA, MBA


This online resource is intended solely to whom it is authorized to receive it. If you are not the intended recipient you are hereby notified that
any disclosure, copying, distribution or taking any action in reliance on the contents of this information is strictly prohibited and may be
unlawful.
SAINT VINCENT DE FERRER COLLEGE December 2019
BS ACCOUNTANCY (2nd semester SY 2020-2020) Part 2
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA

To make cash settlement to venturers upon termination of a completed venture.

Cash settlement to a venture may be computed as follows:


Investments………………………………………………………………….. Pxx
Add: Share in venture gain……………………………………… ……. xx
Total………………………………………………………………………… Pxx
Less: Withdrawals…………………………………………………………. xx
Cash settlement……………………………………………………………. . Pxx

Installment Sales
https://www.youtube.com/watch?v=CE7MK1gkvA4
https://www.youtube.com/watch?v=AiGNYcfLEb8
https://www.youtube.com/watch?v=Z_uRAFYiP6U

I. Introduction

Traditionally, under the Revenue Recognition Principle, revenue should be recognized when two
conditions exist:
1. The earning process is complete or virtually complete, and
2. An exchange has takes place.

These conditions was similarly indicated under PAS No. 18, wherein Revenue is recognized when:
1. It is probable that future economic benefits will flow to the enterprise, and
2. These benefits can be measured realiably.

II. Installment Sales


Generally Accepted Accounting Principles states that the instalment method of accounting for sales is not
acceptable unless circumstances exist such that collection of sales price is “not reasonably assured”.
GAAP also permits use of the instalment sales method when receivables are collected over an extended
period of time, and when there is no reasonable basis for estimating the degree of collectability. It
requires that revenue be recognized at the time of collection. The instalment sales method allows revenue
to be deferred and recognized each year in proportion to the receivables collected during that year.
Receivable accounts and deferred profit accounts must be kept separately for each year because the profit
rates often vary from year to year.

A. Determining Gross Profit Rates:

For Prior Year(s) Sales:

Deferred Gross Profit, beginning of current year


Instalment Accounts Receivable, beginning of current year
For Current Year:
Gross Profit Profit
Installment Sales

III. Cost Recovery Method

Under exception circumstances, however, the cost recovery may be used.


1. The cost recovery method may be used where collectability of proceeds is highly uncertain, where an
investment is very speculative in nature, and/or where the final sale price is to be determined by future
events.
2. Under the cost recovery method, all amounts collected are treated as a recoupment of the cost of the
item sold, until the entire cost associated with the transaction has been recovered. Only at this point profit
is recognized.

Construction
https://www.youtube.com/watch?v=_gQP9T0K7co
https://www.youtube.com/watch?v=rAIiW5wo7zw
https://www.youtube.com/watch?v=i7b7chRhVDg

Copyright of Prof. Hector U. Santos Jr., CPA, MBA


This online resource is intended solely to whom it is authorized to receive it. If you are not the intended recipient you are hereby notified that
any disclosure, copying, distribution or taking any action in reliance on the contents of this information is strictly prohibited and may be
unlawful.
SAINT VINCENT DE FERRER COLLEGE December 2019
BS ACCOUNTANCY (2nd semester SY 2020-2020) Part 2
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA

I. Introduction

The objective of PAS No.11 is to prescribe the accounting treatment of revenue and costs associated with
construction contracts. Because of the nature of the activity undertaken in construction contract, the date
at which the contract activity is entered into and the date when the activity is completed usually fall into
different accounting periods. Therefore, the primary issue in accounting for construction contract is the
allocation of contract revenue and contract costs to the accounting periods in which construction work is
performed. Further, PAS No. 11 establishes the standards for determining when contract revenue and
contract cost should be recognized as revenue and expenses in the income statement. It also provides
practical guidance on the application of these standards.

II. Construction Contract

A construction contract is contract specifically negotiated for the construction of an asset or a


combination of assets that are closely interrelated or interdependent in terms in their design, technology
and function or their ultimate purpose or use.
Two types of construction contract (or contract price):
1. A fixed price contract is a construction contract in which the contractor agrees to a fixed contract
price, or a fixed rate per unit of output, which in some cases is subject to cost escalation clauses.
2. A cost plus contract is a construction contract in which the contractor is reimbursed for allowance or
otherwise defined costs, plus a percentage of these costs or a fixed fee.

III. Contract Revenue

Contract revenue should comprise:


a. The initial amount of revenue agreed in the contract, and
b. Variations in contract work, claims and incentive payments:
1. To the extends that it is probable that they will result in revenue: and
2. They are capable of being reliably measured.

IV. Contract Cost

Contract should comprise:


a. Cost that relate directly to the specific contract;
b. Cost that are attributable to contract activity in general and can be allocated to the contract; and
c. Such other cost as are specifically chargeable to the customer under the terms of the contract.

V. Method of Construction Accounting

A. Percentage of Completion Method


When the outcome of a construction contract can be estimated reliably, contract revenue and contract
costs associated with the construction contract should be recognized as revenue and expenses,
respectively, by reference to the stage of completion of the contract activity at the balance sheet date.
Measuring the Percentage of Completion.

The stage of completion of a contract may be determined in a variety of ways. The enterprise uses the
method that measures reliably the work performed. Depending on the nature of the contract, the methods
may include:

1. Input Measures. Input measures are made in relation to the costs of efforts devoted to a contract. They
are based on an established or assumed relationship between a unit of input and productivity.

a. Cost-to-cost method – the proportion that contract costs incurred for work performed to date bear to the
estimated total contract costs;
b. Efforts-expended method - this is based on surveys of work performed.

2. Output Measures. - Output measures are made in terms of results achieved. This is based on the
completion of a physical proportion of the contract work. Architects and engineers are sometimes asked
to evaluate jobs and estimate what percentage of a job is complete.

Copyright of Prof. Hector U. Santos Jr., CPA, MBA


This online resource is intended solely to whom it is authorized to receive it. If you are not the intended recipient you are hereby notified that
any disclosure, copying, distribution or taking any action in reliance on the contents of this information is strictly prohibited and may be
unlawful.
SAINT VINCENT DE FERRER COLLEGE December 2019
BS ACCOUNTANCY (2nd semester SY 2020-2020) Part 2
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA

Progress payments and advances received from customers often do not reflect the work performed.
B. Cost Recovery Method of Construction Accounting/Hybrid/Zero-Profit Approach

When the outcome of a construction contract cannot be estimated reliably:


a. Revenue should be recognized only to the extent of contract costs incurred that it is probable will be
recoverable; and
b. Contract costs should be recognized as an expense in the period in which they are incurred.

VI. Recognition of Expected or Anticipated Losses

When it is probable that total contract costs will exceed total contract revenue, the expected loss should be
recognized as an expense immediately.
The amount of such a loss is determined irrespective of:
a. Whether or not work has commenced on the contract;
b. The stage of completion of contract activity; or
c. The amount of profits expected to arise on other contracts which are not treated as a single construction
contract.

VII. Changes in Estimates

The percentage of completion method is applied on a cumulative basis in each accounting period to the
current estimates of contract revenue and contract costs. Therefore, the effect of a change in the estimate
of the outcome of a contract is accounted for as a change in accounting estimate (see PAS No. 8,
Accounting Changes). The changed estimates are used in the determination of the amount of revenue and
expenses recognized in the income statement in the period in which the change is made and in subsequent
periods.

VIII. Contract Retentions

Retentions are amounts of progress billings which are not paid until the satisfaction of conditions
specified in the contract for the payment of such amounts or until defects have been rectified. Progress
billings are amounts billed for work performed on a contract whether or not they have been paid by the
customer. Advances are amounts received by the contractor before the related work is performed.

IX. Financial Statement Presentation

1. An enterprise should present:

a. The gross amount due from customers for contract work as an asset; and
b. The gross amount due to customers for contract work as a liability.

2. The gross amount due from customers for contract work is the net amount of:

a. Cost incurred plus recognized profits; less


b. The sum of recognized losses and progress billings for all contracts in progress for which costs incurred
plus recognized profits (less recognized losses) exceeds progress billings.

3. The gross amount due to customers for contract work is the net amount of:
a. Cost incurred plus recognized profits; less
b. The sum of recognized losses and progress billings for all contracts in progress for which progress
billings exceed costs incurred plus recognized profits (less recognized losses).

Franchise
https://www.youtube.com/watch?v=eOMuadaodAU
https://www.youtube.com/watch?v=WedZsnzpCd0
https://www.youtube.com/watch?v=OM4yt9ZVJlU
https://www.youtube.com/watch?v=lnYne5OG6S8
https://www.youtube.com/watch?v=knknNQH7UYc

Copyright of Prof. Hector U. Santos Jr., CPA, MBA


This online resource is intended solely to whom it is authorized to receive it. If you are not the intended recipient you are hereby notified that
any disclosure, copying, distribution or taking any action in reliance on the contents of this information is strictly prohibited and may be
unlawful.
SAINT VINCENT DE FERRER COLLEGE December 2019
BS ACCOUNTANCY (2nd semester SY 2020-2020) Part 2
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA

I. Introduction

Franchising is a system whereby one company grants business rights to another company or individual
through a contract to operate a franchised business for a specified period of time. The company granting
the business rights is called the franchisor, and the company receiving the business rights is called
franchisee.
Under PAS No. 18 it states that:
“Franchise fees may cover the supply of initial and subsequent services, equipment and other tangible
assets, and know-how. Accordingly, franchise fees are recognized as revenue on a basis that reflects the
purpose for which the fees were charged.”

II. Initial Franchise Fees


1. Initial franchise fees from franchise sales ordinarily must recognized (with provision for estimated
uncollectible amounts) when all material services or conditions relating to the sale have been substantially
performed or satisfied by the franchisor, Services are considered to be substantially performed when:
a. The franchisor has no remaining obligation or intent to refund any cash received or forgive any unpaid
noted or receivables;
b. Substantially all initial services of the franchisor required by the franchise agreement have been
performed; and
c. No other material conditions or obligations related to the determination of substantial performance
exist.

2. Installment or cost recovery accounting methods may be used to account for franchise fee revenue only
when revenue is collectible over an extended period and no reasonable basis exists for estimating
collectability.
3. If it is probable that continuing franchise fees will not cover the cost of the continuing services to be
provided by the franchisor and also allow reasonable profit, then a portion of the original franchise fee
should be deferred and amortized over the life of the franchise. The deferred amount should be enough to
cover future costs and provide a reasonable profit on the continuing services.

III. Continuing Franchise Fees


1. Report as revenue when the fees are earned and become receivable from the franchisee.
2. Costs related to continuing franchise fees should be expensed as incurred.

IV. Bargain Purchases


Bargain Purchases – The franchise agreement may allow the franchise to purchase equipment or supplies
at a reduced price for a specified period of time or up to a specified amount. If the bargain price is lower
than the selling price to other customers, or if the price does not provide the franchisor a reasonable profit
on the sale, then a portion of the initial franchise fee should be deferred and accounted for as an
adjustment of the selling price of the equipment or supplies.
V. Options to Purchase

A franchise agreement may give the franchisor an option to purchase the franchisee the franchisee‟s
business. As a matter of management policy, the franchisor may receive the right to purchase a profitable
outlet, or to purchase one that is in financial difficulty. If it is probable at the time the option is given that
the franchisor will ultimately purchase the outlet, then the initial franchise fee should not be recognized as
revenue but should be recorded as a liability. When the option is exercised, the liability would reduce the
franchisor‟s investment in the outlet.

VI. Franchisor’s Cost


1. Direct incremental costs relating to franchise sales ordinarily should be deferred until the related
revenue is recognized; however, the deferred costs must not exceed anticipated revenue less estimated
additional costs.
2. Indirect costs a regular and occurring nature irrespective of the level of sales should be expensed as
incurred.
3. Costs yet to be incurred should be accrued and charged against income no later than the period in
which the related revenue is recognized.

Copyright of Prof. Hector U. Santos Jr., CPA, MBA


This online resource is intended solely to whom it is authorized to receive it. If you are not the intended recipient you are hereby notified that
any disclosure, copying, distribution or taking any action in reliance on the contents of this information is strictly prohibited and may be
unlawful.
SAINT VINCENT DE FERRER COLLEGE December 2019
BS ACCOUNTANCY (2nd semester SY 2020-2020) Part 2
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA

Home Office and Branch


https://www.youtube.com/watch?v=x0kwd0Nqx28
https://www.youtube.com/watch?v=4WNcF9xD9wo

HOME OFFICE BRANCH AND AGENCY ACCOUNTING


I. Introduction

The branches of enterprises are not separate legal entities, they are separate economic and accounting
entities whose special features necessitate accounting procedures tailored for those features, such as the
reciprocal accounts. On the other hand, the sales agency is also not a separate business entity.

In this type of business set-up, one location referred to as the home office is usually the base of operations
wherein branches and agencies are maintained on different business locations depending on the function
and mode of operation.

II. Accounting for Branch Operations

Branch is used to describe a business unit located at some distance from the home office. This unit carries
merchandise obtained from the home office, generates sales, approve customer‟s credit and makes
collections from its customers. They may also obtain merchandise from outside suppliers. The cash
receipts of the branch are often deposited in a bank account and branch expenses are paid from an imprest
cash fund.

III. Accounting for Agency Operations

An agency is an unincorporated entity in which orders are received and then transmitted to the home
office for processing, shipping and billing of merchandise. They do not have merchandise available for
sale, but they maintain samples inventory, they rarely collect cash from customers, since collections are
remitted by customers directly to the home office.
Ordinarily, the only accounting records required for sales agencies are for cash receipts and
disbursements, which are handled in essentially the same manner as a petty cash fund system.

III. Recommended Reference(s):

Local and foreign author books.


Internet

Copyright of Prof. Hector U. Santos Jr., CPA, MBA


This online resource is intended solely to whom it is authorized to receive it. If you are not the intended recipient you are hereby notified that
any disclosure, copying, distribution or taking any action in reliance on the contents of this information is strictly prohibited and may be
unlawful.
SAINT VINCENT DE FERRER COLLEGE December 2019
BS ACCOUNTANCY (2nd semester SY 2020-2020) Part 2
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA

ONLINE ASSESSMENTS
1. On September 30, 2011 Roxas, Silverio and Tan agreed on a joint venture to sell their common stocks
shares of the Golden Copper Mines. Gains and losses are to be shared in proportion to be contributed
shares.

Roxas contributes P6,000 shares, which had cost him P42 a share; Silverio gave 10,000 shares which had
cost P58 each and Tan 4,000 shares which had cost P62 per share.
The par value of the shares was P50 and when the venture began market value was P40 a share.
On October 20 he sold 4,500 for P44 a share and P3,000 expenses incurred. On November 1, Golden
Copper distributed a stock dividend of 20% Tan sold 5,000 shares, ex-stock dividend, on November 5for
P25 a share. On November 22, he sold 6,000 shares for P28. On December 20, the remainder of the shares
were sold for P35 a share. Tan‟s expenses were P4,700.

The 20,000 shares contributed to the venture should be valued at:


a. P800,000 c. P1,080,000
b. P1,000,000 d. P1,200,000

2. AJD Builder entered into a contract to construct an office building and plaza at a contract price of
P10,000,000. Gross profit is to be recognized using the percentage of completion method-output
measures as determined by estimates made by the architect. The data below summarize the activities on
the construction for the year 2010 through 2012:

Actual Estimated Percentage Complete Progress


Year Cost Incurred Cost to Complete Architect‟s Estimate Billing Collections
2010 P3,200,000 P6,000,000 25% P3,300,000 P3,100,000
2011 4,300,000 1,600,000 75% 4,500,000 4,000,000
2012 1,550,000 0 100% 2,200,000 2,900,000
Compute the recognized ross profit- proportional cost approach for the year:
2010 2011 2012 2010 2011 2012

a. P200,000; P675,000; P950,000 c. P278,261; P741,758; P950,000


b. 278,261; 463,497; 208,242 d. 200,000; 475,000; 275,000

3. On September 30, 2011, Criselda‟s, Inc. received from Ambo P550,000 representing franchise fee.
Franchise services were immediately started by Criselda‟s and these completed on October 31, 2011 at
cost amounting to P330,000. The franchise fee revenue to be reported by Criselda‟s in its October 31,
2011 income statements is:

a. P 0 c. P220,000
b. P137,500 d. P550,000

4. Charity, Inc. established its first branch on May 1, 2011. During the first month of operation, the home
office shipped merchandise to the branch worth P138,000 which included a mark-up of 15% on cost.
Sales for cash were P80,000 while sales on account were P250,000. At the month‟s end, the branch
reported operating expenses of P38,000 and a closing inventory of P23,000 at billed price. As far as the
home office is concerned, the true branch net income for May, 2011 is:
a. P82,000 c. P177,000
b. P147,000 d. P192,000

5. Your client furnished you with the following data:


Merchandise inventory, Jan. 1 P 60,000
Purchases, Jan. 1 to Oct. 31 415,000
Purchases returns and allowances 5,000
Transportation In 10,000
Sales, Jan. 1 to Oct. 31, at 35% above cost 540,000
Merchandise not damaged by fire on Oct. 31 42,000
Using the gross profit test, what was the estimated loss in inventory due to the fire?
a. P38,000 c. P80,000
b. P60,000 d. None of the choices

Copyright of Prof. Hector U. Santos Jr., CPA, MBA


This online resource is intended solely to whom it is authorized to receive it. If you are not the intended recipient you are hereby notified that
any disclosure, copying, distribution or taking any action in reliance on the contents of this information is strictly prohibited and may be
unlawful.
SAINT VINCENT DE FERRER COLLEGE December 2019
BS ACCOUNTANCY (2nd semester SY 2020-2020) Part 2
ONLINE RESOURCES by Prof. Hector Santos Jr., CPA, MBA

6. You were engaged to audit the books of accounts of A. Bonifacio Contractors which had a 3-year
construction contract in 2006 for P900,000. A. Bonifacio uses the percentage-of-cost-completion method
for financial statement purposes. Income to be recognized each year is based on the ratio of cost incurred
to total estimated cost to complete the contract. Data on this contract follows:

Accounts receivables construction contract billings P30,000


Construction in progress P93,750
Less: Amount billed 84,375
10% retention 9,375
Net income recognized in 2006 (before tax) 15,000
Bonifacio Contractors maintains a separate bank account for each construction contract. Bank deposits to
this contract amounted to P50,000.
How much cash collected on the contract was not yet deposited as at December 31, 2006?
a. P4,375 c. P19,375
b. P13,750 d. P28,750

7. On an audit engagement for 2006 you handled the audit of fixed assets of A. Luna Copper Mines. This
company bought the exploration rights of Maharishi Mineral Exploration on June 30,2006 for
P7,290,000. Of this purchase price, P4,860,000 was allocated to copper ore which had remaining reserves
estimated at P1,620,000 tons. A. Luna Copper Mines expects to extract 15,000 tons of ore a month with
an estimated selling price of P50/ton. Production started immediately after some new machineries costing
P600,000 were bought on June 30, 2006. These new machineries had an estimated useful life of 5 yrs
with a scrap value of 10% of cost after the ore estimate has been extracted from the property, at which
time the machineries will already be useless. Among the operating expenses of A. Luna Copper Mines at
Dec. 31, 2006 were:
Depletion expense P 405,000
Depreciation, Machineries 40,000
Recorded depletion expense was:
a. Overstated by P90,000 c. overstated by P135,000
b. Understated by P90,000 d. understated by P135,000

8. As to source, the Tax Code classifies income into:


a. Income which is derived in full from sources within the Philippines.
b. Income which is derived in full from sources outside the Philippines.
c. Income which is derived partly from sources outside the Philippines.
d. None of the choices.

9. The term means the excess of the losses from the sales or exchanges of capital assets over the gain
from such sales or exchanges.
a. Net capital gain c. Taxable net income
b. Net capital loss d. Net operating loss

10 ERA Corporation is engaged in the sale of goods and services with net sales/net revenue of P200,000
and P100,000 respectively. The total entertainment, amusement and recreation expense for the taxable
quarter is P3,000.

How much is the amount of the deductible entertainment, amusement and recreation expense?
a. P3,000 c. P1,500
b. P2,000 d. P1,000

Should be submitted on or before


April 30, 2020 exclusively to
svfconlinebsa@yahoo.com

Copyright of Prof. Hector U. Santos Jr., CPA, MBA


This online resource is intended solely to whom it is authorized to receive it. If you are not the intended recipient you are hereby notified that
any disclosure, copying, distribution or taking any action in reliance on the contents of this information is strictly prohibited and may be
unlawful.