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ACCOUNTING

FOR
SPECIAL
TRANSACTIONS
(Advanced Accounting 1)

2018 Edition

BASED ON
PHILIPPINE FINANCIAL REPORTING STANDARDS (PFRSs)

Nation’s Foremost CPA Review Inc. (NCPAR)


4F Pelizloy Centrum, Lower Session Road, Baguio City 2600, Philippines
Mobile Number: (0917) 870 6962

Nation's Foremost CPAR


ii

ALL RIGHTS RESERVED


2018

No part of this work covered by the


copyright hereon may be reproduced or
used in any form or by any means -
electronic or mechanical, including
photocopying – without the written
permission of the author.

ISBN 978-621-8029-12-5

Any copy of this book not bearing the


signature of the author shall be considered
as proceeding from an illegal source.

_______________________________________

Published by:

BANDOLIN ENTERPRISE
(Publishing and Printing)
#66 BAKAKENG CENTRAL, MARCOS HIGHWAY, BAGUIO CITY
CONTACT NOS.
Bandolin Enterprise - Globe: (0917) 813 6037;
Smart: (0928) 374 7571; Landline (074) 442 6764
Author - (0917) 870 6962
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Dear Reader,
This book is intended for students taking up the CHED-
required subject “Accounting for Special Transactions” (formerly
Advanced Accounting 1).
This book is based on current Philippine Financial
Reporting Standards (PFRSs). It is a labor of love and it is
dedicated to you, my reader. I have written this book with the
following goals in mind: completeness, conciseness, simplicity,
fun to learn and practical application. Complex accounting
concepts are not eliminated simply because they are too difficult
to comprehend but rather they are simplified to the highest
possible extent.
Your thoughts about this book are important to me. If later
on you have queries, comments, or suggestions on how I can
improve my work, I would be glad if you inform me. Here are my
contact details: zeusvernonmillan@gmail.com and (0917) 870 6962.
Good luck in your learning and best wishes in your
journey through life…...thank you for making me a part of it.

Sincerely,

Zeus Vernon B. Millan


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Acknowledgements
I would like to extend my sincere gratitude to my family and
relatives for their support all throughout the writing of this book;
to my wife Eureka, my son Devin Joshua, and my daughter
Athena for their sacrifices; to my Dad and Mom for the source of
inspiration; to my in-laws Engr. John L. Socalo, Sr. and Dominga
S. Socalo for the assistance and trust; to my sister Donna Pamela
for the extra help; to my college instructors who have taught me
most of the techniques I have incorporated in this book; to Mr.
Darrell Joe Asuncion, Dean Renante D. Balocating, Mr. Rex B.
Banggawan, Mr. Christopher U. Ismael, Mr. John Carlo G.
Bandolin, and Mr. Einroul Aljohnza A. Bandolin for the much
needed encouragement and support; to my fellow instructors at
NCPAR; colleagues in the profession; previous clients; previous
students; to the staff of the Bandolin Enterprise; and friends who
in one way or another have contributed, directly or indirectly, to
the completion of this book.



About the Author


The author is a 6th Placer in the October 2006 CPA board
examinations. He is a co-founder of, and a CPA reviewer at,
Nation’s Foremost CPA Review Inc. (NCPAR), a teacher, and an
entrepreneur.
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Tips on using this book


To get the most out of this book, I strongly suggest you do the
following:

1. Re-solve the illustrations independently.


After reading a chapter, re-solve the illustrations
independently by covering the suggested solutions with a
piece of paper.

2. Read and reread the chapter summaries


Be sure to read the summary after reading each chapter. This
will reinforce what you have just learned. It is also advisable to
reread the chapter summaries from time to time to ensure that
you are not forgetting the concepts you have learned as you
learn additional concepts.
Long-term memory is invaluable in passing the board
exams (as well as making professional judgments in the
exercise of the profession). However, the human memory is not
without limit. The human brain tends to forget information as
new information is learned. To avoid this, one will need to
recall information previously learned repeatedly as many
times as needed. Studies show that when one forgets
information previously learned, he will need to spend the same
effort in learning that information again!

3. Enjoy learning. Nothing is difficult if you have the passion in


doing it.
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TABLE OF CONTENTS
CHAPTER 1
PARTNERSHIP FORMATION ....................................................................... 1
CHARACTERISTICS OF A PARTNERSHIP .................................................................. 1
ACCOUNTING FOR PARTNERSHIPS ....................................................................... 4
FORMATION .................................................................................................. 4
Valuation of contributions of partners .................................................. 5
PARTNERS’ LEDGER ACCOUNTS .......................................................................... 6
BONUS ON INITIAL INVESTMENTS ..................................................................... 10
Variations to the bonus method .......................................................... 12
CHAPTER 1: SUMMARY .................................................................................. 14
PROBLEMS ............................................................................................... 15

CHAPTER 2
PARTNERSHIP OPERATIONS ..................................................................... 31
DIVISION OF PROFITS AND LOSSES..................................................................... 31
CHAPTER 2: SUMMARY .................................................................................. 52
PROBLEMS ............................................................................................... 52

CHAPTER 3
PARTNERSHIP DISSOLUTION .................................................................... 65
DISSOLUTION ............................................................................................... 65
ADMISSION OF PARTNER ................................................................................ 66
Purchase of interest ............................................................................. 66
Revaluation of assets ....................................................................... 68
Investment in the partnership ............................................................. 70
WITHDRAWAL, RETIREMENT OR DEATH OF A PARTNER.......................................... 78
INCORPORATION OF A PARTNERSHIP ................................................................. 89
CHAPTER 3: SUMMARY .................................................................................. 94
PROBLEMS ............................................................................................... 95

CHAPTER 4
PARTNERSHIP LIQUIDATION .................................................................. 113
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LIQUIDATION ............................................................................................. 113


METHODS OF LIQUIDATION ........................................................................... 113
SETTLEMENT OF CLAIMS ............................................................................... 114
LUMP-SUM LIQUIDATION VS. INSTALLMENT LIQUIDATION ................................... 115
MARSHALLING OF ASSETS ............................................................................. 124
NON-CASH ASSET USED AS PAYMENT FOR CLAIM ............................................... 141
SAFE PAYMENT SCHEDULE ............................................................................. 143
CASH PRIORITY PROGRAM ............................................................................. 149
CHAPTER 4: SUMMARY ................................................................................ 155
PROBLEMS ............................................................................................. 156

CHAPTER 5
CORPORATE LIQUIDATION & REORGANIZATION ................................... 172
MEASUREMENT BASIS .................................................................................. 173
FINANCIAL REPORTS..................................................................................... 173
Statement of affairs ........................................................................... 173
Statement of realization and liquidation ........................................... 183
REORGANIZATION ....................................................................................... 205
Types of corporate reorganization .................................................... 206
CHAPTER 5: SUMMARY ................................................................................ 207
PROBLEMS: ............................................................................................ 211

CHAPTER 6
JOINT ARRANGEMENTS ......................................................................... 224
JOINT ARRANGEMENT .................................................................................. 224
Contractual arrangement .................................................................. 224
Joint control ....................................................................................... 225
TYPES OF JOINT ARRANGEMENT ..................................................................... 228
Rights and obligations arising from the arrangement ....................... 229
Assessment of rights and obligations ................................................ 230
JOINT OPERATIONS ...................................................................................... 233
ACCOUNTING FOR JOINT OPERATION TRANSACTIONS .......................................... 235
No separate records are maintained ................................................. 235
Separate records are maintained ...................................................... 243
ADDITIONAL ILLUSTRATIONS: ......................................................................... 248
INTEREST IN JOINT OPERATIONS WHOSE ACTIVITY CONSTITUTES A BUSINESS ........... 261
JOINT VENTURES ......................................................................................... 266
Presentation in statement of financial position ................................ 267
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Transactions between a venturer and a joint venture ...................... 267


PARTICIPANT TO A JOINT ARRANGEMENT WITH NO JOINT CONTROL ....................... 267
SEPARATE FINANCIAL STATEMENTS ................................................................. 268
CHAPTER 6: SUMMARY ................................................................................ 268
RELEVANT PROVISIONS OF THE PFRS FOR SMES ............................................... 272
SECTION 15 INVESTMENTS IN JOINT VENTURES ................................................ 272
Jointly controlled operations ............................................................. 272
Jointly controlled assets .................................................................... 273
Jointly controlled entities .................................................................. 273
Measurement – accounting policy election....................................... 273
Transactions between a venturer and a joint venture ...................... 274
Investor does not have joint control ................................................. 274
Impairment ........................................................................................ 274
PROBLEMS ............................................................................................. 276

CHAPTER 7
CONSTRUCTION CONTRACTS ................................................................. 296
DEFINITION OF CONSTRUCTION CONTRACT ...................................................... 298
APPLICATION OF THE BASIC PRINCIPLES OF PFRS 15 ......................................... 299
Step 1: Identify the contract with the customer ............................... 299
Combination of contracts .............................................................. 300
Step 2: Identify the performance obligations in the contract ........... 300
Satisfaction of performance obligations ....................................... 303
Step 3: Determine the transaction price ........................................... 310
Step 4: Allocate the transaction price to the performance obligations
........................................................................................................... 313
Step 5: Recognize revenue when (or as) a performance obligation is
satisfied .............................................................................................. 313
PERFORMANCE OBLIGATIONS SATISFIED OVER TIME ........................................... 314
METHODS FOR MEASURING PROGRESS ............................................................ 314
INPUT METHODS ......................................................................................... 314
Cost-to-cost ....................................................................................... 314
Efforts-expended (labor hours-based) method ................................. 318
CONTRACT COSTS........................................................................................ 320
ADJUSTMENTS TO THE MEASURE OF PROGRESS UNDER THE INPUT METHOD ............ 326
PRESENTATION ........................................................................................... 330
ACCOUNTING FOR CONSTRUCTION CONTRACTS ................................................ 335
OUTPUT METHODS ...................................................................................... 349
CHANGES IN THE MEASURE OF PROGRESS......................................................... 352
REASONABLE MEASURES OF PROGRESS ............................................................ 354
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ONEROUS CONTRACT ................................................................................... 356


VARIABLE CONSIDERATION ............................................................................ 365
Incentive payments ........................................................................... 367
Cost escalations ................................................................................. 373
CONTRACT MODIFICATIONS........................................................................... 374
Variations on the contract (Change orders) ...................................... 376
CHANGES IN THE TRANSACTION PRICE ............................................................. 376
Claims for reimbursements on the contract ...................................... 379
EXISTENCE OF A SIGNIFICANT FINANCING COMPONENT IN THE CONTRACT ............... 385
NON-CASH CONSIDERATION .......................................................................... 387
UNCERTAINTY IN THE COLLECTABILITY OF CONTRACT REVENUE ............................. 387
ADDITIONAL ILLUSTRATIONS: ................................................................ 390
CHAPTER 7: SUMMARY ................................................................................ 406
PROBLEMS ............................................................................................. 408

CHAPTER 8
ACCOUNTING FOR FRANCHISE OPERATIONS – FRANCHISOR ................. 441
LICENSING ................................................................................................. 443
FRANCHISE ................................................................................................ 443
APPLICATION OF THE PRINCIPLES OF PFRS 15 .................................................. 444
STEP 1: IDENTIFY THE CONTRACT WITH THE CUSTOMER ...................................... 444
STEP 2: IDENTIFY THE PERFORMANCE OBLIGATIONS IN THE CONTRACT ................... 446
General principles: ............................................................................. 446
Specific principles: (‘Licensing’ section) ............................................. 448
Right to access ............................................................................... 450
Right to use .................................................................................... 451
STEP 3: DETERMINE THE TRANSACTION PRICE ................................................... 459
Franchise fees .................................................................................... 460
STEP 4: ALLOCATE THE TRANSACTION PRICE TO THE PERFORMANCE OBLIGATIONS .... 462
STEP 5: RECOGNIZE REVENUE WHEN (OR AS) A PERFORMANCE OBLIGATION IS SATISFIED
............................................................................................................... 466
EXISTENCE OF A SIGNIFICANT FINANCING COMPONENT IN THE CONTRACT ............... 472
JOURNAL ENTRIES .................................................................................. 475
CONTRACT COSTS........................................................................................ 488
UNCERTAINTY IN THE COLLECTABILITY OF CONTRACT REVENUE ............................. 495
CHAPTER 8: SUMMARY ................................................................................ 502
PROBLEMS ............................................................................................. 503
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CHAPTER 9
CONSIGNMENT SALES ............................................................................ 519
CONSIGNMENT ARRANGEMENTS .................................................................... 519
PRINCIPAL VERSUS AGENT CONSIDERATIONS..................................................... 522
CHAPTER 9: SUMMARY ................................................................................ 527
PROBLEMS: ............................................................................................ 528

CHAPTER 10
INSTALLMENT SALES METHOD............................................................... 537
INSTALLMENT SALES METHOD ........................................................................ 537
Applicability ....................................................................................... 537
Brief history ....................................................................................... 538
ACCOUNTING PROCEDURES ........................................................................... 538
PRESENT VALUE .......................................................................................... 551
REPOSSESSION ........................................................................................... 559
TRADE-INS ................................................................................................. 567
ALLOCATION OF COST OF GOODS SOLD ............................................................ 574
COST RECOVERY METHOD ............................................................................. 578
CHAPTER 10: SUMMARY .............................................................................. 581
PROBLEMS ............................................................................................. 584

CHAPTER 11
HOME OFFICE, BRANCH AND AGENCY ACCOUNTING ............................. 602
BRANCH AND AGENCY DISTINGUISHED ............................................................ 602
ACCOUNTING FOR AN AGENCY ....................................................................... 604
ACCOUNTING FOR BRANCH OPERATIONS .......................................................... 605
RECIPROCAL ACCOUNTS (INTEROFFICE OR INTRA-COMPANY ACCOUNTS) ................ 606
INDIVIDUAL FINANCIAL STATEMENTS ............................................................... 613
COMBINED FINANCIAL STATEMENTS................................................................ 616
RECONCILIATION OF RECIPROCAL ACCOUNTS .................................................... 621
Home office with several branches ................................................... 628
SPECIAL PROBLEMS IN ACCOUNTING FOR BRANCH OPERATIONS ............................ 639
Shipments to branch billed at a price above cost .............................. 639
ADDITIONAL ILLUSTRATIONS: ............................................................ 648
Inter-branch transactions .................................................................. 675
Inter-branch transfers of cash ....................................................... 675
Inter-branch transfers of merchandise ......................................... 676
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CHAPTER 11: SUMMARY .............................................................................. 679


PROBLEMS ............................................................................................. 680

CHAPTER 12
INSURANCE CONTRACTS ........................................................................ 695
INSURANCE CONTRACT ................................................................................. 696
Essential elements in the definition of an insurance contract .......... 696
Significant insurance risk (Uncertain future event) ....................... 697
Indemnification against loss .......................................................... 698
LEGAL PRINCIPLES OF INSURANCE ................................................................... 700
TYPES OF INSURERS ..................................................................................... 704
TYPES OF INSURANCE CONTRACTS .................................................................. 704
SEPARATING COMPONENTS FROM AN INSURANCE CONTRACT............................... 706
LEVEL OF AGGREGATION OF INSURANCE CONTRACTS .......................................... 706
RECOGNITION ............................................................................................ 706
INITIAL MEASUREMENT ................................................................................ 707
Fulfillment cash flows ........................................................................ 707
Contractual service margin ................................................................ 707
SUBSEQUENT MEASUREMENT ....................................................................... 708
ONEROUS CONTRACTS ................................................................................. 709
PREMIUM ALLOCATION APPROACH ................................................................ 710
REINSURANCE CONTRACTS HELD .................................................................... 711
INVESTMENT CONTRACTS WITH DISCRETIONARY PARTICIPATION FEATURES.............. 713
MODIFICATION OF AN INSURANCE CONTRACT ................................................... 714
DERECOGNITION ......................................................................................... 714
PRESENTATION ........................................................................................... 715
CHAPTER 12: SUMMARY .............................................................................. 716

CHAPTER 13
ACCOUNTING FOR BUILD-OPERATE-TRANSFER (BOT) ............................ 722
FEATURES OF BOT ARRANGEMENTS ............................................................... 724
SCOPE ...................................................................................................... 724
ACCOUNTING ISSUES ................................................................................... 725
Treatment of the operator’s rights over the infrastructure .............. 726
Recognition and measurement of arrangement consideration ........ 726
Construction or upgrade services ...................................................... 727
Consideration given by the grantor to the operator ..................... 727
Financial asset ........................................................................... 727
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Intangible asset ......................................................................... 728


Partly by a financial asset and an intangible asset .................... 728
Operation services ............................................................................. 728
Contractual obligations to restore the infrastructure to a specified
level of serviceability ......................................................................... 728
Borrowing costs incurred by the operator ........................................ 729
Items provided to the operator by the grantor ................................. 729
ACCOUNTING FOR SERVICE CONCESSION ARRANGEMENTS .................................. 730
CHAPTER 13: SUMMARY .............................................................................. 751
RELEVANT PROVISIONS OF THE PFRS FOR SMES ............................................... 752
SECTION 34 SPECIALIZED ACTIVITIES ............................................................... 752
Service concession arrangements ..................................................... 752
Two principal categories of service concession arrangements ......... 752
Accounting – financial asset model ................................................... 753
Accounting – intangible asset model ................................................. 753
Operating revenue ............................................................................. 754
PROBLEMS ............................................................................................. 754
REFERENCES .......................................................................................... 764