FINAL EXAM

PART I. CORPORATE LIQUIDATION

Multiple Choice: Theories

1. A special purpose statement prepared to show financial condition of an insolvent business is the:
a. Charge and Discharge Account
b. Deficiency Statement
c. Realization and Liquidation Account
d. Statement of Affairs
2. When the accounting equation of a corporation computes a negative ownership position, because liabilities are
greater than assets, the firm is
a. a distressed corporation.
b. a bankrupt corporation.
c. insolvent in the equity sense.
d. insolvent in the bankruptcy sense.
3. In typical trustee accounting
a. gains and losses on the sale of assets are charged to the estate equity account.
b. unrecorded liabilities discovered by the trustee are credited to the estate equity account and credited to the
liability account.
c. liquidation expenses are charged to the estate equity account.
d. all of the above procedures are typical for trustee accounting.
4. One of the most important characteristics of joint arrangement is: (4)
a. the parties are bound by a contractual arrangement
b. the activities of the joint arrangement should be specified
c. the rights of the parties are clearly specified
d. it should be notarized
5. First Statement: In a joint venture, scrip dividends as bonds payable is acceptable as dividends.
Second Statement: In a joint venture, Investment in associate as property dividends is not acceptable.
a. Both statements are TRUE
b. Both statements are FALSE
c. Only the first statement is TRUE
d. Only the second statement is TRUE

True or False

6. Beginning estate equity plus new asset minus new liability plus any gain or minus loss from realization minus
administrative expenses is equal to? Estate Deficit
7. Ending balances of cash plus ending balance of unrealized asset minus ending balance of liabilities which is higher
than the total asset is equal to? Estate Deficit
8. Proceeds from realization minus liquidated liabilities and supplementary charges is the ending balance of cash.
False: Plus the beginning cash balance
9. Assets to be realized plus new asset minus assets realized and assets not realized is the gain or loss on realization.
T
10. The sum of assets to be realized, new assets, liabilities liquidated, liabilities not liquidated and supplementary
expenses minus the sum of assets realized, assets not realized, liabilities to be liquidated, liabilities incurred and
supplementary credits is equal to income or loss for the period. False: New Liabilities Incurred

Multiple Choice: Problem Solving

1. Part Corporation is a parent, having purchased 80% of Sand Company’s common stock at par value for 800,000. Sand
company is in financial difficulty. The parent granted an unsecured loan of 400,000 to the subsidiary. An accounting statement
of affairs for Sand Company shows a dividend of 40%. Part Corporation can expect to receive the payment for its investment
in Sand Company for approximately:
a. 640,000
b. 320,000
c. 160,000
d. 0
2. Lakeside Bank holds a 100,000 note secured by a building owned by Fly-by-Night Manufacturing, which has filed for
bankruptcy. If the property has a book value of 120,000 and a fair market value of 90,000, what is the best way to describe
the note held by Second Bank and Trust Company? The bank has an:
a. Secured claim of 100,000
b. Unsecured claim of 100,000
c. Secured claim of 90,000 and unsecured claim of 10,000
d. Unsecured claim of 100,000 and unsecured claim of 20,000.
3. Dobby Corporation was forced into bankruptcy and is in the process of liquidation of assets and paying claims. Unsecured
claims will be paid at the rate of thirty cents on the peso. Carson holds a note receivable from Dobby for 75,000 collateralized
by an asset with a book value of 50,000 and a liquidation value of 25,000. The amount to be realized by Carson on this note
is:
a. 25,000
b. 40,000
c. 50,000
d. 75,000
4. Poor Company filed voluntary bankruptcy petition and the settlement of affairs reflected the following amounts:
Assets Book Value Estimated Current Value
Assets Pledge with Fully Secured Creditors 450,000 555,000
Assets Pledge with Partially Secured Creditors 270,000 180,000
Free Assets 630,000 480,000

Liabilities
With Priority 105,000
Fully Secured Creditors 390,000
Partially Secured Creditors 300,000
Unsecured Creditors 810,000

Assume the assets are converted to cash to their estimated values, what amount of cash will be available to pay the unsecured
non-priority claims?
a. 360,000
b. 420,000
c. 480,000
d. 540,000
5. Target Corporation was forced into bankruptcy and is in the process of liquidating assets and paying claims. Unsecured
claims will be paid at the rate of thirty cents on the peso. Arrow hold a note receivable from Target for 90,000 collateralized
by an asset with a book value of 60,000 and a liquidation value of 30,000. The amount to be realized by arrow on this note is:
a. 30,000
b. 48,000
c. 60,000
d. 90,000
6. Sparkman Co. filed a bankruptcy petition and liquidated its non-cash assets. Sparkman was paying forty cents on the dollar
for unsecured claims. Bailey Co. held a mortgage of 150,000 on land that was sold for 110,000. The total amount of payment
that Bailey should have received is calculated to be:
a. 110,000
b. 44,000
c. 126,000
d. 134,000
e. 60,000
Orville Company recently petitioned for bankruptcy and is now in the process of preparing a statement of affairs. The carrying
values and estimated values of the assets are as follows:
Carrying Value Fair Value
Cash 20,0000 -
A/R 45,000 30,000
Inventory 60,000 35,000
Land 75,000 70,000
Building 180,000 100,000
Equipment 170,000 80,000

Debts of Orville are as follows:

A/P 60,000
Wages Payable(all have priority) 10,000
Taxes Payable 10,000
Notes Payable(secured by rec. and inventory) 120,000
Interest on Notes Payable 6,000
Bonds Payable(secured by land and building) 150,000
Interest on Bonds Payable 7,000

7. What is the total amount of unsecured claim?

8. What estimated amount will be available for general unsecured creditors upon liquidation?
9. What is the estimated dividend percentage?

The following data are taken from the statement of affairs of the John Company.

Assets pledged with fully secured creditors (realizable value, P190,000) P240,000
Assets pledged with partially secured creditors (realizable value, P90,000) P110,000
Free assets (realizable value, P102,000) P160,000
Fully secured creditor claims P91,000
Partially secured creditor claims P120,000
Unsecured creditor claims with priority P30,000
General unsecured creditor claims P350,000

10. What is the amount that will be paid to partially secured creditors?
11. What is the payment rate to general unsecured creditors?
12. What is the amount that will be paid to general unsecured creditors?

Miss Universe filed a voluntary bankruptcy petition on August 15, 2014, and the statement of affairs reflected the following
amounts:
Estimated
Book Current
Value Value
Assets
Assets pledged with full secured creditors P 900,000 P1,110,000
Assets pledged with partially secured creditors 540,000 360,000
Free assets 1,260,000 960,000
 Total P2,700,000 P2,430,000

Liabilities
Liabilities with priority P 210,000
Fully secured creditors 780,000
Partially secured creditors 600,000
Unsecured creditors 1,620,000
Total P3,210,000

13. Assume that the assets are converted to cash at the estimated current values and the business is liquidated. What amount
of cash will be available to pay unsecured non-priority claims?

14. Pia Companies is insolvent and its statement of affairs shows the ff information: Estimated gains on realization of assets-
1,440,000, Estimated losses on realization of assets-2,000,000, Additional Assets-1,280,000, Additional liabilities-960,000,
Capital Stock-2,000,000, and Deficit-1,200,000. The prorate payment on the peso to stockholder is:

PART II: Franchise

1. Types of franchising arrangements include all of the following except

a. service sponsor-retailer.
b. wholesaler-service sponsor.
c. manufacturer-wholesaler.
d. wholesaler-retailer.

2. Some of the initial franchise fee may be allocated to

a. co ntinuing franchise fees.
b. interest revenue on the future installments.
c. options to purchase the franchisee's business.
d. All of these may reduce the amount of the initial franchise fee that is recognized as revenue.

3. Continuing franchise fees should be recorded by the franchisor

a. as revenue when earned and receivable from the franchisee.
b. as revenue when received.
c. in accordance with the accounting procedures specified in the franchise agreement.
d. as revenue only after the balance of the initial franchise fee has been collected.

4. Occasionally a franchise agreement grants the franchisee the right to make future bargain purchases of equipment or
supplies. When recording the initial franchise fee, the franchisor should
a. increase revenue recognized from the initial franchise fee by the amount of the expected future purchases.
b. record a portion of the initial franchise fee as unearned revenue which will increase the selling price when the franchisee
subsequently makes the bargain purchases.
c. defer recognition of any revenue from the initial franchise fee until the bargain purchases are made.
d. None of these.

5. A franchise agreement grants the franchisor an option to purchase the franchisee's business. It is probable that the option
will be exercised. When recording the initial franchise fee, the franchisor should
a. record the entire initial franchise fee as a deferred credit which will reduce the franchisor's investment in the purchased
outlet when the option is exercised.
b. record the entire initial franchise fee as unearned revenue which will reduce the amount of cash paid when the option is
exercised.
c. record the portion of the initial franchise fee which is attributable to the bargain purchase option as a reduction of the
future amounts receivable from the franchisee.
d. None of these.

6. On April 1, 2012 Weston, Inc. entered into a franchise agreement with a local business-man. The franchisee paid
P240,000 and gave a P160,000, 8%, 3-year note payable with interest due annually on March 31. Weston recorded the
P400,000 initial franchise fee as revenue on April 1, 2012. On December 30, 2012, the franchisee decided not to open an
outlet under Weston's name. Weston canceled the franchisee's note and refunded P128,000, less accrued interest on the
note, of the P240,000 paid on April What entry should Weston make on December 30, 2012?
a. Loss on Repossessed Franchise 128,000
Cash 128,000
b. Loss on Repossessed Franchise 118,400
Cash 118,400
c. Loss on Repossessed Franchise 278,400
Cash 118,400
Note Receivable 160,000
d. Revenue from Franchise Fees 400,000
Interest Income 9,600
Cash 118,400
Note Receivable 160,000
Revenue from Repossessed Franchise 112,000

7. On January 1, 2012 Dairy Treats, Inc. entered into a franchise agreement with a company allowing the company to do
business under Dairy Treats's name. Dairy Treats had performed substantially all required services by January 1, 2012, and
the franchisee paid the initial franchise fee of P560,000 in full on that date. The franchise agreement specifies that the
franchisee must pay a continuing franchise fee of P48,000 annually, of which 20% must be spent on advertising by Dairy
Treats. What entry should Dairy Treats make on January 1, 2012 to record receipt of the initial franchise fee and the
continuing franchise fee for 2012?
a. Cash 608,000
Franchise Fee Revenue 560,000
Revenue from Franchise Fees 48,000
b. Cash 608,000
Unearned Franchise Fees 608,000
c. Cash 608,000
Franchise Fee Revenue 560,000
Revenue from Franchise Fees 38,400
Unearned Franchise Fees 9,600
d. Prepaid Advertising 9,600
Cash 608,000
Franchise Fee Revenue 560,000
Revenue from Franchise Fees 48,000
Unearned Franchise Fees 9,600

8. Wynne Inc. charges an initial franchise fee of P920,000, with P200,000 paid when the agreement is signed and the
balance in five annual payments. The present value of the future payments, discounted at 10%, is P545,872. The
franchisee has the option to purchase P120,000 of equipment for P96,000. Wynne has substantially provided all initial
services required and collectibility of the payments is reasonably assured. The amount of revenue from franchise fees is
a. P200,000.
b. P721,872.
c. P745,872.
d. P920,000.

9. On January 4, 2013 Magnum Ice Cream signed an agreement authorizing Jacklyn to operate for initial franchise fee of
500,000. On July 1, 2013 the operation commenced and all initial services had been performed at a cost of 10,000. In addition
she has to pay 5% monthly of its gross sales. Jacklyn reported 400,000 from the commencement period to the end of the
year. How much is the net income to be reported by Magnum?

a. 590,000 b. 490,000 c. 520,000 d. 510,000

10. Mr. Not Company signed in 2013 an agreement to operate as a franchisee of Louie Cream Company for an initial
franchise fee of 10,000,000. On the same date, Not Company paid 6,000,000 and pay the balance for four annual
payments, non-interest bearing note. The collectability of the note is not reasonably assured. Not Company can borrow at
14%. Loiue Cream already rendered initial services with a total cost of 2,000,000. The franchisor also incurred indirect cost
of 50,000. The agreement requires 5% continuing franchise fee. Total Sales reported by Not Company is 5,000,000. What
is the net income to be reported by Mr. Not Company as a franchisor?
11. On March 1, 2017, Mr. Patty Company signed an agreement with Arthur Company with an initial franchise fee of 255,000
with a down payment of 95,000 and the balance for four annual payments, non-interest bearing note. Normal borrowing rate
is 12%. Down payment is non-refundable, the collection is reasonably assured and the franchisor has substantially performed
substantially all the services. How much revenue from the initial franchise fee will be reported by Arthur Company?

12. Pasta Inn charges an initial fee of P800,000 for a franchise, with P160,000 paid when the agreement is signed and the
balance in four annual payments. The present value of the annual payments, discounted at 10%, is P507,200. The franchisee
has the right to purchase P60,000 of kitchen equipment and supplies for P50,000. An additional part of the initial fee is for
advertising to be provided by Pasta Inn during the next five years. The value of the advertising is P1,000 a month. Collectibility
of the payments is reasonably assured and Pasta Inn has performed all the initial services required by the contract.

13. Camille H has created a franchise based on the it movie Bukas Luluhod Ang Mga Tala. Many jumped on this movie
bandwagon and several franchise agreements have been signed. At December 2013 the following franchisees have open
accounts with Camille H.
Ana Bea Cora Dora
Cash Paid 100,000 100,000 100,000 100,000
Notes (face 500,000) 350,000 200,000 455,000 275,000
Services Completed 25% 10% 95% 100%
Prob. Of Collection Likely Unlikely Likely Likely
CFF 1% of NI 1% of NI 1% of NI 1% of NI
Period of Refund 1/31/09 2/28/09 12/31/08 12/31/08
What is the total franchise fees earned from these four franchise at December 31, 2013?

14. On January 2, 2013, JJG Company signed an agreement to operate as franchisee of Figaro for an initial franchise fee of
3,125,000 for 10 years. Of this amount 40% was paid the agreement was signed and the balance in for equal annual
payments beginning June 30, 2013. JJG signed a non-interest bearing note for the balance. Credit ratings indicate that it
can borrow at 24% on the loan of this type. Substantial services costing 802,500 have been rendered by Figaro. If the
collection of the note is not reasonably assured, what is the percentage of completion?

16. On April 1, 2013, KFC, Inc. entered into a franchising agreement authorizing Ms. Manalo to operate as a franchisee for
an initial franchisee fee of 1,209,375 payable as follows: 590,625 cash to be paid upon signing and the balance in five equal
annual payment every December 31 starting 2013. Ms. Manalo issued 12% interest bearing note for the balance. CCF is
5% of its monthly gross sales. If the collectability of the note is doubtful, how much is the net income on December
31, 2013?

17. Paul Corporation enters into a franchise agreement with Adia Company on June 1, 2016. Up-front fee of 1,000,000 and
subsequent annual franchise fees of 50,000 over the next four years. Cost of initial services rendered by Paul during the
year is 250,000 and estimates the cost of subsequent services to be 100,000. Paul expects a profit of 20%. Adia paid the
annual fee for 2017 and Paul rendered the annual services for that year. In its December 31, 2017, the realized franchise
revenue to be reported by Paul is?
a. 20,0000 b. 50,000 c. 145,000 d. 245,000

18. On September 1, 2016, Joseph Asis GGSS Company entered into a franchise agreement with two franchisees. The
agreements required an initial fee payment of 700,000 plus four 300,000 payments due every four (4) months, the first
payment due December 31, 2016. The market interest rate is 12%. The initial deposit is refundable until substantial
performance has been completed. The data as as follows:
Franchisee Prob. Of Collection Services Performed Total Costs Incurred
A Likely Substantially 700,000
B Doubtful 25% N/A
How much is the net income in 2016 assuming that 1,000,000 was received from each franchisee?

19. Franchise fees should be recognized

a. on the date the contract was signed
b. on the date the franchise is opened for business
c. on the date the franchise fee is paid to franchisor
d. when performance obligations are satisfied

20. Franchise revenues are recognized over time if

a. Franchise rights are transferred at a point in time
b. the franchise fee is payable upon signing of contract
c. performance obligations regarding franchise rights are completed when the franchise opens
d. None of these answers are correct