XADVACT1 Midterm Exams - Last-Minute Review Notes PDF

XADVACT1 MIDTERM EXAMS - LAST-MINUTE REVIEW NOTES I. Partnership Liquidation Note #1: Clarification regarding the treatment of loans made by partners to the partnership during lump-sum vs piecemeal liquidation scenarios: Type of Order of Payment...

XADVACT1 MIDTERM EXAMS - LAST-MINUTE REVIEW NOTES I. Partnership Liquidation Note #1: Clarification regarding the treatment of loans made by partners to the partnership during lump-sum vs piecemeal liquidation scenarios: Type of Order of Payment Details Liquidation Lump-Sum 1. Pay Loans to Partners: Loans Any remaining cash after paying off Liquidation made by partners to the partnership external creditors and liquidation are settled first before any expenses is used to pay loans due to distribution to capital accounts. partners, followed by any balance distribution to partners' capital accounts. 2. Distribute Remaining to Capital All available cash is distributed at once Accounts: The remaining amount is after settling liabilities and loans, with distributed to the partners' capital no further adjustments or accounts based on their respective distributions. capital balances. Piecemeal 1. Follow Cash Priority Program Loans and capital are treated equal Liquidation (CPP) or Safe Payment Schedule FOR NOW (to compute for Cash (SPS): Determine which partner Priority/Safe Payment) should be paid first based on the CPP or SPS methodology (ignoring priority of loan FOR NOW). 2. Apply Payments in Order - First, apply payment per CPP/SPS to (CPP/SPS): If a partner is due to Any Loans from the Partner FIRST (if receive a distribution according to any): This is where priority for loan will CPP or SPS: be used. - Then, apply to Capital Account: Any remaining amount is credited to the partner's capital account. Note #2: Methods of Determining Cash Distribution in Advance: Aspect Cash Priority Program Safe Payment Schedule Determine the order in which Establish how much cash can be Purpose partners will be paid (first, next, safely distributed during installments last). to avoid overpayment.  Can be prepared before the Preparation Prepared every time there is a realization of non-cash assets Timing realization of non-cash assets. (NCAs). 1. Determine loss absorption capacity (LAC). Cash Priority 2. Equalize the partners LAC. Not applicable. 3. Deducted amount to equalize * P&L% = priority in the distribution Assumes the Maximum Possible Loss: All unsold NCAs are treated as Worst Case losses. Scenario (WCS) Not applicable. = Expected future liquidation costs + #1 potential unrecorded liabilities/expenses If there is any deficiency after WCS #1, Worst Case assume all partners are insolvent and Scenario (WCS) Not applicable. the remaining other partners absorb #2 the loss. The remaining balance after sharing in Cash is distributed based on a Distribution WCS #1 and WCS #2 is the predetermined priority order. distribution amount to each partner. II. Corporate Liquidation Note #1: Clarification regarding PSL and USL without Priority: 1. For questions regarding Partially Secured Liabilities (PSL), include the entire amount of the claim (both the secured and unsecured portions) as indicated in your graph, table, or classification. 2. For questions asking Unsecured Liabilities (USL) Without Priority, do not initially add the unsecured portion of the PSL. The unsecured portion of the PSL should only be included when calculating the estimated recovery percentage. Note #2: Revisit/review relationships of the four (or five) statements, namely: 1. Statement of A airs 2. Statement of Realization and Liquidation 3. Statement of Estate Deficit 4. Statement of Receipts/Disbursements  5. (Balance sheet) Statement of Equity/Estate Deficit Estate equity/(deficit), beg XX Net gain/(loss) on realization X/(X) Unrecorded income (AA) / expenses (LA) (XX) Estate equity/(deficit), end XX Statement of Receipts and Disbursements (St. of Cash Flow) Cash, beg XX Add: Receipts XX Less: Disbursements (XX) Cash, end XX Condensed Balance Sheet (A = L + E) Cash, beg XX ATBR (NCA, beg) XX Total assets, beg XX LTBL (liabilities, beg) XX Net equity/(deficit), beg XX Total liability and equity, beg XX -or- Cash, end XX ANR (NCA, end) XX Total assets, end XX LNL (liab, end) XX Net equity/(deficit), end XX Total liability and equity, end XX (all beg or all end) Hint: One statement may be used to squeeze amount from the other statements (e.g., getting cash beginning, cash ending, etc.) III. Long-Term Construction Contracts: Note #1: How to determine when to use the percentage of completion method or the cost recovery method: Percentage of Completion Cost Recovery Method: Method: Recognize income Recognize revenue only up to the Scenario: progressively based on work amount of costs incurred until the completion. outcome becomes reliable. Overall income and If problem stated to use POC If problem stated to use Cost problem specified method = use POC method Recovery method = use Cost which method to use (simple) Recovery method (simple) If problem is silent as to method = GR: use POC method (particularly cost-to-cost method) Overall income but no indication of which XPN: if there’s mention of: method to use “Outcome cannot be estimated reliably” (or other similar wordings) = use cost recovery method Recognize total loss Recognize total loss immediately immediately Overall loss expected (any gross profit recognized prior will be reversed) Note #2: Here's a table summarizing how to reconcile Revenue, Cost, and Gross Profit: This Year (1 minus Item To Date (1) Prior Year (2) 2) Revenue to Date Revenue prior Revenue (a) Revenue this year year/s  = Total Contract price × POC to date Cost to Date Cost (b) Cost prior year/s Cost this year = Total Estimated Cost × POC to date GP to Date Gross Profit = Revenue to date − Cost to date GP prior year/s GP this year (a minus b) -or- =Total Est. GP × POC to date 1. Revenue: a. To Date: Calculated by multiplying the percentage of completion to date (POC to Date) by the total contract revenue. b. Prior Year/s: The revenue recognized up to the end of the prior year. c. This Year: The di erence between the revenue to date and the prior year revenue. 2. Cost: a. To Date: Calculated by multiplying the total estimated costs by the percentage of completion to date. b. Prior Year: The costs recognized up to the end of the prior year. c. This Year: The di erence between the cost to date and the prior year cost. 3. Gross Profit: a. To Date: The di erence between revenue to date and cost to date. b. Prior Year: Calculated as the di erence between prior year revenue and prior year cost. c. This Year: The di erence between gross profit to date and prior year gross profit. 4. Percentage of completion: a. Cost-to-cost method (silent/general rule) cost incurred to date total est. costs for the whole project b. E orts expended method units (hours, kg, ft, etc.) total est. units for whole project c. Output methods output (units produced, surveys of work performed, etc.) total est. output for whole project