Chapter 1

Statement of Financial Position

PROBLEM 1: TRUE OR FALSE

1. TRUE 6. TRUE
2. FALSE 7. TRUE
3. TRUE 8. FALSE
4. FALSE 9. TRUE
5. TRUE 10. FALSE

PROBLEM 2: FOR CLASSROOM DISCUSSION

1. A
2. C
3. C
4. C
5. C
6. D
7. Solution:

Requirement (a):
Morning Co.
Statement of financial position
As of December 31, 20x1
ASSETS Notes
Current assets:
Cash and cash equivalents 6 ₱1,060,000
Trade and other receivables 7 1,770,000
Inventories 1,200,000
Held for trading securities 800,000
Total current assets 4,830,000

Noncurrent assets:
Investment in FVOCI securities 300,000
Investment property 900,000
Property, plant and equipment 8 4,900,000
Total noncurrent assets 6,100,000

1
 TOTAL ASSETS ₱10,930,000

LIABILITIES AND EQUITY

Current liabilities:
Trade and other payables 9 ₱1,140,000
Income tax payable 500,000
Provisions 430,000
Total current liabilities 2,070,000

Noncurrent liabilities:
Loans payable - net 10 2,260,000
Deferred tax liability 300,000
Total noncurrent liabilities 2,560,000

TOTAL LIABILTIES 4,630,000

Equity:
Ordinary share capital 4,000,000
Share premium 600,000
Retained earnings 1,640,000
Other components of equity 11 60,000
TOTAL EQUITY 6,300,000

TOTAL LIABILITIES & EQUITY ₱10,930,000

Requirement (b):

Note 6: Cash and cash equivalents

This line item consists of the following:
Cash on hand 60,000
Cash in bank 1,000,000
Cash and cash equivalents 1,060,000

Note 7: Trade and other receivables

This line item consists of the following:
Accounts receivable 2,000,000
Allowance for doubtful accounts (300,000)
Advances to employees 40,000

2
Advances to suppliers 30,000
Trade and other receivables 1,770,000

Note 8: Property, plant and equipment

This line item consists of the following:
Land 2,200,000
Building 3,400,000
Accumulated depreciation - Bldg. (700,000)
Property, plant and equipment 4,900,000

Note 9: Trade and other payables

This line item consists of the following:
Accounts payable 720,000
Accrued liabilities 80,000
Interest payable 340,000
Trade and other payables 1,140,000

Note 10: Loans payable - net

This line item consists of the following:
Loans payable 3,000,000
Discount on loan payable (740,000)
Loans payable - net 2,260,000

Note 11: Other components of equity

This line item consists of the following:
Revaluation surplus 90,000
Translation loss on foreign operation (30,000)
Other components of equity 60,000

3
PROBLEM 3: EXERCISE

1. Solutions:

Requirement (a):
Evening Co.
Statement of financial position
As of December 31, 20x1

ASSETS Notes
Current assets:
Cash and cash equivalents 6 1,100,000
Trade and other receivables 7 1,770,000
Inventories 200,000
Total current assets 3,070,000

Noncurrent assets:
Biological assets 1,200,000
Investment property 900,000
Property, plant and equipment 8 4,400,000
Intangible assets 9 560,000
Other noncurrent assets 10 800,000
Total noncurrent assets 7,860,000

TOTAL ASSETS 10,930,000

LIABILITIES AND EQUITY

Current liabilities:
Trade and other payables 11 920,000
Loans payable - net 12 1,760,000
Provisions 430,000
Total current liabilities 3,110,000

Noncurrent liabilities:
Net defined benefit liability 13 1,700,000
Total noncurrent liabilities 1,700,000

TOTAL LIABILTIES 4,810,000

4
 Equity:
Ordinary share capital 4,000,000
Share premium 14 970,000
Retained earnings 15 1,220,000
Other components of equity 30,000
Treasury shares (100,000)
TOTAL EQUITY 6,120,000

TOTAL LIABILITIES & EQUITY 10,930,000

Requirement (b):

Note 6: Cash and cash equivalents

This line item consists of the following:
Cash on hand 120,000
Cash in bank 980,000
Cash and cash equivalents 1,100,000

Note 7: Trade and other receivables

This line item consists of the following:
Accounts receivable 2,000,000
Allowance for doubtful accounts (300,000)
Advances to employees 40,000
Advances to suppliers 30,000
Trade and other receivables 1,770,000

Note 8: Property, plant and equipment

This line item consists of the following:
Land 1,200,000
Building 4,800,000
Accumulated depreciation - Bldg. (1,600,000)
Property, plant and equipment 4,400,000

Note 9: Intangible assets

This line item consists of the following:
Patent 440,000
Accumulated amortization - Patent (80,000)

5
Web site costs 250,000
Accumulated amortization - Web site (50,000)
Intangible assets 560,000

Note 10: Other noncurrent assets

This line item consists of the following:
Advances to officers 130,000
Advances to affiliates 670,000
Other noncurrent assets 800,000

Note 11: Trade and other payables

This line item consists of the following:
Accounts payable 720,000
Utilities payable 80,000
Deposit liability for returnable containers 120,000
Trade and other payables 920,000

Note 12: Loans payable - net

This line item consists of the following:
Loans payable 2,500,000
Discount on loan payable (740,000)
Loans payable - net 1,760,000

Note 13: Net defined benefit liability

This line item consists of the following:
Present value of defined benefit obligation 2,700,000
Fair value of plan assets (1,000,000)
Net defined benefit liability 1,700,000

Note 14: Share premium

This line item consists of the following:
Share premium 600,000
Share premium - Share warrants outstanding 300,000
Share premium - Treasury shares 70,000
Share premium 970,000

Note 14: Retained earnings

This line item consists of the following:
Retained earnings 1,030,000
Reserves for contingencies 190,000

6
Retained earnings 1,220,000

7
PROBLEM 4: CLASSROOM ACTIVITY

1. Solutions:

Requirement (a):
FRIENDSHIPS CO.
STATEMENT OF FINANCIAL POSITION
AS OF DECEMBER 31, 20X1

ASSETS Notes
Current assets:
Cash and cash equivalents 4 4,240,975
Trade and other receivables 5 9,033,111
Inventories 6 22,117,615
Held for trading securities 2,834,079
Prepaid income tax 234,125
Prepaid supplies 890,239
Total current assets 39,350,144

Noncurrent assets:
Loans receivable - net 7 8,592,522
Investment in FVOCI securities 987,234
Investment in associate 1,290,347
Property, plant and equipment 8 12,370,960
Deferred tax asset 1,092,387
Total noncurrent assets 24,333,450

TOTAL ASSETS 63,683,594

LIABILITIES AND EQUITY

Current liabilities:
Trade and other payables 9 10,302,733
Loans payable - net 10 7,253,748
Income tax payable 721,346
Provision for warranty obligations 432,187
Total current liabilities 18,710,014

Noncurrent liabilities:
Deferred tax liability 918,732
Deferred credits 712,788
Total noncurrent liabilities 1,631,520

8
TOTAL LIABILTIES 20,341,534

Equity:
Ordinary share capital 20,000,000
Share premium 6,000,000
Retained earnings 11 16,344,664
Other components of equity 12 997,396
TOTAL EQUITY 43,342,060

TOTAL LIABILITIES & EQUITY 63,683,594

Requirement (b):

Note 4: Cash and cash equivalents

This line item consists of the following:

Cash on hand 62,350

Cash in bank - BPI (Savings) 1,720,500
Cash in bank - BPI (Current) 1,890,234
Cash in bank - BDO (Current) 567,891
Cash and cash equivalents 4,240,975

Note 5: Trade and other receivables

This line item consists of the following:

Accounts receivable 8,341,689

Allowance for doubtful accounts (347,182)
Advances to employees 57,610
Advances to suppliers 34,981
Interest receivable (due on Mar. 1, 20x2) 946,013
Trade and other receivables 9,033,111

Note 6: Inventories
This line item consists of the following:

Raw materials inventory 1,237,398

Work in process inventory 7,987,908
Finished goods inventory 12,892,309
Inventories 22,117,615

9
Note 7: Loans receivable - net
This line item consists of the following:

Loans receivable 9,827,341

Unearned interest income (1,234,819)
Loans receivable - net 8,592,522

Note 8: Property, plant and equipment

This line item consists of the following:

Land 8,980,751
Building 3,419,877
Accumulated depreciation - Bldg. (712,930)
Equipment 917,387
Accumulated depreciation - Equipt. (234,125)
Property, plant and equipment 12,370,960

Note 9: Trade and other payables

This line item consists of the following:

Accounts payable 9,071,239

Accrued liabilities 889,712
Interest payable 341,782
Trade and other payables 10,302,733

Note 10: Loans payable - net

This line item consists of the following:

Loans payable 8,000,000

Discount on loan payable (746,252)
Loans payable - net 7,253,748

Note 11: Retained earnings

This line item consists of the following:

Retained earnings - unrestricted 15,144,664

Retained earnings - appropriated 1,200,000
Retained earnings 16,344,664

10
Note 12: Other components of equity
This line item consists of the following:

Revaluation surplus 873,984

Unrealized gains on FVOCI 123,412
Other components of equity 997,396

PROBLEM 5: MULTIPLE CHOICE – THEORY

1. D
2. C
3. C
4. B
5. B
6. D
7. A
8. B
9. B
10. B
11. D
12. C
13. C
14. A
15. C

PROBLEM 6: MULTIPLE CHOICE – COMPUTATIONAL

1. C
Solution:
Cash 70,000
Accounts receivable (120,000 - 26,000) 94,000
Inventories [60,000 + (26,000 / 130%)] 80,000
Total current assets 244,000

2. A
Solution:
Accounts payable 15,000
Bonds payable, due 20x4 25,000
Discount on bonds payable, due 20x4 (3,000)
Dividends payable 1/31/x4 8,000
Total current liabilities 45,000

11
3. B
Solution:
Earnings from long-term contracts 6,680,000
Costs and expenses (5,180,000)
Profit before tax 1,500,000
Income tax expense (1,500,000 x 30%) (450,000)
Profit after tax 1,050,000
Retained earnings - unappropriated (Jan. 1) 900,000
Retained earnings - restricted for note payable (Jan. 1) 160,000
Total retained earnings (Dec. 31) 2,110,000

4. A – Note payable - noncurrent

5. C
Solution:
The year-end adjustment to record income tax expense is as follows:
Dec. Income tax expense (see solution above) 450,000
31,
20x3
Prepaid taxes 450,000

Cash 600,000
Accounts receivable, net 3,500,000
Cost in excess of billings on longterm contracts 1,600,000
Prepaid taxes -
Total current assets 5,700,000

6. A
Solution:
Unadjusted net assets 875,000
Treasury share of Mont erroneously included in assets (24,000)
Adjusted net assets 851,000

12
 Chapter 2
Statement of Comprehensive Income

PROBLEM 1: TRUE OR FALSE

1. FALSE
2. FALSE
3. TRUE
4. FALSE
5. FALSE

PROBLEM 2: FOR CLASSROOM DISCUSSION

1. C
2. D
3. D
4. D
5. D
6. B
7. Solution:

Requirement (a):
Lunch Co.
Statement of profit or loss and other comprehensive income
For the year ended December 31, 20x1

Notes
Sales 22,000,000
Cost of goods sold 12 (6,000,000)
Gross profit 16,000,000
Distribution costs 13 (2,230,000)
Administrative expenses 14 (3,050,000)
Impairment loss on financial assets (190,000)
Finance costs (340,000)
Profit before tax 10,190,000
Income tax expense (2,000,000)
Profit for the year 8,190,000
Other comprehensive income
Items that will not be reclassified subsequently:
Investments in equity instruments 200,000
Items that may be reclassified subsequently to profit or loss:
Cash flow hedges 30,000

1
Other comprehensive income for the yr., net of tax 230,000

TOTAL COMPREHENSIVE INCOME FOR THE YR. 8,420,000

Requirement (b):

Note 12: Cost of goods sold

This line item consists of the following:

Beginning inventory 1,700,000

Purchases 5,600,000
Purchase returns (500,000)
Freight in 400,000
Total goods available for sale 7,200,000
Ending inventory (1,200,000)
Cost of goods sold 6,000,000

Note 13: Distribution costs

This line item consists of the following:
Salaries of sales personnel 670,000
Advertising expense 320,000
Rent expense (280,000 x ½) 140,000
Commission expense 1,100,000
Distribution costs 2,230,000

Note 14: Administrative expenses

This line item consists of the following:

Research and development expense 180,000

Directors' remuneration 2,000,000
Salaries of administrative personnel 520,000
Rent expense 140,000
Depreciation expense 160,000
Insurance expense 50,000
Administrative expenses 3,050,000

PROBLEM 3: EXERCISE
1. Solutions:

Requirement (a):

Dinner Co.

2
 Statement of profit or loss and other comprehensive income
For the year ended December 31, 20x1
Notes
Sales 16,800,000
Cost of goods sold 12 (8,390,000)
Gross profit 8,410,000
Distribution costs 13 (3,090,000)
Administrative expenses 14 (2,910,000)
Impairment of property, plant and equipment (290,000)
Finance costs (280,000)
Profit before tax 1,840,000
Income tax expense (552,000)
Profit for the year 1,288,000
Other comprehensive income
Items that will not be reclassified subsequently:
Revaluation decrease during the period (120,000)
Items that may be reclassified subsequently to profit or loss:
Translation gain on foreign operation 25,000
Other comprehensive income for the yr., net of tax (95,000)

TOTAL COMPREHENSIVE INCOME FOR THE YR. 1,193,000

Requirement (b):

Note 12: Cost of goods sold

This line item consists of the following:

Beginning inventory 2,100,000

Purchases 6,800,000
Purchase returns (480,000)
Freight in 350,000
Total goods available for sale 8,770,000
Ending inventory (380,000)
Cost of goods sold 8,390,000

Note 13: Distribution costs

This line item consists of the following:

Freight out 870,000

Sales commissions 480,000
Marketing expense 320,000

3
Salaries of sales personnel 670,000
Rent expense 210,000
Depreciation expense 540,000
Distribution costs 3,090,000

Note 14: Administrative expenses

This line item consists of the following:

Salaries of administrative personnel 2,520,000

Rent expense 210,000
Depreciation expense 180,000
Administrative expenses 2,910,000

4
PROBLEM 4: CLASSROOM ACTIVITIES
1. Solutions:

Requirement (a):

(a) Inventory – end. 386,000

{370,000 + [320K x (370K/7.4M)]}
Income summary 386,000
(b) Loss on inventory write-down 116,000
(386,000 – 270,000)
Inventory – end. 116,000
(c) Bad debts expense 50,000
Allowance for bad debts 50,000

Allowance for bad debts

280,000 beg.
Write-offs 120,000 28,000 Recoveries
50,000 Bad debts
end. (4.76M x 5%) 238,000

(d) Loss on reclassification (1M – 800K) 200,000

Held for trading securities 200,000
(d) Held for trading securities 180,000
Unrealized gain (980K – 800K) 180,000
(e) Income tax expense 1,572,000
Income tax payable 1,572,000

5
Requirement (b):

Best Friends Co.

Statement of profit or loss and other comprehensive income
For the year ended December 31, 20x1
Sales 22,800,000
Cost of sales (9,664,000)
Gross profit 13,136,000
Distribution costs (1,470,000)
Administrative expenses (6,400,000)
Gain on impairment recovery of property, plant and equipment 720,000
Loss on inventory write-down (116,000)
Bad debts expense (50,000)
Reclassification of financial asset (200,000)
Unrealized gains on financial assets 180,000
Finance costs (560,000)
Profit before tax 5,240,000
Income tax expense (1,572,000)
Profit for the year 3,668,000
Other comprehensive income:
Items that will not be reclassified subsequently:
Revaluation increase during the period 130,000
Items that may be reclassified subsequently to profit or loss: -
Other comprehensive income for the year, net of tax 130,000

TOTAL COMPREHENSIVE INCOME FOR THE YR. 3,798,000

2. Solutions:

Requirement (a):

(a) Investment in bonds (950K – 800K) 150,000

Gain on derecognition of 150,000
financial asset
(b) Unrealized loss [2.8M – (2.640M – 140M)] 300,000
Biological assets 300,000
(c) Investment in associate 46,000
Dividend income 90,000
Sh. in the profit of associate 100,000
(1M x 30% x 4/12)
Sh. in revaluation increase 36,000
(120,000 x 30%)

6
(d) Retirement benefits expense 588,000
(336K + 252K)
Remeasurements to the net defined 252,000
benefit liability (asset)
Defined benefit cost 840,000
(e) Income tax expense 1,104,600
Income tax payable 1,104,600

Requirement (b):
Buddies Co.
Statement of profit or loss and other comprehensive income
For the year ended December 31, 20x1

Revenue from service fees 12,000,000

Contract costs (4,000,000)
Employee benefits (3,000,000)
Advertising expense (680,000)
Gain on derecognition of financial asset measured at cost 150,000
Unrealized losses on biological assets (300,000)
Share in profit of associate 100,000
Retirement benefits expense (588,000)
Profit before tax 3,682,000
Income tax expense (1,104,600)
Profit for the year 2,577,400
Other comprehensive income:
Items that will not be reclassified subsequently:
Share in revaluation increase of associate 36,000
Remeasurements to net defined benefit liability (asset) (252,000)
Items that may be reclassified subsequently to profit or loss: -
Other comprehensive income for the year, net of tax (216,000)

TOTAL COMPREHENSIVE INCOME FOR THE YR. 2,361,400

7
3. Solutions:

Requirement (a):

(a) No entry
(DIT and OC are bank reconciling items;
not book)

(The money market placements will be

included in ‘Cash and cash equivalents’)

(b) No entry

(c) Inventory 200,000

Accounts payable 200,000
(d) Investment property (2.9M – 2.8M) 100,000
Unrealized gain 100,000
(e) Depreciation expense – Bldg. 405,000(1)
Accumulated depreciation – Bldg. 405,000
(1)
Double declining balance rate = (450K ÷ 4.5M) = 10%
Depreciation, 20x1 = (4.5M – 450K) x 10% = 405,000

(f) Depreciation – Equipment 320,000(2)

Accumulated depreciation – Equipt. 320,000
(2)
Using trial and error, the depreciation method used for the equipment is the
SYD method.

Proof:
SYD denominator = 5 x [(5+1) ÷ 2] = 15
Depreciation, 20x0 = (1.4M – 200K) x 5/15 = 400,000
Depreciation, 20x1 = (1.4M – 200K) x 4/15 = 320,000

(g) Amortization expense 30,000(3)

Accumulated amortization 30,000
(3)
Estimated useful life = 17 yrs.
Remaining legal life = 20 yrs. – 5 yrs. = 15 yrs. (shorter)
Amortization expense = 900,000 ÷ 15 x 6/12 = 30,000

(h) Inventory 108,000(4)

Interest expense 108,000
(4)
The borrowing costs eligible for capitalization are computed as follows:
(1.8M ÷ 2) x 12% = 108,000

8
 (i) Discount on bonds payable 932,392
(8M – 7,067,608)
Cash 932,392
to correct the initial recording of the bond
issue

(5)
The issue price of the bonds is computed as follows:
Cash flows PVF PV
P: 8,000,000 PV of 1 @14%, n=4 0.59208 4,736,640
i: 800,000 PV ord. annuity @14%, n=4 2.91371 2,330,968
7,067,608

(i) Interest expense 189,465

Discount on bonds payable 189,465
to amortize the discount on bonds payable

(6)
Partial amortization table:
Date Payments Int. expense Amort. Present value
1/1/x1 7,067,608
12/31/x1 800,000 989,465 189,465 7,257,073

The balance of the “interest payable” on the trial balance is tested for its

Face amount Nominal rate Interest payable

Note payable 2,000,000 12% 240,000
Bonds payable 8,000,000 10% 800,000
Required balance 1,040,000
Carrying amount 1,040,000
Adjustment -

The adjusted “interest expense” is computed as follows:

Effective int. Interest
Present value rate expense
Notes payable 2,000,000 12% 240,000
Capitalizable b. costs (h) (108,000)
Total 132,000

Bonds payable 7,067,608 14% 989,465

Adj. interest expense 1,121,465

9
 (j) Utilities expense 360,000
Accrued liabilities 360,000

(k) Income tax expense 719,861

Current tax asset 719,861

Requirement (b):

COLLEAGUES CO.
STATEMENT OF FINANCIAL POSITION
AS OF DECEMBER 31, 20X1

ASSETS Notes
Current assets:
Cash and cash equivalents 4 6,017,608
Trade and other receivables 5 2,980,000
Inventories 2,608,000
Current tax asset 30,140
Total current assets 11,635,748

Noncurrent assets:
Investment in FVOCI securities 1,600,000
Investment property 2,900,000
Property, plant and equipment 6 5,925,000
Intangible assets 7 870,000
Other noncurrent assets 8 1,660,000
Total noncurrent assets 12,955,000

TOTAL ASSETS 24,590,748

LIABILITIES AND EQUITY

Current liabilities:
Trade and other payables 9 2,850,000
Current portion of loans payable - net 10 400,000
Total current liabilities 3,250,000

Noncurrent liabilities:
Noncurrent portion of loans payable - net 11 1,600,000
Bonds payable - net 12 7,257,073

10
 Total noncurrent liabilities 8,857,073

TOTAL LIABILTIES 12,107,073

Equity:
Ordinary share capital 6,000,000
Retained earnings (1) 6,223,675
Other components of equity 260,000
TOTAL EQUITY 12,483,675

TOTAL LIABILITIES & EQUITY 24,590,748

(1)
Ret. earnings unadjusted bal. 4.544M + adjusted profit after tax 1,679,675
= 6,223,675

Requirement (c):
COLLEAGUES CO.
STATEMENT OF PROFIT OR LOSS
FOR THE YEAR ENDED DECEMBER 31, 20X1
NOTES
Sales 16,800,000
Cost of sales (7,200,000)
Gross profit 9,600,000
Distribution costs 13 (2,424,000)
Administrative expenses 14 (3,755,000)
Finance costs (1,121,465)
Unrealized gain on investment property 100,000
Profit before tax 2,399,535
Income tax expense (719,861)
Profit for the year 1,679,675

COLLEAGUES CO.
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED DECEMBER 31, 20X1
NOTES
Profit for the year 1,679,675
Other comprehensive income:
Items that will not be reclassified subsequently:
Investment in equity securities 260,000
Items that may be reclassified subsequently to profit or loss: -
Other comprehensive income for the year, net of tax 260,000

11
TOTAL COMPREHENSIVE INCOME FOR THE YR. 1,939,675

Requirement (d):

Note 4: Cash and cash equivalents

This line item consists of the following:

Cash on hand 450,000

Cash in bank 3,867,608
Money market placements 1,700,000
Cash and cash equivalents 6,017,608

Note 5: Trade and other receivables

This line item consists of the following:

Accounts receivable 3,900,000

Allowance for bad debts (920,000)
Trade and other receivables 2,980,000

Note 6: Property, plant and equipment

This line item consists of the following:

Land 1,600,000
Building 4,500,000
Accumulated depreciation - Bldg. (855,000)
Equipment 1,400,000
Accumulated depreciation - Equipt. (720,000)
Property, plant and equipment 5,925,000

Note 7: Intangible assets

This line item consists of the following:

Patent 900,000
Accumulated amortization (30,000)
Intangible assets 870,000

Note 8: Other noncurrent assets

This line item consists of the following:

12
Cash surrender value 860,000
Bond sinking fund 800,000
Other noncurrent assets 1,660,000

Note 9: Trade and other payables

This line item consists of the following:

Accounts payable (890K + 200K adj.) 1,090,000

Interest payable 1,040,000
Accrued liabilities (360K + 360K adj.) 720,000
Trade and other payables 2,850,000

Note 10: Loans payable

This line item consists of the following:

Current portion (2M x 1/5) 400,000

Non-current portion (2M x 4/5) 1,600,000
Total loans payable 2,000,000

Note 11: Bonds payable - net

This line item consists of the following:

Bonds payable 8,000,000

Discount on bonds payable (742,927)
Bonds payable - net 7,257,073

Note 12: Distribution costs

This line item consists of the following:

Freight out 870,000

Sales commissions 504,000
Salaries of sales personnel 870,000
Utilities expense (360K x 1/2) 180,000
Distribution costs 2,424,000

Note 13: Administrative expenses

This line item consists of the following:

Salaries of administrative personnel 2,820,000

13
Depreciation expense - Bldg. 405,000
Depreciation expense - Equipt. 320,000
Amortization expense 30,000
Utilities expense (360K x 1/2) 180,000
Administrative expenses 3,755,000

PROBLEM 5: MULTIPLE CHOICE – THEORY

1. D
2. D
3. A
4. B
5. C
6. A
7. A
8. D
9. B
10. B

PROBLEM 6: MULTIPLE CHOICE – COMPUTATIONAL

1. D 25,000 gross of tax – 10,000 tax effect = 15,000 net of tax

reclassification adjustment

2. A - Reclassification adjustment of cumulative unrealized gains

(losses) on FVOCI securities is prohibited. The cumulative
unrealized gains (losses) on FVOCI securities are transferred
directly in equity when the FVOCI securities are derecognized.

3. A
Solution:
Actuarial gain or loss on defined benefit plan (6,000)
Unrealized gain on FVOCI securities 30,000
Reclassification adjustment for cumulative gain on
translation of foreign operation included in profit or loss (5,000)
Profit for the year 154,000
Total comprehensive income 173,000

4. C
Solution:
Unadjusted bal. of advertising expense 146,000

14
Prepaid advertising (15,000)
Accrued advertising 9,000
Adjusted advertising expense 140,000

5. A
Solution:
Contribution to youth and educational programs 250,000
Contribution to health and human-service organizations 140,000
Contribution shouldered by employees (80,000)
Charitable contributions expense 310,000

6. A
Solution:
Finished goods
Jan. 1 400,000
COGM (squeeze) 200,000 240,000 Cost of sales
360,000 Dec. 31

7. A 600,000 total credit in trial balance – 420,000 total debit =

180,000 profit before tax x 70% net of income tax rate = 126,000
profit after tax

8. A
Solution:
Advertising 150,000
Freight-out 80,000
Rent for office space (220,000 x 1/2) 110,000
Sales salaries and commissions 140,000
Total selling expenses 480,000

9. A
Solution:
Accounting and legal fees 25,000
Officers’ salaries 150,000
Insurance 85,000
Total general and administrative expenses 260,000

15
 Chapter 3

Revenue from Contracts with Customers

PROBLEM 1: TRUE OR FALSE
1. FALSE – PFRS 15 applies only to contracts with customers
2. FALSE – A contract can be oral, written, or implied by the entity’s
customary business practices.
3. TRUE
4. TRUE
5. FALSE
6. FALSE – see #9
7. FALSE - A performance obligation that is not satisfied over time
is presumed to be satisfied at a point in time.
8. TRUE
9. TRUE
10. TRUE – e.g., when the consideration is received in advance but
the delivery of the goods or services is deferred beyond
one year.

PROBLEM 2: FOR CLASSROOM DISCUSSION

1. Answer: No. The “probable of collection” criterion under PFRS 15 is not
met because the customer’s ability and intention to pay may be in doubt.
This is evidenced by the following:
a. the customer intends to repay the loan (which has a significant
balance) primarily from income derived from its restaurant business
(which is a business facing significant risks because of high
competition in the industry and the customer’s limited experience);
b. the customer lacks other income or assets that could be used to
repay the loan; and
c. the customer’s liability under the loan is limited because the loan is
non-recourse.

The entity accounts for the non-refundable ₱50,000 payment as a deposit

liability. The entity continues to account for the initial deposit, as well as any
future payments of principal and interest, as a deposit liability, until such time
that the entity is able to conclude that it is probable that the entity will collect
the consideration or one of the following events has occurred.
a. the entity has no remaining obligations to transfer goods or services to
the customer and all, or substantially all, of the consideration promised
by the customer has been received by the entity and is non-refundable;
or
b. the contract has been terminated and the consideration received from
the customer is non-refundable.

1
The entity continues to assess the contract to determine whether the
“probable of collection” criterion is subsequently met or whether the events
above (‘a’ or ‘b’) have occurred.

2. Answer: Yes, it is a performance obligation. Explicit.

Because the promise of maintenance services is a promise to transfer goods

or services in the future and is part of the negotiated exchange between the
entity and the distributor, the entity determines that the promise to provide
maintenance services is a performance obligation. The entity concludes that
the promise would represent a performance obligation regardless of whether
the entity, the distributor, or a third party provides the service. Consequently,
the entity allocates a portion of the transaction price to the promise to provide
maintenance services.

3. Answer: Yes, it is a performance obligation. Implicit.

4. Answer: No, it is not a performance obligation. The maintenance

services shall be accounted for under PAS 37 Provisions,
Contingent Liabilities and Contingent Assets.

5. Solution:

Estimated
stand-alone As
Product Estimation method selling prices Allocation allocated
X N/A (Stand-alone price) 50 (100 x 50/150) 33
Adjusted market
Y assessment 25 (100 x 25/150) 17
Expected cost plus a
Z margin (50 x 150%) 75 (100 x 75/150) 50
Total 150 100

6. Answer: The performance obligation is satisfied over time because

of the following reasons:
a. The development of the professional opinion does not create an
asset with alternative use to the entity because the professional
opinion relates to facts and circumstances that are specific to the
customer. Therefore, there is a practical limitation on the entity’s
ability to readily direct the asset to another customer.
b. The entity has an enforceable right to payment for its performance
completed to date for its costs plus a reasonable margin, which
approximates the profit margin in other contracts.

The entity recognizes revenue over time by measuring the progress towards
complete satisfaction of the performance obligation.

7. Solution:

2
 Asset Expense
Design services - PFRS 15 (40,000 x 6/7) 34,286
Amortization of design services (40,000 ÷ 7) 5,714

Hardware - PAS 16 (120,000 x 4/5) 96,000

Depreciation of hardware (120,000 ÷ 5) 24,000

Software - PAS 38 (90,000 x 4/5) 72,000

Amortization of software (90,000 ÷ 5) 18,000

Migration and testing - PFRS 15 (100,000 x 6/7) 85,714

Amortization of migration & testing (100,000 ÷ 7) 14,286

Employee benefits 30,000

Totals 288,000 92,000

8. Solution:
Jan.
1, No entry
20x8
Jan. Contract asset (₱1,000 x 480/1,200a) 400
3, Revenue 400
20x8
Mar. Receivable 1,000
31, Contract asset 400
20x8 Revenue (₱1,000 x 720/1,200a) 600
Apr. Cash 1,000
8, Receivable 1,000
20x8
a
Sum of relative stand-alone selling prices: (480 + 720) = 1,200

9. Solution:
Stand-alone As
Product Allocation Discount
prices allocated
A 40 N/A 40 -
B 55 (60 x 55/100) 33 22
C 45 (60 x 45/100) 27 18
Residual approach
D N/A -
(130K - 40K - 33K - 27K) 30
Total 140 130 40

The use of the residual approach is appropriate because the ₱30 allocated to
Product D is within the range of its observable selling prices (₱15 - ₱45).

10. Solution:
Date Cash 10,000
Revenue (₱10,000 x 97%) 9,700
Refund liability (₱10,000 x 3%) 300

3
Date Cost of goods sold (97 x ₱60) 5,820
Asset for right to recover product to be
returned (3 x ₱60) 180
Inventory (100 x ₱60) 6,000

11. Solution:
(a) Contract inception:
Jan. 1, 20x1
Cash 4,000
Contract liability 4,000

(b) During the two years from contract inception until the transfer of the asset,
the entity adjusts the promised amount of consideration (in accordance with
paragraph 65 of IFRS 15) and accretes the contract liability by recognizing
interest on ₱4,000 at six per cent for two years:

Dec. 31, 20x1

Interest expense (4,000 x 6%) 240
Contract liability 240

Dec. 31, 20x2

Interest expense [(4,000 + 240) x 6%] 254.4
Contract liability 254.4

(c) Transfer of the asset:

Jan. 1, 20x3
Contract liability (4,000 + 240 + 254.4) 4,494.4
Revenue 4,494.4

PROBLEM 3: COMPUTATIONAL: EXERCISES

1. Answer: The performance obligation is satisfied over time because of
the following reasons:
a. The customer simultaneously receives and consumes the benefits of
the entity’s performance in processing each payroll transaction as
and when each transaction is processed.
b. The fact that another entity would not need to re-perform payroll
processing services for the service that the entity has provided to
date also demonstrates that the customer simultaneously receives
and consumes the benefits of the entity’s performance as the entity
performs.

The entity recognizes revenue over time by measuring its progress towards
complete satisfaction of that performance obligation. Since the monthly
services are rendered evenly throughout the year, revenue may be
recognized on a straight-line basis (i.e., ₱100,000 per month).

2. Answer:

4
The performance obligation is satisfied over time because the customer
simultaneously receives and consumes the benefits of the entity’s
performance – which is making the health clubs available for the customer to
use as and when the customer wishes. The extent to which the customer
uses the health clubs does not affect the amount of the remaining goods and
services to which the customer is entitled.

The entity recognizes revenue over time by measuring its progress towards
complete satisfaction of that performance obligation. Since the monthly
services are rendered evenly throughout the year, revenue may be
recognized on a straight-line basis (i.e., ₱500 per month).

3. Solution:
Receivable (100 x ₱150) 15,000a
Revenue (100 x ₱125) 12,500
Refund liability (contract liability) 2,500b
a
Consideration is due when control of the products transfer to the customer.
Therefore, the entity has an unconditional right to consideration (i.e., a
receivable) for ₱150 per product until the retrospective price reduction applies
(i.e., after 1 million products are shipped).
b
The refund liability represents a refund of ₱25 per product, which is
expected to be provided to the customer for the volume-based rebate (i.e.,
the difference between the ₱150 price stated in the contract that the entity
has an unconditional right to receive and the ₱125 estimated transaction
price).

4. Solutions:
March 31, 20x8: (75 units x ₱100) = ₱7,500

June 30, 20x8:

Net revenue from units sold in the 2nd quarter
(500 x ₱90) ₱45,000
Retrospective discount on units sold in the 1st quarter
(75 x ₱10) (750)
Net revenue in 2nd quarter ₱44,250

5. Solution:
Requirement (a):
The contract includes a discount of ₱40 on the overall transaction (₱140 sum
of stand-alone selling prices less ₱100 transaction price).

Requirement (b):
Product Stand-alone prices Allocation As allocated Discount
A 40 N/A 40 -
B 55 (60 x 55/100 a) 33 22
C 45 (60 x 45/100 a) 27 18
Total 140 100 40
a
(55 + 45) = 100

5
6. Solutions:
(a) When the product is transferred to the customer:

Asset for right to recover product to be returned ₱80

Inventory ₱80

(b) During the three-month right of return period, no interest is recognized

because no contract asset or receivable has been recognized.

(c) When the right of return lapses (the product is not returned):

Receivable ₱100
Revenue ₱100

Cost of sales ₱80

Asset for product to be returned ₱80

Until the entity receives the cash payment from the customer, interest
revenue would be recognized in accordance with PFRS 9. In determining the
effective interest rate in accordance with PFRS 9, the entity would consider
the remaining contractual term.

7. Solutions:
Case A
1,000,000 – the contract price is deemed the cash selling price because the
contractual rate of interest of five per cent reflects the credit characteristics of
the customer.

OR
Monthly cash flow 18,871
Multiply by: PV of ordinary annuity @ 0.004167 a, n=6 52.99020
Sale revenue (answer is rounded-off) 999,978

a
5% annual rate ÷ 12 months = 0.004167

Case B
Monthly cash flow 18,871
Multiply by: PV of ordinary annuity @ 0.01b, n=6 44.95504
Sale revenue 848,347

b
12% annual rate ÷ 12 months = 0.01

8. Solution: (100 shares per week x 52 weeks x ₱20) = ₱104,000

9. Solutions:
Requirement (a): Performance obligations
1. machine
2. spare parts
3. custodial services

6
Requirement (b): Revenue recognition
The entity allocates the transaction price to the three performance obligations
and recognizes the amounts allocated to each of the machine and spare
parts as revenue on December 31, 20x9. The amount allocated to the
custodial services is recognized over the next 2 to 4 years based on the
entity’s estimates of its progress towards the complete satisfaction of the
performance obligation.

10. Solution:
The contract modification results to the addition of services that are distinct.
However, the price of the additional services does not reflect their stand-
alone selling price. Therefore, the contract modification shall be accounted for
as a termination of the existing contract and the creation of a new
contract.

Accordingly, the entity recognizes revenue of ₱100,000 per year in the 1st
and 2nd years and ₱70,000 per year in the 3rd, 4th, 5th, and 6th years.
Revenue per year after the contract modification is computed as follows:

Modified* price of services from the original contract not yet

rendered (i.e., for the 3rd year of the original contract) 80,000
Price of the three additional years of service from the new
contract 200,000
Transaction price not yet recognized as revenue 280,000
Divide by: Total years of service to be rendered (3rd to 6th) 4
Revenue per year in the 3rd to the 6th year 70,000

* This is the amount of consideration to which ABC Co. expects to be entitled

in exchange for the services. Therefore, the initial agreement of ₱100,000 per
year is ignored.

Summary of answers:
Year Revenue
1 100,000
2 100,000
3 70,000
4 70,000
5 70,000
6 70,000
480,000

7
PROBLEM 4: CLASSROOM ACTIVITY

ANSWERS
STEP 1: Identify the contract with the customer
Checklist
PFRS 15 Criteria
(/ X)
a. The contracting parties have approved the contract and are (1) 
committed to perform their respective obligations;

REASON/INDICATOR:
(2)_Signing of an enforceable contract._

b. The entity can identify each party’s rights regarding the (3) 
goods or services to be transferred;

c. The entity can identify the payment terms for the (4) 
goods or services to be transferred;

REASON/INDICATOR:
(5) (Make a reference to certain paragraphs in the
contract)_Paragraphs 1(a) to (c) of the contract

d. The contract has commercial substance; (6) 

REASON:
(7) The contract affects ABC’s future cash flows.

e. The consideration in the contract is probable of (8) 

collection.

REASON/INDICATORS:
(9) The credit investigation yielded a favorable result.
(10) The contract requires a down payment (earnest money)
and, in case of default, ABC Co. is entitled to a significant
portion of the amounts collected.

CONCLUSION: Does the contract qualify for accounting under PFRS 15?
State your reason.
(11) Yes, because all of the criteria in ‘Step 1’ are complied with

STEP 2: Identify the performance obligations in the contract

(12) Identify the performance obligation(s) in the contract. The promise to
transfer the land to buyer upon the full payment of the consideration.

(13) State whether the performance obligation(s) is/are satisfied over time or
at a point in time. at a point in time

STEP 3: Determine the transaction price

(14) Determine the transaction price. ₱1,000,000
(15) Identify whether the transaction price is fixed or variable. Fixed
8
STEP 4: Allocate the transaction price to the performance obligations
(16) How much is allocated to each of the performance obligations?
₱1,000,000 to the promise to transfer the land to the buyer.

JOURNAL ENTRIES:
(17) Provide the entry at contract inception.
Date Accounts Debits Credits
10.3.2015 Cash 300,000
Contract liability 300,000
to record the receipt of the
earnest money (or similar
description)

(18) Assume that the next entry made by ABC Co. on the contract is on
December 31, 2015. What would be this entry?
Date Accounts Debits Credits
12.31.2015 Cash 175,000 a
Contract liability 175,000
to record the collection of
installment payments for the
months of October,
November and December
(or similar description)
a
(58,333.33 x 3) = 175,000

PRESENTATION
How should the contract be presented in ABC Co.’s December 31, 2015
statement of financial position?
Checklist
ACCOUNT AMOUNT
(/ X)
(19) Contract asset X -
(20) Contract liability  475,000
(21) Receivable X -

(22) Assume that the January 31, 2016 check is dishonored and the contract
is settled on this date, in accordance with the terms of the contract. What is
the journal entry?
Date Accounts Debits Credits
1.31.2016 Contract liability 475,000 b
Cash 17,500 c
Revenue 457,500
to record revenue for the
non-refundable payments
received (or similar
description)
b
(300,000 + 175,000) = 475,000
c
(175,000 x 10%) = 17,500

9
Step 5: Recognize revenue when (or as) the entity satisfies a
performance obligation

(23) Disregard the assumption in number (18). Assume that the consideration
is fully paid and the land is transferred to the buyer. Provide the compound
journal entries.
Date Accounts Debits Credits
9.30.2016 Cash 58,333.33
Contract liability 941,666.67
Revenue 1,000,000
to record the satisfaction of
the performance obligation
(or similar description)
9.30.2016 Cost of sales 400,000
Inventory 400,000
to record the cost of the land
sold as expense (or similar
description)

PROFIT OR LOSS
Use the assumption in number (23). Determine the effects of the contract in
ABC Co.’s 2015 and 2016 profit or loss, respectively. Disregard taxes and
registration costs.
2015 2016
(24) (25)
Revenue 0 1,000,000
Expenses 0 (400,000)
Profit 0 600,000

PROBLEM 5: MULTIPLE CHOICE - THEORY

1. A 6. D 11. A
2. A 7. C 12. D
3. C 8. D 13. D
4. D 9. E 14. E
5. A 10. C 15. C

10
PROBLEM 6: MULTIPLE CHOICE - COMPUTATIONAL
1. D PFRS 15 does not apply to non-monetary exchanges. Therefore, no
revenue shall be recognized from such transactions.

Inventory – diesel (FV of asset given up) ₱4M

Inventory – premium (CA of asset given up) ₱3.5M
Gain on exchange ₱ .5M

2. E
Inventory – diesel (CA of asset given up) ₱3.8M
Inventory – premium (CA of asset given up) ₱3.8M

3. B
Solution:
Sale to Customer W 5,000
Sale to Customer X 20,000
Sales returns (20,000 x 10%) (2,000) 18,000
Sale to Customer Y 10,000
Sales returns (10,000 x 5%) (500) 9,500
Sale to Customer Z -
Sale to Customer Voiz&Gurlz 10,000
Total net sales revenues 42,500

4. A (4,000,000 + 2,000,000) = 6,000,000

5. D The principal recognizes revenue at the gross amount of the

transaction price while the agent recognizes revenue at the commission
the agent is entitled to.

6. A - the cash selling price.

7. B (8,000 x PV of 1 @9%, n= 1) =7,339 – the present value of the

transaction price

8. D – the transaction price

9. A (154,000 x 3 months/ 48 months) = 9,625

In a performance obligation satisfied over time in which efforts or

inputs are expended evenly throughout the performance period,
revenue may be recognized on a straight-line basis.

10. B – the costs incurred to date

Revenue for a performance obligation satisfied over time is

recognized only if the progress towards the complete satisfaction of
the performance obligation can be reasonably measured.

11
If the outcome of a performance obligation cannot be reasonably
measured but the entity expects to recover the costs incurred in
satisfying the performance obligation, revenue shall be recognized
only to the extent of the costs incurred until such time that the
outcome of the performance obligation can be reasonably measured.

12
 Chapter 4

Non-current assets Held for Sale and

Discontinued Operations

PROBLEM 1: TRUE OR FALSE

1. FALSE 6. TRUE
2. TRUE 7. FALSE
3. TRUE 8. TRUE
4. TRUE 9. TRUE
5. FALSE 10. TRUE

PROBLEM 2: FOR CLASSROOM DISCUSSION

1. B

2. D

3. B

4. A

5. D

6. D

7. C

8. A

9. D

10. B

11. C [1M C.A. – (800K FV – 50K costs to sell)] = 250K Impairment loss

12. Solution:
Dec. Impairment loss 250,000
31,
20x1
Machinery – held for sale 750,000
Accumulated depreciation 2,000,000
Machinery 3,000,000

13. B [750K C.A. – (700K FV – 50K costs to sell)] = 100K Impairment loss

14. Solution:

1
Dec. Impairment loss 100,000
31, Machinery – held for sale 100,000
20x2

15. B Gain is recognized only up to the cumulative losses recognized (i.e.,

250K + 100K = 350K). (650K C.A. + 350K gain = 1M new C.A.).

16. Solution:
Dec. Machinery – held for sale 350,000
31, 350,000
20x3
Gain on impairment recovery

17. A
Solution:
C.A. adjusted for depreciation not recognized:
(1M C.A. on Dec. 31, 20x1 x 2/5*) = 400,000
Recoverable amount: (1M FV – 50K costs to sell) = 950,000
Lower amount = 400,000

*(5-yr. total life less 3 yrs. that have passed from 20x2 to 20x4) = 2 yrs.

18. Solution:
Dec. Machinery 400,000
31, 600,000
20x4
Loss on reclassification
Machinery – held for sale 1,000,000

19. D
Solution:
Impairment loss [1M - (600K - 50K)] (450,000)
Profit from Jan. to Mar. 200,000
Loss from Apr. to Dec. (120,000)
Total (370,000)
Multiply by: (100% - 30%) 70%
Results of discontinued operations (259,000)

2
PROBLEM 3: EXERCISES

1. Solution:
Dec. Impairment loss [8M – (7M – 200K)] 1,200,000
31,
20x1
Building – held for sale 6,800,000
Accumulated depreciation 12,000,000
20,000,000
Building
Dec. Impairment loss [6.8M – (6.8M – 200K)] 200,000
31, Building – held for sale 200,000
20x2
Dec. Building – held for sale 1,400,000
31, 1,400,000
20x3
Gain on impairment recovery
Dec. Building 5,000,000
31, 3,000,000
20x4
Loss on reclassification
Building – held for sale 8,000,000

Carrying amount adjusted for depreciation not recognized:

(8M x 5/8) = 5,000,000
Recoverable amount: (9M – 200K) = 8.8M
Lower amount = 5,000,000

2. Solution:
ASSSETS
Current assets:
Cash and cash equivalents 600,000
Trade and other receivables 1,200,000
Inventories 3,600,000
5,400,000
Noncurrent asset classified as held for sale 1,400,000
Total current assets 6,800,000

Noncurrent assets:
Investment in associate 800,000
Property, plant and equipment 5,000,000
Total noncurrent assets 5,800,000

TOTAL ASSETS 12,600,000

LIABILITIES AND EQUITY

Current liabilities:
Trade and other payables 4,900,000
Current tax payable 1,800,000
Total current liabilities 6,700,000

Noncurrent liabilities:
Deferred tax liability 700,000

3
TOTAL LIABILITIES 7,400,000

Ordinary share capital 2,000,000

Retained earnings 2,700,000
Other components of equity 500,000
TOTAL EQUITY 5,200,000

TOTAL LIABILITIES & EQUITY 12,600,000

3. Solution:

ASSSETS
Current assets:
Cash and cash equivalents 1,500,000
Trade and other receivables 2,800,000
Inventories 8,440,000
12,740,000
Noncurrent asset classified as held for sale(1) 2,360,000
Total current assets 15,100,000

Noncurrent assets:
Investment property 3,500,000
Investment in associate 2,000,000
Property, plant and equipment 9,700,000
Total noncurrent assets 15,200,000

TOTAL ASSETS 30,300,000

LIABILITIES AND EQUITY

Current liabilities:
Trade and other payables 11,890,000
Current tax payable 4,500,000
16,390,000
Liabilities directly associated with noncurrent assets held for
360,000
sale
Total current liabilities 16,750,000

Noncurrent liabilities:
Deferred tax liability 1,750,000

TOTAL LIABILITIES 18,500,000

Ordinary share capital 5,000,000

Retained earnings (6.75M – 1.2M impairment loss) 5,550,000
Other components of equity 1,250,000

4
 TOTAL EQUITY 11,800,000

TOTAL LIABILITIES & EQUITY 30,300,000

(1)
(1.6M equipment at FVLCS + 200K receivable + 560K inventory) = 2.360M

Revenue 5,600,000
Cost of sales (2,000,000)
Gross profit 3,600,000
Distribution costs (780,000)
Administrative expenses (900,000)
Impairment loss on assets held for sale (2.8M – 1.6M) (1,200,000)
Finance costs (300,000)
Share of profit of associates 240,000
Profit for the year 660,000

4. Solution:
Revenue (2M + 2.4M) 4,400,000
Cost of goods sold (800K + 960K) (1,760,000)
Gross profit 2,640,000
Distribution costs (300K + 360K) (660,000)
Administrative expenses (150K + 180K) (330,000)
Profit before tax 1,650,000
Income tax expense (1.650M x 30%) (495,000)
Profit from continuing operations 1,155,000
Loss from discontinued operations (1) (735,000)
Profit for the year 420,000

(1)

Loss from operations (50,000)

Impairment loss (6M - 5M) (1,000,000)
Total before tax (1,050,000)
Income tax benefit (1.050M x 30%) 315,000
Loss from discontinued operations (735,000)

5. Solutions:
ASSSETS
Current assets:
Cash and cash equivalents 1,800,000
Trade and other receivables 3,360,000
Inventories 10,128,000
15,288,000
Noncurrent asset classified as held for sale
2,512,000
(240K + 672K + 1.6M)

5
 Total current assets 17,800,000
Noncurrent assets:
Investment property 4,200,000
Investment in associate 2,400,000
Property, plant and equipment 11,640,000
Total noncurrent assets 18,240,000
TOTAL ASSETS 36,040,000
LIABILITIES AND EQUITY
Current liabilities:
Trade and other payables 14,268,000
Current tax payable 5,400,000
19,668,000
Liabilities directly associated with noncurrent assets held for
432,000
sale
Total current liabilities 20,100,000
Noncurrent liabilities:
Deferred tax liability 2,100,000
TOTAL LIABILITIES 22,200,000
Ordinary share capital 6,000,000
Retained earnings (8.1M – 1.76M impairment loss) 6,340,000
Other components of equity 1,500,000
TOTAL EQUITY 13,840,000
TOTAL LIABILITIES & EQUITY 36,040,000

Revenue 4,720,000
Cost of sales (1,200,000)
Gross profit 3,520,000
Distribution costs (656,000)
Administrative expenses (648,000)
Finance costs (360,000)
Share of profit of associates 288,000
Profit from continuing operations 2,144,000
(1)
Loss from discontinued operations (1,672,000)
Profit for the year 472,000

(1)

Profit from operations (2M – 1.2M – 280K – 432K) 88,000

Impairment loss (3.36M – 1.6M) (1,760,000)
Loss from discontinued operations (1,672,000)

6
PROBLEM 4: MULTIPLE CHOICE – THEORY

1. D 6. C
2. D 7. B
3. C 8. C
4. A 9. B
5. C 10. B

PROBLEM 5: MULTIPLE CHOICE – COMPUTATIONAL

1. A
Solution:
Cash (-10,000 + 30,000) 20,000
Accounts receivable, net 35,000
Inventory 58,000
Prepaid expenses 12,000
Non-current assets classified as held for sale 100,000
Total current assets 225,000

2. D
Solution:
C.A. of building 12/31/x1 = 12M x 4/5 = 9.6M
FV less costs to sell = (8M – 100K) = 7.9M
Lower amount = 7.9M

3. C
Solution:
C.A. of building 12/31/x1 = 12M x 4/5 = 9.6M
FV less costs to sell = (8M – 100K) = 7.9M
Impairment loss = (9.6M – 7.9M) = 1.7M

4. D
Solution:
Impairment loss (6.5M - 8M) (1,500,000)
Loss during the 20x3 (2,000,000)
Loss from discontinued operations (3,500,000)

5. D
Solution:
Estimated loss on sale (700,000)
Loss during the 20x3 (200,000)
Loss from discontinued operations (900,000)

7
6. A (400,000 + 1,000,000) = 1,400,000 loss from discontinued
operations

7. C
Solution:
Profit from Jan. to April 20x5 150,000
Loss from May to Dec. 20x5 (50,000)
Actual gain on sale - Dec. 20x5 100,000
Profit from discontinued operations 200,000

8. C
Solution:
20x5 20x4
Actual operating losses (300,000) (300,000)
Actual gain on sale 650,000
Results of discontinued operations 350,000 (300,000)

9. A 480,000 including all of the items stated in the problem +

120,000 = 600,000

10. C
Solution:
Profit for the period from discontinued operations 50,000
Foreign currency translation gain 100,000
Profit for the year 400,000
Unrealized gain on FVOCI equity securities 20,000
Total comprehensive income 570,000

8
 Chapter 5
Statement of Changes in Equity

PROBLEM 1: TRUE OR FALSE

1. FALSE (100 + 20 – 5) = 115
2. TRUE
3. TRUE (115 end. – 20 profit + 5 dividends) = 100 beg.
4. FALSE (20 comp. income – 5 dividends) = 15 net increase
5. TRUE

PROBLEM 2: FOR CLASSROOM DISCUSSION

Solution:

Entity A
Statement of Changes in Equity
For the year ended December 31, 20x2
(amounts in Philippine Pesos)

Unrealized
Share Retained Total
gains -
capital earnings equity
FVOCI
Balance, Jan.1, 20x2 1,000,000 800,000 200,000 2,000,000
Changes in equity for 20x2:
Profit for the year 720,000 720,000
Other comprehensive income (70,000) (70,000)
Total comprehensive income 650,000
Issue of share capital 400,000 400,000
Dividends (200,000) (200,000)
Bal., Dec. 31, 20x2 1,400,000 1,320,000 130,000 2,850,000

PROBLEM 3: MULTIPLE CHOICE – THEORY

1. D
2. D

1
 Chapter 6

Statement of Cash Flows

PROBLEM 1: TRUE OR FALSE

1. TRUE 6. TRUE
2. FALSE 7. FALSE
3. FALSE 8. TRUE
4. TRUE 9. TRUE
5. TRUE 10. FALSE

PROBLEM 2: FOR CLASSROOM DISCUSSION

1. D

2. D

3. A

4. B

5. D

6. B

7. C

8. B

9. D

10. A

11. A

12. B

13. D

14. C

15. D

16. Solution:

Bell Industries

1
 Statement of Cash Flows
For the Year Ended December 31, 2002

Cash flows from operating activities:

Net income ............................ ₱ 50,000(1)
Adjustments:
Depreciation expense ................ ₱ 25,000
Increase in accounts receivable ..... (8,000)
Decrease in merchandise inventory ... 13,000
Decrease in accounts payable ........ (10,000) 20,000
Net cash provided by operating
activities ........................... ₱70,000

Cash flows from financing activities:

Payment of cash dividends ........... ₱(40,000)
Net cash used in financing activities (40,000)
Net increase in cash .................... ₱ 30,000
Cash at beginning of year ............... 10,000
Cash at end of year ..................... ₱ 40,000

(1)

Retained earnings
20,000 beg.
Dividends declared 40,000 50,000 Net income (squeeze)

end. 30,000

17. Solution:

Sage Corporation
Statement of Cash Flows
For the Year Ended December 31, 2002

Cash flows from operating activities:

Net income .............................. ₱ 45,000
Adjustments:
- Gain on sale of investment in bonds ₱ (2,250)
- Gain on sale of equipment ........... (750)
+ Depreciation expense ................ 75,000
- Increase in accounts receivable ..... (3,750)
- Increase in merchandise inventory ... (24,000)
+ Decrease in prepaid insurance ....... 375
- Decrease in accounts payable ........ (82,875)
- Decrease in salaries payable ........ (7,500)
- Decrease in notes payable ........... (112,500) (158,250)
Net cash used in operating activities ... ₱(113,250)

2
Cash flows from investing activities:
Sale of investment in bonds ₱ 90,000
Sale of equipment ..................... 4,500
Purchase of equipment ................. (310,125)
Net cash used in investing activities ... (215,625)
Cash flows from financing activities:
Proceeds from bond issue .............. ₱375,000
Payment of cash dividends ............. (22,500)
Net cash provided by financing activities 352,500
Net increase in cash .................... ₱ 23,625
Cash at beginning of year ............... 63,750
Cash at end of year ..................... ₱ 87,375

18. Solution:

Top Ten Clothiers Inc.

Statement of Cash Flows
For the Year Ended December 31, 2002

Cash flows from operating activities:

Cash receipts from customers ........ ₱ 940,000*
Cash payments for:
Inventory ......................... ₱750,000 **
Operating expenses ................ 342,000*** 1,092,000
Net cash used in operating activities . ₱ (152,000)
Cash flows from investing activities:
Sale of long-term investments ....... ₱105,000
Net cash flow provided by investing 105,000
activities ..........................
Cash flows from financing activities:
Payment of bonds payable ............ ₱(60,000)
Payment of dividends ................ (90,000)(1)
Net cash flow used in financing (150,000)
activities ..........................
Net decrease in cash .................. ₱ (197,000)
Cash at beginning of year ............. 240,000
Cash at end of year ................... ₱ 43,000

Computations:

* Sales .......................................... ₱1,120,000

Accounts Receivable, beginning ................. 210,000
Accounts Receivable, ending .................... (390,000)
Cash collected from customers ................ ₱ 940,000

** Purchases ...................................... ₱ 660,000

Accounts Payable, beginning .................... 240,000
Accounts Payable, ending ....................... (150,000)
Cash payments for inventory .................... ₱ 750,000

*** Operating Expenses ............................. ₱ 360,000

3
 Operating Expenses Payable:
Beginning .................................... 30,000
Ending ....................................... (48,000)
Cash payments for operating expenses ........... ₱ 342,000
(1)

Retained earnings
300,000 beg.
Net loss 5,000
Dividends 90,000
end. 205,000

PROBLEM 3: EXERCISES

1. Solutions:
Requirement (a):
Cash collected from customers (96K + 536 – 138K) ₱494,000
Cash paid for inventory
(206K + 396K – 168K = 434K purchases);
(68K + 434K – 90K = 412K payments to suppliers) (412,000)
Cash paid for salaries (20K + 18K – 16K) (22,000)
Cash paid for other expenses (56,000)
Cash flow from operations ₱ 4,000

Requirement (b):
Net income ........................................... ₱44,000
Add: Depreciation .................................. 22,000
Increase in accounts payable .................. 22,000
Less: Increase in accounts receivable ............... (42,000)
Increase in inventory ......................... (38,000)
Decrease in salaries payable .................. (4,000)
Cash flow from operations ..................... ₱ 4,000

2. Solutions:

Requirement (a):

Cash collected from customers (62.4K + 616.6K – 70.6K) ₱608,400

Cash paid for inventory
(148.2K + 490K – 158.6K = 479.6K purchases);
(51K A/P + 40K N/P + 479.6K – 39K – 41.6K = 490K) (490,000)
Cash paid for other expenses ......................... (56,000)
Net cash flows from operating activities ............. ₱ 62,400

Requirement (b):

Net income ........................................... ₱59,800

Add: Depreciation .................................. 18,200

4
 Amortization .................................. 2,600
Loss on sale of building ...................... 3,000
Decrease in inventory ......................... 10,400
Increase in short-term notes payable .......... 1,600
Less: Increase in accounts receivable ............... (8,200)
Decrease in accounts payable .................. (12,000)
Gain on sale of investments ................... (13,000)
Cash flow from operations ..................... ₱62,400

3. Solution:
Anderson Industries
Partial Statement of Cash Flows--Operating Activities
For the Year Ended December 31, 2002

Cash flows from operating activities:

Net income ................................. ₱ 50,000
Adjustments:
+ Depreciation ........................... ₱25,000
+ Decrease in accounts receivable ........ 12,000
– Increase in inventory .................. (22,000)
+ Increase in accounts payable ........... 20,000 35,000
Net cash provided by operating activities .... ₱ 85,000

4. Solution:
Cash flows from operating activities:
Net income ................................. ₱319,500
Adjustments:
Depreciation expense ..................... ₱36,000
Increase in accounts receivable .......... (19,350)
Increase in inventories .................. (43,500)
Decrease in prepaid insurance ............ 1,200
Decrease in accounts payable ............. (22,500)
Increase in other current liabilities .... 18,000 (30,150)
Net cash provided by operating activities .... ₱289,350

5. Solutions:

Requirement (a):
Cost of goods sold ................................... ₱350,000
Inventory, ending .................................... 85,000
Inventory, beginning ................................. (95,000)
Purchases ............................................ ₱340,000
Accounts payable, beginning .......................... 135,000
Accounts payable, ending ............................. (105,000)
Cash payments for inventory .......................... ₱370,000

5
Requirement (b):
Profit 15,000
Depreciation expense 30,000
Decrease in A/R 42,000
Decrease in Inventory 10,000
Decrease in A/P (30,000)
Cash flow from operating activities 67,000

Requirement (c):
Collections from customers (260K + 490K - 218K) 532,000
Payments to suppliers (see requirement ‘a’ above) (370,000)
Other expenses (see solution below) (95,000)
Cash flow from operating activities 67,000

Sales 490,000
COGS (350,000)
Depreciation (30,000)
Other expenses (squeeze) (95,000)
Profit 15,000

6. Solution:

Deloitte Industries
Partial Statement of Cash Flows--Investing and Financing Activities
For the Year Ended December 31, 2002

Cash flows from investing activities:

Purchase of equipment ..................... ₱(125,000)
Net cash used in investing activities ..... ₱(125,000)

Cash flows from financing activities:

Proceeds from sale of stock ............... ₱ 140,000
Payment of dividends ...................... (40,000)
Net cash provided by financing activities . ₱ 100,000

7. Solution:

Covey Corporation
Statement of Cash Flows
For the Year Ended December 31, 2002

Cash flows from operating activities:

Net income ................................... ₱545,600

6
Adjustments:
- Gain on sale of investment in bonds ₱(100,000)
+ Depreciation expense ................... 140,000
+ Decrease in accounts receivable ........ 28,400
- Increase in inventories ................ (42,000)
+ Increase in accounts payable ........... 78,000 104,400
Net cash provided by operating activities .... ₱ 650,000
Cash flows from investing activities:
Purchase of equipment ...................... ₱(560,000)
Sale of investment in bonds ...... 300,000
Net cash used in investing activities ........ (260,000)
Cash flows from financing activities:
Retirement of bonds at face ................ ₱(400,000)
Issuance of common stock ................... 280,000
Payment of dividends ....................... (240,000)
Net cash used in by financing activities ..... (360,000)
Net increase in cash and cash equivalents .... ₱ 30,000
Cash and cash equivalents at beginning of year 220,000
Cash and cash equivalents at end of year ..... ₱250,000

8. Solution:

Spurrier Co.
Statement of Cash Flows
For the Year Ended December 31, 2002

Cash flows from operating activities:

Net income ................................... ₱150,000
Adjustments:
+ Depreciation ........................... ₱ 12,000
+ Loss on sale of equipment .............. 15,000
+ Decrease in accounts receivable ........ 68,700
- Increase in inventory .................. (43,500)
- Decrease in accounts payable ........... (27,600) 24,600
Net cash provided by operating activities .... ₱174,600
Cash flows from investing activities:
Proceeds from sale of equipment .............. ₱ 63,000
Purchase of equipment ........................ (84,000)
Net cash used in investing activities ........ (21,000)
Cash flows from financing activities:
Issuance of common stock ..................... ₱105,000
Retirement of long-term debt ................. (120,000)
Payment of dividends ......................... (18,600)
Net cash used in financing activities ........ (33,600)
Net increase in cash and cash equivalents .... ₱120,000
Cash and cash equivalents, beginning of year . 200,000
Cash and cash equivalents, end of year ....... ₱320,000

9. Solution:

UR Company

7
Statements of Income
For Years Ended December 31, 2002 & 2003

Forecasted,
Description 2002 12/31/03 Explanations
Sales ₱3,172,000 ₱6,000,000 Given.
Same percentage of sales
Cost of Goods 2,532,000 4,789,407 as last year.
Sold
Gross Margin 640,000 1,210,593
Depreciation Same percentage of
Expense 14,576 28,224 PP&E as last year.
Other Operating Same percentage of sales
Expenses 122,684 410,134 as last year.
Operating Profit 502,740 772,235
Interest Expense 142,740 119,400 Same as prior year: 15%
of bank loan
Income before
Taxes 360,000 652,835
Income Taxes 108,000 195,850 Same as prior year: 30%
of Income before Taxes
Net Income 252,000 456,985

UR Company
Forecasted Statement of Cash Flows
For Year Ended December 31, 2003

Cash flows from operating activities:

Net income ................................. ₱456,985
Adjustments:
Depreciation ............................. 28,224
Increase in other current assets ......... (440,000)
Increase in accounts payable ............. 36,000 ₱ 81,209

Cash flows from investing activities:

Purchase of property, plant and equipment .. (440,224)
Cash flows from financing activities:
Payment of dividends ....................... ₱(32,985)
Borrowings on bank loans ................... 472,000 439,015

Net increase in cash and cash equivalents .... ₱ 80,000

Cash and cash equivalents at beginning of 132,000
the year ...................................
Cash and cash equivalents at end of year .....
₱212,000

10. Solution:

EMD, Inc.

8
Statement of Cash Flows
For the Year Ended December 31, 2002
(in thousands)

Cash flows from operating activities:

Net income ................................. ₱44
Adjustments for noncash revenue and expense
items:
Depreciation expense ..................... ₱22
Increase in accounts receivable .......... (42)
Increase in inventory .................... (38)
Increase in accounts payable ............. 22
Decrease in income taxes payable ......... (4) (40)
Net cash flows from operating activities ... ₱4

Cash flows from investing activities:

Purchase of building ....................... (26)
Cash flows from financing activities:
Sale of stock .............................. ₱60
Payment of cash dividends .................. (8)
Net cash flows from financing activities ... 52
Increase in cash ............................. ₱30
Cash January 1, 2002 ......................... 36
Cash December 31, 2002 ....................... ₱66

PROBLEM 4: MULTIPLE CHOICE – THEORY

1. D 6. D
2. B 7. D
3. A 8. D
4. C 9. A
5. D 10. C

9
PROBLEM 5: MULTIPLE CHOICE – COMPUTATIONAL
1. B
Solution:
Profit 420,000
Gain on sale of equipment (7,000)
Depreciation expense 72,800
Net cash from operating activities 485,800

2. A
Solution:
The entry for the sale of the equipment is reconstructed as follows:
2002 Cash (squeeze) 25,200
Accumulated depreciation 16,800
Equipment 35,000
Gain 7,000

Selling price of equipment sold (see journal entry) 25,200

Cash payment for equipment purchased (28,000)
Net cash used in investing activities (2,800)

3. C
Accounts receivable
Jan. 1 108,000
Sales on account and Cash collections
cash sales 2,190,000 2,146,000 (squeeze)
152,000 Dec. 31
4. B
Solution:
Profit for the year 360,000
Amortization 20,000
Depreciation 60,000
Increase in accounts receivable (140,000)
Increase in inventory (48,000)
Decrease in accounts payable (76,000)
Increase in salaries payable 28,000
Net cash from operating activities 204,000

5. D
Solution:
Profit 396,000
Depreciation expense 102,000
Decrease in accounts receivable 126,000
Increase in inventories (90,000)
10
Increase in accounts payable 24,000
Decrease in income taxes payable (16,000)
Cash flow from operating activities 542,000

6. D
Solution:
Cash paid to suppliers and employees (1,020,000)
Cash received from customers 1,740,000
Rent received 20,000
Taxes paid (220,000)
Cash flow from operating activities 520,000

7. C
Solution:
Rent payable
40,000 beg.
Payment (squeeze) 35,000 10,000 Rent expense
end. 15,000

8. B 50,000 net proceeds less carrying amount of 70,000 (250,000 –

180,000) = 20,000 loss, added back to profit when computing for
the net cash flows from operating activities under the indirect
method.

9. D (100,000 + 75,000) = 175,000 total dividends paid, cash

outflow under financing activities.

10. C

11
 Chapter 7

Notes (Part 1)

I. Accounting Policies, Changes in Estimates and Errors

PROBLEM 1: TRUE OR FALSE

1. FALSE 6. FALSE
2. FALSE 7. FALSE
3. TRUE 8. FALSE
4. FALSE 9. TRUE
5. TRUE 10. FALSE
11. TRUE

PROBLEM 2: FOR CLASSROOM DISCUSSION

1. C

2. B

3. D

4. C

5. D

6. B

7. C

8. C

9. A

10. E

11. D

12. C

13. C

Explanation: PAS 8 requires an entity to account for a change in accounting

policy in accordance with the transitional provision of the related standard. In
the absence of a transitional provision, the entity shall account for the change

1
in accounting policy by retrospective application. If retrospective application is
impracticable, PAS 8 allows a change in accounting policy to be accounted
for by prospective application.

14. Solutions:
Requirement (a):
1st step: CA on 1/1/x5: (600,000 x 6/10) = 360,000;
2nd step: 360,000 ÷ 3 yrs. = 120,000 amortization expense in 20x5

Requirement (b):
CA on 1/1/x5 360,000 – 120,000 = 240,000 CA on 12/31/x5

15. Solutions:
Requirement (a):
140,000 increase in beginning inventory x 70% = 98,000

Requirement (b):
Inventory – beg. 140,000
Retained earnings – beg. 98,000
Deferred tax liability 42,000

16. Solutions:

Requirement (a):
20x1 20x2
Under (Over) statement of ending inventory - 20x1 10,000 (10,000)
Under (Over) statement of ending inventory - 20x2 (4,000)
Depreciation understatement - 20x1 (4,000) -
Depreciation understatement - 20x2 (6,000)
Failure to accrue salaries at year end - 20x1 (8,000) 8,000
Failure to accrue salaries at year end - 20x2 (12,000)
Effect on profit or loss - (Over) Under statement (2,000) (24,000)

Requirement (b):
Effect on 12/31/x2 retained earnings = (2,000) + (24,000) = (26,000)

17. Solutions:

Requirement (a):
20x1 20x2
Ending inventory - 20x1 4,000 (4,000)
Ending inventory - 20x2 (3,600)
Depreciation (800)
Insurance premium (3,600 x 2/3) 2,400
Insurance premium (3,600 / 3) (1,200)
Gain on sale 6,400

2
Effect on profit or loss - (Over) Under statement 5,600 (2,400)

Requirement (b):
Effect on 12/31/x2 retained earnings = 5,600 + (2,400) = (3,200)

PROBLEM 3: EXERCISES

1. Solutions:

Requirement (a):
CA on 1/1/x4: (600,000 x 75% x 75% x 75%) = ₱253,125
Depreciation 20x4: (253,125 – 150,000) ÷ 5 = 20,625

DDB rate = 2/Life = 2/8 = 25%; (100% - 25% = 75%)

Requirement (b):
CA on 1/1/x4 253,125 – 20,625 depreciation = 232,500 CA on 12/31/x4

Requirement (c):
(600,000 historical cost – 232,500 CA on 12/31/x4) = 367,500 accumulated
depreciation 12/31/x4

2. Solution:
CA on 1/1/x4: (46,000 - 2,000) x 7/10 + 2,000 = 32,800
Depreciation 20x4 = (32,800 – 500) ÷ 2 = 16,150

Depreciation Expense ........................ 16,150

Accumulated Depreciation .................. 16,150

3. Solution:
Historical cost: 124,000;
Accumulated depreciation - 1/1/x4: (124,000 - 12,000) x [(8+7+6) / 36*] =
65,333;
CA on 1/1/x4: (124,000 – 65,333) = 58,667

*SYD denominator = Life x [(Life + 1) ÷ 2] = 8 x (9 ÷ 2) = 36

Depreciation 20x4 = (58,667 – 12,000) ÷ 5 = 9,333

Depreciation Expense ......................... 9,333

Accumulated Depreciation ................... 9,333

4. Solution:
Historical cost: 100,000;
Accumulated depreciation - 1/1/x4: 100,000 x [(10+9+8) / 55*] = 49,090;
CA on 1/1/x4: (100,000 – 49,090) = 50,909

*SYD denominator = Life x [(Life + 1) ÷ 2] = 10 x (11 ÷ 2) = 55

3
Depreciation 20x4 = 50,909 ÷ 7 = 7,273

Year Adjusted net income

20x1 350,000
20x2 450,000
20x3 300,000
20x4 (670K - 7,273) 662,727

5. Solutions:

Requirement (a):

Bad Debt Expense (163,000 x 2%) 3,260

Allowance for Bad Debts 3,260

Requirement (b):
Allowance for bad debts
Write-offs: Estimated bad debts:
20x1 1,200 2,610 20x1
20x2 2,850 3,690 20x2
20x3 3,222 4,410 20x3
20x4 3,720 3,260 20x4
End. 2,978

6. Solutions:

Requirement (a):
The change is an error (not a change in accounting policy or estimate)
because it is a change from an unacceptable principle to an acceptable
principle. The change shall be accounted for by retrospective restatement.

Requirement (b):
Retained Earnings – beg. ........................... 22,000
Allowance for Doubtful Accounts ........... 22,000

7. Solutions:

Requirement (a):
The beginning balance of retained earnings (Jan. 1, 20x2) shall be increased
by ₱40,000 (400,000 – 360,000).

Requirement (b):

Inventory .................................... 40,000

Retained Earnings (1/1/x2) .......................... 40,000

4
8. Solutions:

Requirement (a):
20x1 20x2
Asset inappropriately charged as expense
170,000
(120K + 50K) -
Unrecorded depreciation [(120K + 50K) - 20K] ÷ 5 yrs. (30,000) (30,000)
Effect on profit or loss - (Over) Under statement 140,000 (30,000)

Requirement (b):
Effect on 12/31/x2 retained earnings = 140,000 + (30,000) = 110,000 under

Requirement (c):

i. books still open

Machinery (150K + 20K) 170,000

Depreciation expense 30,000
Accumulated depreciation (30K x 2) 60,000
Retained earnings – beg. 140,000

ii. books already closed

Machinery (150K + 20K) 170,000

Accumulated depreciation (30K x 2) 60,000
Retained earnings 110,000

9. Solution:
(a)
No journal entry is required. The error has already counterbalanced.

(b)
Sales ....................................... 4,000
Retained Earnings ......................... 4,000

(c)
Insurance Expense ........................... 2,880
Retained Earnings ........................... 1,920
Prepaid Insurance ......................... 4,800

(d)
Interest Revenue ............................ 240
Retained Earnings ......................... 240

(e)
Depreciation Expense ....................... 3,920
Retained Earnings .......................... 3,920
Accumulated Depreciation--Equipment ...... 7,840

5
10. Solution:
20x0 20x1 20x2
Unadjusted profit (loss) 40,000 (15,000) 35,000
Accrued expenses (2,900) 2,900
(3,000) 3,000
(3,400)
Prepaid expenses 2,000 (2,000)
2,800 (2,800)
1,500
Accrued revenue 2,750 (2,750)
2,500 (2,500)
2,700
Unearned revenue (4,250) 4,250
(4,500) 4,500
(4,100)
Adjusted profit (loss) 37,600 (14,800) 33,900

PROBLEM 4: MULTIPLE CHOICE – THEORY

1. C 6. C
2. A 7. D
3. B 8. B
4. D 9. D
5. D 10. A

PROBLEM 5: MULTIPLE CHOICE – COMPUTATIONAL

1. B
Solution:
Carrying amt. on Dec. 31, 20x6: (100K – 10K) x 6/10 + 10K = 64,000
Carrying amt. on Dec. 31, 20x7: (64K – 4K) x 3/4 + 4K = 49,000

2. D
Solution:
Historical cost 264,000
Divide by: Original estimate of useful life 8
Original annual depreciation 33,000
Multiply by: (20x6 to 20x8) 3
Accumulated depreciation - Dec. 31, 20x8 99,000

Historical cost 264,000

Accumulated depreciation - Dec. 31, 20x8 (99,000)

6
Carrying amount - Dec. 31, 20x8 165,000
Less: New estimate of residual value (24,000)
New depreciable amount 141,000
Divide by: Revised estimate of useful life (6 - 3) 3
Revised annual depreciation 47,000

Accumulated depreciation - Dec. 31, 20x8 99,000

Depreciation - 20x9 47,000
Accumulated depreciation - Dec. 31, 20x9 146,000

3. D The change is a change in accounting estimate that is accounted for

prospectively. Therefore, no cumulative effect shall be computed.

4. D No deferred tax liability arises because the change did not give rise to
any difference in the tax base and the carrying amount of the asset.

5. C (700,000 x 70% net of tax rate) = 490,000

6. A from 83,000 FIFO balance as of Dec. 31, 20x6 to 78,000

Weighted average = 5,000 decrease

7. C Jan. 1, 20x1 balances: (77,000 – 71,000) x 70% = 4,200

8. B The best answer is “retrospective application” because the

transaction is a change in accounting policy.

9. D
Solution:
Unadjusted profit 74,100
Unrealized loss on decline in fair value of investments in
FVOCI 5,400
Adjustment to profits of prior years for errors in
depreciation (net of ₱3,750 tax effect) 7,500
Adjusted profit 87,000

10. B Amortization expense = (100,000 ÷ 5) = 20,000;

Retained earnings = (20,000 x 2 yrs. from 20x3 to 20x4) = 40,000

7
II. Events After the Reporting Period

PROBLEM 6: IDENTIFICATION
1. ADJUSTING
2. ADJUSTING
3. NON-ADJUSTING
4. ADJUSTING
5. ADJUSTING
6. NON-ADJUSTING
7. NON-ADJUSTING
8. ADJUSTING
9. NON-ADJUSTING
10. NON-ADJUSTING

PROBLEM 7: FOR CLASSROOM DISCUSSION

1. D The application of a letter of guarantee is not an obligating event. An

obligating event would be the application and granting of loan. Moreover,
the application of a letter of guarantee need not be disclosed by the
grantee (ABC Ltd.). However, the guarantor (not ABC Ltd.) may disclose
the guarantee if it is deemed a significant commitment.

2. C Before a liability is recognized, all of the following conditions must first

be met:
a. The item meets the definition of a liability (i.e., present obligation
arising from past events);
b. Probable outflow of resources embodying economic benefits; and
c. The outflow can be measured reliably.

If not all the conditions are met, no liability is recognized. However, the entity
may disclose a contingent liability if the outflow is deemed reasonably
possible.

In the problem above, the fact that a lawsuit is filed cannot be presumed that
the outflow is probable.

3. B

4. D Only a disclosure shall be made because there is no present obligation

as of the end of the reporting period, i.e., the fire happened subsequent
to year-end.

5. C Changes in fair values, market prices and exchange rates after the
end of the reporting period are non-adjusting events.

8
PROBLEM 8: EXERCISES
1. Solution:
Unadjusted profit 1,000,000
(a) Impairment loss (100,000)
(c) Additional write-down of inventory (120K - 100K) (20,000)
Adjusted profit 880,000

2. Solution:
Unadjusted profit 2,000,000
(c) Impairment loss (500,000)
Adjusted profit 1,500,000

3. Solutions:

Current Noncurrent
assets assets Liabilities Equity Profit
Unadjusted
balances 3,000,000 7,000,000 4,000,000 6,000,000 2,000,000
(a) (300,000) 300,000
(b) 500,000 (500,000) (500,000)
(e) 160,000 160,000 160,000
Adjusted
balances 2,700,000 7,460,000 4,500,000 5,660,000 1,660,000
4. Solutions:

Requirement (a):

McMaster, Inc.
Statement of financial position
As of December 31, 2001 and 2000

ASSETS 2001 2000

Current assets
Cash and cash equivalents ₱550,000 ₱300,000
Trade and other receivables 874,000 720,000
Held for trading securities 156,000 -
Inventories 820,000 770,000
Total current assets 2,400,000 1,790,000

Noncurrent assets:
(1)
Property, plant and equipment 384,000 192,000

TOTAL ASSETS ₱2,784,000 ₱1,982,000

9
LIABILITIES & EQUITY
Current liabilities:
Trade and other payables ₱340,000 ₱194,000
Note payable 100,000 -
Total current liabilities 440,000 194,000

Noncurrent liabilities:
Note payable 500,000 600,000

TOTAL LIABILITIES 940,000 794,000

Common stock, ₱10 par 420,000 420,000

Additional paid-in capital 260,000 260,000
Retained earnings (2) 1,164,000 508,000
TOTAL EQUITY 1,844,000 1,188,000

TOTAL LIABILITIES & EQUITY ₱2,784,000 ₱1,982,000

(1)
(620,000 – 300,000 + (80,000 x 4/5) = 384,000

(2)

Retained earnings, unadjusted 930,000

(b) Overstatement of ending inventory (30,000)
(c) Asset charged as expense (80K x 4/5) 64,000
(d) Contingent liability 200,000
Retained earnings, adjusted 1,164,000

Requirement (b):
McMaster, Inc.
Statements of profit or loss
For the years ended December 31, 2001 and 2001

ASSETS 2001 2000

Net sales 3,160,000 2,500,000
Cost of sales (1.510M + 30K overstatement of EI) (1,540,000) (1,380,000)
Gross profit 1,620,000 1,120,000
Selling costs (295,000) (219,000)
Administrative expenses (984K - 295K + 80K) (609,000) (511,000)
Depreciation [58K + (80K/5)] (74,000) (36,000)
Unrealized gain on held for trading securities 14,000
Profit for the year 656,000 354,000

10
Requirement (c):

 Summary of significant accounting policies.

A description of accounting principles and methods used in recognizing
revenues and allocating asset costs to current and future periods.
Specifically, McMaster should disclose accounting policies relating to
measurement of financial assets, inventories, and depreciable assets
and any other policies that would influence the decisions of users.

 Information regarding loss contingency.

A description of the pending legal action, including information and data
to assist users in evaluating the risk of potential loss. Based on the
opinion of McMaster's counsel, the estimated loss of ₱200,000 should
not be reported in the financial statements, but the contingency should
be described in a note, since the incurrence of a loss is "reasonably
possible."

 Information regarding the bankruptcy of a major customer.

This type of subsequent event does not affect the amounts reported in
the financial statements, because the casualty giving rise to the
bankruptcy occurred after McMaster's balance sheet date.

 Additional information to support totals in financial statements.

For example, McMaster might present additional detail for trade and
other receivables, property, plant and equipment, and trade and other
payables.

PROBLEM 9: MULTIPLE CHOICE – THEORY

1. B 6. A
2. A 7. B
3. A 8. D
4. B 9. C
5. A 10. D

11
 Chapter 8

Notes (Part 2)

I. Related Party Disclosures

PROBLEM 1: TRUE OR FALSE

1. TRUE 6. TRUE
2. TRUE 7. TRUE
3. TRUE 8. FALSE
4. TRUE 9. TRUE
5. TRUE 10. FALSE

PROBLEM 2: FOR CLASSROOM DISCUSSION

1. C
2. D
3. B
4. C
5. C

PROBLEM 3: EXERCISE
1. Solution:

Requirement (a):
“Accounts receivable” is assumed to connote trade receivables. “Accounts
receivable” represents amounts owed by customers for goods sold and
services rendered as part of normal business operations. Inclusion of other
forms of receivables under the caption "accounts receivable" thus may be
confusing and misleading. Although, the three items listed above may be
aggregated with “accounts receivable” and presented under a single line item
described as “trade and other receivables,” the three items must not be
included in the “accounts receivable” account.

Requirement (b):
Related party disclosures:
a. Advances made to officers (key management personnel only) and
b. Advances to subsidiary company (in the separate financial
statements). This account is eliminated in the consolidated financial
statements.

1
PROBLEM 4: MULTIPLE CHOICE – THEORY
1. A 6. D
2. B 7. D
3. C 8. D
4. D 9. B
5. B 10. D

II. Operating Segments

PROBLEM 5: TRUE OR FALSE

1. TRUE 6. TRUE
2. TRUE 7. TRUE
3. FALSE 8. FALSE
4. TRUE 9. FALSE
5. FALSE 10. FALSE

PROBLEM 6: FOR CLASSROOM DISCUSSION

1. D

2. D

3. B – “Management approach” – “The company is divided for internal

reporting purposes into 5 different divisions…….”

4. C

5. D – “Management approach” – “The entity reports to the board of

directors on the basis of each of the four regions.”

6. B – “Management approach” – an operating segment can be a

reportable segment even if it does not meet any of the quantitative
thresholds if that segment is treated as a reportable segment for internal
reporting purposes.

7. C – PFRS 8 uses a “management approach” in determining which

operating segments are reportable.

8. Solutions:

Requirement (a):
Operating Revenue Identifiable
Total revenue Asset test
segments test assets
A 1,200,000 24.39% 4,000,000 43.01%
B 420,000 8.54% 1,000,000 10.75%

2
 C 350,000 7.11% 800,000 8.60%
D 600,000 12.20% 1,700,000 18.28%
E 1,100,000 22.36% 800,000 8.60%
F 1,250,000 25.41% 1,000,000 10.75%
Totals 4,920,000 100.00% 9,300,000 100.00%

Operating
Profit Loss P/L test
segments
A 240,000 64.86%
B (20,000) 5.41%
C (30,000) 8.11%
D 70,000 18.92%
E 50,000 13.51%
F (320,000) 86.49%
Totals 360,000 (370,000)
Higher

Answer: The reportable segments are segments A, B, D, E and F.

Requirement (b):

Answer: Yes.
Operating segments External revenue

A 1,000,000
B 420,000
C -
D 500,000
E 900,000
F 1,200,000
Totals 4,020,000
Divide by: 4,220,000
95.26%

Requirement (c):
Total external revenue 4,220,000 x 10% = 422,000

3
PROBLEM 7: EXERCISES

1. Answer: The reportable segments are segments A, C, D and F.

2. Solution:
Operating Revenue
Profit test Asset test
segments test
A 29.41% 23.26% 43.01%
B 14.71% 13.95% 10.75%
C 8.82% 3.49% 8.60%
D 14.71% 5.81% 18.28%
E 5.88% 6.98% 8.60%
F 26.47% 46.51% 10.75%

Answer: The reportable segments are segments A, B, D, and F.

3. Solutions:

Requirement (a):

Operating Revenue Identifiable

Total revenue Asset test
segments test assets
A 1,400,000 29.72% 5,000,000 45.45%
B 1,000,000 21.23% 1,300,000 11.82%
C 1,050,000 22.29% 900,000 8.18%
D 760,000 16.14% 1,800,000 16.36%
E 300,000 6.37% 800,000 7.27%
F 200,000 4.25% 1,200,000 10.91%
Totals 4,710,000 100% 11,000,000 100%

Operating
Profit Loss P/L test
segments
A (300,000) 56.60%
B (180,000) 33.96%
C 220,000 41.51%
D 270,000 50.94%
E (20,000) 3.77%
F (30,000) 5.66%
Totals 490,000 (530,000)
Higher

4
Answer: The reportable segments are segments A, B, C, D and F.

Requirement (b):

Answer: YES.

Operating segments External revenue

A 1,200,000
B 900,000
C 800,000
D 600,000
E
F 200,000
Totals 3,700,000
Divide by: 4,000,000
92.50%

Requirement (c):
Total external revenues 4,000,000 x 10% = 400,000

PROBLEM 8: MULTIPLE CHOICE – THEORY

1. D 6. C
2. C 7. B
3. D 8. D
4. C 9. B
5. C 10. A

5
PROBLEM 9: MULTIPLE CHOICE – COMPUTATIONAL
1. C
Solution:
Revenue Profit Assets
Totals 32,750,000 5,800,000 67,500,000
10% Thresholds 3,275,000 580,000 6,750,000

Revenue
Operating test Profit test Assets test
segments qualifiers qualifiers qualifiers
A   
B   
C   
D x x 
E   
F x x x

2. B
Solution:
Sales to unaffiliated customers 2,000,000
Intersegment sales of products similar to those sold to
unaffiliated customers 600,000
Total external and internal revenues excluding
interest 2,600,000
Multiply by: 10%
Revenue threshold 260,000

Interest revenue and interest expense are reported separately for

each reportable segment unless a majority of the segment’s revenues
are from interest (e.g., financial institution)

3. A (30,000,000 x 10%) = 3,000,000

4. A (30,000,000 x 75%) = 22,500,000

5. D 40,600 – including the intersegment profits but excluding the

common costs that are not allocated in internal reporting.

6
 Chapter 9

Interim Financial Reporting

PROBLEM 1: TRUE OR FALSE

1. FALSE 6. FALSE
2. TRUE 7. FALSE
3. FALSE 8. TRUE
4. TRUE 9. FALSE
5. FALSE 10. TRUE

PROBLEM 2: FOR CLASSROOM DISCUSSION

1. D

2. A

3. B

4. B

5. B

6. C

7. A

8. Solution:

Revenue 9,000,000
Cost of goods sold (5,000,000)
Gross profit 4,000,000
Other operating expenses (2,800,000)
Loss on inventory write-down (2.2M – 2.8M) (600,000)
Interest income (2M x 12% x 3/12) 60,000
Profit 660,000
Other comprehensive income:
Unrealized loss on FVOCI [450K – (500K + 60K)] (110,000)
Comprehensive income 550,000

9. Solution:
Revenue 7,000,000
Cost of goods sold (3,000,000)

1
 Gross profit 4,000,000
Other operating expenses (2,800,000)
Property tax expense (1.2M x 1/4) (300,000)
Depreciation expense [(1.2M / 5) x 3/12] (60,000)
Insurance expense (15,000)
Profit 825,000
Other comprehensive income:
Revaluation increase (4.4M - 3.8M) 600,000
Comprehensive income 1,425,000

10. Solution:

Revenue 9,000,000
Cost of goods sold (3,000,000)
Gross profit 6,000,000
Other operating expenses (2,800,000)
Salaries expense (2.8M x 3/12) (700,000)
Impairment loss (500,000)
Profit from continuing operations 2,000,000
Discontinued operations (700,000)
Profit for the year 1,300,000

11. Solution:

Estimated annual profit before tax 1,200,000

Less: Operating loss carryforward (300,000)
Total 900,000
Multiply by: 30%
Estimated annual income tax expense 270,000
Divide by: Estimated annual profit before tax 1,200,000
Weighted average income tax rate 22.50%

Profit before tax - 1st quarter 350,000

Multiply by: Weighted ave. tax rate 22.50%
Income tax expense 78,750

2
PROBLEM 3: EXERCISES

1. Solution:

Revenue 9,000,000
Cost of goods sold (5,000,000)
Gross profit 4,000,000
Other operating expenses (2,800,000)
Property tax expense (250,000)
Impairment loss (600,000)
Loss 350,000

The write-up is not recognized because there are no write-downs in the past.

2. Solution:

Revenue 9,000,000
Cost of goods sold (5,000,000)
Gross profit 4,000,000
Other operating expenses (2,800,000)
Insurance expense (60K x 3/24) (7,500)
Commission expense (80,000)
Unrealized gain (1.45M - 1.5M) (50,000)
Profit from continuing operations 1,062,500
Discontinued operations (2.8M - 3M) + 800K (1,000,000)
Profit for the year 62,500
Other comprehensive income: -
Comprehensive income 62,500

3. Solution:

Revenue 9,000,000
Cost of goods sold (5,000,000)
Gross profit 4,000,000
Other operating expenses (2,800,000)
Employee benefits (450,000)
Depreciation expense (see solution below) (45,000)
Interest income (1.2M x 10% x 3/12) 30,000
Profit for the year 735,000

By trial and error, the depreciation method used by Puppy is determined to be

the SYD method.

Trial and error:

Historical cost (squeeze) 1,000,000

3
 Accumulated depreciation (540,000)
Carrying amount - 1/1/x1 460,000

Historical cost 1,000,000

Residual value (100,000)
Depreciable amount 900,000

Depreciation - 1st yr. (900K x 5/15) 300,000

Depreciation - 2nd yr. (900K x 4/15) 240,000
Accumulated depreciation - 1/1/x1 540,000

Depreciation - 20x1 (900K x 3/15) 180,000

Multiply by: 3/12
Depreciation - 1st qtr. 45,000

4. Solution:
Estimated annual profit before tax 1,200,000
Less: Operating loss carryforward (300K / 30%) (1,000,000)
Total 200,000
Multiply by: 30%
Estimated annual income tax expense 60,000
Divide by: Estimated annual profit before tax 1,200,000
Weighted average income tax rate 5.00%

Profit before tax - 1st quarter 350,000

Multiply by: Weighted ave. tax rate 5.00%
Income tax expense 17,500

5. Solution:
Estimated annual profit before tax 800,000
Less: Operating loss carryforward (100,000)
Total 700,000
Multiply by: 30%
Estimated annual income tax expense 210,000
Divide by: Estimated annual profit before tax 800,000
Weighted average income tax rate 26.25%

Profit before tax - 1st quarter 280,000

Multiply by: Weighted ave. tax rate 26.25%
Income tax expense 73,500

4
PROBLEM 4: MULTIPLE CHOICE – THEORY
1. D 6. C
2. C 7. B
3. A 8. C
4. D 9. C
5. D 10. A

PROBLEM 5: MULTIPLE CHOICE – COMPUTATIONAL

1. B 70,000 loss recognized immediately; (100,000 x ¼) = 25,000
insurance expense allocated to the quarter

2. C
Solution:
Depreciation expense (60,000 x 6/12) 30,000
Salaries expense - bonus (120,000 x 6/12) 60,000
Total expense for the semi-annual period 90,000

3. B
Solution:
Property tax (180,000 x 1/4) 45,000
Costs benefitting the remainder of the year (300,000 x 1/3) 100,000
Total expense for the 2nd quarter 145,000
4. C

5. B (-20,000 - 30,000 + 90,000) = 40,000

6. C (200,000 x 25%) = 50,000

7. C – The entire write-down of 900,000 is recognized in the 2nd

quarter.

8. D

9. C

10. B

Solution:
Estimated annual profit before tax 1,200,000
Less: Operating loss carryforward (120K / 30%) (400,000)

5
 Total 800,000
Multiply by: 30%
Estimated annual income tax expense 240,000
Divide by: Estimated annual profit before tax 1,200,000
Weighted average income tax rate 20.00%

1st Qtr. 2nd Qtr. 3rd Qtr.

Profits before taxes 350,000 200,000 400,000
Multiply by: Weighted ave. tax
20.00% 20.00% 20.00%
rate
Income tax expense 70,000 40,000 80,000

6
 Chapter 10

Cash Basis to Accrual Basis of Accounting

PROBLEM 1: FOR CLASSROOM DISCUSSION

1. D

2. C

3. C

4. Solutions:
Requirement (a):

Accounts/Trade notes receivable

beg. (0 + 200K) 200,000
Gross credit sales 3,710,000 1,000,000 Collections on A/R
Recoveries 10,000 2,000,000 Collections on trade N/R
100,000 Write-offs
20,000 Sales returns
800,000 end. (800K + 0)

Gross credit sales 3,710,000

Sales returns (20,000)
Net sales - accrual 3,690,000

Requirement (b):

Collections on A/R 1,000,000

Collections on trade N/R 2,000,000
Net sales - cash basis 3,000,000

5. Solutions:
Requirements (a) & (b):

1
 Accounts payable
- beg.
COGS - cash basis 2,000,000 2,800,000 Net purchases (squeeze)

end. 800,000

Inventory
beg. 200,000
Net purchases 2,800,000 3,000,000 COGS - accrual basis

- end.

6. Solution:
Prepaid/Accrued
beg. - Prepaid utilities 100,000 80,000 beg. - Accrued payable

Payments for utilities Utilities expense

(Cash basis) 270,000 220,000 (Accrual basis)

end. - Accrued payable 50,000 120,000 end. - Prepaid utilities

7. Solution:
Receivable/Unearned
beg. - Rent receivable 1,000,000 600,000 beg. - Unearned rent
Rent income Collections on rent
(Accrual basis) 2,100,000 2,420,000 (Cash basis)

end. - Unearned rent 720,000 800,000 end. - Rent receivable

8. Solution:

Net income under accrual basis (squeeze) ₱ 50,000

Adjustments:
Depreciation expense ................ ₱ 25,000
Increase in accounts receivable ..... (8,000)
Decrease in merchandise inventory ... 13,000
Decrease in accounts payable ........ (10,000) 20,000
Net cash provided by operating
activities ........................... (start) ₱70,000

2
PROBLEM 2: EXERCISES

1. Solutions:
Requirement (a):
Accounts/Trade notes receivable
beg. (0 + 240K) 240,000
Credit sales - gross 4,452,000 1,200,000 Collections on A/R
Recoveries 12,000 2,400,000 Collections on trade N/R
120,000 Write-offs
24,000 Sales returns
960,000 end. (960K + 0)

Gross credit sales 4,452,000

Sales returns (24,000)
Net sales - accrual 4,428,000

Requirement (b):
Collections on A/R 1,200,000
Collections on trade N/R 2,400,000
Net sales - cash basis 3,600,000

2. Solutions:
Requirements (a) & (b):

Accounts payable
- beg.
COGS - cash basis 3,000,000 4,200,000 Net purchases (squeeze)

end. 1,200,000

Inventory
beg. 300,000
Net purchases 4,200,000 4,500,000 COGS - accrual basis

- end.

3
3. Solution:
Prepaid/Accrued
beg. - Prepaid utilities 150,000 120,000 beg. - Accrued payable

Payments for utilities Utilities expense

(Cash basis) 405,000 330,000 (Accrual basis)

end. - Accrued payable 75,000 180,000 end. - Prepaid utilities

4. Solution:
Receivable/Unearned
beg. - Rent receivable 1,800,000 1,080,000 beg. - Unearned rent
Rent income Collections on rent
(Accrual basis) 3,780,000 4,356,000 (Cash basis)

end. - Unearned rent 1,296,000 1,440,000 end. - Rent receivable

5. Solution:

Accrual basis profit (squeeze) 860,000

Depreciation expense (900K - 800K) 100,000
Decrease in trade and other receivables 40,000
Increase in inventory (50,000)
Increase in prepaid supplies (20,000)
Decrease in trade and other payables (10,000)
Increase in deferred tax liability 80,000
Cash basis profit 1,000,000

4
PROBLEM 3: MULTIPLE CHOICE – THEORY
1. B

2. A

3. D

4. B

5. C

6. D

7. C

8. D

9. D

Proof:

Case 1: Accounts increase during the period.

Accounts payable Inventory
- beg. -
COGS – COGS –
50,000 150,000 150,000 70,000
Cash basis Accrual basis
100,000 80,000

Case 2: Accounts decrease during the period.

Accounts payable Inventory
100,000 beg. 80,000
COGS – COGS –
150,000 50,000 50,000 130,000
Cash basis Accrual basis
end. - - end.

10. B

Proof:
Accounts receivable
beg.
-
Sales - Sales -
Accrual Basis 150,000 70,000 Cash Basis

80,000

5
PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL
1. B
Solution:
Receivable/ Unearned
beg. - Receivable 90,000 60,000 beg. - Unearned
Royalty income
215,000 200,000
(squeeze) Collection remittances
end. - Unearned 40,000 85,000 end. - Receivable

2. C
Solution:
Receivable/Unearned
beg. A/R 40,000 - beg. Unearned
Service revenue (squeeze) 215,000 200,000 Collections
end. Unearned 5,000 60,000 end. A/R

3. B
Solution:
Prepaid/Payable
beg. Prepaid 55,000 80,000 beg. Payable
Payments 300,000 305,000 Royalty expense (squeeze)
end. Payable 75,000 45,000 end. Prepaid

4. D
Solution:
Accrual basis profit 95,000 (squeeze)
Increase in accounts receivable (20,000)
Decrease in accounts payable (15,000)
Cash basis profit 60,000 (start)

5. C
Solution:
Cash basis revenue 30,000
Payments received but not earned (2,100)
Services performed but not yet collected 3,400
Revenue - accrual basis 31,300

6. C

6
 Effect on 20x3 profit: overstated – understatement in beginning
inventory (‘cannot be determined’) causes overstatement in profit
– inverse relationship.
 Effect on 12/31/x3 equity: none – the error in beginning inventory
has already counter-balanced.

7. C
Solution:
Initial investment 2,000
Collection on services performed 5,000
Drawings (1,000)
Capital - 3/31/x3 6,000

The expenses incurred are not accounted for because they were paid
in the second quarter.

8. D
Solution:
Accounts receivable
beg. A/R 40,000
Net cash & credit sale Collections - cash
(80K - 4K + 120K - 6K) 190,000 200,000 & credit (squeeze)
30,000 end. A/R

9. D
Solution:
Rent receivable
beg. bal. 800,000
Rent revenue (squeeze) 2,500,000 30,000 Write-offs
2,210,000 Collections
1,060,000 end. bal.

10. D
Solution:

Accounts receivable
beg. A/R 1,000,000
Net sales 4,600,000 20,000 Write-offs
4,280,000 Collections (squeeze)
1,300,000 end. A/R

7
 Chapter 11

PFRS for Small and Medium-sized Entities

(SMEs)

PROBLEM 1: MULTIPLE CHOICE – THEORY

1. B 6. C 11. D
2. B 7. C 12. D
3. A 8. D 13. C
4. D 9. A 14. B
5. B 10. B 15. D

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. B 6. A 11. A
2. C 7. B 12. D
3. A 8. C 13. B
4. D 9. A 14. D
5. D 10. B 15. A

PROBLEM 3: MULTIPLE CHOICE – THEORY

1. D 11. D
2. E 12. C
3. A 13. B
4. C 14. C
5. B 15. C
6. C 16. A
7. A 17. C
8. C 18. A
9. D 19. C
10. D 20. C

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PROBLEM 4: MULTIPLE CHOICE – THEORY
1. A

2. D

3. C

4. B

5. C

6. B

7. D

8. D

9. D

10. E

PROBLEM 5: TRUE OR FALSE

1. FALSE 6. TRUE 11. FALSE 16. FALSE
2. FALSE 7. FALSE 12. TRUE 17. FALSE
3. TRUE 8. FALSE 13. FALSE 18. TRUE
4. FALSE 9. TRUE 14. FALSE 19. FALSE
5. FALSE 10. FALSE 15. TRUE 20. FALSE

PROBLEM 6: TRUE OR FALSE

1. FALSE 6. TRUE 11. FALSE 16. FALSE
2. FALSE 7. FALSE 12. FALSE 17. FALSE
3. TRUE 8. FALSE 13. FALSE 18. FALSE
4. FALSE 9. TRUE 14. FALSE 19. FALSE
5. TRUE 10. FALSE 15. TRUE 20. FALSE

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PROBLEM 7: MULTIPLE CHOICE – COMPUTATIONAL
1. B
Solution:
Revenues 5,000
Dividend income 800
Operating and other expenses (3,200)
Profit for the year 2,600
Retained earnings, Jan. 1 2,400
Adjustments to opening balance:
Cumulative effect of change in accounting policy
(2,600 FIFO - 3,200 Average) (600)
Retrospective effect of correction of error (1,200)
Adjusted retained earnings, Jan. 1 600
Dividends declared (350)
Retained earnings, Dec. 31 2,850

2. A (See solutions below)

3. A (See solutions below)
4. B (See solutions below)
Solutions:
The initial carrying amount of the bond is determined as follows:
Acquisition cost 1,000
Transaction costs 70
Initial measurement 1,070

The effective interest rate is determined using the “trial and error
approach” with interpolation when necessary.
Future cash flows x PF @X% n = Present value (initial carrying amount)
Where: X% = effective interest rate

First trial: @6%

 (1,200 x PV of 1 @6%, n=5) + (50 x PV ordinary annuity of 1
@6%, n=5) = 1,070
 (1,200 x 0.747258) + (50 x 4.212364) = 1,070
 897 + 211 = 1,108 is not equal to 1,070

Second trial: @7% (we need a lower amount so we’ll increase the
rate)
 (1,200 x PV of 1 @7%, n=5) + (50 x PV ordinary annuity of 1
@7%, n=5) = 850
 (1,200 x 0.712986) + (50 x 4.100197) = 1,070
 856 + 205 = 1,061 is not equal to 1,070

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From the above computations, we can infer that the effective interest
rate is a rate between 9% and 10%. We’ll perform interpolation next.
x% - 6%
7% - 6%
1,070 - 1,108
=
1,061 - 1,108 0.81

Effective interest rate (x%) = 6% + .81% = 6.81%

The amortization table using 6.81% as the effective interest is

prepared as follows:
Date Payments Int. income Amortization Present value
1/1/x0 1,070
12/31/x0 50 73 23 1,093
12/31/x1 50 74 24 1,117
12/31/x2 50 76 26 1,143
12/31/x3 50 78 28 1,171
12/31/x4 50 80 30 1,201

Use the following information for the next three questions:

On January 1, 20x0, an entity issues a bond for P900, incurring transaction
costs of P50. Interest of P40 is payable annually, in arrears, over the next five
years starting December 31, 20x0. The bond has a mandatory redemption of
P1,100 on December 31, 20x4.

5. A (See solutions below)

6. B (See solutions below)
7. D (See solutions below)
Solutions:
The initial carrying amount of the bond is determined as follows:
Issue price 900
Transaction costs (50)
Initial measurement 850

The effective interest rate is determined using the “trial and error
approach” with interpolation when necessary.
Future cash flows x PF @X% n = Present value (initial carrying amount)
Where: X% = effective interest rate

First trial: @10%

 (1,100 x PV of 1 @10%, n=5) + (40 x PV ordinary annuity of 1
@10%, n=5) = 850
 (1,100 x 0.620921) + (40 x 3.790787) = 850
 683 + 152 = 835 is not equal to 850

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Second trial: @9% (we need a higher amount so we’ll decrease the
rate)
 (1,100 x PV of 1 @9%, n=5) + (40 x PV ordinary annuity of 1
@9%, n=5) = 850
 (1,100 x 0.649931) + (40 x 3.889651) = 850
 715 + 156 = 871 is not equal to 850

From the above computations, we can infer that the effective interest
rate is a rate between 9% and 10%. We’ll perform interpolation next.
x% - 9%
10% - 9%
850 - 871
=
835 - 871 0.58

Effective interest rate (x%) = 9% + .58% = 9.58%

The amortization table using 9.58% as the effective interest is

prepared as follows:
Date Payments Int. expense Amortization Present value
1/1/x0 850
12/31/x0 40 81 41 891
12/31/x1 40 85 45 937
12/31/x2 40 90 50 987
12/31/x3 40 95 55 1,041
12/31/x4 40 100 60 1,101

8. A
Analysis: The entity has transferred to the bank substantially all of the
risks and rewards of ownership of the receivables. Accordingly, it
removes the receivables from its statement of financial position (i.e.,
derecognizes them), and it shows no liability in respect of the
proceeds received from the bank.

9. C (850,000 proceeds – 1,000,000 carrying amount) = 150,000

loss

10. C
Analysis: In this case, the entity has retained the risk of slow payment
or non-payment by the debtors—a significant risk with respect to
receivables. Accordingly, the entity does not treat the receivables as
having been sold to the bank, and it does not derecognize them.

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Instead, it treats the proceeds from the bank as a loan secured by the
receivables. The entity continues to recognize the receivables as
an asset until they are collected or written off as uncollectible.

11. C
Solution:
Cost model (equal to acquisition cost) 100,000
Equity model [100K + (30K x 20%) - (10K x 20%)] 104,000
Fair value model (equal to year-end fair value) 110,000

12. C
Solution:
Cost model (equal to dividend received) (10K x 20%) 2,000
Equity model - share in profit (30K x 20%) 6,000
Fair value model (dividend + fair value gain) (2K + 10K) 12,000

13. C (See solutions below)

14. C (See solutions below)

Solutions:
Year Annual rentals
1 360,000
2 (360K x 110%) 396,000
3 (396K x 110%) 435,600
4 479,160
5 527,076

15. A (See solutions below)

16. C (See solutions below)
17. A (See solutions below)
18. A (See solutions below)
Solutions:
Year Annual rentals
1 100,000
2 (100K x 105%) 105,000
3 (105K x 105%) 110,250
Total rentals 315,250
Divide by: Lease term 3
Annual rent expense/ income 105,083

Rent expense - Year 1 105,083

Rentals paid (100,000)
Rent payable - Year 1 5,083

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Rent income - Years 1 and 2 (105,083 x 2) 210,167
Rentals received (100K + 105K) (205,000)
Rent receivable - Year 2 5,167

19. A (See solutions below)

20. B (See solutions below)
Solutions:
Major defects (5,000 x 8% x P100) 40,000
Minor defects (5,000 x 12% x P20) 12,000
Warranty expense 52,000
Actual repair costs (10,000)
Year-end provision 42,000

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PROBLEM 8: MULTIPLE CHOICE – COMPUTATIONAL

1. B (See solutions below)

2. D (See solutions below)
Solutions:
The effective interest rate is determined using the “trial and error
approach” with interpolation when necessary.
Future cash flows x PF @X% n = Present value (initial carrying amount)
Where: X% = effective interest rate

First trial: @10%

 (340,000 x PV of 1 @10%, n=2) = 280,992
 (340,000 x 0.826446) = 280,992 is equal to 280,992
Therefore, the effective interest rate is 10%.

Revenue 280,992
Cost of sales (280,992 x 100%/130%) (216,148)
Gross profit 64,844
Interest income (280,992 x 10%) 28,099
Operating expenses (50,000)
Profit 42,944

3. D
Solution:
The carrying amount of the equipment on December 31, 20x1 is
computed as follows:
(1,600,000 – 100,000) x 7/15 + 100,000 = 800,000

The recoverable amount is determined as follows:

a. Fair value less costs to sell = (700,000 – 20,000) = 680,000
b. Value in use
Net cash Present
Year flows PV of 1 factors value
20x2 180,000 0.8928571429 160,714
20x3 167,400 0.7971938776 133,450
20x4 155,682 0.7117802478 110,811
20x5 144,784 0.6355180784 92,013
20x6 134,649 0.5674268557 76,404
20x7 125,224 0.5066311212 63,442
20x8 116,458 0.4523492153 52,680
Residual value 100,000 0.4523492153 45,235
Value in use 734,750

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The recoverable amount is the value in use of P734,750 – the higher
amount.

The impairment loss is computed as follows:

Recoverable amount 734,750
Carrying amount (800,000)
Impairment loss (65,250)

4. D
Solution:
Pretax income 18,000
Permanent differences -
Accounting profit subject to tax 18,000
Warranty provision (FI < TI) 3,000
Interest receivable (FI > TI) (1,000)
Depreciation (FI > TI) (30,000)
Taxable profit (Tax loss) (10,000)

Depreciation for financial reporting purposes (200K ÷ 10) 20,000

Depreciation for taxation purposes (200K ÷ 4) 50,000
Taxable temporary difference (FI > TI) (30,000)
or
Carrying amount (200K x 9/10) 180,000
Tax base (200K x 3/4) 150,000
Taxable temporary difference (FI > TI) 30,000

Required annual income tax payment -

Quarterly tax payments 50,000
Prepaid income tax / Current tax asset 50,000

5. D
Solution:
Warranty provision (FI < TI) 3,000
Tax loss 10,000
Valuation allowance on tax loss (10,000 x 60%) (6,000)
Total deductible temporary difference 7,000
Multiply by: Tax rate applicable to 20x2 and future periods 30%
Deferred tax asset - Dec. 31, 20x1 2,100

6. A
Solution:
Interest receivable (FI > TI) 1,000
Depreciation (FI > TI) 30,000
Total taxable temporary difference 31,000

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Multiply by: Tax rate applicable to 20x2 and future periods 30%
Deferred tax liability - Dec. 31, 20x1 9,300

7. A
Solution:
Accounting profit subject to tax 18,000 x 35% current tax rate = 6,300

8. B
Solution:
Pretax income 280,000
Interest income subject to final tax (30,000)
Nondeductible entertainment expense 25,000
Accounting profit subject to tax 275,000
Bad debt expense (FI < TI) 2,000
Depreciation (FI > TI) (100K - 75K) (25,000)
Taxable profit 252,000

Taxable profit 252,000

Multiply by: Tax rate 30%
Current tax expense 75,600

9. D
Solution:
Change in DTA (2,000 x 30%) (600)
Change in DTL (25,000 x 30%) 7,500
Deferred tax expense 6,900

10. A
Solution:
Accounting profit subject to tax 275,000
Multiply by: Tax rate 30%
Income tax expense 82,500

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