FINAC 3 TOPICS

PROBLEM A

On December 31, 20x1, an entity classified a building with an original cost of P20,000,000, carrying amount of
P8,000,000 and remaining useful of 8 years as held for sale. The entity uses the straight-line method of depreciation
with no residual value for this asset. The fair value of the building on December 31, 20x1 is P7,000,000 while costs
to sell are estimated at P200,000. The building is being marketed at a sale price of P7,000,000.

On December 31, 20x2, the building remains unsold. The fair value of the building on December 31, 20x2 is
P6,800,000 while costs to sell are estimated at P200,000. The entity decreased the sale price to P6,000,000.

On December 31, 20x3, the building still remains unsold. The fair value of the machinery on December 31, 20x3
is P8,800,000 while costs to sell are estimated at P200,000. The failure to locate a buyer and complete the sale is
beyond the entity’s control. The entity further decreased the sale price to P5,800,000.

On December 31. 20x4, the building remains unsold. The fair value of the machinery on December 31, 20x1 is
P9,000,000 while costs to sell are estimated at P200,000. The entity did not further decrease the sale price.

Requirements: Provide the journal entries.

PROBLEM B

The statement of financial position of an entity on December 31, 20x1 shows the following information:

Cash and cash equivalents 600,000

Trade and other receivables 1,200,000
Inventories 3,600,000
Investment property (Cost model) 1,400,000
Investment in associate 800,000
Property, plant and equipment 5,000,000
Total assets 12,600,000

Trade and other payables 4,900,000

Current tax payable 1,800,000
Deferred tax liability 700,000
Ordinary share capital 2,000,000
Retained earnings 2,700,000
Other components of equity 500,000
Total liabilities & equity 12,600,000

On December 31, 20x1, the entity commits to a plan to sell the investment property. All conditions of PFRS 5 are
met. The fair value of the investment property on this date is P1,600,000 while the estimate of costs to sell is
P50,000.

Requirement: Prepare the classified statement of financial position of the entity as at December 31, 20x1.

PROBLEM C

The statement of financial position and profit or loss of an entity on December 31, 20x1 shows the following
information:

Cash and cash equivalents 1,500,000

Trade and other receivables 3,000,000

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 Inventories 9,000,000
Investment property (Cost model) 3,500,000
Investment in associate 2,000,000
Property, plant and equipment 12,500,000
Total assets 31,500,000

Trade and other payables 12,250,000

Current tax payable 4,500,000
Deferred tax liability 1,750,000
Ordinary share capital 5,000,000
Retained earnings 6,750,000
Other components of equity 1,250,000
Total liabilities & equity 31,500,000

Revenue 5,600,000
Cost of sales (2,000,000)
Gross profit 3,600,000
Distribution of costs (780,000)
Administrative expenses (900,000)
Impairment loss (reversal) on assets held for sale
Finance costs (300,000)
Share of profit of associates 240,000
Profit for the period from continuing operations 1,860,000
Discontinued Operations:
Profit for the period from discontinued operations -_
Profit for the period 1,302,000

On December 31, 20x1, the entity commits to a plan to sell an equipment with carrying amount of P2,800,000. The
following will be sold together with the equipment accounts receivable with carrying amount of P200,000,
inventories with carrying amount of P560,000 and accounts payable with carrying amount of P360,000. The entity
determines that the equipment has a fair value less costs to sell of P1,600,000. The carrying amounts of the other
assets and the liability approximate their fair value less costs to sell. All the conditions of PFRS 5 are met.

Requirement: Prepare the December 31, 20x1 classified statement of financial position and the statement of profit
or loss of the entity. Ignore the effects of income taxes.

PROBLEM D

An entity has three major product lines. Each product line comprises operations and cash flows that can be clearly
distinguished, operationally and for financial reporting purposes, from the rest of the entity. During the year, the
entity commits to a plan to sell Product line 2. All the conditions of PFRS 5 are met. The results of operations of
the product lines during the year are shown below:

Product Line 1 Product Line 2 Product Line 3

Revenue 2,000,000 1,700,000 2,400,000

Cost of goods sold (800,000) (1,100,000) (960,000)

Gross profit 1,200,000 600,000 1,440,000

Distribution costs (300,000) (450,000) (360,000)
Administrative expense (150,000) (200,000) (180,000)

Profit before tax 750,000 (50,000) 900,000

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Additional information:
 Product line 2 has total assets of P6,000,000 and total liabilities of P4,500,000. The assets have a fair value
less costs to sell of P5,000,000.
 The entity expects to realize a gain of P200,000 on the sale, which is expected to occur in the following
period.
 The entity is subject to a 30% income tax rate. There are no temporary differences. All gains and losses
have tax consequences.

Requirement: Prepare the statement of profit or loss of the entity.

PROBLEM E

The statements of financial position and profit or loss of an entity on December 31, 20x1 shows the following
information.

Cash and cash equivalents 1,800,000

Trade and other receivables 3,600,000
Inventories 10,800,000
Investment property (Cost model) 4,200,000
Investment in associate 2,400,000
Property, plant and equipment 15,000,000
Total assets 37,800,000

Trade and other payable 14,700,000

Current tax payable 5,400,000
Deferred tax liability 2,100,000
Ordinary share capital 6,000,000
Retained earnings – Dec. 31, 20x1 8,100,000
Other components of equity 1,500,000
Total liabilities & equity 37,800,000\

Revenue 6,720,000
Cost of sales (2,400,000)
Gross profit 4,320,000
Distribution costs (936,000)
Administrative expenses (1,080,000)
Finance costs (360,000)
Share of profit of associates 288,000
Profit for the year 2,232,000

On December 31, 20x1, the entity commits to a plan to sell a component of an entity that represents a major
geographical area of operations. All the conditions of PFRS 5 are met. Information on the component is as follows:

Financial position:
Accounts receivable 240,000
Inventory 672,000
Equipment 3,360,000
Accounts payable 432,000

Financial performance:
Revenue 2,000,000
Cost of sales 1,200,000
Distribution costs 280,000
Administrative expenses 432,000
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Additional information:
 The entity determines that the equipment has a fair value less costs to sell of P1,600,000. The carrying
amounts of the other assets and the liability approximate their fair value less costs to sell.

Requirement: Prepare the December 31, 20x1 classified statement of financial position and the statement of profit
or loss of the entity. Ignore the effects of income taxes.

PROBLEM F

The inexperienced accountant of Friday Corp. prepares the following statement of profit or loss and other
comprehensive income for the first quarter ended March 31, 20x1:

Revenue 9,000,000
Dividend income 100,000
Cost of goods sold (5,000,000)
Commission expense (60,000)
Other operating expense s (2,000,000)
Profit 1,240,000
Other comprehensive income -___
Comprehensive income 1,240,000

Additional information:
a. On January 28, 20x1, the entity acquires 10% interest in the ordinary shares of Sunday Co. for P500,000.
Transactions cost on the acquisition amounts to P60,000. The transaction costs are recognized as commission
expense. The investment is classified as financial asset measured at fair value through other comprehensive
income. The fair value of the investment on March 31, 20x1 is P450,000. Friday Corp. strongly believes that
the fluctuation in fair value is only temporary. In fact, the fair value of the investment increases to P580,000
on April 5, 20x1.
b. Sunday Co. has an established practice of declaring dividends every year-end. Friday expects that Sunday will
declare dividends of P1,000,000 on December 20x1. Friday recognizes the estimate as dividend income.
c. On January 1, 20x1, Friday has an outstanding 12% long-term, loan receivable with carrying amount of
P2,000,000. Although the principal amount is due only at maturity, interests are collectible every year-end.
Friday recognizes interest income every year-end when the interest is collected.
d. As of March 31, 20x1, Friday’s inventory has a total cost of P2,800,000 and a net realizable value of P2,200,000.
The inventory decline is not recognized because Friday believes that it is only temporary. Friday’s past
experience supports this fact.

Requirement: Prepare a correct statement of profit or loss and other comprehensive income for Friday Corp. (Ignore
income taxes).

PROBLEM G

This statement of profit or loss of Sunny Corporation for the first quarter ended March 31, 20x1 is shown below:
Revenue 7,000,000
Cost of goods sold (3,000,000)
Gross Profit 4,000,000
Other operating expenses (2,800,000)
Property tax expense (1,200,000)
Depreciation expense (240,000)
Insurance expense (60,000)
Profit (300,000)
Other comprehensive income:
Revaluation increase 150,000
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 Comprehensive income (150,000)

Additional information:
a. The 20x1 property tax of P1,200,000 was paid on February 28, 20x1.
b. Sunny’s depreciable asset consists only of equipment with carrying amount of P1,200,000 and remaining useful
life of 5 years as of January 1, 20x1. Sunny depreciates this asset using the straight-line method with no residual
value.
c. Sunny took a one-year fire insurance on January 1, 20x1 for P60,000.
d. During January 20x1, Sunny revalued its land from its original cost of P3,800,000 to P4,400,000.

Requirement: Prepare a correct statement of profit or loss and other comprehensive income for Sunny Corporation.
(Ignore income taxes).

PROBLEM H

The statement of profit or loss of Sunset Co. for the first quarter ended March 31, 20x1 is shown below:

Revenue 9,000,000
Cost of goods sold (3,000,000)
Gross profit 6,000,000
Other operating expenses (2,800,000)
Impairment loss (125,000)
Profit 3,075,000

Additional information:
a. Sunset Co. pays its employees 13th month pay as year-end bonus. Since the bonus is paid only at year-end, this
is not reflected in the statement of profit or loss above. Sunset expects that a total amount of P2,800,000 will
be paid to the employees as 13th month pay on December 31, 20x1. The estimate is based on Sunset’s current
number of employees, the employee’s expected service hours during the year, and their expected salary levels
on December 20x1.
b. On March 1, 20x1, the carrying amount of Sunset’s land exceeded its recoverable amount by P500,000. A
portion of this amount is recognized during the quarter.
c. On March 16, 20x1, Sunset committed to a plan to sell a component of an entity. All of the conditions under
PFRS 5 are met. The carrying amount of the net assets of the component approximates the fair value less costs
to sell. The component incurred an operating loss of P700,000 during the first quarter. Sunset decided to defer
the loss until the actual sale of the component. The component is sold on April 8, 20x1.

Requirement: Prepare a correct statement of profit or loss and other comprehensive income for Sunny
Corporation. (Ignore income taxes).

PROBLEM I

Instruction: State whether each of the following items is to be recognized IMMEDIATELY in its entirety in the
interim period or to be SPREAD OUT over the interim periods.

a. Temporary decline in the fair value of an investment in equity securities.

b. Significant and permanent decline in the fair value of an investment in equity securities.
c. Casualty loss from typhoon.
d. Government grant received as aid for the loss incurred in item #2 above.
e. Depreciation.
f. Year-end bonuses of employees which they earn as they render service.
g. Results of discontinued operations.
h. Premium paid for a one-year insurance.
i. Regular repairs and maintenance costs.

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 j. Dividend income.
k. Effect of change in foreign exchange rates on foreign currency denominated liabilities.
l. Temporary decline in the value of inventories.
m. Property tax for the year.
n. Post-employment benefits.
o. Significant but temporary increase in the fair value of investment in equity securities measured at fair value
through other comprehensive income.

PROBLEM J

QUIRK ACCIDENT Co. reports profit before tax of ₱200,000 in its 2nd quarter interim financial statements before
consideration for the following:

a. Inventory with a carrying amount ₱10,000 has a net realizable value of ₱12,000. It is expected that the change
in value will reverse in the 3rd quarter. There have been no write-downs of inventory recognized in previous
periods.
b. An investment property measured under the cost model has a carrying amount of ₱150,000 but its recoverable
amount is ₱140,000.
c. An investment in FVPL measured at acquisition cost of ₱20,000 has a fair value of ₱38,000 as at the end of
2nd the quarter. However, the increase in fair value is expected to be only temporary.
d. No depreciation is recognized during the 2nd quarter. The annual straight-line depreciation of items of PPE is
₱60,000.
e. ABC Co. has a policy of providing 12 days paid vacation leaves for its employees. The vacation leaves are
vesting and accumulating. Total paid vacation leaves eligibility of employees for the full year is ₱140,000.
However, only ₱20,000 worth of paid vacation leaves have been availed of during the quarter.
f. It was discovered that depreciation in the previous year was overstated by ₱7,000.

Requirement: Compute for the adjusted profit before tax.

PROBLEM K

FATUOUS SILLY Co. is preparing its interim financial statements for the period ended March 31, 20x1. The
following relate to the transactions during the first quarter:

a. Total sales for the interim period was ₱2,000,000.

b. Cost of sales was ₱900,000.
c. FATUOUS is liable for 5% commission on its sales to its sales representatives and agents. No commission has
yet been paid as of March 31, 20x1.
d. The allowance for doubtful accounts has a balance of ₱10,000 as of January 1, 20x1. The required balance as of
March 31, 20x1 is ₱30,000. There were no write-offs or recoveries during the period.
e. A building with historical cost of ₱2,400,000 is being depreciated over 5 years using straight line method.
f. FATUOUS prepaid a one-year insurance on its assets for ₱80,000 on January 1, 20x1.
g. Property taxes for 20x1 amounting to ₱52,000 was paid in January.
h. Advertising costs of ₱100,000 were incurred in February on promotional activities held on Valentine’s Day.
i. Year-end staff bonuses are expected to be around ₱184,000. Employees become entitled to the bonuses as they
provide services to FATUOUS during the year.
j. FATUOUS’s president is entitled to a 10% bonus on profit before bonus and taxes.
k. Loss on sale of a used equipment on March 2, 20x1 was ₱60,000.
l. FATUOUS incurred ₱24,000 on unanticipated repairs on its factory equipment on March 16, 20x1.
m. Due to the unexpected breakdown of the factory equipment on March 16, 20x1, FATUOUS has planned a major
periodic overhaul of its other equipment to be held annually starting on December 31, 20x1. The cost of the major
planned periodic overhaul is estimated at ₱96,000.

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 n. FATUOUS leases one of its retail stores. Monthly rentals are ₱10,000, however, the lease contracts provide for
a contingent rent equal to 2% of the excess of sales over ₱1,800,000.
o. FATUOUS’s budget for 20x1 included charitable contributions of ₱58,000 and employee training costs of
₱26,000. None of those costs were incurred as of March 31, 20x1.
p. Other operating expenses incurred during the first quarter totaled ₱240,000.

Requirement: Compute for the profit or loss for the first quarter ended March 31, 20x1.

PROBLEM L

1. An analysis of Thrift Corp.’s unadjusted prepaid expense account at December 31, 20x3, revealed the following:
 An opening balance of ₱1,500 for Thrift’s comprehensive insurance policy. Thrift had paid an annual
premium of ₱3,000 on July 1, 20x2.
 A ₱3,200 annual insurance premium payment made July 1, 20x3.
 A ₱2,000 advance rental payment for a warehouse

Thrift leased for one year beginning January 1, 2004. In its December 31, 20x3 balance sheet, what amount should
Thrift report as prepaid expenses?

2. The balance in retained earnings at December 31, 2003 was ₱810,000 and at December 31, 2004 was ₱654,000.
Net income for 2004 was ₱563,000. A stock dividend was declared and distributed which increased common stock
₱225,000 and paid-in capital ₱125,000. A cash dividend was declared and paid. The amount of the cash dividend
was?

3. On April 1, 2008, Ivy began operating a service proprietorship with an initial cash investment of ₱1,000. The
proprietorship provided ₱3,200 of services in April and received full payment in May. The proprietorship incurred
expenses of ₱1,500 in April which were paid in June. During May, Ivy drew ₱500 against her capital account. What
was the proprietorship's income for the two months ended May 31, 2008, under the following methods of
accounting? Cash basis and Accrual basis

4. Entity Co. uses the cash basis of accounting and reported income of ₱87,000 in 20x1. The following items were
considered in the computation of the cash basis net income.

Inventory, beginning 12,000

Inventory, ending 18,000
Receivables, beginning 40,000
Receivables, ending 38,000
Payables, beginning 19,000
Payables, ending 25,000

The accrual basis income is

5. Information on an entity’s accounts is shown below:

Current tax payable, beg. 150,000

Current tax payable, end. 400,000
Increase in deferred tax liability 60,000
Increase in deferred tax asset 20,000
Income tax paid 280,000

How much is the income tax expense for the period?

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PROBLEM M

Aroma Company and its divisions are engaged solely in manufacturing operations. The entity reported following segment
profit (loss) for the current year:

V 3,400,000
W 1,000,000
X (2,000,000)
Y 400,000
Z (200,000)
2,600,000
In the segment information for the current year, what are the reportable segment?

PROBLEM N

Correy Company and its divisions are engaged in manufacturing operations. The following data pertain to the industries
in which operations were conducted for the current year:

Industry Revenue Profit Total Assets

A 10,000,000 1,750,000 20,000,000

B 8,000,000 1,400,000 17,500,000

C 6,000,000 1,200,000 12,500,000

D 3,000,000 550,000 7,500,000

E 4,250,000 675,000 7,000,000

F 1,500,000 225,000 3,000,000

32,750,000 5,800,000 67,500,000

How many reportable segments does Correy have?

PROBLEM O

Tam Company is engaged in a small export business. The company maintains limited records. Most of the company’s
transactions are summarized in a cash journal; non-cash transactions are recorded by making memo entries. The
following balances are abstracted from the company’s records.

Jan. 1, 2015 December 31, 2015

Accounts receivable 150,000 100,000

Accounts payable 200,000 100,000

Accounts written off 5,000

Cash received from customers 2,100,000

Cash paid to creditors 1,400,000

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 Sales discount 4,000

Sales returns and allowances 10,000

Notes receivable – trade 50,000 100,000

Purchase discounts 2,500

Purchase returns 5,000

a. The gross sales for the year is?

b. Gross purchases for the year is?

PROBLEM P

Xavier Company has three segments, A B, and C. Segment C, the closing division, is deemed inconsistent with the long-
term direction of the entity. Management has decided to dispose of Segment C. On November 15, 2014 the board of
directors of Xavier Company voted to approve the disposal and an announcement was made. On that date the carrying
amount Segment C’s net assets was P90,000,000 and the fair value less cost of disposal was P70,000,000. Segment C’s
revenue and expenses for 2014, respectively, were P50,000,000 and P32,000,000, including an interest of P5,000,000
attributable to Segment C. There was no further impairment of assets between November 15 and December 31, 2014.

Before income tax, what is the income or loss from discontinued operation to be reported in the 2014 income statement?

PROBLEM Q

Zebra Company is a diversified entity with nationwide interest in commercial real estate development, banking, mining
and food distribution. The food distribution division was deemed to be inconsistent with the long-term direction of the
entity. On October 1, 2014 the board of directors voted to approve the disposal of this division. The sale is expected to
occur in August 2015. The food distribution had the following revenue and expenses in 2014: January 1 to September
30, revenue of P35,000,000 and expenses of P27,000,000; October 1 to December 31, revenue of P15,000,000 and
expenses of P10,000,000. The carrying amount of the division’s net assets on December 31, 2014 was P56,000,000 and
the fair value less cost of disposal was P58,000,000. The sale contract requires Zebra to terminate certain employees
incurring an expected termination cost of P4,000,000 to be paid by December 15, 2015. The income tax rate is 30%. In
the income statement for the year ended December 31, 2014, what amount should be reported as income from
discontinued operation?

-end of the discussion material-

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