College of Accounting Education

3F, Business & Engineering Building

Matina, Davao City
Phone No.: (082)300-5456 Local 137

Let’s Check LUTHER GALLANO 7751

Activity 1. Now that you know what is monetary and nonmonetary items and the corresponding
treatment of these items under constant accounting and current cost accounting. Let’s check
your understanding of these terms. In the space provided, write M if the item is monetary and NM
if the item is nonmonetary.
1. Deferred Revenue NM __________
2. Financial assets at fair value through other comprehensive income.NM __________
3. Inventories NM __________
4. Prepaid Advertising NM __________
5. Prepaid Interest M __________
6. Notes Receivable M __________
7. Property, plant and equipment NM __________
8. Share Capital NM __________
9. Cash dividends payable M __________
10. Advances to employees M __________

Activity 2 Encircle the letter which corresponds to your answer.

1.) Hyperinflation is indicated by characteristics of the economic environment of a country
which include all of the following, except
a. The general population prefers to keep its wealth in nonmonetary assets or in
relatively stable foreign currency.
b. The general population regards monetary amounts not in terms of the local
currency but in terms of a relatively stable foreign currency.
c. Interest rates, wages and prices are linked to a price index.
d. The cumulative inflation rate over three years is approaching or exceeds 50%.

2.) All of the following would indicate that hyperinflation exists, except
a. The general population regards monetary amounts in terms of relatively stable
foreign currency
b. The cumulative inflation rate over three years is approaching, or exceeds 100%.
c. Inflation rates have exceeded interest rates in three successive years.
d. The general population prefers to keep its wealth in nonmonetary assets.

3.) An entity that wishes to present information about the effect of changing prices in a
hyperinflationary economy should report this information in
a. The body of the financial statements
b. The notes to financial statements
c. Supplementary information to the financial statements
d. Management report to shareholders

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

4.) Purchasing power gain or loss results from which of the following:
I monetary assets and liabilities
II nonmonetary assets and liabilities
a. Both I and II
b. I only
c. II only
d. Neither I nor II

5.) Which of the following would indicate that hyperinflation exists?

a. Sales on credit are at lower prices than cash sales
b. Inflation is approaching, or exceeds, 20% per year.
c. Monetary items do not increase in value.

d. People prefer to keep their wealth in nonmonetary assets or a stable foreign

currency.

6.) The financial statements of an entity that reports in the currency of a hyperinflationary
economy shall be stated in terms of
a. Historical cost
b. Current cost
c. Fair value
d. Measuring unit current at the end of reporting period

7.) The gain or loss on the net monetary position in a hyperinflationary economy shall be
included in
a. Profit or loss and separately disclosed
b. Retained earnings
c. Equity
d. Comprehensive income

8.) For purposes of adjusting financial statements for changes in the general price level,
monetary items consist of
a. Assets and liabilities whose amounts are fixed by contract or otherwise in terms of
pesos regardless of price level change.
b. Assets and liabilities which are classified as current in the statement of financial
position.
c. Cash and cash equivalents plus all receivables with a fixed maturity date.
d. Cash, other assets expected to be converted into cash, and current liabilities.

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

9.) Financial statements that are expressed under a stable monetary unit are
a. Constant peso financial statements
b. Nominal peso financial statements
c. Current cost financial statements
d. Fair value financial statements

10.) A general price level statement of financial position is prepared and presented in
terms of
a. The general purchasing power of the peso at the latest end of reporting period.
b. The general purchasing power of the peso in the base period.
c. The average general purchasing power of the peso for the latest reporting period.
d. The general purchasing power of the peso at the time the financial statements are
issued.

11.) The restatement of historical peso financial statements to reflect the general price
level change results in presenting assets at
a. Lower of cost and net realizable value
b. Fair value
c. Cost adjusted for purchasing power change
d. Current replacement cost

12.) An entity prepares financial statements on a current cost basis. How should the
entity compute cost of goods sold on a current cost basis?
a. Number of units sold times average current cost of units during the year
b. Number of units sold times current cost of units at year-end
c. Number of units sold times current cost of units at the beginning of the year
d. Beginning inventory at current cost plus cost of goods purchased less ending
inventory at current cost.

13.) The entity’s monetary assets exceed the monetary liabilities. Which of the
following statements in relation to financial reporting in a hyperinflationary economy is
true?
I There will be a loss on the net monetary position.
II Any gain or loss on the net monetary position is recognized in other comprehensive
income
a. I only
b. II only
c. Both I and II
d. Neither I nor II

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

14.) In a hyperinflationary economy, amounts in the statement of financial position not

expressed in the measuring unit current at the end of reporting period are restated by
applying the
a. General price index
b. Specific price index
c. Both the general price index and specific price index
d. Either the general price index or the specific price index

15.) In a hyperinflationary economy, monetary items

a. Are not restated because they are already expressed in terms of the measuring
unit current at the end of reporting period.
b. Are not restated because they do not represent money held and items to be
received or paid in money.
c. Are restated applying the general price index
d. Are restated applying the specific price index

Let’s Analyze LUTHER GALLANO 7751

Monetary Asset
Now, your task is to use your knowledge on the items discussed above in solving the problems
laid down in this section. HC>RS=Gain
HC<RS=Loss
Activity 1
Monetary Liab
Cherry Company reported that financial position did not change during the current year. The
general price index was 120 on January 1 and 300 on December 31. The entity provided the HC>RS=Loss
following statement of financial position on January 1 and December 31: HC<RS=Gain
M Cash 500,000 500,000
M Accounts Receivable 1,000,000 1,000,000 1,500,000 * 300/120 = 3,750,000
Trading Securities 800,000
Inventory 5,000,000
Land 2,700,000
M Accounts Payable 3,000,000 3,000,000
M Mortgage Payable 1,000,000 1,000,000 (4,000,000) *300/120 = (10,000,000)
Share Capital 5,000,000 (2,500,000) (6,250,000)
Retained Earnings 1,000,000 HCLiab < RS Liab = 3,750,000 gain
What is the purchasing power gain or loss for the current year? 3,750,000 gain

Activity 2
At the beginning of current year, Grace company had monetary assets of P10,000,000 and
monetary liabilities of P6,000,000. During the current year, the entity’s monetary inflows and 10,000,000
outflows were relatively constant and equal so that it ended the year with the same net monetary
(6,000,000)
assets of P4,000,000. The index number on January 1 was 125 and the index number on
4,000,000
December 31 was 280. What is the gain or loss on purchasing power during the current year?
4,000,000 * 280 / 125 = 8,960,000
HCAsset < RSAsset = 4,960,000 Loss
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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Activity 3
Alona company reported the following machinery on December 31, 2019:
Cost Accumulated Depreciation
Acquired in December 2016 8,000,000 3,200,000 4,800,000 x 350 / 120 = 14,000,000
Acquired in December 2018 2,000,000 400,000 1,600,000 x 350 / 125 = 4,480,000
Index numbers at the end of each year: 2016, 120; 2018, 125 and 2019, 350. In a 18,480,000
hyperinflationary statement of financial position prepared on December 31, 2019, what should be
reported as carrying amount of machinery?

Activity 4
Irish company provided the following information for the current year: HC RS
Net monetary assets-January 1 1,760,000 1,760,000 2,240,000
x140/110
6,000
Sales 6,000,000
Purchases 2,400,000 (2,400)
Expenses 1,800,000 (1,800)
Income Tax 1,200,000 (1,200) 600,000x140/125 672,000
Cash dividend paid on Dec. 31 400,000 (400,000) (400,000)
1,960,000 < 2,512,000
The sales, purchases, expenses and income tax accrued evenly during the year. The index
numbers are 110 on January 1 and 140 on December 31. Compute the gain or loss on purchasing
power for the current year. HCAsset < RSAsset = 552,000 loss

Activity 5
Emma company acquired an equipment on January 1, 2018 for 10,000,000. Depreciation is
computed using the straight line method. The estimated useful life of the equipment is 5 years
with no residual value. A specific price index applicable to the equipment was 150 on January 1,
2018 and 225 on December 31, 2018.
1. What amount of depreciation should be reported in the historical cost income statement
for 2018? 10,000,000 / 5 yrs = 2,000,000
2. What amount of depreciation should be reported in the current cost income statement for 2,000,000
10,000,000 * 225 /150 = 15,000,000
2018? 12,500,000 / 5 yrs = 2,500,000 AccDep is Contra-Asset (2,500,000)
3. What is the realized holding gain on the equipment to be reported in 2018? HCAst<RSAst = 500,000 gain
4. What is the unrealized holding gain on the equipment to be reported in 2018?
Cost 15,000,000 10,000,000
Less: Dep 3,000,000 2,000,000
Activity 6 12,000,000 8,000,000 = 4,000,000
Rome company reported the following information with respect to cost of goods sold for 2018:
Units Historical cost
Inventory-January 1 Sold 10+45-15 10,000 530,000 530 + 2790 - 945
Purchases 40,000 units 45,000 2,790,000 2,375,000
Inventory, Dec. 31 15,000 945,000
The current cost per unit of inventory was P58 on January 1, 2018 and P72 on December 31,
2018.
1. In the statement of financial position restated to current cost, what is the inventory on
December 31, 2018? 15,000 x 72 = 1,080,000

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
58+72
= 65
2. What is the unrealized holding gain on inventory for 2018? 1,080,000 - 945,000 = 135,000 2
3. In the income statement restated to current cost, what is the cost of goods sold for 2018? 40,000 x 65
4. In the income statement restated to current cost, what is the realized holding gain from = 2,600,000
the inventory sold in 2018? 2,600,000 - 2,375,000 = 225,000 gain
180*40k= 7.2M
cc 40k * 125 = 5,000k
Activity 7 hc 40k * 100 = 4,000k
At the beginning of current year, Georgia company purchased 50,000 units at P100 per unit. 1,000k
CC During the year, the entity sold 40,000 units at P180 per unit. The entity paid P700,000 for
7,200,000
operating expenses. The current replacement cost of the inventory at year-end is P150 per unit.
(5,000,000) 10k*150= 1.5M
1. What is the realized holding gain on inventory for the current year? 1,000,000
(700,000) 10k*100= 1M
2. What is the unrealized holding gain on inventory for the current year? 500,000 500k
1,000,000
500,000 3. What is the net income under current cost accounting for the current year? 3,000,000
3,000,000 4. What is the net income under historical cost accounting for the current year? 2,500,000

HC In a Nutshell LUTHER GALLANO 7751

7,200,000
(4,000,000)
700,000 In this task you are asked to explain briefly the following questions and state the importance of
preparing financial statements under current cost and constant peso accounting:
2,500,000
1. Why is there a need to account for the effect of changing prices? Because prices of an item changes in a
2. Differentiate constant peso accounting from current cost accounting? way that it gain or loss a portion of its
Current cost accounting is the restatement of historical financial value and must be accounted in line
statements in terms of the current purchasing power of the peso with accounting conservatism.
Q&A LIST through the use of index number while current cost accounting is the
restatement of historical cost in terms of current replacement cost.
Should you have any questions for clarification, please feel free to write it below.

Questions/Issues Answers

1. 1.
2. 2.
3. 3.
4. 4.
5. 5.

KEYWORDS INDEX
This section lists down the keywords that help you to recall the discussions.

Constant Peso Accounting Purchasing power gain Realized Holding Loss

Current Cost Accounting Purchasing Power Loss Monetary items
Hyper Inflation Unrealized Holding Gain Nonmonetary Items
General Price Index Unrealized Holding Loss Restatement
Specific Price Index Realized Holding Gain

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