FAR Lecture Notes

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THE SECRET NOTES
PART 1
EXPECTED QUESTION | STEP BY STEP PROCEDURES | SHORT CUTS | SUMMARY OF NOTES
Topic 1: Cash and Cash Equivalents

Expected question(s):
1. What is the amount of cash and cash equivalents to be presented in the financial statements?
1) What is the amount of cash and cash equivalents?
Answer: One must know which items (trial balance

balance accounts)
accounts) are included
included or which
which are excluded as cash. To
simplify, cash and cash equivalent is dividend in two (2) groups; cash is dividend into three (3) sub-group
illustrated below.
Cash and Cash Equivalents
Cash Cash Equivalents
Cash Cash
Cash
On In
Funds
Hand Bank
Cash on Hand:
Hand:
1. Currencies and coins
2. Money order Included as Cash
3. Bank drafts
4. Checks (some are included as cash some are excluded from cash)
a. Cashier’s check
b. Certified check
c. Customer’s check
d. Manager’s check Included
Includ ed as Cash
e. Personal check
f. Traveler’s check
a. Customer’s postdated check Excluded from Cash

b. Customer’s NSF / DAIF check (treated as receivable)
c. Customer’s stale check
Checks drawn by the company:

1. Company’s unreleased check
2. Company’s postdated check Add back to Cash
Cas h
3. Company’s stale check
It is assumed that the journal entry

entry for payment is already made when the check was drawn. But because the
check (cash) is still in your control as of reporting date, the entry for payment should be reversed.
Assumed entry when

whe n drawn: Entry to reverse since
s ince the check
c heck is still
s till in your control:
Dr. Accounts payable XX Dr. Cash XX
Cr. Cash XX Cr. Accounts payable XX
Secret Notes by: John Bo S. Cayetano, CPA, MBA Page 1 of 98

Cash in Bank – some cash in bank is included in cash, some are excluded from cash.
1. Checking
Included as Cash
Account
2. Savings
Included as Cash
Account
3. Time Excluded
Excluded from cash
cas h If the question is:
Deposit (treated as cash equivalents)
How much is Cash?
Exclude
How much is Cash & CE?

Include
Legally restricted – Excluded from cash

(treated as other current asset if related loan is short term
treated as other non current asset if related loan is long term)
4. Compe
ompen
nsa
sati
ting
ng
Balance Not legally restricted – Included as Cash
Silent – Included as Cash
Legally restricted – Excluded from cash

treated
treated as non current
current asset
5. Deposit in Not legally restricted – Included as Cash

Foreign Bank
Not legally restricted – Included as Cash
6. Deposit in Excluded from cash

Closed Bank (treated as other current asset)
Different Bank – Excluded in the computation of cash

(treated as current liability
7. Bank Same Bank – Included as Cash (included in the computation as a deduction )

Overdraft
Silent – Excluded in the computation of cash (different bank)

Cash in Fund – Sub-divided into two (2) categories: (1) cash fund for operations and (2) cash fund not for
operation:
1. Cash fund for operation:

a. Petty cash fund
b. Revolving fund
c. Change fund
d. Payroll fund
Included as
e. Tax fund
Cash
f. Interest fund
g. Dividend fund
h. Travel fund
2. Cash fund not for operation:

a. Sinking fund
Within 12 months – Included as
b. Pension fund When is the cash
c. Preference share redemption fund disbursement? Beyond 12 months – excluded from
cash
Silent– excluded from cash
d. Plant acquisition fund

e. Depreciation fund
Always excluded
exclude d from Cash
f. Contingency fund
(treated as non current asset)
g. Insurance fund
Cash Equivalents (CE) – highly liquid investments.

1. deposit)
Time deposit (a.k.a. certificate of deposit)
Within 3 months – Included as Cash Equivalents
2. Money order (a.k.a. commercial paper)
Beyond 3 months – Excluded as Cash Equivalents
3. Treasury bills Silent – Included as Cash Equivalents
4. Investment in preference share with redemption date
If not classified as cash equivalents, the proper classification would be:

• Other current assets if from reporting date to maturity date is within 12 months;
• Other non current assets if from reporting date to maturity date is beyond 12 months;
Three-month rule test:
The counting of three months is from date of acquisition of CE to the date of maturity of CE.
Usual distractions (items that are NOT considered as cash)

1. I Owe You (IOUs) – treated as receivables
2. Postage stamps – treated as supplies
3. Credit memo from suppliers – treated as contra purchase account
4. Cash surrender value – treated as investment
5. Investment in shares (equity securities) – treated as investment

Topic 2: Petty Cash Fund

1. What is the correct journal entries affecting petty cash fund (PCF)?
2. What is the amount of shortage or overage of petty cash fund?
3. What is the adjusted balance of petty cash fund at the end of year?
2) What is the correct journal entries affecting petty cash fund?
Answer:
Transaction Journal Entry Amount
1. Establishment Dr. Petty Cash Fund XX Equal to imprest balance

Cr. Cash in Bank XX Equal to imprest balance
2. Disbursement No entry
Dr. Various Expenses XX Equal to amount of vouchers

3. Replenishment Cr. Cash in Bank XX Amount needed to bring back the
remaining balance to imprest balance
Dr. Various Expenses XX Equal to amount of vouchers

Year-end
4. Cr. Petty Cash Fund XX Amount needed to bring down the
adjustment
imprest balance to remaining balance
3) What is the amount of shortage or overage of petty cash fund?
Answer:
Accountability Accounted
1 Imprest balance of petty cash fund X X Currencies and coins 1
2 Undeposited collectio
collection
n currencies from customer X X Undeposited collectio
collection.
n. check from customer 2
3 Undeposited collectio
collection
n check from customer X X Paid vouchers (regardless of date) 3
4 Unclaimed salaries X X Replenishment check 4
5 Excess of advance of travel X X IOUs 5
6 Employee contributions (always) X X Accommodation check (all) 6
. X Employee contribution (only if closed) 7
Total X X Total
Total accountabilit
accountabilityy of custodian X
Less: Total accounted by custodian X
Shortage (overage) X

4) What is the adjusted petty cash fund at the end of the year?
Answer:
Currencies and coins at the date of count X
Add: Disbursements
Disbursem ents after December 31 X
Less: Receipts after December 31 (X)
Currencies and coins at December 31 X
Less: Cash included

included in
in currencies
currencies but do not belong to PCF
1. Undeposited currencies collection X
2. Unclaimed salaries X
3. Excess of advance travel X
4. Employee contributions (only if open) X (X)
Currencies and coins belonging to PCF at December 31 X
Add: Replenishment
Replenish ment checks
chec ks X
Add: Accommodation
Accommod ation checks
check s (valid checks
ch ecks at December
De cember 31
3 1 only) X
Adjusted balance
balan ce of PCF at December 31 X

Topic 3: Bank Reconciliation

1. What is the adjusted balance of cash in bank?
2. What is the unadjusted balance of cash in bank per book or per bank statement?
3. What is the amount of the missing reconciling item?
5) What is the adjusted balance of cash in bank?
Answer:
Per book Per bank

Unadjusted balance per ledger X Unadjusted balance per bank statement X
Add: Credit memos
mem os Add: Deposit in transit X
(1) Note collected by bank in behalf X
(2) Interest earned by bank deposit X
(3) Loan proceeds directly credited X
Less: Debit memos Less: Outstanding checks (X)

(1) NSF check from customer (X) (excluding certified check)
(2) Bank service charge (X)
(3) Auto debit
deb it agreement
agreemen t (X)
Add: Errors Add: Errors

(1) Overstated disbursements X (1) Overstated disbursements X
(2) Understated receipts X (2) Understated receipts X
Less: Errors Less: Errors

(1) Understated disbursements (X) (1) Understated disbursements (X)
(2) Overstated receipts (X) (2) Overstated receipts (X)
Adjusted balance
balan ce X Adjusted balance
ba lance X
6) What is the unadjusted balance of cash in bank per book or per bank statement?
Answer:
Per book Per bank

Unadjusted balance per ledger X Unadjusted bal. per bank statement X
Add: Credit memos
mem os Add: Deposit in transit X
Less: Debit memos Less: Outstanding checks (X)

(2) Bank debit
(3) Auto service
deb charge t
it agreement
agreemen (X)
(X)


Adjusted balance X Adjusted balance X
First, compute the adjust balance of either book or bank depending on which unadjusted balance is given.
Second, whatever the adjusted of one that will also be the adjusted balance of the other one.
Last, from the adjusted balance copied from one record work back the unadjusted balance.

7) What is the amount of the missing reconciling item?
Answer:
Per book Per bank

Unadjusted balance per ledger X Unadjusted bal. per bank statement X
Add: Credit memos
me mos Add: Deposit in transit X
Less: Debit memos Less: Outstanding checks SQUEEZE

(2) Bank service charge (X)
(3) Auto debit
deb it agreement
agreemen t (X)


Adjusted balance X Adjusted balance X
The missing reconciling item can be squeezed from the two records as shown above (for example the missing
reconciling item is outstanding check).
4-C
How much is the unadjusted receipt and disbursement per book?
Cash in Bank
Debit Credit
(1) Collections from customer X X (1) Check drawn
(2) Credit memo of prior month X X (2) Debit memo of prior month
(3) Correction of error X X (3) Correction of error
Unadjusted receipt per book X X Unadjusted disbursement per book
4-D
How much is the unadjusted receipt and disbursement per bank?
Bank Statement
Debit Credit
(1) Check encashed X X (1) Deposit received
(2) Debit memo of current month X X (2) Credit memo of current month
(3) Correction of error X X (3) Correction of error
Unadjusted disbursement per bank X X Unadjusted receipt per bank

Topic 4: Proof of Cash

1. What is the adjusted or unadjusted balance of cash in the previous month?
2. What is the adjusted or unadjusted receipt?
3. What is the adjusted or unadjusted disbursement?
4. What is the adjusted or unadjusted balance of cash in the current month?
5. What is the amount of the missing reconciling item?
How to proof of cash the bank balance?

Prev. Rec. Dis. Curr.
Unadjusted
Deposit in transit, prior month + –
Deposit in transit, current month + +
Outstanding check, prior month – –
Outstanding check, current month + –
Overstated disbursement, prior month, corrected at current month + –
Overstated disbursement, prior month, not yet corrected at current month + +
Overstated receipt, prior month, corrected at current month – –
Overstated receipt, prior month, not yet corrected at current month – –
Overstated disbursement, current month, corrected at current month – –
Overstated disbursement, current month, not yet corrected at current month – +
Overstated receipt, current month, corrected at current month – –
Overstated receipt, current month, not yet corrected at current month – –
Understated disbursement, prior month, corrected at current month – –
Understated disbursement, prior month, not yet corrected at current month – –
Understated receipt, prior month, corrected at current month + –
Understated receipt, prior month, not yet corrected at current month + +
Understated disbursement, current month, corrected at current month none none none none
Understated disbursement, current month, not yet corrected at current month + –
Understated receipt, current month, corrected at current month none none none none
Understated receipt, current month, not yet corrected at current month + –
Adjusted X X X X
How to proof of cash the book balance?

Prev. Rec. Dis. Curr.
Unadjusted
Credit memo, prior month + –
Credit memo, current month + +
Debit memo, prior month – –
Debit memo, current month + –
Overstated disbursement, prior month, corrected at current month + –
Overstated disbursement, prior month, not yet corrected at current month + +
Overstated receipt, prior month, corrected at current month – –
Overstated receipt, prior month, not yet corrected at current month – –
Overstated disbursement, current month, corrected at current month – –
Overstated disbursement, current month, not yet corrected at current month – +
Overstated receipt, current month, corrected at current month – –
Overstated receipt, current month, not yet corrected at current month – –
Understated disbursement, prior month, corrected at current month – –
Understated disbursement, prior month, not yet corrected at current month – –
Understated receipt, prior month, corrected at current month + –
Understated receipt, prior month, not yet corrected at current month + +
Understated disbursement, current month, corrected at current month none none none none
Understated disbursement, current month, not yet corrected at current month + –
Understated receipt, current month, corrected at current month none none none none
Understated receipt, current month, not yet corrected at current month + –
Adjusted X X X X
Legend:
Prev. = Previous month balance
Rec. = Receipt for the current month
Dis. = Disbursement for the current month
Curr. = Current month balance

Topic 5: Trade Receivable and Allowances

1. What is the balance of accounts receivable at year end?
2. What is the balance of allowance for doubtful accounts at year end?
3. What is the amount of bad debt expense for the year?
4. What is the net realizable value of accounts receivable at year end?
8) What is the balance of accounts receivable at year end?
Answer: If what is given is the opening

opening balance of accounts
accounts receivable.
Accounts receivable
Beginning balance
(1) Gross sales X
X X (1) Collection of accounts receivable
(2) Recovery of write off X X (2) Collection of recovery
X (3) Write off of accounts receivable
X (4) Discounts taken during the
period
X (5) Sales actually returned
X (6) Other forms of payment
Ending balance X
Answer: If what is given is the unadjusted closing balance of accounts receivable.
Unadjusted balance X
Add: Reversal of
o f customer’s
custome r’s postdated
postda ted or NSFNS F check; X
Add: Adding back
b ack of customer’s
cu stomer’s credit
c redit balance
balan ce that was wa s assumed “netted”; X
Less: Recorded sales without transfer of title of title (e.g., FOB destination) X
Add: Unrecorded
Unrecord ed sales with
wi th transfer
transf er of title of
o f title (e.g., FOB shipping
ship ping point) X
Adjusted balance
ba lance X
9) What is the balance of allowance for doubtful accounts at year end?
10) What is the amount of bad debt expense for the year?
Answer: To answer, First – determine the method used in accounting for bad debt. Second – determine what
should be computed first (i.e., allowance for bad debt or bad debt expense).
1. Using Percentage Of Sales Method.
First, solve for the allowance for doubtful accounts as follows:
Accounts receivable ending balance

ba lance (from
(fro m question number 8)
8) X
Multiply by: Percentage of uncollectib
uncollectiblity
lity x%
Allowance for doubtful
d oubtful accounts
accoun ts X
Second, solve for the bad debt expense by squeezing the bad debt expense in the T-account of allowance:

doub tful accounts
accou nts
X Beginning balance
(1) Write off of receivable X X Bad debt expense SQUEEZE
X Recovery of write off
X Ending balance
2. Using Percentage Of Sales Method.
First, solve for the bad debt expense as follows:
Sales X
Multiply by: Percentage of uncollectib
uncollectiblity
lity x%
Bad debt expense X
Second, solve for the allowance by using T-account as follows:

doub tful accounts
accou nts
X Beginning balance
Write off of receivable X X Bad debt expense
X Ending balance

3. Using Aging Of AR Method
First, solve for the allowance for doubtful accounts as follows:
Group 1 Group 2 Group 3 Total

Accounts receivable X X X X
Multiply : Percentage of uncollectibl
uncollectiblity
ity x% x% x% x%
do ubtful accounts
account s X + X + X = X
Second, solve for the bad debt expense by squeezing the bad debt expense in the T-account of allowance:

doub tful accounts
accou nts
X Beginning balance
(1) Write off of receivable X X Bad debt expense SQUEEZE
X Ending balance
11) What is the net realizable value of accounts receivable?
Answer:
Accounts receivable balance at year end (question 07) X

Less: Allowance for doubtful accounts (question 08) (X)
Less: Allowance for sales discount (X)
Less: Allowance for sales returns (X)
Net realizable value of accounts receivable X
If the percentage of uncollectilibity is not given in the problem, it can be computed as follows:
Total amount of write off – total amount of recovery

= % of uncollectability
Total amount of credit sales
Note! Be careful with the questions.

If the question is the accounts receivable “balance”, contra accounts (allowance for doubtful accounts,
allowance for discount and returns) are not deducted to get the answer.
If the question is the NRV,

NRV , amortized cost, carrying amount, carrying value, book value of accounts receivable,
contra accounts are deducted to get the answer.

Topic 6: Notes Receivable

1. What is the initial measurement of notes receivable (fair value at the date received)?
2. What is the gain or loss on sale of property, plant and equipment?
3. What is the amount of revenue or sales where the consideration received is in a form of notes?
4. What is the subsequent measurement of notes receivable (carrying amount at year end)?
5. What is the interest income for the year?
6. What is the interest receivable as of year end?
7. What is the current portion of the notes receivable?
8. What is the non current portion of the notes receivable?
12) What is the initial measurement (fair value) of the notes receivable at the date received?
Answer:
Method 1.
Fair value of the consideratio

consideration
n given up (i.e., inventory, service or PPE) X
Less: Down payment (X)
Fair value of the notes receivable X
Method 2.
Type of note Fair value at date of recognition

1. Interest Bearing Face Amount = Fair value
Principal amount X
2. Non Interest Bearing Times: PVF X
PV of Principal = Fair value X
Principal X PVF X
3. Interest Bearing With Unrealistic Nominal Add: Nominal interest
in terest X PVF X
PV of P + Int. = Fair value X
13) What is the gain or loss on sale of property, plant and equipment?
Answer:
Fair value of the notes receivable (question 12) X

Add: Down payment,
paym ent, if any
an y X
Total consideratio
consideration n received X
Less: Carrying amount of property, plant and equipment sold X
Gain or (loss) on sale of property, plant and equipment X
Cost of property, plant and equipment sold X

Less: Accumulated depreciation X
Carrying amount of the property, plant and equipment sold X
14) What is the revenue or sales when the consideration received is in a form of notes receivable?
Answer:
Add: Fair
Down value
paymofent,
the ifnotes
payment, an y receivable (question 12)
any X
X
Revenue or sales X

15) What is the subsequent measurement of notes receivable (carrying amount at year end)?
Answer:
Type of note Carrying amount at year end
1. Interest Bearing Face Amount
Initial measurement (question 12) X

Times: 1 + Effective rate x%
2. Non Interest Bearing
Less: Principal payment, if any X
Carrying amount at year end X

3. Interest Bearing With
Less: Nominal interest (Face x NR) X
Unrealistic Nominal
16) What is the amount of interest income for the year?
Answer:
Type of note Interest Income
1. Interest Bearing Times: Face Amount

Nominal Rate X
x%
Interest Income X
Carrying amount at beginning of the year X

2. Non Interest Bearing Times: Effective Rate x%
Interest Income X

Times: Effective Rate x%
Unrealistic Nominal
Interest Income X
17) What is the amount of interest receivable as of the year end?
Answer:
Type of note Interest Receivable
Face Amount X
1. Interest Bearing Times: Nominal Rate x%
Interest Receivable X
2. Non Interest Bearing None
Face Amount X

3. Interest Bearing
Unrealistic With
Nominal Times: Nominal Rate x%
Interest Receivable X

18) What is the current portion of the notes receivable?

19) What is the non current portion of the note receivable?
Answer: If term note – either wholly current (principal is to be paid within 12 months) or wholly non current
(principal is to be paid beyond 12 months).
If serial note –
– it
it is partially currently and partially non current, the carrying amount (refer to question 18) should
be separated to its current and non current portion, guide in separating will be seen below:
Type Current portion Non current portion
Interest Less: Payment of face and

Nominal interest interest
for one year w/ one year (X)X Less: Carrying amountofofnotes
Current portion NR atreceivable
year end X
(X)
Bearing
Current portion of notes receivable X Non current portion of NR X
Carrying amount of NR at year X

Non Carrying amount of NR at year end X
Interest Less: Non current portion of notes receivable (X)
Less: Principal
Principal payment next year (X)
Bearing Current portion of NR X
Non current portion of NR X
Interest
Carrying amount of NR at year X
Bearing
Carrying amount of NR at year end X Times: 1 + Effective rate x%
With
Less: Non current portion of notes receivable (X) Less: Nominal interest (X)
Unrealis-
Current portion of NR X Less: Principal
Principal payment next year (X)
tic
Nominal

Topic 07: Loans Receivable (LR)

1. What is the initial measurement of loans receivable (fair value at the date received)?
2. What is the subsequent measurement of loans receivable (carrying amount as of year end)?
3. What is the interest income for the year before impairment?
4. What is the impairment loss for the year?
5. What is the carrying amount of the loans receivable subsequent to the date of impairment?
6. What is the interest income for the year after impairment?
20) What is the initial measurement (fair value) of the notes receivable at the date received?
Answer:
Method 1.
Face amount of loans receivable X

Add: Origination cost (direct only) X
Less: Origination fee X
Initial measureme
measurement
nt of LR X
Method 2.
Present value factor X Principal amount X

Add: Present value
v alue factor X Nominal interest
in terest X
Initial measureme
measurement
nt of LR X
21) the subsequent measurement of LR (carrying amount as of year end)?
Answer:
1. Interest Bearing Face Amount

Less: Nominal interest (face x NR) (X)
Unrealistic Nominal
Less: Principal payment, if any (X)
22) What is the interest income for the year?
Answer:
Face Amount X
Interest Income X

Unrealistic Nominal
Interest Income X

23) What is the impairment loss of the notes for the year?
Answer:
Step 1: Compute the total amount of

of receivable (old
(old receivable).
Carrying amount of loan receivable at impairment date (refer to question 21) X

Add: Interest receivable,
re ceivable, if any (if the
th e problem state “the
“th e company did not accrue”,
a ccrue”, do
d o not add) X
Total amount of receivable subject to impairment X
Step 2: Compute the present value of expected

expected cash flows (new receivable).
receivable).
New principal amount X PVF X

Add: New nominal
nomin al interest, if any X PVF X
Present value of expected cash flows (new AR) X
Step 3: Compute the present value of expected cash flows (new receivable).
Total amount of receivable (loan receivable + interest receivable) X

Less: Present value of expected cash flows X
Impairment loss X
24) What is the carrying amount of LR subsequent to impairment?
Answer:
Measurement of new receivable (question 23) X

Times: 1 + Original effective rate x%
Less: Nominal interest, if any (X)
Less: Principal payment, if any (X)
Carrying amount of LR at year end X
25) What is the interest income subsequent to impairment?
Answer:
Measurement of new receivable (question 23) X

Times: Original effective interest rate X
Interest income subsequent to impairment X

Initial Measurement Subsequent Measurement Interest Interest Non Current Current

Classification
(Fair Value) (Amortized Cost) Revenue Receivable Portion Portion
Face Amount
Face Amount
(1) x Nominal Rate Principal Payable beyond 12 Principal payable within
Face Amount Face Amount x Nominal Rate
Interest Bearing x Months unpaid / 12mo. months 12 months.
Interest Income
Interest Income
Initial Measurement
Carrying Amount, End
Multiply: 1+Effective Rate Carrying Amount, BEG Carrying Amount, End
(2) Multiply: 1+Effective Rate
PV of Principal Less: Principal Payment x Effective Rate None Less: NC Portion
Non Interest Bearing Less: Principal Payment
Amortized Cost Interest Income Current Portion
NC Portion
Initial Measurement Carrying Amount, End

(3) Face Amount
PV of Principal Multiply: 1+Effective Rate Carrying Amount, BEG Multiply: 1+Effective Rate Carrying Amount, End
Interest Bearing x Nominal Rate
Add: PV of Nominal Interest Less: Nominal Interest x Effective Rate Less: Nominal Interest Less: NC Portion
with Unrealistic x Months unpaid / 12mo.
Fair Value Less: Principal Payment Interest Income Less: Principal Payment Current Portion
Nominal Rate Interest Income
Amortized Cost NC Portion
Topic 08: Receivable Financing

Assignment
1. What is the balance of accounts receivable – assigned?
2. What is the balance of loans payable?
3. What is the equity to be disclosed in the notes to financial statement?
Factoring
4. What is the net proceeds from factoring of receivable?
5. What is the cost of factoring?
Discounting
6. What is the net proceeds from discounting of NR?
7. What is the gain or loss from discounting of NR?
8. What is the journal entry for discounting of NR?
26) What is the balance of accounts receivable – assigned?
Answer:
Answer:
Accounts Receivable
Rece ivable - Assigned
Assi gned
Balance X X (1) Collection of accounts receivable

Recovery of write off X X (2) Collection of recovery
X (3) Write off of accounts receivable
X (4) Discounts taken during the period
X (5) Sales actually returned
Ending balance X
27) What is the balance of accounts receivable – assigned?
Answer:
Amount collected from accounts receivable – assigned X

Less: Remittance for payment of interest incurred, if stated it will be applied to interest first X
Remittance for payment of amount loaned X
Amount loaned from

fr om the bank X
Less: Remittance for payment of amount loaned X
Loans payable at year end X
28) What is the equity of the accounts receivable – assigned to be disclosed in the notes to FS?
Answer:
Accounts receivable
receiv able – assigned
ass igned at year
yea r end X
Less: Loans payable (where the accounts receivable is assigned) X
Equity to be disclose in the notes X
29) What is the net proceeds from factoring?
Answer:
Selling price of accounts receivable (equal to face amount if silent) X

Less: Assessment fee / Service fee / Commission fee X
Less:
Less: Factor’s holdback
Interest charge (treated
(Interest as receivable
rate x number of days x 365 days) X
X
Net proceeds from factoring X
30) What is the cost of factoring?
Answer:
Assessment feefe e / Service fee / Commission

Comm ission fee X
Add: Interest charge
charg e (Interest rate
ra te x number of days da ys x 365 days) X
Add: Fair value of recourse
r ecourse obligation
obl igation (only if with
wi th recourse) X
Total cost of factoring X
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31) What is the net proceeds from discounting of NR?
Answer:
Step 1: Compute the total interest over the term of note
Face amount of the note X

Times: Nominal interest rate x%
Times: Whole term of the note / 12 months X / 12
Total interest over the term X
Step 2: Compute the maturity value

Add: Total interest over the term
ter m (step 1) X
Maturity value X
Step 3: Compute the discount charge
Maturity value (step 2) X

Times: Discount rate x%
Times: Remaining term / 12 months X / 12
Discount charge X
Step 4: Compute the net proceeds
Maturity value (step 2) X

Less: Discount charge by the bank (step 3) (X)
Net proceeds from discounting X
32) What is the net gain or loss from discounting of NR?
Answer:
Step 1: Compute the interest receivable earned

Times: Nominal interest rate x%
Times: Number of months the company held the note / 12 months X
Interest receivable sold X
Step 2: Compute the total receivable sold
Add: Interest receivable
rece ivable sold (step 1) X
Total receivable sold X
Step 3: Compute the gain or loss on discounting of NR
Total receivable sold (step 2) X

Less: Net proceeds (question 31) (X)
Gain or loss from discounting X
33) What is journal entry for discounting of NR?
Answer:
Type of discounting Journal Entry
Dr. Cash (net proceeds,
proceeds , question 31) X
Dr. Loss from discounting (question 32) X
1. Without recourse
Cr. Notes receivable (face amount) X
Cr. Interest receivable (question 31, step 1) X

2. With recourse – Dr. Loss from discounting (question 32) X
Conditional sale Cr. Notes receivable discounted (face amount) X

3. With recourse – Dr. Interest expense (loss from discounting, question 32) X
Secured Borrowing Cr. Loans payable (face amount) X

Topic 09: Inventory Composition
34) What is the total amount classified as inventory?
1. Inventories

•
a) Finished goods

1. Raw
Raw mate
materi
rial
als
s used
used
b) Work in process
2. Dire
irect lab
labor
or use
usedd
c) Raw materials
3. Overhead
d) Supplies
i. Factory supplies, included as inventory
ii. Marketing supplies EXCLUDED from inventory
iii. Office supplies
2. Inventories under consignment

3 Include (tip: sent out, shipped out, out on)
Consignor
Consignee Exclude (tip: held on, received on)

3. Goods in transit
Shipping terms Owner
a. FOB shipping point

b. FOB seller Buyer
c. FOB CIF
d. FOB FAS
a. FOB destination

b. FOB buyer Seller
c. FOB ex-ship
4. Inventoriable expenditures

Expenditure Treatment
1. Freight:
a. Freight in, inventoriable
b. Freight out, not inventoriable
2. Insurance:
a. During delivery, inventoriable
b. After delivery,
delivery , not inventoriab
inventoriable
le
3. Storage cost:

a. Storage of WIP, inventoriable
b. Storage of RW, FG not inventoriable
4. Waste, spoilage of resources

a. Normal inventoriable
b. Abnormal not inventoriab
inventoriable
le
5. Interest incurred

a. Non routinely manufactured inventoriable
b. Routinely manufactured (silent) not inventoriable
6. Tax
a. Non recoverable (import duties) inventoriable
inventoriable
b. Recoverable (vat) not inventoriable
7. Commission, advisers fee

a. Related to purchase inventoriable
b. Related to sales not inventoriable
Topic 10: Inventory System, Inventory Discounts and Inventory Errors

1. What is the correct journal entry for inventory related transactions?
2. What is the effect of the inventory error to inventory related accounts?
35) What is the correct journal entry for inventory related transactions?
Answer:
PERIODIC INVENTORY SYSTEM PERPETUAL INVENTORY SYSTEM
Purchase transaction Purchase transaction

Purchases X Inventory X
Accounts payable
pay able or cash
cas h X Accounts payable
paya ble or cash X
Sale transaction Sale transaction

Accounts receivable
rece ivable or cash
ca sh X Accounts receivable
receiv able or cash
ca sh X
Sales X Sales X
Cost of goods sold X

Inventory X
Sale
Salesreturn
return transaction X Sale
Salesreturn
return transaction X
Accounts receivable
rece ivable X Accounts receivable
recei vable X
Inventory X
Year-end adjusting
adju sting entry Year-end adjusting
adju sting entry
Inventory, end X No entry
Inventory, beg X
Purchases X
Note: Under perpetual, cost of goods sold is an
Note: Under periodic, cost of goods sold is residual
account and physical count is conducted for internal
amount and physical count is required to established the
control purpose only.
ending inventory and cost of goods sold.
Gross method Net method
Purchase for P100, 2% discount. Purchase for P100, 2% discount.

Purchases 100 Purchases 98
Accounts payable
pay able 100 Accounts payable
paya ble 98
Payment within discount period Payment within discount period

Accounts payable
paya ble 100 Accounts payable
payab le 98
Cash 98 Cash 98
Purchase discount 2
Payment beyond discount period Payment beyond discount period

Accounts payable
paya ble 100 Accounts payable
payab le 98
Cash 100 Discount lost 2
Cash 100
discount lost is presented as operating expense

and will not form part of purchases.
36) What is the correct journal entry for inventory related transactions?
Inventory AR & Sales AP & Purchases Cost of Sale Income

Erroneous beg inventory NE NE NE Direct Inverse
Erroneous net purchases NE NE Direct Direct Inverse
Erroneous net sales NE Direct NE NE Direct
Erroneous end inventory Direct NE NE Inverse Direct

Topic 11: Subsequent Measurement

Measuremen t of Inventory and Inventory Impairment
1. What is the carrying value (LCNRV) of inventory at year end?
2. What is the amount of impairment (or reversal of impairment) for the year?
3. What is the amount of cost of goods sold during the year?
37) What is the carrying value (LCNRV) of inventory at year end?
Step 1: Compute the net realizable value (NRV) per item of inventory
For problem purposes, NRV is computed as follows:

For theory purposes, NRV is
described as:
1. NRV of finished goods:
Estimated selling price X Estimated selling prices, less

Less: Estimated cost to repair, if any (X) cost to complete and less cost
Less: Estimated cost to sell (X) to sell. (NRV of WIP)
NRV X
2. NRV of work in process:
Estimated selling price X

Less: Estimated cost to complete (X)
Less: Estimated cost to sell (X)
NRV X
3. Raw materials and factory supplies: NRV = Replacement cost
Step 2: Compare the NRV and the cost of EACH ITEM of inventory, select the lower
Item 1 Item 2 Item 3 Item 4

Cost X X X X
Vs. NRV X X X X
Lower X X X X
Step 3: Total all the “lower”.
Item 1 Item 2 Item 3 Item 4

Lower X + X + X + X = X
38) What is the amount of impairment (or reversal of impairment) for the year?
Step 1: Compute the ending balance of “allowance for inventory write down”
Cost of ending inventory X

Less: LCNRV (question 36) (X)
Ending balance of allowance X
Step 2: Squeeze the amount of impairment (or reversal) in the T-account of allowance
Allowance for inventory

inv entory writedown
write down
X Beginning balance
Reversal of impairment X X Impairment
Impairment
X Ending balanc
balance
e (Step 1)
39) What is the cost of goods sold during the year?
method
Allowance metho d Direct method
metho d
Beginning inventory at cost X Beginning inventory at LCNRV X
Add: Net purchases
purchas es X Add: Net purchases
purchas es X
Less: Ending inventory at cost (X) Less: Ending inventory at LCNRV (X)
CGS, excluding impairment X CGS, including impairment X
Add: Impairment of inventory (question
(q uestion 37) X
Less: Reversal of inventory (question 37) (X)
CGS, including impairment X

Topic 12: Inventory Cost Flow

1. What is the value of the ending inventory using different cost flow method?
2. What is the cost of goods sold during the year using different cost flow method?
40) What is the value of the ending inventory using different cost flow method?
Answer:
1. FIRST IN, FIRST OUT (FIFO)
Step 1: Compute the ending inventory in units
Beginning inventory in units X

Add: Net purchases
purchase s in units X
Less: Units sold (X)
Ending inventory in units X
Step 2: Compute the cost of ending inventory by multiplying it to the proper unit cost
Units Unit cost In Peso
Ending inventory XXX

Less: Number of units from last purchase (XXX) x XXX = XXX
Ending inventory from 2 nd to last purchase XXX x XXX = XXX
Ending inventory in Peso XXX
41) What is the cost of goods sold during the year using different cost flow method?
Answer:
Beginning inventory, in peso X

Add: Net purchases,
purchase s, in peso X
Less: Ending inventory, in peso (question 39) (X)
2. WEIGHTED AVERAGE METHOD
Step 1: Compute the ending inventory in units
Beginning inventory in units X

Add: Net purchases
purchase s in units X
Less: Units sold (X)
Ending inventory in units X
Step 2: Compute the “average unit cost”
Total goods available for sale, in peso

= Average unit cost
Total goods available for sale, in units
Step 3: Compute the cost of ending inventory
Ending inventory in units (step 1) X

Times: Average unit cost (step 2) X
Ending inventory in peso X
Step 4: Compute th

the
e cost of
of goods sold
Number of units sold X

Times: Average unit cost (step 2) X
3. MOVING AVERAGE METHOD
Step 1: Prepare a four column

column table.
table.
Particulars Number of units (A) Cost per unit (B) Total cost (AxB) = C
Beginning, inventory X Given X
Purchase Add: X Given Add: X
Total, updated unit cost X (C/A) X
Every after purchase transaction, you should compute the updated average unit cost by dividing total goods
available for sale in peso by total goods available for sale in units.
Step 2: Compute the cost of goods sold based on the latest updated average unit cost.
Particulars Number of units (A) Cost per unit (B) Total cost (AxB) = C
Beginning, inventory X Given X
Purchase Add: X Given Add: X
Total, updated unit cost X (C/A) X
Sale Less: (X) Updated Unit cost (AxB)
Ending, inventory X X
Topic 13: Inventory Estimation

Gross Profit Method
1. What is the estimated cost of ending inventory (or cost of missing inventory)?
Retail Method
2. What is the estimated cost of ending inventory (or cost of missing inventory)?
3. What is the estimated cost of goods sold?
42) What is the estimated cost of ending inventory (or cost of missing inventory)?
Answer: Follow the step

ste p by step procedure.
procedu re.
Step 1: Form the solution for the ending inventory
Beginning inventory X Given in the problem (most of the time)

Add: Net purchases
purchase s X Step No. 2
Less: Cost of goods sold (X) Step No. 4
Estimated ending inventory X
Step 2: Compute for the net purchases
Gross purchases X
Add: Freight in X
Less: Purchase discount (X)
Less: Purchase returns (X)
Net purchases X
In case the gross purchases is not given, solve it by squeezing in accounts payable T-account:
Accounts payable
paya ble
Returns and discounts X X Beginning, AP
Payments X X Purchases, SQUEEZE
X Ending, AP
Step 3: Compute for the net sales
Gross credit sales X

Add: Cash sales X
Total sales X
Less: Sales returns (or sales return and allowances) (X)
Net sales X
In case the gross credit sales is not given, solve it by squeezing in accounts receivable T-account:
Accounts receivable
re ceivable
Beginning, AR X
Gross sales, SQUUEZE X X Collection of AR
Recovery of AR X X Write off
X Sales return
X Sales discounts
Ending, AR
Step 4: Convert the net sales (step 3) to cost of goods sold
Gross profit based on sale Gross profit based on cost
Net sales (step 3) X Net sales (step 3) X

Multiply: (100% - GPR) x% Divide: (100% + GPR) x%
Cost of goods sold X Cost of goods sold X
Step 5: Compute the missing inventory by completing the formula in step 1
Beginning inventory X Given in the problem (most of the time)

Add: Net purchases
purchase s X Step No. 2
Less: Cost of goods sold (X) Step No. 4
Estimated ending inventory X
Less: LCNRV of actual inventory remaining (X)
Missing inventory (inventory loss) X
43) What is the estimated cost of ending inventory?
Answer:
Step 1: Compute the total goods available for sale (TGAS) for cost and retail columns as follows:
Cost Retail
Beginning inventory Add Add
Purchases Add Add
Freight in Add --
Purchase returns Less Less
Purchase discounts Less --
Purchase allowance Less --
Departmental
Department al transfer in (debit) Add Add
Departmental
Department al transfer out (credit) Less Less
Abnormal losses
los ses Less Less
Mark up -- Add
Mark up cancellation -- Less
Mark down -- Less
Mark down cancellation -- Add
TGAS XX XX
Step 2: Compute the net sales:
Sales X
Less: Sales returns (Sales allowance and return is also deducted) (X)
Add: Employee discounts
d iscounts X
Add: Normal losses
loss es (i.e., shrinkage,
shr inkage, shoplifting,
shoplifting , spoilage) X
Net sales X
Step 3: Compute for the cost ratio.
TGAS at cost (Step 1) AVERAGE METHOD

= Cost ratio
TGAS at retail (Step 1)
TGAS at cost
= Cost ratio
TGAS at retail + net mark down LCNRV (CONSERVATIVE) METHOD
TGAS at cost – beginning inventory FIFO METHOD

= Cost ratio
TGAS at retail – beginning inventory
Step 4: Compute for the ending inventory.
TGAS at retail (Step 1) X

Less: Net sales (Step 2) (X)
Ending inventory at retail X
Multiply: Cost ratio (Step 3) x%
Ending inventory at cost X
Step 5: Compute for the cost of goods sold.
TGAS at cost (Step 1) X

Less: Ending inventory at cost (Step 4) (X)
Note!
1 - If the losses are silent as to normal or abnormal, consider it as normal.
2 - If what is given in the problem is “NET Sales” it is assumed that sales discount and allowances are deducted,
but is should not be deducted. Thus it should be added back.
3 – If the question is, “How much is the missing inventory?”, it can be computed by, Estimated ending inventory
(step 4) minus the actual remaining inventory (inventory per count).
Topic 14: Investment Under Fair Value Model

1. What is the initial measurement of the investment?
2. What is the subsequent measurement (carrying amount) of the investment?
3. What is the unrealized gains or loss to be presented in Statement of Profit or Loss?
4. What is the unrealized gains or loss to be presented in Statement of Other Comprehensive Income?
5. What is the unrealized gains or loss to be presented in Statement of Financial Position?
6. What is the gain or loss on sale of investment?
7. What is the dividend income for the year?
44) What is the initial measurement of the investment?
Answer:
Investment in Fair Value Through Investment in Fair Value Through Other

Profit or Loss (FVPL) Comprehensive Income (FVOCI)
Fair Value = Initial Measurement Fair Value X

Add: Transaction Cost
C ost X
Transaction is expensed Initial Measuremen
Measurementt X
Purchase Price of Shares = Fair Value
Note! If the purchase of investment is dividend-on, the dividend receivable of the seller was also purchase in
addition to the purchase of share investment. So, from the total purchase, the dividend receivable purchase
should be deducted to arrived at the purchase price of the shares.
Total purchase price of the investment X

Less: Purchased dividend receivable (X)
Purchase price of investment in shares X
Purchase is considered as dividend-on, when the purchased happened in between date of declaration and date
of record. See illustration:
Date of Declaration Date of Record Date of Settlement
Purchase Date
45) What is the subsequent measurement (carrying amount / CA) of the investment?
Answer:
Investment in Fair Value Through Investment in Fair Value Through Other Comprehensive
Profit or Loss (FVPL) Income (FVOCI)
Fair Value (date of the question) Fair Value (date of the question)
46) What is the unrealized gains or loss to be presented in the Statement of Profit or Loss?
Answer:

Fair Value, Ending X Zero

Less: Fair Value, Beginning (X)
Unrealized gain (loss) – P/L X
47) What is the unrealized gains or loss to be presented in the Statement of Other Comprehensive Income?
Answer:

Zero Fair Value, Ending X

Less: Fair Value, Beginning (X)
Unrealized gain (loss) – OCI X
Note! If the question is, “What is the unrealized gains or loss in the Statement of Comprehensive Income?”,
combine whatever amount presented in the statement of profit or loss and the amount presented in the
statement of other comprehensive income. See illustration:
Unrealized gains or loss presented in the Statement of Profit or Loss X

Add: Unrealized gains
ga ins or loss presented
p resented in the Statement of Other Comprehensive
Com prehensive Income
Inc ome X
Unrealized gains or loss presented in the Statement of Comprehensive Income X
48) What is the unrealized gains or loss to be presented in the Statement of Financial Position?
Answer:

Zero Fair Value, Ending X

Less: Initial Measurement (question 43) (X)
Unrealized gain (loss) – OCI X
Alternative computation
c omputation for unrealized gains
gai ns or losses,
losses , (e.g., computing
com puting the unrealized
unreal ized gain)
Investment @ FVPL Unrealized gain or loss – P/L
Beg. Balance (FV beg) X -0- Beg. Bal. (zero)*
Acquisition X X Disposal
Unrealized gain X X Unrealized gain
End Balance (FV end) X X End balance @ PL
Investment @FVOCI Unrealized gain or loss – OCI

Beg. Balance (FV beg) X X Beg. Balance*
Acquisition X X Disposal
Unrealized gain X X Unreal’d gain @ OCI
@ OCI
End Balance (FV end) X X End balance @ BS
BS
Notes!
Note 1 – as alternative method, unrealized gains and losses can be squeezed from the investment account.
Note 2 – unrealized gain or loss – profit or loss (PL) has a beginning balance of zero (nominal account, previous
balance was closed to income summary).
Note 3 – unrealized gain or loss – other comprehensive income (OCI) has a beginning equal to the ending
balance of the previous period (real account, carried forward). The increase or decrease of which is presented in
the statement of OCI, while the cumulative (ending) balance is presented in the balance sheet & changes in
equity.

49) What is the gain or loss on sale of investment?
Answer:

Selling price of the shares sold X Zero

Less: CA of investment at the date of sale (X)
Gain (loss) on sale X
The carrying amount (CA) of investment at

the date of sale is equal to the fair value o
value off
the last year-end before
year-end before the date of sale.
Upon sale of investment in FVOCI, three
(3) journal entries should be prepared:
If the sale of investment is dividend-on
dividend-on,, the
selling price of the shares investment can be 1. Upd
Updat
ated
ed the Fair
Fair Valu
Value
e
2. De
Dere
recog
cognit
nition
ion o
off Invest
Investmen
mentt
computed as follow: 3. Tr
Trans
ansfe
ferr o
off O
OCI
CI to RE
RE..
Total selling price
p rice X
Less: Dividend receivable sold (X)
Selling price of shares sold X
(1) Updating the fair value at the date of sale. The investment sold should
s hould be updated to its fair value at the
date of sale. The fair value at the date of sale is equal to the selling price of the shares sold. Record the
unrealized gains or loss – OCI to update the fair value.
Increase in Fair Value Decrease in Fair value

DR. Investment X DR. Unrealized gain or loss – OCI X
Cr. Unrealized gain or loss – OCI X Cr. Investment X
(2) Derecognition of Investment. Record the sale transaction by: Debit the cash received equal to the selling
price, then credit the investment account which is equal
equal to the carrying value of the shares sold. Note that the
carrying value of the investment is share is now equal to the selling price because it was updated in the first
entry.
DR. Cash (at selling price) X

CR. Investment (at selling price) X
(3) Transfer of OCI to Retained Earnings. The cumulative amount in OCI

O CI of tthe
he investment
i nvestment in
i n shares
s hares sold
sol d will
transferred to the retained earnings.
The possible question here, “How much is the amounted transferred to retained earnings”?
Answer:
Selling price of investment in shares X

Less: Initial measurement (question 43) (X)
Amount transferred
tran sferred to retained e
earnings
arnings X
To transfer cumulative unrealized GAIN To transfer cumulative unrealized LOSS

DR. Unrealized gain or loss – OCI X DR. Retained earnings X
CR. Retained earnings X CR. Unrealized gain or loss – OCI X
50) What is the dividend income for the year?
Answer:
Type of Dividend Measurement

Measuremen t of Dividend Income
1 Cash Dividend Face Value

2 Property Dividend Fair Value at the date of declaration
Priority 1: Fair Value of Shares at date of declaration

3 Share Dividend in Lieu of Cash Dividend
Priority 2: Amount of cash that should have been receive
4 Share dividend ZERO
5 Cash Dividend in Lieu of Share Dividend ZERO
6 Liquidating Dividend ZERO
Liquidating Dividend. You are receiving

rec eiving what you invested, not the earnings of your investment. Journal Entry:
Dr. Cash X
Cr. Investment X
Cash Dividend in Lieu of Share Dividend. It will be accounted

accounted by:
First, assuming that the shares dividend was received

received.. By assuming tthis,
his, the number of shares will increase and
the value of each shares will decrease.
Second, assuming that the shares that was assumed received will be sold at
sold at the selling price equal to the cash
dividend actually received (replacement dividend).
Third, the company

co mpany will recognize
recognize gain or loss
loss on the assumed sale as
sale as illustrated below:
Number of shares before assuming the share dividend X
Add: Assumed share dividend
divi dend X
Number of shares after assuming the share dividend X
Total value of the investment in P eso X

Divide: Number of shares after assuming the share dividend X
Updated value of each share investment X
Cash Dividend in Lieu of Share dividend (assumed selling price) X

Less: Value of shares assumed sold (Share dividend x updated value of each share) (X)
Gain or loss on assumed sale X
Share Dividend. No effect on the total value of investmen

investment:
t:
1. Th
The
e nu
numbe
mberr of sha
shares
res wi
willll incr
increa
ease
se
2. Th
The
e val
value
ue of ea
each
ch sh
share
ares
s will d
dec
ecrea
rease
se

Topic 15: Investment Associates

1. What is the implied goodwill (or bargain purchase) acquired upon acquisition of investment?
2. What is the investment income for the year?
3. What is the carrying amount of the investment in associate at year-end?
4. What is the gain or loss on sale of investment in associate?
51) What is the investment income for the year?
Answer:
Profit reported by the investee (associate) X

Less: Amortizat ion of Excess fair value of asset
Amortization (X)
Add: Amortization of Excess
E xcess carrying
carry ing amount of asset
as set X
Less: Inter-company gains (X)

Add: Inter-company losses X
Less: Amortization of inter-company

inter-compa ny losses (X)
Add: Amortization of inter-company
i nter-company gains X
Adjusted profit
pro fit of the investee
investe e X
Less: Share of preference shareholder in the profit (X)
Adjusted profit
pro fit for ordinary
ordinar y shareholders
shareholder s X
Times: Ratio of months as an owner over 12 months x/12
Times: Percentag
Percentage e of ownership X
Share of in the profit of associate X
Add: Bargain purchase
purc hase (refer to
t o question 52) X
Investment income X
Amortization of Excess & Inter Company Gain

Gainss (Losses)
Depreciable Asset Non Depreciable Asset

Continues Amortization (every year):
Continues Amortization One Time Amortization
Time Amortization
Excess Excess on the

Whole Excess on
Remaining Life = Amortization date of it was sold
sold
Share of Preference Shareholders

in the Profit of Associate
Cumulative Non Cumulative

Preference Share Preference Share
With declaration of No declaration of

Share of preference shareholder is equal to
dividend dividend
One basic dividend
Share of preference Share of preference
Par value of preference share X shareholder is shareholder is
Times: Dividend rate X equal to: actual equal to: zero
One basic dividend X dividend declared
52) What is the implied goodwill (or bargain purchase) acquired upon acquisition of investment?
Answer:
Purchase price of the investment X

Less: Fair value of the net asset of the investee acquired (X)
Goodwill (bargain purchase) X
Carrying value of the net asset of the investee X

Add: Excess fair value of asset (understatement
( understatement of asset) X
Less: Excess carrying amount of asset (overstatement of asset) (X)
Fair value of the whole net asset of the investee X
Times: Percentage of ownership acquired x%
Fair value of the net asset acquired X
53) What is the carrying amount of the investment in associate at year end?
Answer:
Investment in Associate
CA, Beg (purchase price of investment) X X Dividend received

Investment income (question 50) X
Carrying amount, End X
54) What is the gain or loss in sale of investment in associate?
Answer:
Selling price of the investment X
Less: Carrying amount at the date of sale (question 53) (X)
Gain on sale of investment X
Another question
questi on here is the “What
“W hat is the total
tota l income during
duri ng the year of sale”?
Share in profit of associate – prorated from January 1 to date of sale (question 50) X
Add: Dividend income
incom e (dividend received subsequent
s ubsequent to the
t he date of sale)
sal e) X
Add: Gain or loss on sale of inve
investment
stment (question
(quest ion 53) X
Add: Gain or loss on reclassific
reclassification
ation of the remaining
rem aining investment
investm ent to FVPL or FVOCI
F VOCI X
Total income during the year X
Fair value of the remaining investment at the date of sale X

Less: Carrying amount of the remaining investment at the date of sale X
Gain or loss on reclassification of the remaining investment to FVPL or FVOCI X
Topic 16: Investment in Debt Securities

1. What is the initial measurement of the investment?
2. What is the subsequent measurement of the investment?
3. What is the unrealized gains and losses to be presented in the Statement of Profit or Loss?
4. What is the unrealized gains and losses to be presented in the Statement of Other Comprehensive Income?
5. What is the unrealized gains and losses to be presented in the Statement of Financial Position?
6. What is the interest income for the year?
7. What is the gain or loss on sale of the investment in Debt Securities?
Answer:
Investment in Fair Value Investment in Fair Value Through Investment Measured At

Through Profit or Loss Other Comprehensive Income Amortized Cost
(FVPL) (FVOCI) (AC)
Fair value X Fair value X

Fair value = Initial Measure Add: Transaction Cost
C ost X Add: Transaction Cost
C ost X
Initial Measureme
Measurement
nt X Initial Measuremen
Measurementt X
Fair Value = Purchase Price
Alternative Method
Me thod for Initial Measurement:
Measurement :
Principal x Present Value Factor = X

Add: Nominal Interest
Intere st x Present Value Factor = X
Initial Measureme
Measurement nt (Purchase Price) X
Note!
1- The effective interest rate should be used in getting the PVF.
2- The PVF for Principal is:

PV of 1 for Term Bonds
PV of annuity for Serial Bonds
3- The PVF for Nominal Interest is:

PV of 1 for Serial Bonds
PV of annuity for Term Bonds
Answer:

(FVPL) (FVOCI) (AC)
Fair value Fair value Initial Measurement X

(at the date of question) (at the date of question) Times: Effective Rate x%
Less: Principal payment (X)
Carrying amount, end X
57) What is the unrealized gains and losses to be presented in the Statement of Profit or Loss?
Answer:

(FVPL) (FVOCI) (AC)
Fair value, Ending X None None

Less Fair value, Beginning (X)
Unrealized
Unrealiz ed G/L X
58) What is the unrealized gains and losses to be presented in the Statement of Financial Position?
Answer:

(FVPL) (FVOCI) (AC)
None Fair Value, Ending X None

Less: AC, Ending (X)
Unrealized G/L – BS X
59) What is the unrealized gains and losses to be presented in the Statement of Other Comprehensive Income?
Answer:

(FVPL) (FVOCI) (AC)
None Step 1: Compute the Unrealized G/L in None
the balance sheet (BS) at the beginning
of the period.
Fair Value, Beginning X

Less: AC, Beginning (question 56) (X)
Unrealized G/L – BS, Beg X
Step 2: Compute the Unrealized G/L in

the balance sheet (BS) at the end of the
period.
Fair Value, Ending X

Less: AC, Ending (question 56) (X)
Unrealized G/L – BS, End X
Step 3: Compute the change in

Unrealized G/L in the balance sheet
during the period.
Unrealized G/L – BS, End X

Less: Unrealized
Unrealized G/L – BS, Beg X
Unrealized G/L – OCI X
60) What is the interest income for the year?
Answer:
Through(FVPL)
Profit or Loss Other Comprehensive
(FVOCI) Income Amortized
(AC) Cost
Face Amount X Amortized Cost,

Co st, beg X Amortized Cost,
C ost, beg X
Times: Nominal Rate x% Times: Effective
Effective Rate x% Times: Effective Rate x%
Interest income X Interest income X Interest income X
61) What is the gain or loss on sale of the investment?
Answer:

C ost
(FVPL) (FVOCI) (AC)
Selling price X Selling price X Selling price X

Less: FV, at the last year end(X) Less: AC, at the date of sale (X) Less: AC, at the date of sale (X)
Gain or loss on sale X Gain or loss on sale X Gain or loss on sale X
62) What is the balance of interest receivable at year end?
Answer:
C ost
(FVPL) (FVOCI) (AC)
Face amount of the bonds X

Times: Nominal interest rate X
Times: Number of months unpaid over 12 months x/12
Interest receivable X
Note! The number of months unpaid is equal to the months from the last interest payment date up to
December 31 (year end).
Example 1 – The interest date is every March 1 and October 1 (semi annual).
October 1 to December 31 = 3 months
Example 2 – The interest date is every January 1 (annual).

January 1 to December 31 = 12 months
Example 3 – The interest date is every December 31 (annual).

December 31 to December 31 = 0 months
Topic 17: PPE Acquisition

1. What is the initial measurement of the property, plant and equipment acquired?
2. What is the gain or loss on exchange of property, plant and equipment?
3. What is the total amount expenditure capitalized as building?
4. What is the total amount expenditure capitalized as land?
63) What is the gain or loss on sale of the investment?
Answer:
Acquisition cost of PPE (Step 1) X

Add: Direct attributable
attrib utable cost (Step 2) X
Add: Dismantling cost
cos t (Step 3) X
Initial measureme
measurement nt of PPE X
Step 1: The measurement of acquisition cost will depend on the MODE OF ACQUISITION:
MODE MEASUREMENT OF COST OF PPE

1. Cash Cash paid = Cost of PPE
2. On Account List price X

Less: Trade discounts (X)
Invoice price X
Less: Cash discount (X)
Cash price = Cost of PPE X
3 Issuance of note Priority 1:

(deferred payment) Cash price = Cost of PPE
Priority 2:
A. Interest Bearing Note (Nominal is given, Effective is not given)
Face amount (FV of note) X
Add: Down payment
paym ent X
Cost of PPE X
B. Non-interest Bearing Note (Nominal is not given, Effective is given)

PV of Principal (FV of note) X
Add: Down payment
paym ent X
Cost of PPE X
C. Interest Bearing W/ Unrealistic Rate (Both Nominal & Effective given)
PV of Principal X
Add: PV of Nominal Interest X
Fair value of note X
Add: Down payment
paym ent X
Cost of PPE X
4. Issuance of shares Priority 1:
Fair value of PPE received = Cost of PPE
Priority 2:
Fair value of shares given up X
Add: Cash paid X
Cost of PPE X
Priority 3:
Par value of shares given up X
Add: Cash paid X
Cost of PPE X

MODE MEASUREMENT OF COST
5. Lump-sum Priority 1 – Relative Fair Value Method (ALL FV IN THE GROUP IS AVAILABLE)
Acquisition
FV of SINGLE PPE
Purchase Price of the Group X FV of GROUP = Cost of the SINGLE PPE
(Acquiring a group
of PPE)
Priority 2 – Residual Value Method (FV OF ONE PPE IN THE GROUP IS NOT
AVAILABLE)
Purchase Price of the Group X

Less: Fair value of single PPE (Cost of Single PPE with available FV) (X)
Residual (Cost of SINGLE PPE with NO available FV) X
Priority 3 – Whole amount is allocated to the LAND and NONE is allocated to

the building. (ALL FV IN THE GROUP IS NOT AVAILABLE)
6. Exchange Priority 1:
(Trade-in)
Fair value of asset given up X
Add: Cash paid X
Less: Cash received (X)
Cost of PPE X
Priority 2:
Fair value of asset received = Cost of PPE
Priority 3:
Carrying amount of asset given up X
Add: Cash paid X
Less: Cash received (X)
Cost of PPE X
64) How much is the gain or loss on exchange?
Answer:
Fair value of asset given up X
Less: Carrying amount of asset given up (X)
Gain (loss) on exchange X
In case fair value of asset given up is NOT given:
Step 1: Compute the “assumed fair value” by referring to the asset received:
Fair value of asset received X
Add: Cash received
rece ived X
Less: Cash paid (X)
Assumed fair value X
Step 2: Then you can compute the gain or loss by using the assumed fair value
Fair value of asset given up (used the assumed FV) X

Less: Carrying amount of asset given up (X)
Gain (loss) on exchange X
Fair value of asset received = Cost of PPE

7. Donation
Note: Cost of transferring the asset from the donor to the company is
NOT capitalized, instead it will be deducted to:
• Share-premium
Share-premium if the donor is shareholde
shareholderr
• Other income if not shareholder
MODE MEASUREMENT OF COST OF PPE
8. Construction (a) Demolition of old building (net of proceeds from sale of scraps)
(b) Payment to vacant the building
(c) Cost of materials (net of discounts); direct labor; overhead (if self constructed)
(d) Construction cost (if constructed by a contractor)
(e) Excavation cost
(f) Architect cost
(g) Cost of construction & removal of temporary structures (e.g., fences, shelters)
(h) Building permit
(i) Supervision and inspection
(j) Interest incurred (specific borrowings)
(k) Insurance during the construction
Total cost of constructed Building
Step 2: Identify expenditures are considered as direct attributable cost to be capitalized and which are not.
CLASS OF PPE DIRECT ATTRIBUTAB
ATTRIBUTABLE
LE COST – CAPITALIZED
1. Equipment & (a) Import duties and non-refundable taxes

Machineries (b) Freight, delivery, transportation and handling
(c) Installation cost

(d)
(e) Testing cost,
Repair or net of proceeds
reconditioning prior to use
(f) Registration cost
(g) Site preparation
(h) Professional fees (e.g., consultants, advisers, finders, brokers fee)
(i) Cost of safety platforms and other devices needed prior to use
2. Land (a) Options acquired

(b) Unpaid mortgage assumed
(c) Unpaid taxes assumed (before acquisition)
(d) Professional fees
(e) Title search, legal fees, title guarantee cost
(f) City assessments
(g) Cost of grading, leveling, surveying
(h) Payment to vacant the land prior to construction
(i) Demolition cost (if no building was constructed)
3. Building (a) Options acquired

(b) Unpaid mortgage assumed
(c) Unpaid taxes assumed (before acquisition)
(d) Professional fees
(e) Remodeling (repairs) prior to usage
CLASS OF PPE CAPITALIZED COST

4.
Land Improvement (a) Landscaping, trees, and scrubs
(b) Permanent fences
(c) Water systems
(d) External driveways, parking lots and safety lightings
(e) Sidewalks and pavements
Final note: The followings are the common distractions that should be ignored (not capitalizable):
Equipment and Machineries related Land and Building related
(a) Pre operating loss (a) Insurance after construction
(b) Loss on premature disposal of old PPE (b) Taxes subsequent to the acquisition
(c) Dismantling cost of the old PPE (c) Imputed interest
(d) Repair cost due to negligence (d) Damages incurred or accidents during construction
(e) Repair cost after during the use (e) Options not acquired
(f) Training cost of the personnel (f) Advertiseme
Advertisementnt and open-house
open-hous e parties
(g) Insurance cost after delivery (g) Abnormal amount of wasted materials, labor and
(h) Recoverable taxes (VAT) overhead
(i) Advertisem
Advertisement
ent cost or marketing
m arketing cost (h) Internal profits or savings on constructions

Topic 18: Borrowing Cost

1. What is the amount of borrowing cost?
2. What is the interest expensed for the year?
3. What is the cost of the building?
65) What is the amount of borrowing cost?
Answer:
Scenario 1: Specific borrowing only (loan that can only be used to finance the construction of the building.
Principal amount of specific borrowing X

Multiply: Interest rate (mostly given) x%
Interest incurred X
Less: Investment income (X)
Borrowing cost X
Scenario 2: General borrowing only (loan that can be used to finance the construction & can be used for other
purposes aside from construction)
Step 1: Compute the weighted average expenditure
Number of months outstanding (Note 1) = Weighted average

Amount of expenditure
expend iture x
Number of months under construction during the year (Note 2) expenditure
Number of months outstanding (Note 1):
Scenario 1: If completed at December 31 or next year

Number of months outstanding is equal to: Date of expenditure up to December 31
Scenario 2: If completed during the year before December 31 (e.g., October 31)
Number of months outstanding is equal to: Date of expenditure up to Date Completed (Oct. 31)
Number of months under construction during the year (Note 2):
Scenario 1: If completed at December 31 or next year

Number of months outstanding is equal to: January 1 up to December 31
Scenario 2: If completed during the year before December 31 (e.g., October 31)
Number of months outstanding is equal to: January 1 up to Date Completed (October 31)
Total expenditure
= Weighted average expenditure (If
expenditure (If incurred evenly)
2
Step 2: Compute the average interest rate
Total annual interest of all general borrowings

= Average interest rate
Total principal of all general borrowings
Step 3: Compute the borrowing cost
Weighted average expenditure (step 1) X

Multiply: Average interest rate (step 2) x%
Borrowing cost from general borrowing X
Note! The borrowing cost from general borrowing should not exceed the annual interest from all general
borrowings. If exceeded the borrowing cost is the annual interest interest from all general borrowings.
Scenario 3: Combination of Specific and General borrowing
Answer:
Weighted average expenditure (Scenario 2, Step 1) X

Less: Principal of specific borrowing (X)
Expenditures financed by general borrowing X
Multi: Average interest rate (Scenario 2, Step 2) x%
Borrowing cost from general borrowing X

Add: Borrowing cost
co st from specific
spe cific borrowing
borrow ing (Scenario 1) X
Total borrowing cost X
66) What is the interest expensed for the year?
Answer:
Interest expense of all general borrowing X

Less: Borrowing cost from general borrowing (interest capitalized) (X)
Interest expensed X
67) What is the total cost of the building constructed?
Answer :
Construction cost (refer to question 61 mode of acquisition number 8) X

Add: Total Borrowing
Borrow ing cost X
Capitalized cost of building X
Note! In computing the weighted average expenditure and the construction lasted for more than one year. The
total cost of the building (including the capitalized interest in the prior period) will be included in full amount.

Topic 19: Government Grant

1. What is the grant income for the year?
2. What is the balance of unearned grant income at the end of the year?
3. What is the depreciation expense of the PPE related to the grant?
4. What is the carrying amount of the PPE related to the grant at year end?
5. What is the depreciation expense for the PPE in the year of repayment?
6. What is the amount of loss on repayment?
68) What is the grant income for the year?
Answer:
1. Grant Related To Income.
Amount of expense
expe nse incurred for the year
Value of the grant x = Grant income for the year
Total estimated expenses over the period of grant
2. Grant Related To Asset.
Method 1 Method 2
Grant is treated as unearned income Grant is treated as deduction to
(deferred income) the cost of asset acquired
Value of the grant X Zero

Divide: Useful life X
(the grant income will be offset to depreciation
Grant income per year X
expense)
69) What is the balance of unearned grant income at the end of the year?
Answer:
Value of the grant received X

Less: Cumulative grant income recognized (question 66) (X)
Unearned grant income X
Method 1 Method 2
Value of the grant X Zero

Less: Cumulative grant income (X)
The liability (unearned grant income) is offset to the
Unearned
Unearne d grant income X
asset (PPE).
70) What is the depreciation expense of the PPE related to the grant?
Answer:
Method 1 Method 2
Cost of the PPE acquired X Cost of the PPE acquired X

Less: Residual value (X) Less: Value of the grant (X)
Depreciable cost X Adjusted cost
cos t X
Divide: Useful life X Less Residual value (X)
Depreciation expense X Depreciable cost X
Depreciation expense X

71) What is the carrying amount of the PPE related to the grant at year end?
Answer:
Method 1 Method 2
Cost of the PPE acquired X Cost of the PPE acquired X

Less: Accumulated depreciat
depreciation
ion (question 68) (X) Less: Value of the grant (X)
Carrying value of PPE acquired X
Adjusted cost
cos t X
Less: Accumulated depreciati
depreciation
on (ques. 68) (X)
Carrying value of PPE acquired X
72) What is the depreciation expense on the year of repayment of grant?
Answer:
(ASSUMING STRAIGHT LINE DEPRECIATION)
Step 1: Compute the accumulated depreciation

depreciat ion at the BEGINNING (January 1) of the year of re-payment
WITH GRANT BEING CONSIDERED (deducting the grant to the cost of PPE) the grant.
Cost of the PPE acquired X

Less: Value of the grant (grant being considered) (X)
Adjusted cost X
Less Residual value (X)
Depreciable cost X
deprecia tion
Annual depreciation X
Multi: Number of years from grant date up to the BEGINNING (January 1) of the year of repayment X
Accumulated depreciation BEGINNING
BEGIN NING – WITH GRANT
GR ANT BEING CONSIDERED
CONSIDE RED X
Step 2: Compute the accumulated depreciation

depreciat ion at the ENDING (December 31) of the year of re-payment
WITHOUT CONSIDERING THE GRANT (not deducting the grant to the cost of PPE) the grant.
Cost of the PPE acquired X

Less Residual value (X)
Depreciable cost X
Annual depreciation
deprecia tion X
Multi: Number of years from grant date up to the ENDING (December 31) of the year of repayment X
Accumulated depreciation ENDING – WITHOUT CONSIDERING
CONSID ERING THE GRANT
GRA NT X
Step 3: Compute the amount of depreciation required to bring the accumulated depreciation to its ENDING
BALANCE without grant
d epreciation ENDING without grant – REQUIRED ENDING (STEP 2)

Accumulated depreciation X
Less: Accumulated depreciatio
depreciationn BEGINNING with grant – RECORDED BEGINNING (STEP 1) (X)
73) What is the loss on repayment?
Answer:
Balance of unearned grant income at the date of re-payme

re-payment
nt (refer to question 67) X
Less: Amount of re-payment (amount demanded by the government to be returned) (asset to give) (X)
Gain (loss) on re-payment X
Method 1 Method 2
Zero –
Balance of unearned grant income X the amount of re-payment will not be
Less: Amount of re-payment (X) recognized,
recognize d, instead it will be added
Gain or loss on re-payment X to the new depreciation expense.
Topic 20: Depreciation Expense

1. What is the depreciation expense for the year?
2. What is the gain or loss on sale of the PPE?
74) What is the depreciation expense for the year?
Answer:
1. STRAIGHT LINE METHOD

Cost of PPE – residual value
Useful life = Depreciation expense
2. DOUBLE DECLINING
Step 1: Compute the depreciat

depreciation
ion rate.
2
= Depreciation rate
Useful life

depreciation
ion expense.
Initial measurement (Cost) of PPE X

Less: Accumulated Depreciatio
Depreciation,
n, Beg (X)
Basis for Depreciatio

Depreciationn X
Times: Depreciation rate (step 1) x%
3. SUM OF YEARS DIGIT
Useful life – number of years lapsed

Cost minus residual value x = Depreciation expense
Summation of useful life
4. OUTPUT METHOD

depreciation
ion rate per output.
Initial measurement (Cost) of PPE X
Less: Residual value (X)

Depreciable cost X
Divide: Total estimated X
Depreciation rate per output X
Step 2: Compute the depreciation

depreciatio n expense.
Depreciation rate per output (step 1) X

Times: Actual output during the year X
5. COMPOSITE METHOD
Step 1: Compute the composite rate.
Cost
= Composite rate
Annual depreciation
deprecia tion of all assets
ass ets

depreciation.
ion.
Cost X
Times: Composite rate (step 1) x%
Depreciation X
depreciation
ion for the subsequent period.
Cost, beginning X
Add: Cost of acquisition
acq uisition during the year X
Less: Cost of disposal during the year (X)
Adjusted basis
bas is for depreciation
depr eciation X
Times: Depreciation rate (step 1) x%
6. LEASEHOLD IMPROVEMENT
Cost
= Depreciation expense
Shorter
Useful life Remaining

of improvem
improvement ent Lease term Note: Add the renewal option (extension) if it is
probable or certain to be used (silent, not probable)
7. DEPRECIATION WITH CHANGE IN ESTIMATE
ASSUMING STRAIGHT
STRAIG HT LINE METHOD
METHO D
Step 1: Compute the carrying amount at the date of change in estimate.
Cost X
Depreciable amount X
Annual depreciation
depreci ation expense X
Multi: Number of years lapsed from the acquisition date up to the date of change) X
Accumulated depreciation
d epreciation (cumulative
( cumulative up to
t o the date of change) X
Cost X
depreciation
on (cumulative up to the date of change) (X)
Carrying amount at the date of change X
Step 2: Apply the changes (new remaining useful life, new residual value, new depreciation method,
addition to cost) from the carrying amount at the date of change: (Assuming straight line method)
Carrying amount at the date of change (Step 1) X

Less: New residual value (X)
Depreciable cost X
Divide: New remaining useful life X
New depreciation expense X
75) What is the gain or loss on sale of PPE?
Answer:
Initial measurem
measurement
ent (cost) X
depreciation
n (question 72) (X)
Carrying amount of the PPE at the date of sale X
Selling price X
Less: Carrying amount of the PPE at the date of sale (X)
Gain or loss on sale X
Topic 21: Impairment of Asset

1. What is the amount of impairment loss?
2. What is the carrying amount of the PPE right after impairment?

3. What
4. What is the amount
is the new depreciation
of reversalexpense after recording
of impairment loss? impairment?
76) What is the amount of impairment loss?
Answer: Subsequently, property, plant and equipment (PPE) is measured either under cost model or
revaluation model. Under cost model, PPE
PPE carried at:
Cost (Initial measurem

measurement
ent refer to topics: 16, 17, 18) X
depreciation
n (refer to 19) X
Less: Accumulated impairment (refer below) X
Decrease in Value of PPE
Cost Model Revaluation Model
Record as Impairment Loss Record as Impairment Loss
Step 1: Determine the fair value less cost of disposal.
Fair value (a.k.a. estimated selling price) X

Less: Cost of disposal (X)
Fair value less cost to sell X
Step 2: Determine the value in use.
Annual net cash inflow x PVF of annuity = PV of annual net cash flow X
Add: Residual value
valu e x PV of 1 = PV of residual
resid ual value X
Value in use X
Step 3: Determine the

the recoverable amount
amount (RA).
Fair value less cost of disposal X

VS. Value in use X
Recoverable amount (select the higher value) X
Step 4: Compute the carrying amount at the date of impairment

impairment..
Cost X
depreciationn (annual depreciatio
depreciationn x age) X
Carrying amount at the date of impairment X
Step 5: Compute the amount of impairment.
Carrying amount at the date of impairment X

Less: Recoverable
Recoverabl e amount (step 3) (X)
Impairment loss X
CA > RA = WITH IMPAIRMEN

IMPAIRMENT
T CA < RA = NO IMPAIRMENT

77) What is the carrying amount of the PPE right after impairment?
Answer:
Initial measurem
measurement
ent of PPE (Cost) X
depreciationn (X)
Less: Impairment (question 74) (X)
Carrying amount of the PPE after impairment X
Alternative solution:
s olution:
Recoverable amount = CA of PPE after impairment
78) What is the new depreciation expense after impairment?
Answer:
CA after impairment (equal to RA)

= New Depreciation
Remaining useful life
79) What is the gain on reversal of impairment loss?
Answer:
Step 1: Compute the carrying

carrying amount on the date of reversal.
reversal.
Recoverable amount (New CA after impairment) X

Less: Subsequent new depreciatio
depreciationn up to reversal date (question 76) (X)
Carrying amount on the date of reversal X
Step 2: Compute the carrying amount AS IF NO IMPAIRMENT.

Initial measurem
measurement
ent of PPE (Cost) X
depreciationn at reversal date (using the original depreciatio
depreciation)
n) (X)
Carrying amount on the date of reversal (as if no impairment) X
Step 3: Determine the NEW recoverable amount.
Fair value less cost of disposal at reversal date X

VS. Value in use at reversal date X
NEW recoverable amount (select the higher) X
Note! The recoverable amount

amount at the date of impairment is not the recoverable
recoverable amount at the date of reversal.
reversal.
Step 4: Determine reversal limit.

limit.
NEW recoverab
recoverable
le amount X
VS. Carrying amount as if no impairment X
Reversal limit (select the lower) X
Step 5: Compute the gain on reversal of impairm

impairment.
ent.
Carrying amount on the date of reversal (step 1) X

Less: Reversal limit (step 2) X
Gain on reversal of impairment X
CA > LIMIT = NO REVERSAL CA < LIMIT = WITH REVERSAL

Topic 22: Revaluation Surplus

1. What is the revaluation surplus on the date of revaluation?
2. What is the balance of revaluation surplus subsequent to the date of revaluation?
3. What is the new depreciation expense for the revaluated PPE?
4. What are the journal entries to record the revaluation?
80) What is the revaluation surplus on the date of revaluation?
Answer: Under cost model, the company can not increase the value of their PPE to its fair value (unless there
was a previous
previous impairment). under revaluation model, the company can increase the value of their PPE
impairment). While under
to its fair value, such increase is referred as revaluation surplus (one of the sever OCIs).
Increase in Value of PPE
PPE was PPE was not PPE was PPE was not
impaired impaired impaired impaired
before before before before
Record as Do not record Record as both Record as

Gain on reversal anything Gain on reversal & Revaluation
Revaluation Surplus Surplus
Step 1: Compute the depreciated replacement

replace ment cost or the sound value or the fair value.
Replacement cost – residual value

= Annual depreciation based on replacement cost
Useful life
Replacement cost X
Less: Accumulated depreciation based on replacement cost (from purchase to revaluation date)
Accumulated (X)
Depreciated replacement cost (a.k.a. sound value, fair value) X
Note! If what is given in the problem is FAIR VALUE OR SOUND VALUE, there is no need to compute for the
depreciated replacement
replacement cost. The fair value or
or sound value will
will be your depreciated replacement
replacement cost. If what
is given in the problem is REPLACEMENT COST, there is a need to compute the depreciated replacement cost.
Step 2: Compute for the carrying amount at the date of revaluation.
Initial measurem
measurement
ent (original cost) X
depreciationn – original (X)
Carrying amount at the date of revaluation X
Step 3: Compute for the initial revaluation.
Depreciated replaceme
replacementnt cost (a.k.a. fair value, sound value) X
Less: Carrying amount at the date of revaluation (X)
Revaluation surplus – initial, before tax X
Step 4: Compute the initial revaluation, after tax (IF WITH TAX RATE GIVEN).

Less: (100% - Tax rate) x%
Revaluation surplus – initial, after tax X
Note! All OCI items are presented in the statement of comprehens

comprehensive
ive income, after tax. If there is no tax rate
given, ignore step 4.

81) What is the balance of revaluation surplus subsequent to the date of revaluation?
Answer:
Step 1: Compute the amount of transfer of revaluation surplus to retained earnings.
Type of asset revalued
Depreciable Asset Non Depreciable Asset
Initial revaluation
= Annual transfer
Remaining life Asset not sold
sol d Asset was sold
Annual transfer X
Times: Years lapsed since revaluation
r evaluation X amount
No amount Whole amount
Cumulative amount transferred X is transferred is transferred
Step 2: Compute the balance (REMAINING) of the revaluation surplus at year end?
Initial revaluation surplus (question 78) X

Less: Amount transferred to retained earnings (X)
Remaining revaluation surplus at year-end X
82) What is the NEW depreciation expense after recording the revaluation?
Answer: When the asset is revalued, there will be a change in estimate. Thus the new depreciation should be
computed.
replacement
nt cost (a.k.a. fair value, sound value) X
Divide: Remaining useful life X
NEW depreciation expense X
83) What is the NEW depreciation expense after recording the revaluation?
Answer: The company can chose between proportional method or elimination method in recording the
revaluation surplus:
Proportional method:
Step 1: Compute the percentage of increase:
Initial revaluation (refer question 78)

= Percentage of increase
Carrying amount before revaluation (question 78)
Step 2: Journalize
Dr. PPE (Cost x percentage of increase) X

Cr. Accumulated depreciat
depreciation
ion (A.D. x percentage of increase) X
Cr. Revaluation surplus (question 78) X
Elimination method:
Dr. Accumulated depreciati

depreciation
on (equal to initial revaluation) X
Cr. Revaluation surplus (question 78) X

Topic 23: Combination of Impairment & Revaluation

Revaluation first, before impairment

Revaluation
1. What is the amount of impairment loss of the revalued asset?
Impairment first, before revaluation

2. What is the amount of revaluation surplus of the previously impaired asset?
84) What is the amount of impairment loss of the revalued asset?
Answer: The company should zero out the remaining revaluation surplus first before recording any impairment.
Decrease in Value of PPE under Revaluation Model
PPE was PPE was

revalued before not revalued before
Record as Record as
1. Ded
educ
uctition
on to RS Impairment Loss
2. Impa
mpair
irme
men nt Loss
Loss
Step 1: Compute the initial revaluation surplus.
replacementnt cost (a.k.a. fair value, sound value) X
Step 2: Compute the carrying amount of PPE on the date of impairment.
replacement
nt (a.k.a. fair value, sound value) – NEW CA X
depreciation
on based on NEW depreciatio
depreciation
n (question 80) (X)
Carrying amount on the date of impairment X
Step 3: Compute the remaining balance of revaluation on the date of impairment

impairment..
Initial revaluation surplus (question 78) X

Less: Amount transferred to retained earnings (X)
Remaining revaluation surplus at impairment date X
Step 4: Compute the impairment to

to be recorded.
replacement
nt (a.k.a. fair value, sound value) – NEW CA (step 2) X
Less: Recoverable
Recoverab le amount on the date of impairme
impairmentnt (FVCOD vs. VIU select higher) (X)
Total decrease in value of PPE X

Less: Remaining revaluation surplus at impairment date (step 3) (X)
Impairment loss recognized X

85) What is the amount of revaluation surplus of the previously impaired asset?
Answer:
Increase in Value of PPE
PPE was PPE was not PPE was impaired PPE was not
impaired impaired before impaired before
before before
Record the Do not record Record the increase Record the increase
increase in the increase in value WITHOUT in value WITHOUT
value WITH in value LIMIT as both LIMIT as,
LIMIT as:
GAIN ON REVERSAL REVALUATION
GAIN ON & REVALUATION SURPLUS
REVERSAL SURPLUS
Step 1: Compute the carrying value of PPE on the date of reversal.
Recoverabl e amount (NEW CA right after impairment

Recoverable impairment)) X
Less: NEW depreciatio
depreciation
n (question 76) (X)
Carrying amount at the date of revaluation X
Step 2: Compute the gain on reversal of impairme

impairment.
nt.
Less: Carrying
Reversal amount
limit on the date of reversal X
(X)
Gain on reversal of impairment (question 77) X
Step 3: Compute the total increase in value of the asset.
Recoverabl e amount at the date of revaluation

Recoverable X
Total increase in value X

Less: Gain on reversal of impairment (X)
Revaluation surplus X
Topic 24: Cash Generating Unit

1. What is the total impairment loss of the CGU?
2. What is the impairment loss allocated to individual asset included in the CGU?
86) What is the total impairment loss of the CGU?
Answer:
Step 1: Compute the carry amount of the CGU:
Cash X
Add: Accounts receivable
recei vable X
Less: Allowance for bad debt (X)
Add: Notes receivable
rece ivable X
Less: Notes receivable – discounted (X)
Add: Inventory X
Less: Allowance for inventory write-down (X)
Add: Investments X
Add: PPE X
depreciationon (X)
Add: Intangible assets
asse ts (including goodwill)
goo dwill) X
Carrying amount of CGU X
Note! Liabilities of CGU is not included in the computing the carrying value.
Step 2: Compute the total impairment of the CGU.
Carrying amount of CGU X

Less: Recoverable
Recoverab le amount (FVCOD vs. VIU, Higher) (X)
Total impairment of CGU X
87) What is the impairment loss allocated to the individual asset included in the CGU?
Answer:
Step 1: Allocate to the impairment to Goodwill first:
Total impairment (question 84) X

Less: Goodwill (X)
Remaining impairment allocated to non-goodwill asset X
Step 2: Allocate the remaining impairment to “obviously impaired asset” (asset in which individual impairment
can be computed): SKIP THIS STEP IF NO ASSET IS OBVIOUSLY IMPAIRED
Carrying amount of asset obviously impaired X

Less: Recoverable
Recoverab le amount for PPE or LCNRV for inventory (X)
Impairment allocated to obviously impaired asset X
Remaining impairment allocated to non-goodwill asset (step 1) X

Less: Impairment allocated to obviously impaired asset (step 2) (X)
Remaining impairment allocated to other assets X
Step 3: Last allocation
Remaining impairment
Carrying amount of individual asset = Impairment allocated to
allocated to other x
Carrying of all other assets in CGU( see
see note! )
) individual asset
asset (Step 2)
Note! All other asset

asse t do not include:
includ e:
(1) goodwill; (2) obviously impaired asset; (3) cash; and (4) other asset stated in the problem that is not
impaired.

Topic 25: Investment Property (IP)

1. What is the total composition of investment property?
2. What is the carrying amount of the investment property at year end?
3. What is the depreciation expense for the year of the investment property?
4. What is the gain or loss due to change in fair value of the investment property?
5. What is the amount of impairment loss for the year?
6. What is the initial measurement of PPE or Inventory after reclassifying from investment property?
7. What is the initial measurement of PPE or Inventory after reclassifying to investment property?
8. What is the gain or loss from the reclassification of investment property from PPE or Inventory?
9. What is the gain or loss from the reclassification of investment property to PPE or Inventory?
88) What is the total composition of investment property?
Answer: To answer this question, one must know which asset is included as investment property and which are
excluded as investment property.
(1) Land held for capital appreciation;

(2) Land held for undetermined future use;
(3) Land being held as potential plant site;
INCLUDED
(4) Land or building being leased out under operating lease;
(5) Land or building leased out to subsidiary in the separate FS;
(6) Land or building being constructed or developed as investment property;
(1) Land or building being leased out as finance lease;

(2) Land or building used in production or administrative purposes (owner occupied);
(3) Land or building for sale in ordinary course of business;
(4) Land or building for sale not in ordinary course of business;
(5) Land or building being constructed or developed as owner-occupied;
EXCLUDED
(6) Land or building leased out under operating lease to subsidiary in the consolidated FS;
(7) Land or building leased out under operating lease to employees at or below market rent;
(8) Building being constructed in behalf of third party;
(9) Hotel
(10) Machineries;
Machineries; equipment; furniture; fixtures;
89) What is the carrying amount of the investment property at year-end?
Answer:
Cost model Fair value model
Cost (same rule as PPE) X Fair value = Carrying amount

depreciation
n (X) (at the date of the question)
Carrying
Ca rrying amount X
90) What is the amount of depreciation for the year?
Answer:
Cost X ZERO
Less: Residual Value (X)
Depreciable cost X
91) What is the gain or loss due to change in fair value of the investment property?
ZERO Fair value, Ending X

Less: Fair value, Beginning (X)
Gain (loss) in change in FV X
The answer should be the change for the CURRENT

year only. NOT the cumulative change in FV.
92) What is the amount of impairment loss during the year?
Carrying amount (question 87) X ZERO

Less: Recoverable
Recoverabl e amount (X)
Impairment loss X
93) What is the initial measurement of PPE or Inventory after reclassifying FROM IP?
94) What is the gain or loss from reclassification PPE or Inventory FROM IP?
1. COST MODEL
Initial measure of PPE:

PPE Carrying amount of IP at the
date of reclassification.
Gain or loss on reclassification:

ZERO
Investment Property
Initial measure of Inventory:

INVENTORY Carrying amount of IP at the

ZERO
2. FAIR VALUE MODEL
PPE Initial measure of PPE:

Fair value of IP at the date of
reclassification.

Investment Property ZERO
INVENTORY Initial measure of Inventory:

reclassification.

ZERO

95) What is the initial measurement of PPE or Inventory after reclassifying TO IP?
96) What is the gain or loss from reclassification PPE or Inventory TO IP?
Answer:
1. COST MODEL
Initial measure of IP:

PPE Investment Property Carrying amount of PPE at the

ZERO
INVENTORY Investment Property

Carrying amount of Inventory
at the date of reclassification.

ZERO
2. FAIR VALUE MODEL

PPE Investment Property Fair value of IP at the date of
reclassification.
FV of IP X
Less: CA of PPE (X)
Reval Surplus X
INVENTORY Investment Property Initial measure of IP:

reclassification.
FV of IP X
Less: CA of Inven. (X)
Gain on reclass X

Topic 26: Depletion

1. What is the amount of depletion during the year?
2. What is the amount of depletion included in the cost of goods sold (a.k.a. depletion expense)?
3. What is the carrying amount of the wasting asset as of year end?
4. What is the NEW depletion in the event of change in estimate?
5. What is the depreciation expense for the year of the PPE used in mining activity?
6. What is the maximum amount of dividend that a mining company can declare?
97) What is the amount of depletion during the year?
Answer: Depletion is the increase in value of the nature acquired (also referred as the wasting asset) due to
extraction of natural resources from it. The depletion is inventoriable (e.g., same treatment as depreciation of
factory equipment).
Step 1: Compute the initial carrying amount of the wasting asset:
Acquisition cost of the land (area)

(ar ea) X
Add: Exploration cost
cos t (notes below)
below ) X
Add: Development cost (intangible only, if not stated,
sta ted, considered
conside red as intangible)
intang ible) X
Add: Present value of restoration
restoratio n cost X
Initial carrying amount of wasting asset X
Exploration Cost – Successful Cost Method
Cost of successful exploration Cost of unsuccessful exploration

Capitalized (part of wasting asset) Expensed (not part of wasting asset)
Exploration Cost – Full Cost Method

Cost of successful exploration Cost of unsuccessful exploration
Capitalized (part of wasting asset) Capitalized (part of wasting asset)
Step 2: Compute the depletable amount:
Initial carrying amount of wasting asset (step 1) X

Less: Residual value (estimated selling price at the end of life) (X)
Depletable amount X
Step 3: Compute depletion rate:
Depletable
Original amount
estimated (step
number of 2)
output = Depletion rate
Step 4: Compute the depletion:
Depletion rate (step 3) X

Times: Actual output extracted (produced) X
Depletion for the year X
98) What is the amount of depletion expensed (depletion as part of cost of goods sold) during the year?
Answer: Depletion is initially recorded as inventory and will be expensed only when sold (as of part of cost of
goods sold).
Scenario 1: When there is no change in depletion rate:
Depletion rate (question 97) X

Multiply: Number of units sold X
Depletion expense X
Scenario 2: With change in depletion rate
Previous depletion rate x Number of units sold coming from previous year = X
Add: NEW depletion
depleti on rate x Number of units
uni ts sold coming
com ing from present
pre sent year = X
Depletion expense X
99) What is the carrying amount of the wasting asset as of year end?
Answer: Development cost is not only incurred before the start of production process (extraction), but can also
be incurred during the process of extraction along the way.
Initial carrying amount (question 97, step 1) X

Add: Additional development
dev elopment cost
cos t subsequent to acquisition
acquisitio n X
Less: Accumulated depletion (total of depletion from acquisition to the date of the question) (X)
Carrying amount at year-end X
100) What is the NEW depletion when there is a change in estimate?
Answer:
Step 1: Check if there is a need to compute the new depletion rate:

Compute the new depletion rate if

(1) There is an additional development cost incurred in the subsequent year;
(2) There is a change in the estimated number of outputs.
(3) New residual value
Step 2: Compute the remaining depletable amount at the date of change:
Initial measurem
measurement
ent (question 95, step 1) X
Add: Additional development
dev elopment cost
cos t (from acquisition
acq uisition to date of change in depletion
de pletion rate) X
Less: Accumulated depletion cost (depletion from acquisition to date of change in depletion rate) (X)
Carrying amount at the date of change in estimate X

Remaining depletable amount X
Step 3: Compute the NEW depletion rate:
Remaining depletable amount (step 2)

= NEW depletion rate
Revised estimated remaining output
Step 4: Compute the NEW depletion:
Actual output extracted

extr acted (produced)
(prod uced) X
Times: New depletion rate X
NEW depletion X

101) What is the depreciation expense of PPE used in the mining activity?
Answer: The true question here is, “what method of depreciation should be used”?
Then you can refer to question 72 as a guide in computing the depreciation.
Depreciation method
With alternative use Without alternative use
Straight-line select is SHORTER
Life of the mine Useful life of PPE
Output method Straight line method
102) What is the maximum amount of dividend that a wasting asset company can declare?
Answer:
Un-appropriated retained earnings

Un-appropriated X
Add: Accumulated depletion
d epletion (total of depletion from
fr om acquisition
acquisitio n to date of question)
q uestion) X
Less: Capital liquidate
liquidated*
d* X
Less: Depletion not yet sold (depletion rate x ending inventory) X
Maximum dividend X
*Capital liquidated. The excess of dividend declared from the un-appropria

un-appropriated
ted retained earnings.
Maximum dividend declared X
Less: Un-appropriated
Un-appropr iated retained earnings X
Dividends not coming from RE but from capital (capital liquidated) X
Topic 27: Non Current Asset (NCA) Held for Sale

1. What is the amount of impairment loss on the date of reclassification to NCA held for sale?
2. What is the carrying amount of NCA held for sale at year end?

3. What is the amount of impairment or reversal of impairment of NCA held for sale at year-end?
4. What is the amount of gain or loss on sale of NCA held for sale?
5. What is the initial measurement of PPE after reclassification back from NCA held for sale?
6. What is the gain or loss on reclassification back to PPE?
103) What is the amount of impairment loss on the date of reclassification to NCA held for sale?
Answer:
Step 1: Determine the initial measurement of the NCA held for sale.
Fair value less cost to sell X

VS. Carrying amount of the asset before reclassified as NCA held for sale X
Initial measureme
measurement nt (select the LOWER value) X
Step 2: Compute the amount of impairment.
Carrying amount of the asset before reclassified as NCA held for sale X
VS. Initial measurem
measurement
ent (step 1) X
Impairment loss X
Note! Once the asset is reclassified

reclassified as NCA held for sale, no more depreciation
depreciation will be recognized.
recognized.
104) What is the carrying amount of NCA held for sale at year end?
Answer:
Fair value less cost to sell (at year end) X
VS. Carrying amount of the asset before reclassified as NCA held for sale X
Carrying amount (select the LOWER value) X
Note! The fair value less cost to sell at the reclassification date is not the same as the fair value less cost to sell
at year – end.
105) What is the amount of impairment or reversal of impairment of NCA held for sale at year-end?
Answer:
NCA HELD FOR SALE ACCOUNT

Initial Measurement (question 101) X
Reversal of impairment (SQUEEZE) X X Impairment loss (SQUEEZE)
Carrying amount at year end (question 102) X
Note!
Note!
1) You can solve for either impairment loss or reversal of impairment by squeezing the amount in the T-
account of NCA held for sale. Plot the ending balance (carrying amount) and the initial measurement,
then you can not squeeze for the answer.
2) Be sensitive with the question, impairment loss may happen in two periods, (1) is on the reclassification
date and; (2) at year end. If the problem is asking for the “total impairment for the year”, solve as follow:
Impairment at the reclassifica

reclassification
tion date X
Add: impairment at year end X
Total impairment for the year X

106) What is the gain or loss on sale of the NCA held for sale?
Answer:
Selling price of the asset X

Less: Carrying amount of the NCA held for sale (X)
Gain or loss on sale X
Note!
Note!
1) The carryi
carrying
ng amount
amount of the
the NCA held
held for
for sale is equal to the initial measurement, if it was sold
is equal
during the year of reclassification.
2) The carry
carrying
ing amoun
amountt of the NCA
NCA held
held for sale
sale is equal the carrying amount of the last year end , if
equal to the
it was sold the following year of the year of reclassification.
107) What is the initial measurement of PPE after reclassification back from NCA held for sale?
Answer:
Step 1: Compute the carrying amount of the PPE “AS IF IT WAS NEVER CLASSIFIED AS NCA HELD FOR
SALE AND THE DEPRECIATION WILL CONTINUE”.
Cost of the PPE X

depreciation
n (assuming continues up to reclassificat
reclassification
ion back date) (X)
Carrying amount, AS IF X
Step 2: Compute the initial measureme

measurement
nt of the reclassified back PPE.
Recoverabl e amount at the date of reclassificat
Recoverable reclassification
ion back (FVCOD VS. VUI, HIGHER) X
VS. Carrying amount, AS IF X
Initial measureme
measurement
nt of the reclassified back PPE X
108) What is the gain or loss on the reclassification back?
Answer:
Initial measurem
measurement
ent of the reclassified back PPE (question 105) X
Less: Carrying amount of the NCA held for sale (lower of CA before reclassificat
reclassification
ion VS FVCOD) (X)
Gain or (loss) on the reclassification back X

Topic 28: Intangible Assets

1. What is the composition of intangible asset?
2. What is the amount of research and development expense?
3. What is the initial measurement (cost) of intangible asset?
4. What is the amortization expense during the year?
5. What is the total related to intangible assets?
6. What is the carrying amount of intangible assets at year end?
109) What is the composition of intangible asset?
Answer:
(1) Patent
(2) Franchise
(3) Trademark
(4) Copyright Included
(5) Licenses
(6) Computer software
(7) Website
(8) Organizational cost (start-up cost)

(9) Prepaid expenses
(10) Discount
Discount and premium on bonds Excluded
(11) Leasehold
Leasehold improvement
(12) Continuing
Continuing franchise fee
(13) Cost
Cost of defending the intangible asset
If purchased (silent), INCLUDED

(1) Go
Good
odw
will
ill
(2) Cu
Cust
stom
omer
er llis
istt
(3) Bra
ran
nds
(4) Ma
Mast
sthe
head
adss
(5)
(5) Sec
Secret
ret formula
formula or rec
recipe
ipe
(6)
(6) Prod
Product
uction
ion Backl
Backlog
ogss
If internally generated, EXCLUDED
Note!
1) Compute software rule:
Integral part of the machine – excluded from intangible asset (treated as PPE).
Not integral part of the machine – included as intangible asset.
2) Website rule:

Solely for advertisement and promotion – excluded from intangible asset (treated as expense).
Not solely for advertisement and promotion – included as intangible asset.
3) Research and development:

As a general rule
r ule (silent) – excluded
e xcluded from intangible asset
ass et (treated as expense)
Purchase from another party – included as intangible asset.
Acquired from a business combination
co mbination – included
inc luded as intangible
inta ngible asset.
Technical feasibility was establish – included as intangible asset.
110) What is the total amount of research and development (R & D) expense?
Answer: To answer this question, one must know which expenditures are treated as R & D expense and which
are not.
Expenditure Included or excluded?
(a) Material, labor and overhead used in conducting research & development
(b) Cost of activities aim to obtain new knowledge
(c) Cost of developing, designing, producing and testing prototype Included as research
(d) Cost of searching and testing alternatives and development
(e) Cost of designing tools, jigs and molds Expense
(f) Depreciation of PPE used in research and development with alternative use
(g) Whole of cost PPE used in research and development without alternative use
(a) Trouble shooting during commercial production Excluded from R & D

(b) Periodic, routine, seasonal changes of existing product expense
(c) Changes or modification for specific customer
(d) Engineering follow through during commercial production (treated as factory
(e) Quality control during commercial production overhead / inventory)
Excluded from R & D

expense
(a) Marketing or advertising cost
(Treated as selling
expense)
Excluded from R & D

(a) Payment to intellectual property office in connection with registration expense
(b) Legal expenses to register the patent
(c) Drawing cost required by the patent office (Treated as capitalized
intangible asset)
111) What is the initial measurement of intangible asset?

Answer: This will depend on how the intangible asset was acquired. If purchased, the accounting rule is the
same as the acquisition rule for PPE (refer to topic 16). The initial measurement will be different if self
constructed or developed.
Type of intangible asset Acquired by purchased Self-developed (internally generated)
Payment to register the patent

Add: Legal expense with registration
registra tion
1. Patent Refer to topic 16
Add: Cost of drawing
dr awing required
require d by patent
pate nt office
Initial measure of patent
R & D after technical feasibility

Trademark &
2. Refer to topic 16 Add: Direct cost (registration cost)
Copyright
Initial measurement
Cost of coding and testing

Add: Cost of producing
pr oducing product
prod uct master
3. Website & Software Refer to topic 16
Add: Cost of installation
insta llation
Initial measurement of Website
Franchise
Licenses
Goodwill
Brands
4. Refer to topic 16
Mastheads Not applicable
Customer list
Production backlogs
Secret formula or recipe

112) What is the amount of amortization of intangible asset?
Answer: This will depend on the life of intangible asset whether indefinite (unlimited) or finite (limited) life.
Life of Intangible Asset
Limited Life Unlimited Life
No Amortization
Record amortization using straight line method.
Initial measurement
measurem ent of intangible asset (cost), refer to question 111 X
Divide: Useful life or remaining legal life, which ever is shorter X
Amortization expense
ex pense X
Note! The legal life of patent is 20 years. All other intangible asset’s legal life will be state in the problem. If not
stated in the problem, use the useful life for amortization.
113) What is the carrying amount of the intangible assets at year end?
Answer: The intangible asset can be subsequently measured either under cost model or revaluation model.
The rule for subsequent measurement of PPE is the same as the rule for intangible asset.
Cost model Revaluation model (refer to topic 20)

Cost (refer to question 111) X Fair value X
Less: Acc’d amortization (question 112) X Less: Acc’d amortization (question 112) X
Less: Acc’d impairment (topic 19) X Less: Acc’d impairme

impairment
nt (topic 19) X
Carrying amount at year end X Carrying amount at year end X
114) What is the total expenses related to intangible assets?
Answer:
Type of intangible asset Related expenses
Cost of successful or unsuccessful defense against litigation X

Add: Amortization expense
e xpense for the year X
1. Patent Add: Impairment loss, if any X
Add: R & D expense
expe nse related X
Total expense X
Continuing franchise fee X

Add: Interest expense
expe nse related to the notes issued
is sued X
2. Franchise Add: Amortization expense
e xpense X
Add: Impairment loss, if any X
Total expense X
Amortization expense
e xpense X
3. Other intangible asset Add: Impairment loss X
Total expense X
Note! If the defense for litigation is unsuccessful, there will be an impairment equal to the carrying amount at the
date of loss of litigation.
litigation.
THE SECRET NOTES

PART 2
          

BY: JOHN BO S. CAYETANO, CPA, MBA
Topic 01: Current Liabilities and Classifications

2. What is the adjusted balance of trade accounts payable at year end?
3. What is the amount of accrued expense at year end?
4. What is the amount of unearned income at year end?
5. What is the amount of escrow liability at
at year end?
6. What is the total current liability and non current liability at
at year end?
115) What is the adjusted balance of trade accounts payable at year end?
Answer:
1. If what is given is the beginning balance.
Trade – Accounts Payable

X Beginning balance
Purchase discount X X Gross credit purchases
Purchase return X
Disbursements
Disbursements (payments made) X
X Ending balance
2. If what is given is the ending balance.
Ending balance (unadjusted) X

Add: Drawn check, post-date
p ost-date X
Add: Drawn check, unreleased
unr eleased X
Add: Suppliers debit
d ebit balance X
Add: Discount deducted
deduc ted but can no longer avail X
Less: Any unrecorded purchase returns X
Add or less:
les s: Recording of goods in transit * X
Ending balance (adjusted) X
Goods in transit adjustment *
Recorded Not recorded (silent)

With transfer of title
(1. FOB shipping point)
No adjustment Add
(2. FOB seller)
(3. FOB CIF / FAS)
Without transfer of title

(1. FOB destination)
Minus No adjustment
(2. FOB buyer)
(3. FOB ex-ship)
116) What is the amount of accrued expense at year end?
Answer:
Accrued Expense
Expen se
X Beginning balance
Disbursements
Disbursements (payments made) X X Expenses incurred during the year
X Ending balance
Examples of accrued expenses:
(1) Interest payable (2) Salaries payable
(3) Insurance payable (4) Utilities payable
(5) Income tax payable (6) Rent payable
Computation of bonus payable:
Bonus based on profit before bonus and before tax Bonus based on profit after bonus and before tax
Formula: Formula:
B = B% (Profit) B = B% (Profit – B)
Trial and error (alternative):
Profit X
Less: Bonus X (trial amount)
Times: Bonus rate x%
Bonus X (should be trial amount)
Bonus based on profit before bonus and after tax Bonus based on profit after bonus and after tax
Formula: Formula:
B = B% [Profit – T%(Profit – B)] B = B% [Profit – B – T%(Profit – B)]
Trial and error (alternative): Trial and error (alternative):

Profit X Profit X
Less: Bonus X (trial amount) Less: Bonus X (trial amount)
Times: Tax remove x% (100% - tax rate) Times: Tax remove x% (100% - tax rate)
Add: Bonus X (trial amount) Times: Bonus rate x%
Times: Bonus rate x% Bonus X (should be trial amount)
Bonus X (should be trial amount)
117) What is the amount of unearned income at year end?
Answer:
Unearned income
X Beginning balance
Revenue earned for advance payments X X Cash advance payments
X Ending balance
Examples of accrued expenses:

(1) Advances from customers (2) Gift certificate payable
(3) Unearned revenue (4) Customers’ credit balance
118) What is the amount of escrow liability at year end?
Answer:
Escrow Liability
X Beginning balance
Taxes remitted (paid in behalf of customers) X X Cash receipt from customer for their taxes
X Ending balance
119) What is the amount of current and non current liability at year end?
Answer:
Common distractions (not liabilities)

(1) Share dividend payable (equity account) (2) Cash surrender value (asset account)
(3) Reserve for contingencies (equity account) (4) Dividends in-arrears (disclosure)
(5) Advances to (asset
(a sset account) (6) Contingent liability (disclosure)
1. As a general rule,

r ule, liabilities that will be paid within 12 months
m onths is current
curre nt liabilities.
2. Trade payable (purchases of inventory) and accrued expenses (incurred in the process of production) is
always presented as current liabilities.
3. If the problem is silent as to when it will be paid, the classification should be as below-mentioned:
Commonly current liability Commonly non current liability

(1) Trade accounts payable (1) Mortgage payable
(2) Notes payable (2) Bonds payable (add premium, minus discount)
(3) Accrued expenses
expens es (3) Deferred tax liability (always non current)
(4) Unearned income (4) Lease deposit received
(5) Dividend payable: (5) Advances from:
fro m:
a) Cash dividend a. Shareholders
b) Property dividend b. Officers
c) Dividend payable (silent as to kind) c. Subsidiary
(6) Deposits from customers d. Associates (affiliates)
(a ffiliates)
(7) Advances from:
from :
(a) Customers
(b) Suppliers
(c) Employees
(8) Bank overdraft (different bank and silent)
(9) Deposits from customer
(10) Liabilities
Liabilities payable on demand
(11) Provisions:
Provisions:
(a) Warranty payable
(b) Premiums payable
(c) Lawsuit payable
(12) Currently
Currently maturing originally long term debt
Currently maturing originally long term debt.

As a general rule, presented as current liability . Exception to the rule if any of the below-mentioned is met,
the liability is presented as non current liability :
1. Refinance (roll over) on or before year end (December 31).

2. The company has the discretion to refinance in long term. Non current liability
3. Grace period was provided on or before year end (December 31).
Topic 02: Provision & Contingencies

1. What is the amount of expense from lawsuit for the year?
2. What is the lawsuit payable at year end?
3. What is the amount of premium expense for the year?
4. What is the premium payable at year end?
5. What is the amount warranty expense for the year?
6. What is the warranty payable at year end?
PROVISIONS CONTINGENCIES
• Liability with uncertain time and/or amount • Liability with uncertain time and/or amount
• Recorded as liability V.S. • Not recorded as liability
• (a) measureable but not probable
• Both measureable and probable (or higher) (b) probable but not measureable
(c) not measureable and not probable
• If possible – disclosure to F/S is required
• No disclosure to F/S is required • If remote – no disclosure to F/S is required
Virtually certain – Above 90% chance

ch ance
Probable – Above 50% chance
Possible – 50% and below chance
Remote – 5% and below chance

120) What is the amount of expense from lawsuit for the year?
121) What is the lawsuit payable at year end?
Answer: Measurement of liability and expense:

expense:
FIRST PRIORITY – Actual

– Actual amount
amou nt, if known before the F/S issuance date.
SECOND PRIORITY – Best estimate made by the company (company’s lawyer).

lawyer).
THIRD PRIORITY –
– Midpoint if a range of estimate is given [(highest point + lowest point) / 2].
FOURTH PRIORITY –
– Expected value, if multiple outcomes is given [total of (outcome x probability %)].
(Outcome 1 x Probability %) = X
Expected value X
WITH INSURANCE COVER LIABILITY – Best estimate made by the company (company’s lawyer).
Rule for the liability: Rule for the expense:

Rule 1: The liability is not affected (as is). Rule 1: If no deductible clause, expense is ZERO
No offsetting of lawsuit liability and Rule 2: If with

thedeductible
deductibleclause,
clauseexpense
. is equal to
receivable (claims from) insurance
company. Best answer is to offset the expense from lawsuit and
the gains from insurance claims. Regardless
Regardless,, the
deductible clause will be paid and should be
expensed.
122) What is the premium expense for the year?

123) What is the premium payable at year end?
Answer:
Step 1: Compute for the premium expense, in units.
Total number of coupons (proof of purchase, bottle caps, etc.) X

Times: Percentag
Percentage
e of expected redemption x%
Divide: Number of coupons required to redeem one premium X
Premium expense, in units (premiums to be distributed for the current year’s sale) X
Step 2: Compute the net cost of each premium.
Cost of each premium X

Add: Cost to distribute
dist ribute the pr
premiums
emiums X
Less: Cash demand from customers redeeming the premiums X
Net cost of each premium X
Step 3: Compute for the premiums distributed, in units.
Alternative 1 Alternative 2
Divide: Actual
Number
Number number of coupons
of coupons redeemed
redfor
required eemed
1 prem. X
X Add: Beginning purchased
Premiums inventory
p urchasedof premiums X
X
Number of premiums distributed X Less: Ending inventory of premiums X
Premiums distributed
distributed X
Step 4: Compute for the premium expense and premium payable by preparing the table below:
(Step 2)
In units Net cost In Peso
Beginning premium payable
Beginning X X X
Add: Premium expense
expe nse (Step 1) X X X
Less: Premium distributed (Step 3) X X X
Ending premiums payable X X X
124) What is the warranty expense for the year?

125) What is the warranty payable at year end?
Answer:
Step 1: Compute the amount of warranty expense.
Total sales during the period X

Times: Total expected warranty cost during the warranty period x%
Warranty expense X
Step 2: Compute the amount of warranty payable.
Beginning warranty payable X

Add: Warranty expense
exp ense (Step 1) X
Less: Actual warranty expenditure during the year X
Ending warranty payable X
Alternative way:
w ay:
Cumulative sales (from the very beginning up to date of question) X

Times: Total expected warranty cost during the warranty period x%
Cumulative
Cumulativ e warranty expense X
Less: Cumulative actual warranty expenditure (from beginning to question date) X
Ending warranty payable X
Topic 03: Bonds Payable

1. What is the initial measurement of bonds payable?
2. What is the total cash proceeds from issuance of bonds?

3.
4. What is the
What is the interest
subsequent measurement
expense of bonds payable (carrying amount)?
for the year?
5. What is the interest payable for the year?
6. What is the gain or loss from retirement of the bonds?
126) What is the initial measurement (initial carrying amount) of bonds payable?
Answer:
Fair value of the bonds (issue price, selling price) of the bonds X
Less: Transaction cost X
Initial measureme
measurement
nt of bonds payable X
Alternative way:
w ay:
Use effective interest rate.
PVF of 1 if the bond payable is term bond.

PVF of Annuity if the bond payable is serial
Principal amount x PVF = X

Nominal interest x PVF = X
Initial measureme
measurement
nt of the bonds X
Use effective interest rate.

PVF of Annuity if the bond payable is term bond.
PVF of 1 if the bond payable is serial bond.
127) What is the net cash proceeds from issuance of bonds?
Answer:
Step 1: Compute the interest receivable (accrued interest) sold.
Principal amount of the bonds X

Times: Number of months from the last interest date to issuance date / 12 months x/12
Interest receivable sold X
Step 2: Compute the net proceeds.
Fair value of the bonds (issue price) X

Add: Interest receivable
rece ivable sold (Step 1) X
Less: Transaction cost X
Net cash proceeds from issuance of bonds X
128) What is the subsequent measurement of the bonds payable (carrying amount)?
Answer: Bonds payable is subsequently measured at amortized cost using the effective amortization method.
Date Effective interest Nominal interest Amortization Carrying amount

Issue date -- -- -- Initial measureme
measurement
nt
Year end (CA beg x ER) (Face x NR) (EI – NI) CA, beg ( + or – Amor.)
Alternative way:
w ay:
Initial measurement
measurem ent X
Times: 1 + effective interest x%
Less: Nominal interest X
Less: Principal payment (only if serial bonds) X
129) What is the interest expense for the year?
Answer:
Carrying amount, beginning X

Times: Effective interest rate (original) X
Interest expense for the year X
Alternative way:
w ay:
Nominal interest X
Add: Amortization of discount
d iscount X
Less: Amortization of premium X
Interest expense X
The carrying amount should be updated when there are: (1) Principal payment made during the year; and (2)
Interest payment during the year.
130) What is the interest payable at year end?
Answer:
Principal amount X
Times: Nominal interest x%
Times: Number of months from last interest date up until December 31 X / 12mo.
Interest payable X
131) What is the gain or loss on retirement of the bonds payable?
Answer: The gain or loss happens only when the bonds were retired earlier than its original maturity date.
Step 1: Compute the amount of interest payment included in the total retirement price.
Face amount of the retired bonds (be sensitive if total or partial retirement) X
Times: Number of months unpaid (last interest date up to retirement date) X
Interest payment included in the retirement price X
Step 2: Calculate the retirement price of the bonds (using residual method).
Total retirement price X

Less: Interest payment (retirement price of interest, Step-1) X
Retirement price of the bonds X
Step 3: Get the gain or loss on bond retirement.
Carrying amount at date of retirement (refer to Question 14 in getting the CA) X

Less: Retirement price allocated to the bonds payable (Step 2) X
Gain or loss on retirement X
STRAIGHT LINE METHOD OF AMORTIZATION
The following questions should be answered in a different procedures for this method:
(a) Subsequent measurement of the bonds payable.

(b) Interest expense for the year.
(c) Gain or loss on retirement of the bonds.
(a) Subsequent measurement of the bonds payable
Answer:
Step 1: Compute the total premium or discount.
Initial measurement
measurem ent (refer to Question 12) X
Less: Principal amount of bonds X
Total premium (discount) X
Step 2: Compute the annual amortization of premium or discount
Total premium or discount (Step 1) X

Divide: Term of the bonds X
Annual amortization
am ortization of premiu
premiumm or discoun
discountt X
Step 3: Compute the subsequent measurement of the bonds payable (carrying amount).
Initial measurement
Add: Amortization of discount
d iscount X
(b) Interest expense for the year
Nominal interest X
Add: d iscount (refer to a-Step 2 )
Amortization of discount X
Interest expense X
(c) Gain or loss on retirement of bonds.
Initial measurement
Add: Cumulative amortization
am ortization of discount
d iscount X
Less: Cumulative amortization of premium X
Carrying amount, date of retirement X
Less: Retirement price of the bonds payable X
Gain or loss on retirement of bonds X
Topic 04: Compound Financial Instrument

1. What is the amount of the issue price of a compound instrument assigned to equity?
2. What is the amount credited to share premium when the share warrants were exercised?
3. What is the amount credited to share premium when the conversion options were exercised?
132) What is the interest payable at year end?
Answer: The total selling price (issue price) of a compound financial instrument is composed of selling price of
the bonds payable and selling price of the equity instrument (share warrants or conversion option). Issue price
should be allocated using residual method.
From the issue price, first to allocate is the value assigned to the bonds. The fair value of the bonds is the
amount allocated to the bonds and whatever is the residual, it will be allocated to the equity instrument See
illustration below:
Total issue price of

Compound Instrument
Bonds + SW/CO
Allocated to the bonds Allocated to the

th e equity
Equal to, Fair value of bonds Equal to, Residual amount
Bonds payable Equity instrument

normall y (topic 03)
Accounted normally No subsequent problem
Will remain the same at year end
Total issue price of the compound instrument (given in the problem) X

Less: Fair value of the bonds payable (refer to question 12 ) X
Value assigned to equity instrument
instru ment (share warrants or c
conversion
onversion option
option)) X
133) What is the amount credited to share premium when the share warrants were exercised?
Answer: The share warrants is an instrument giving the holder a privilege to purchase a share a fixed price.
Step 1: Compute the total exercise price (purchase price of shares using the warrants).
Exercise price of shares using each warrants (assume one is to one, if silent) X
Times: Number of share warrants exercised X
Cash received from selling shares X
Step 2: Compute the total consideration received from selling the shares.
Cash received from selling shares (Step 1) X

Add: Value of the equity
equi ty instrument (share warrants)
warra nts) used/surrendered ( refer to question 18 )
used/sur rendered (refer X
Total consideration received X
Step 3: Compute the share premium arise from exercise of share warrants.
Total consideration received (Step 2) X

Less: Total par value of shares issue (par value per share x number of shares issued) X
Share premium – ordinary shares X
Journal Entry, exercise of share warrants:

Dr. Cash (Step 1) X
Dr. Share premium – Share warrants (refer to question 18) X
Cr. Share capital (total par value) X
Cr. Share premium – ordinary shares (Step 3) X
134) What is the amount credited to share premium when the conversion options were exercised?
Answer: The conversion option is a right given to the holder to convert their right to collect cash to right to
receive shares of the company.
Step 1: Compute the carrying amount (amortized cost) of the bonds payable at the time of conversion.
Initial measurement
measurem ent of the bonds payable (FV of bonds) X
Times: 1 + effective interest rate x%
Less: Nominal interest X
Carrying amount of the bonds at conversion date X
Step 2: Compute the total consideration received from converting the bonds.
Carrying amount of the bonds at conversion date (which will be forgiven ! ) X
Add: Value assigned to the conversion
conver sion option (refer
(re fer to question
questio n 18) X
Total consideration X
Step 3: Compute the share premium from conversion (excess

(excess of consideration received from given up).
Total consideration X
Less: Total par value of shares issue (par value per share x number
numb er of shares issued) X
Share premium – ordinary shares X
Journal Entry, exercise of conversion option:

Dr. Bonds payable (face amount) X
Dr. Share premium – Share warrants (refer to question 18) X
Dr. Premium on bonds payable, if any (CA – face) X
Cr. Share premium – ordinary shares (Step 3) X
Cr. Discount on bonds payable, if any (CA – face) X
Topic 05: Notes Payable (NP)

9. What is the initial measurement of notes payable?
10. What is the subsequent measurement of notes receivable (carrying amount at year end)?
11. What is the interest expense for the year?
12. What is the interest payable as of year end?
13. What is the current portion of the notes payable?
14. What is the non current portion of the notes payable?
135) What is the initial measurement of notes payable?
Answer: The fair value of the notes minus any transaction cost. Usually, no transaction cost is incurred from
issuing a promissory note, so it is just the fair value. We have two (2) methods in getting the fair value, which
will be used will depend on the information given in the problem.
Method 1.
Fair value of the consideration received (cash, non-cash asset, service) X

Less: Down payment X
Fair value of the notes payable X
Method 2.
Type of note Fair value at date of recognition
4. Interest Bearing Face Amount = Fair value
Principal amount X
5. Non Interest Bearing Times: PVF X
Fair value X
Principal amount x PVF X
6. Interest Bearing With Unrealistic Nominal Add: Nominal interest x PVF X
Fair value X
136) What is the subsequent measurement of notes payable (carrying amount at year end)?
Answer:
4. Interest Bearing Face Amount = Carrying amount at year end

5. Non Interest Bearing

Less: Nominal interest (Face x NR) X
Unrealistic Nominal
137) What is the amount of interest expense for the year?
Answer:
Face Amount X
Interest expense X

5. Non Interest Bearing Times: Effective Rate x%
Interest Income X

Unrealistic Nominal
Interest expense X
138) What is the amount of interest payable as of the year end?
Answer:
Type of note Interest Receivable
Face Amount X
Interest payable X
5. Non Interest Bearing None
Face Amount X
Times: Nominal Rate x%
Unrealistic Nominal
Interest payable X
139) What is the current portion of the notes payable?

140) What is the non current portion of the note payable?
Answer: If the note is a term note (principal is payable one time), the whole NP will be classified as current if the
principal is payable within one year. If the principal will be paid beyond one year, the whole NP will be classified as
non current asset.
If the note is a serial note, it is both current and non current and can be computed as follows:
Type Current portion Non current portion
Payment of face and interest w/ one year X Carrying amount of NP at year end X
Interest
Less: Nominal interest for one year (X) Less: Current
Cu rrent portion of notes receivable (X)
Bearing
Current portion of notes payable X Non current portion of NP X
Carrying amount of NP at year X

Non Carrying amount of NP at year end X
Interest Less: Non current portion of notes receivable (X)
Less: Principal payment next year (X)
Bearing Current portion of NP X
Interest Carrying amount of NP at year X

Bearing Carrying amount of NP at year end X Times: 1 + Effective rate x%
With Less: Non current portion of notes receivable (X) Less: Nominal interest (X)
Unrealistic Current portion of NP X Less: Principal payment next year (X)
Nominal Non current portion of NR X
Summary of rules for notes payable.
Initial Measurement Subsequent Measurement Interest Interest Non Current Current

Classification
(Fair Value) (Amortized Cost) Expense Payable Portion Portion
Face Amount
Face Amount
(1) x Nominal Rate Principal Payable beyond Principal payable
Interest Bearing Face Amount Face Amount x Nominal Rate x Months unpaid / 12mo. 12 months within 12 months.
Interest Income
Interest Income
Initial Measurement
Carrying Amount, End
Multiply: 1+Effective Rate Carrying Amount, BEG Carrying Amount, End
(2) Multiply: 1+Effective Rate
PV of Principal Less: Principal Payment x Effective Rate None Less: NC Portion
Non Interest Bearing Less: Principal Payment
Amortized Cost Interest Income Current Portion
NC Portion
Initial Measurement Carrying Amount, End

(3) Face Amount
PV of Principal Multiply: 1+Effective Rate Carrying Amount, BEG Multiply: 1+Effective Rate Carrying Amount, End
Interest Bearing x Nominal Rate
Add: PV of Nominal Interest Less: Nominal Interest x Effective Rate Less: Nominal Interest Less: NC Portion
with Unrealistic x Months unpaid / 12mo.
Fair Value Less: Principal Payment Interest Income Less: Principal Payment Current Portion
Nominal Rate Interest Income
Amortized Cost NC Portion
            

Topic 06: Debt Restructuring

Restructurin g
1. What is the gain or loss from extinguishment of debt through asset swap?
2. What is the gain or loss from extinguishment of debt through equity swap?
3. What is the share premium arise from equity swap transaction?
transaction?
4. What is the gain or loss from extinguishment of debt through modification of terms?
5. What is the new interest expense after modification of terms?
141) What is the gain or loss from extinguishment of debt through asset swap?
Answer: Result of settlement of liability in exchange for non-cash asset. There are two possible answer here
depend on the acceptable framework used.
IFRS based.
Carrying amount of the liability (bonds or notes + interest payable if any) X

Less: Carrying amount of the non-cash asset (inventory, PPE, intangible, etc.) X
Gain or loss on extinguishment
extinguishm ent of liability X
U.S. GAAP based.
Assumption 1: The non-cash asset

ass et is sold to
t o other party
part y at fair value.
va lue.
Fair value (assumed selling price) of non-cash asset used to settle debt X
Less: Carrying amount of the non-cash asset (inventory, PPE, intangible, etc.) X
Gain or loss disposal of non-cash asset X
Assumption 2: The proceeds

proceed s from assumed
ass umed sale will
w ill be used to
t o settle the debt.
d ebt.
Carrying amount of the liability (bonds or notes + interest payable if any) X

Less: Proceeds from assumed sale (fair value) of the non-cash asset X
extinguishm ent of liability X
142) What is the gain or loss from extinguishment of debt through equity swap?
143) What is the share premium arise from equity swap transaction?
Answer: The formula to compute the gain or loss and share premium will depend on the given information. Use
the level of priority below:
Priority Amount of gain or loss on extinguishment

extinguishme nt Share premium arise from equity swap
Carrying amount of debts X Fair value of shares issued to settle X

First Less: Fair value of shares issued to settle X Less: Par value of shares issued X
extinguishm ent X Share premium X
Carrying amount of debts X Fair value of the debt (ref. ques. 18) X
Second Less: Fair value of the debt (ref. ques.18) X Less: Par value of shares issued X
Carrying amount of debts X Carrying amount of debts X

Third Less: Carrying amount of debts X Less: Par value of shares issued X
Journal Entry, exercise of conversion option:

Dr. Bonds/No
Bonds/Notes
tes payable (face amount) X
Dr. Premium on bonds/notes payable, if any (CA – face) X
Dr. Gain on extinguishment, if any (refer to question 28) X
Cr. Share premium (refer to question 29) X
Cr. Discount on bonds/notes payable, if any (CA – face) X
Cr. Loss on extinguishment, if any (refer to question 28) X
144) What is the gain or loss from extinguishment of through modification of terms?
Answer: If the modification is substantial – the old liability is extinguish and new liability arises. If this is the
case, the company should recognize gain or loss on extinguishment.
However, is the modification is not substantial – the old liability is not extinguish but will remain. If this is the
case, no gain or loss on modification is recognize, but the company should record gain or loss on modification
(not extinguishment). See illustration below:
Modification of Debt
Substantial Modification Not Substantial Modification

Change in liability > 10% Change in liability ! 10%
Do not recognized gain or

loss on extinguishment
Recognized gain or loss
extinguishment of debt
Instead, recognized gain or

loss on modification
Step 1: Compute the total amount of liability to be extinguish.
Carrying amount of the main debt (bonds payable or notes payable) X

Add: Interest payable,
pay able, if any X
Total amount of liability to extinguish X
Step 2: Compute the present value of the new liability.
New principal amount x PVF = X

Add: New nominal interest,
inte rest, if any x PVF = X
PV of new liability X
Use the original effective interest rate (EIR on the

time the original debt arises). If not given, the
original nominal rate is also the original effective.
Step 3: Compute gain or loss on extinguishment (>10%) or modification ( !10%).
Total amount of liability to extinguish (old liability, Step 1) X

Less: PV of new liability (Step 2) X
extinguishm ent or modification X
145) What is the new interest expense after the modification of terms?
Answer:
PV of new liability (refer to question 30, Step 2) X

Times: Original effective interest rate X
Interest expense X

Topic 07: Contributed Capital

1. What is the balance of share capital at year end?
2. What is the balance of share premium at year end?
3. What is the balance of retained earnings at year end?
4. What is the number of shares outstanding?
146) What is the balance of share capital at year end?

147) What is the balance of share premium at year end?
148) What is the balance of retained earnings at year end?
Answer: The usual question in this topic-07 is the ending balance of equity accounts. To answer these
question, one must know how to journalize share transactions and subsequently post in a ledger (T-account or
column) and compute the ending balance.

Since posting and footing is very easy, this topic will focus on journalizing share transaction. The following
transaction affects the equity accounts of the company:
a) Authorization
b) Subscription
c) Issuance of shares
d) Reacquisition of shares
e) Reissuance of shares
f) Retirement of shares
g) Donation from shareholders
h) Conversion of preference shares
i) Share split
j) Conversion of convertible bonds (discussed in Topic 04: Compound Instrument)
k) Exercise of share warrants attached on a bonds (discussed in Topic 04: Compound Instrument)
l) Exercise of share options (discussed in Topic 09: Share Based Payments)
(a) Authorization.
There are two methods in accounting for Authorization transaction:
(1) Memo Entry Method – The most common method in accounting for authorization. In method, one
principal account will be used namely: “Share Capital” and no contra account is made. No entry is
made on Authorization transaction.
Journal Entry, Authorization: Journal Entry, Issuance:

None Dr. Cash 100
Cr. Share capital 100
(2) Journal Entry Method – In this method, one principal account and one contra-account is made. The
principal account “Authorized Share Capital” will remain the same all throughout, while the contra-
account “Unissued Share Capital” will decrease each time there is an issuance of share.
Journal Entry, Authorization:
Dr. Unissued Share Capital (authorized number of shares x par value per share) 1,000
Cr. Authorized Share Capital (authorized number of shares x par value per share) 1,000
Journal Entry, Issuance:
Dr. Cash 100

Cr. Unissued Share Capital (number of shares issued x par value per share) 100
Memo Entry Method Journal Entry Method
Principal Account : Share Capital 100 Principal Account : Authorized Share Cap 1,000
Contra Account : -- 0 Contra Account : Unissued Share Cap (900)
Carrying Amount 100 Carrying Amount 100
(b) Subscription.
It is not possible to issue shares if the full consideration is not yet received. Since there is a limited number of
shares that the company can sold (authorized shares), a potential investor who do not yet have the means to pay
the full consideration can “reserve” the shares.
Journal Entry, Subscription:
Dr. Subscription Receivable (selling price – downpayment) X

Dr. Cash (downpaymen
(downpayment) t) X
Cr. Subscribed Share Capital (par value) X
Cr. Share premium – Excess of par (selling price – par value of shares subscribed)
subscri bed) X
Journal Entry, Subsequent Collection:

Dr. Cash (selling price – down payment) X
Cr. Subscription receivable (selling price – down payment)
Subscription X
Journal Entry, Subsequent Collection:

Dr. Subscribed Share Capital X
Cr. Share Capital X
Journal Entry, Cancellation:
Dr. Subscribed Share Capital (selling price – par value) X

Dr. Share Premium – Excess (par value) X
Cr. Subscription Receivable (selling price – down payment) X
Cr. Cash / Accounts payable (if refundable) X
Cr. Share Premium – Forfeited Subscription (if not refundable) X
“Subscription Receivable” account is:

a) Contra-Equity Account – if collectible beyond 12 months (also if silent)
b) Current Asset Account – if collectible within 12 months
(c) Issuance.
C.1 Assigning Value to the Consideration Received – If the investor can pay in full immediately there is no
need to subscribed for the shares first, it can be issued already. Shares can be sold in exchange for the
following:
a) Cash
b) Non-cash
c) Services
d) Extinguishment of debt (Discussed in Topic 06: Debt Restructurin
Restructuringg )
Step 1: Determine the value of the consideration received.
Consideration received Value assigned

a) Cash Face amount
1ST Priority – Fair value of the non cash asset received.

b) Non-cash 2ND Priority – Fair value of shares issued.
3RD Priority – Par value of shares issued.
1ST Priority – Fair value of the service received.

c) Service 2ND Priority – Fair value of shares issued.
3RD Priority – Par value of shares issued.
Step 2: Compute for the amount of Share Premium – Excess of Par.
Value of the consideratio

considerationn received X
Less: Par value of shares issued X
Share Premium – Excess of Par X
Journal Entry, Issuance:
Dr. Cash / Non-cash / Service Expense (value assigned) X

Cr. Share Capital X
Cr. Share Premium – Excess of Par X
C.2 Share Issuance Cost – Cost incurred in connection with selling or issuing of shares (e.g., commission to
brokers, finders fee, cost of printing share certificates, registrations, filing fees with SEC, legal fees, CPA fees,
underwriting fees, documentary stamp tax, etc.)
Share Issuance Cost
Indirectly Related Direct Related
Deducted to:
Treated as Expense Share Premium – Excess of Par
If no SP – Excess
Deduct to:
Retained Earnings
Journal Entry, Indirect: Journal Entry, Direct:

Dr. Expense X Dr. SP – Excess of Par X
Cr. Cash X Cr. Cash X
or
Dr. Retained Earnings X
Cr. Cash X
C.3 Lump-sum Issuance – Issuance of multiple class of shares (i.e., ordinary and preference) or two different
kinds of investment (i.e., shares and bonds) in exchange for a single consideration.
Ordinary + Preference
Shares
Investor The Company
Cash
Allocate to different
differe nt class
using:
1. Relat
Relativ
ive
e FV meth
method
od
2. Resid
Residuauall Valu
Value
e me
meth
thod
od
Fair value of all class of shares/debt Not all fair value of instrument issued is
issued is available: available:
Use Relative FV Method Use Residual Value Method

1. Relative FV Method
Step 1: Compute the total fair value of all instrument issued.

Number of ordinary shares issue x Fair value per share = Total fair value of O.S.
Number of preference shares issue x Fair value per share = Total fair value of P.S.
Total fair value of all instrument = Total fair value of all shares
Step 2: Allocate the consideration

c onsideration received
r eceived (usually
(usua lly cash).
Total fair value of O.S.

Total issue price (cash proceeds) x = Amount allocated to O.S.
Total fair value of all shares
Total fair value of P.S.

Total issue price (cash proceeds) x = Amount allocated to P.S.
Total fair value of all shares
2. Residual Value Method
Total issue price (cash proceeds) X

Less: Fair value of shares with available fair value (amount allocated to it also) X
Amount allocated
alloc ated to shares with no availa
available
ble fair value (the residual) X
(d) Reacquisition.
Reacquiring your own shares that was previously issued. Shares reacquired is referred as treasury shares (TS).
Treasury shares is a contra-equity account (normal balance is debit).
The measurement of the treasury shares is cost, the value of consideration given up to acquire the treasury
shares. The cost is:
a) Cash – face amount

b) Non cash – carrying amount of the non cash.
Journal Entry, Reacquisition:
Dr. Treasury Shares (cash = face, non-cash = CA) X

Cr. Cash / Non-cash (at CA) X
(e) Reissuance.
Selling the same share for the second time is called reissuance. Always be careful in defining the transaction
whether issuance (selling shares for the first time, selling unissued shares) or reissuance (selling shares from
treasury shares). There are two (2) issue here:
a) Value of treasury shares sold – The value of the treasury shares is measured at cost. The problem
arises when there is a multiple reacquisition of shares with different cost. Follow the following level of
priority when assigning value to the treasury shares:
1. Specific identification – the problem will state from what reacquisition the treasury shares will be
sold.
2. First in, first out – if the problem is silent as to method in assigning value, FIFO should be used. The
treasury shares sold will be coming from the earliest acquisition.
3. Weighted average – the value of all treasury shares is equal. The equal value of each shares can be
computed by:
Treasury shares available for sale in Peso
= Value of EACH treasury shares
Treasury shares available for sale in Units
b) Gain or loss from sale of treasury shares – There will a gain if the treasury shares is sold above its
value (refer to first issue for the value). While a loss if sold below its value (it can be sold below par
value). After debiting the consideration received and crediting the value of treasury shares, it is down to
the gain or loss:
Selling price (consideration

(considerati on received) of treasury shares sold X
Less: Value of treasury shares sold X
Gain (loss) from issuance X
If GAIN, If LOSS,
Credited to: Debited to:
Share Premium – Treasury Shares First – Share Premium – Treasury Shares, if any
Second – Retained Earnings
If GAIN, If GAIN,
Dr. Cash (at selling price) X Dr. Cash (at selling price) X
Cr. Treasury Shares X Dr. SP – Treasury Shares X
Cr. SP – Treasury Shares X Dr. Retained Earnings X
Cr. Treasury Shares X
(f) Retirement.
The corporation code requires the restriction (appropriation) of retained earnings equal to the amount of treasury
shares. Companies can retire their treasury shares so they can declare dividends without restriction.
One disadvantage of retirement though is that the company will incur new share issuance cost when issuing
unissued shares instead of issuing treasury shares. To journalize, we follow four (4) steps:
Step 1: Derecognize the Share Capital.
Number of shares retired X

Times: Par value of each shares X
Share Capital to derecognize (debited) X
Step 2: Derecognize the Share Premium – Excess of Par (SP from original issuance).
Total Share Premium Excess of Par X

Divide: Total Shares Issued X
Share Premium Excess Per Share X
Times: Number of shares retired X
Share Premium – Excess of Par to derecognized (debited) X
Step 3: Derecognize the Treasury Shares.
Number of treasury shares reacquired then retired X

Times: Cost per treasury shares X
Treasury shares to derecognize (credited) X
Step 4: Recognized the gain or loss from retirement.
Par value of shares retired X

Add: Share premium – excess of shares retired
retir ed X
Original selling price (consideration
(considerati on received from first sale) X
Less: Cost of treasury shares (cost to reacquire and retire) X
Gain or loss from retirement X
Gain or loss from retirement

If GAIN, If GAIN,
Credited to: Debited to:

Share Premium – Retirement First – Share Premium – Treasury Shares, if any
Second – Retained Earnings
Dr. Share Capital X Dr. Share Capital X

Dr. Share Premium – Excess X Dr. Share Premium – Excess X
Cr. Treasury Shares X Dr. Share Premium – Treasury X
Cr. Share Premium – Retirement X Dr. Retained Earnings X

Cr. Treasury Shares X
(g) Donation.
The company received either: (1) cash; (2) non-cash; (3) service or (4) company’s own shares for free. The The
journal entry from receiving
receiv ing the following donation inc lude a credit to:
d onation would include
a) Other income – if donation is coming from a non shareholder.

b) Share Premium – Donated Capital (DC) – if donation is coming from a shareholder.
(1) Cash
Dr. Cash (face amount) X

Cr. Share Premium – DC X
(2) Non cash
Dr. Non cash asset (at FV) X

(3) Service
Dr. Service Expense (at FV) X

(4) Own Share
Upon receiving the donation:

No journal entry (memo only)
Upon reissuing the donated shares:

Dr. Cash (selling price) X
(h) Conversion of preference shares.
Ordinary shares Preference shares

(a) Residual income (a) Fixed income
(b) Least priority during liquidation (b) Priority during liquidation
(c) Can be issued with no par value (c) Par value is required
(d) With voting rights (d) Without voting rights
(e) No other features (e) Other features includes:
1. Can be convertible into ordinary shares
2. Can be redeemable preference shares
3. Share warrants can be attached
If the preference share is converted into ordinary shares, the preference returned will be retired , thus the step-
by-step procedure
procedur e for retirement will apply. Then the ordinary shares will be issued, the issuance rule will apply.
Step 1: Derecognize the Preference Share (PS) – Share Capital.
Number of PS retired X
Times: Par value of each shares X

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Batangas CPA Review Center

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Topic 1: Cash and Cash Equivalents

1) What is the amount of cash and cash equivalents?

Answer: One must know which items (trial balance

Cash and Cash Equivalents

Cash Cash Equivalents

a. Customer’s postdated check Excluded from Cash

Checks drawn by the company:

It is assumed that the journal entry

Assumed entry when

How much is Cash & CE?

Legally restricted – Excluded from cash

Silent – Included as Cash

Legally restricted – Excluded from cash

5. Deposit in Not legally restricted – Included as Cash

Not legally restricted – Included as Cash

6. Deposit in Excluded from cash

Different Bank – Excluded in the computation of cash

7. Bank Same Bank – Included as Cash (included in the computation as a deduction )

Silent – Excluded in the computation of cash (different bank)

1. Cash fund for operation:

2. Cash fund not for operation:

d. Plant acquisition fund

Cash Equivalents (CE) – highly liquid investments.

If not classified as cash equivalents, the proper classification would be:

Three-month rule test:

Usual distractions (items that are NOT considered as cash)

Topic 2: Petty Cash Fund

Transaction Journal Entry Amount

1. Establishment Dr. Petty Cash Fund XX Equal to imprest balance

Dr. Various Expenses XX Equal to amount of vouchers

Dr. Various Expenses XX Equal to amount of vouchers

3) What is the amount of shortage or overage of petty cash fund?

Less: Cash included

Topic 3: Bank Reconciliation

5) What is the adjusted balance of cash in bank?

Per book Per bank

Less: Debit memos Less: Outstanding checks (X)

Add: Errors Add: Errors

Less: Errors Less: Errors

Per book Per bank

Less: Debit memos Less: Outstanding checks (X)

Add: Errors Add: Errors

Less: Errors Less: Errors

7) What is the amount of the missing reconciling item?

Per book Per bank

Less: Debit memos Less: Outstanding checks SQUEEZE

Add: Errors Add: Errors

Less: Errors Less: Errors

Unadjusted receipt per book X X Unadjusted disbursement per book

Unadjusted disbursement per bank X X Unadjusted receipt per bank

Topic 4: Proof of Cash

How to proof of cash the bank balance?

How to proof of cash the book balance?

Topic 5: Trade Receivable and Allowances

8) What is the balance of accounts receivable at year end?

Answer: If what is given is the opening

Answer: If what is given is the unadjusted closing balance of accounts receivable.

1. Using Percentage Of Sales Method.

First, solve for the allowance for doubtful accounts as follows:

Accounts receivable ending balance

Allowance for doubtful

2. Using Percentage Of Sales Method.