TOPIC 3: Accounting Policies, Estimates and Errors

Lecture 01 - Accounting Policies, Estimates, and Errors (PAS 8)

General jutsu:

ACCOUNTING POLICIES - are the specific principles, bases, conventions, rules and practices applied by an entity in preparing
and presenting financial statements.

Change in accounting policy

Once selected, accounting policies must be applied consistently for similar transactions and events. A change in accounting
policy shall be made only when:
a. Required by an accounting standard.
b. The change will result in more relevant and faithfully represented information about the financial position, financial
performance and cash flows of the entity.

Examples of change in accounting policy

a. Change in the method of inventory pricing from the FIFO to weighted average method.
b. Change in the method of accounting for long-term construction contract from cost recovery method to percentage of
completion method.
c. The initial adoption of policy to carry assets at revalued amount is a change in accounting policy to be dealt with as
revaluation.
d. Change from cost model to fair value model in measuring investment property.
e. Change to a new policy resulting from the requirement of a new PFRS.

Reporting a change in accounting policy

A change in accounting policy required by a standard or an interpretation shall be applied in accordance with the transitional
provisions therein. If the standard or interpretation contains no transitional provisions or if an accounting policy is changed
voluntarily, the change shall be applied retrospectively or retroactively.
Retrospective application - means that any resulting adjustment from the change in accounting policy shall be reported as an
adjustment to the opening balance of retained earnings. The amount of the adjustment is determined as of the beginning of
the year of change.
Example: When adjusting a decrease of inventory due to change in inventory valuation method:
Retained earnings PHP 250,000.00
Inventory - January 1 PHP 250,000.00

ACCOUNTING ESTIMATES - a change in this is a normal recurring correction or adjustment of an asset or liability which is the
natural result of the use of an estimate. This may need revision if changes occur regarding the circumstances on which the
estimate was based or as a result of new information, more experience or subsequent development.
 Examples of accounting estimates
a. Doubtful accounts
b. Inventory obsolescence
c. Useful life, residual value, and expected pattern of consumption of benefit of depreciable asset
d. Warranty costs
e. Fair values of assets and liabilities

Reporting changes in accounting estimate

The effect of a change in accounting estimate shall be recognized currently and prospectively by including it in the income or
loss of:
a. The period of change if the change affects that period only.
b. The period of change and future periods if the change affects both.

A change in an accounting estimate shall not be accounted for by restating amounts reported in the financial statements of
prior periods. Changes in accounting estimates are to be handled currently and prospectively, if necessary.

Prospective recognition off the effect of a change in accounting estimate means that the change is applied to transactions,
other events and conditions from the date of change in estimate .
Example: When changing a depreciable asset's depreciation because the residual value and the useful life estimate is
changed:
The procedure is not to correct past depreciation, but to consider its carrying amount. The carrying amount shall be used as
the new starting cost to calculate the new annual depreciation with the remaining useful life and the new residual value.

PRIOR PERIOD ERRORS - ommissions and misstatements in the financial statements for one or more periods arising from a
failure to use or misuse of reliable information. Errors may occur as a result of mathematical mistakes, mistakes in applying
accounting policies, misinterpretation of facts, fraud, or oversight.

Treating prior period errors

Prior period errors shall be corrected retrospectively by adjusting the opening balances of retained earnings and affected
assets and liabilities .

If comparative statements are presented, the financial statements of the prior period shall be restated so as to reflect the
retroactive application of the prior period errors as a retrospective statement.

Banko Construction Company has used the cost recovery method of accounting since it began operations in 2016. In 2019, for
PROBLEM
justifiable reasons, management decided to adopt the percentage of completion method.

The following schedule, reporting income for the past 3 years has been prepared by the entity.
 2016 2017 2018
Total revenue from completed contracts PHP 25,000,000.00 PHP 42,000,000.00 PHP 40,000,000.00
Less: Cost of completed contracts PHP (18,000,000.00) PHP (29,000,000.00) PHP (28,000,000.00)
Income from operations PHP 7,000,000.00 PHP 13,000,000.00 PHP 12,000,000.00
Casualty loss PHP - PHP - PHP (2,000,000.00)
Income before tax PHP 7,000,000.00 PHP 13,000,000.00 PHP 10,000,000.00

Analysis of the accounting records disclosed the following income by contracts, earned in the years 2016-2018 using the
percentage of completion method.

2016 2017 2018

Contract 1 PHP 7,000,000.00
Contract 2 PHP 5,000,000.00 PHP 8,000,000.00
Contract 3 PHP 3,000,000.00 PHP 7,000,000.00 PHP 2,000,000.00
Contract 4 PHP 1,000,000.00 PHP 6,000,000.00
Contract 5 PHP (1,000,000.00)

What pretax amount should be reported as the cumulative effect of change in accounting policy in the statement of retained
REQUIRED
earnings for 2019?

Percentage of completion income per year

2016 (7,000,000 + 5,000,000 + 3,000,000) PHP 15,000,000.00
2017 (8,000,000 + 7,000,000 + 1,000,000) PHP 16,000,000.00
2018 (2,000,000 + 6,000,000 - 1,000,000) PHP 7,000,000.00 PHP 38,000,000.00
Less: Income from operations, cost recovery method
2016 PHP 7,000,000.00
2017 PHP 13,000,000.00
2018 PHP 12,000,000.00 PHP 32,000,000.00
Cumulative effect of change in accounting policy PHP 6,000,000.00

Therefore, the cumulative effect of change in accounting policy is P6,000,000.

While preparing the financial statement for 2019, Dakila Company discovered computational errors in the 2017 and 2018
PROBLEM depreciation expense. These errors resulted in overstatement of each year’s income by P25,000, net of income tax. The net
income for 2019 is correctly reported at P500,000.

The following amounts were reported in the previously issued financial statements:
 2018 2017
Retained earnings, Jan 1 PHP 700,000.00 PHP 500,000.00
Net income PHP 150,000.00 PHP 200,000.00
Retained earnings, Dec 31 PHP 850,000.00 PHP 700,000.00

REQUIRED What is the balance of retained earnings on December 31, 2019?

Retained earnings, Jan 1, 2019 PHP 850,000.00

Net income PHP 500,000.00
Correcting overstatement (25,000 x 2 years) PHP (50,000.00)
Retained earnings, Dec 31, 2019 PHP 1,300,000.00

Therefore, the retained earnings balance as of Dec 31, 2019 is P1,300,000.

Effective January 1, 2019, King Company adopted the accounting policy of expensing advertising and promotion costs when
PROBLEM
incurred. Previously, advertising and promotion costs applicable to future periods were recorded in prepaid expenses.

The entity can justify the change which was made for both financial statement and income tax reporting purposes.

The prepaid advertising and promotion costs totaled P600,000 on December 31, 2018. The income tax rate is 30%.

What is the adjustment for the effect of the change in accounting policy that should result in a net charge against income for
REQUIRED
2019?

The company is only changing how prepayments are recorded in the books. Whatever method is used, the ending balances
should be the same. This should not affect income but the retained earnings since the error is not included in the profit or loss
statement.

Therefore, the adjustment to effect the change in accounting policy is P0.

In reviewing the draft financial statements for the year ended December 31, 2019, Bituin Company decided that market
PROBLEM
conditions were such that the provision for inventory obsolescence on December 31, 2019 should be increased by P3,000,000.

If the same basis of calculating inventory obsolescence had been applied on December 31, 2018, the provision would have been
P1,800,000 higher than the amount recognized in statement of comprehensive income.

REQUIRED What adjustment should be made to net income of 2019?

 Overvaluation of December 31, 2019 inventory PHP (3,000,000.00)
Overvaluation of December 31, 2018 inventory PHP 1,800,000.00
Net increase (decrease) in 2019 net income PHP (1,200,000.00)

Therefore, the adjustment to net income of 2019 is a P1,200,000 decrease.

PROBLEM Harem Company began operations on January 1, 2021 and adopted the weighted average method of inventory pricing.

2021 2022 2023

Sales PHP 3,000,000.00 PHP 4,000,000.00 PHP 4,800,000.00
Cost of sales PHP 1,500,000.00 PHP 2,000,000.00 PHP 2,400,000.00
Gross income PHP 1,500,000.00 PHP 2,000,000.00 PHP 2,400,000.00
Expenses PHP 800,000.00 PHP 900,000.00 PHP 1,000,000.00
Net income PHP 700,000.00 PHP 1,100,000.00 PHP 1,400,000.00

Comparative inventory amount

Weighted Average FIFO
December 31, 2021 PHP 270,000.00 PHP 420,000.00
December 31, 2022 PHP 300,000.00 PHP 500,000.00
December 31, 2023 PHP 380,000.00 PHP 650,000.00

REQUIRED Revise the condensed comparative income statement assuming the entity used the FIFO method.

2021 2022 2023

Net income - Weighted average method PHP 700,000.00 PHP 1,100,000.00 PHP 1,400,000.00
Adjustments to ending inventory
2021 PHP 150,000.00 PHP (150,000.00)
2022 PHP 200,000.00 PHP (200,000.00)
2023 PHP 270,000.00
Net income - FIFO method PHP 850,000.00 PHP 1,150,000.00 PHP 1,470,000.00

2021 2022 2023

Sales PHP 3,000,000.00 PHP 4,000,000.00 PHP 4,800,000.00
Cost of sales PHP 1,350,000.00 PHP 1,950,000.00 PHP 2,330,000.00
Gross income PHP 1,650,000.00 PHP 2,050,000.00 PHP 2,470,000.00
Expenses PHP 800,000.00 PHP 900,000.00 PHP 1,000,000.00
Net income PHP 850,000.00 PHP 1,150,000.00 PHP 1,470,000.00
 On January 1, 2012, Roma Company purchased heavy duty equipment for P4,000,000. On the date of installation, it was
PROBLEM
estimated that the equipment has a useful life of 10 years and a residual value of P400,000.

On January 1, 2016, the entity decided to review the useful life of the equipment and the residual value. The entity determined
that the useful life of the equipment was 12 years from the date of acquisition and the residual value was P460,000.

REQUIRED What is the depreciation expense for 2016?

As of January 1, 2016, the equipment is 4 years depreciated.

Cost of equipment PHP 4,000,000.00
Less: Residual value PHP (400,000.00)
Divided by: useful life 10
Annual depreciation PHP 360,000.00
Multiplied by number of years depreciated 4
Accumulated depreciation - January 1, 2016 PHP 1,440,000.00

Therefore, the current value of the equipment is:

Cost of equipment PHP 4,000,000.00
Less: Accumulated depreciation PHP (1,440,000.00)
Book value of the equipment, January 1, 2016 PHP 2,560,000.00

This will then be used as the new cost to determine the new annual depreciation.
Book value of the equipment, January 1, 2016 PHP 2,560,000.00
Less: New residual value PHP (460,000.00)
Depreciable amount PHP 2,100,000.00
Divided by: remaining useful life (12 yrs - 4 yrs) 8
New annual depreciation PHP 262,500.00

Therefore, the depreciation expense for 2016 amounts to P262,500.

Acute Company was organized on January 1, 2013. In preparing the financial statements for the year ended December 31,
PROBLEM
2015, the entity used the following original cost and useful life for property, plant, and equipment.

Original cost Useful life

Building PHP 15,000,000.00 15 years
Machinery PHP 10,500,000.00 10 years
Furniture PHP 3,500,000.00 7 years
 On January 1, 2016 the entity decided to review the useful life of the property, plant, and equipment. On such date, the
remaining useful life is 10 years for the building, 7 years for the machinery and 5 years for the furniture. The entity used the
straight line method of depreciation with no residual value.

REQUIRED What is the total depreciation for 2016?

Building Machinery Furniture

Original cost PHP 15,000,000.00 PHP 10,500,000.00 PHP 3,500,000.00
Less: Accumulated depreciation PHP 3,000,000.00 PHP 3,150,000.00 PHP 1,500,000.00
Book value as of January 1, 2016 PHP 12,000,000.00 PHP 7,350,000.00 PHP 2,000,000.00
Divided by: new useful life 10 7 5
Depreciation for 2016 PHP 1,200,000.00 PHP 1,050,000.00 PHP 400,000.00

Aggregated depreciation PHP 2,650,000.00

Therefore, total depreciation for 2016 amounts to P2,650,000.

After the issuance of the 2015 financial statements, Narra Company discovered a computational error of P150,000 in the
PROBLEM calculation of the December 31, 2015 inventory. The error resulted in a P150,000 overstatement in the cost of goods sold for
the year ended December 31, 2015.

In October 2016, the entity paid the amount of P500,000 in settlement of litigation instituted against it during 2015.

REQUIRED In the 2016 financial statements, what is the pretax adjustment to retained earnings on January 1, 2016?

Overstatement of cost of goods sold PHP 150,000.00

Total adjustment to retained earnings PHP 150,000.00

The settlement of litigation is recorded as a debit of the litigation liability and credit of cash.

The overstatement of cost of goods sold recognizes an understatement of inventory that also results in the understatement of
retained earnings. The adjustment is recorded as a debit of inventory and credit of retained earnings.

Therefore, adjustment to retained earnings is a P150,000 credit.

 Natasha Company reported net income of P700,000 for 2016. The entity declared and paid dividends of P150,000 in 2016 and
PROBLEM
P300,000 in 2015.

In the financial statements for the year ended December 31, 2015, the entity reported retained earnings of P1,1000,000 on
January 1, 2015. The net income for 2015 was P600,000.

In 2016, after the 2015 financial statements were approved for issue, the entity discovered an error in the December 31, 2015
financial statements.

The effect of the error was a P650,000 overstatement of net income for the year ended December 31, 2015 due to
underdepreciation.

REQUIRED What amount should be reported as retained earnings on December 31, 2016?

Retained earnings - January 1, 2015 PHP 1,100,000.00

Add: Net income for 2015 PHP 600,000.00
Less: Cash dividends for 2015 PHP (300,000.00)
Retained earnings - December 31, 2015 and January 1, 2016 PHP 1,400,000.00
Changes in retained earnings for 2016
Net income PHP 700,000.00
Cash dividends PHP (150,000.00)
Error adjustment PHP (650,000.00) PHP (100,000.00)
Retained earnings - December 31, 2016 PHP 1,300,000.00

Therefore, retained earnings balance as of December 31, 2016 is P1,300,000.

 TOPIC 4: Subsequent Events
Lecture 01 - Events After The Reporting Period

General jutsu:

EVENTS AFTER THE REPORTING PERIOD - Per PAS 10, paragraph 3, this occurs, whether favorable or unfavorable, between the
end of reporting period and the date on which the financial statements are authorized for issue. This is also called subsequent
events.

Types of events after the reporting period

1. ADJUSTING EVENTS - those that provide evidence of conditions that exist at the end of the reporting period. These are
events that need adjusting regarding a prior event that happened before the reporting period ends.
Examples:
1. Settlement after the reporting period of a court case because it confirms that the entity already had a present obligation
at the end of reporting period.
2. Bankruptcy of a customer which occurs after the reporting period.
3. Sale of inventories after the reporting period may give evidence about the net realizable value at reporting date.
4. The determination after the reporting period of the cost of asset purchased or the proceeds from asset sold before the
end of reporting period.
5. The determination after the reporting period of the profit sharing or bonus payment if the entity has the present
obligation at the end of the reporting period to make such payment.
6. The discovery of fraud or errors that show the financial statements were incorrect.
An entity must adjust the amounts recognized in the financial statements for adjusting events.

2. NONADJUSTING EVENTS - those that are indicative of conditions that arise after the end of reporting period. These are
events that need disclosure when it happens after the reporting period.
Examples:
1. Business combination after the reporting period.
2. Plan to discontinue an operation.
3. Major purchase and disposal of asset or expropriation of major asset by government.
4. Destruction of a major production plant by a fire after the reporting period.
5. Major ordinary share transactions and potential ordinary share transactions after the reporting period.
6. Announcing or commencing the implementation of a major restructuring.
7. Abnormally large changes after the reporting period in asset prices or foreign exchange rates.
8. Entering into significant commitments or contingent liabilities, for example, by issuing guarantees.
9. Commencing major litigation arising solely from events that occurred after the reporting period.
10. Change in tax rate enacted or announced after the end of reporting period that has a significant effect on current and
deferred tax asset and liability.
 The entity is required only to disclose significant nonadjusting events.

It is appropriate to adjust the financial statements for all events that offer clarity concerning the conditions that existed at the
end of the reporting period and that occur prior to the date the financial statements are authorized for issue.

FINANCIAL STATEMENTS AUTHORIZED FOR ISSUE

Financial statements are authorized for issue when the board of directors reviews the financial statements and authorizes
them issue. In some cases, an entity is required to submit the financial statements to the shareholders for approval after the
financial statements have been issued. In such cases, the financial statements are authorized for issue on the date of issue by
the board of directors and not on the date when shareholders approve the financial statements.

The audit of Anne Company for the year ended December 31, 2020 was completed on March 1, 2021. The financial statements
PROBLEM
were signed by the managing director on March 15, 2021 and approved by the shareholders on March 31, 2021.

The following events have occurred:

1. On January 15, 2021, a customer owing P900,000 to Anne filed for bankruptcy. The financial statements include an allowance
for doubtful accounts pertaining to this customer only of P100,000.

2. The entity's issued share capital comprised 100,000 ordinary shares with P100 par value. The entity issued additional 25,000
shares on March 1, 2021 at par value.

3. Equipment with carrying amount of P525,000 was destroyed by fire on December 15, 2021. The entity booked a receivable of
P400,000 from the insurance entity. After the insurance entity completed the investigation on February 1, 2021, it was
discovered that the fire took place due to negligence of the machine operator. Therefore, the insurer's liability was zero on the
claim.

REQUIRED Prepare adjusting entries on December 31, 2020 for the events after the reporting period.

2020
Dec 31 Provision for doubtful accounts PHP 800,000.00
Allowance for doubtful accounts PHP 800,000.00
To account for the total amount that the bankrupt
customer owes

Allowance for doubtful accounts PHP 900,000.00

Accounts receivable PHP 900,000.00
To account for the write off of the bankrupt customer

The 2nd event is a nonadjusting event. This will be accounted for on 2021 financial statements.
 Loss on insurance claim removal due to fire PHP 400,000.00
Claims on insurance entity PHP 400,000.00
To account for the removal of the insurance claim
since the liability falls on the machine operator

Loss on equipment due to fire PHP 525,000.00

Equipment PHP 525,000.00
To account for the removal of the equipment due
to its loss on the fire.

Reasons for accounting for the changes:

Event 1: This is an adjusting event. The bankruptcy of the customer is already an evidence that the accounts receivable should
be written off already. There should be an adjustment in order to provide for the allowance first.
Event 2: A disclosure is only necessary since share issuances are accounted for in their specific periods.
Event 3: This is an adjusting event. The investigation's outcome is already an evidence that the insurance entity should not have
claims on the fire incident, and that the liability should fall on the machine operator.

Norway Company reported that the year-end is December 31, 2020 and the financial statements are authorized for issue on
PROBLEM
March 15, 2021.

On December 31, 2020, Norway Company had a receivable of P400,000 from a customer that is due 60 days after the end of
reporting period. On January 15, 2021, a receiver was appointed for the said customer. The receiver informed Norway that the
P400,000 would be paid in full by June 30, 2021.

Norway Company measured share investments held for trading at FVPL. On December 31, 2020, these investments were
recorded at the market value of P5,000,000. During the period up to February 15, 2021, there was a steady decline in the
market value of all the shares in the portfolio and on the same date, the market value had fallen to P2,000,000.

Norway Company had reported a contingent liability on December 31, 2020 related to a court case in which Norway Company
was the defendant. The case was not heard until the first week of February 2021. On March 1, 2021, the judge handed down a
decision against Norway Company. The judge determined that Norway Company was liable to pay damages and costs totaling
P3,000,000.

On December 31, 2020, Norway Company had an account receivable from a large customer totaling P3,500,000. On January 31,
2021, Norway Company was advised by the liquidator of the said customer that the customer was insolvent and would be
unable to repay the full amount owed to Norway Company. The liquidator advised Norway Company in writing that only 10% of
the account receivable will be paid on April 30, 2021.
REQUIRED Prepare adjusting entries on December 31, 2020 for the events after the reporting period.

2020
Dec 31 The 1st event is a nonadjusting event. The receivable mentioned is still collectible.

The 2nd event is a nonadjusting event. FMV changes are accounted in their specific periods.

Provision for litigation PHP 3,000,000.00

Estimated litigation liability PHP 3,000,000.00
To account for the recognition of the loss in the
court case

Provision for doubtful accounts PHP 3,150,000.00

Allowance for doubtful accounts PHP 3,150,000.00
To account for the provision of accounts receivable
certained to be uncollectible.

Allowance for doubtful accounts PHP 3,150,000.00

Accounts receivable PHP 3,150,000.00
To writeoff the accounts receivable certained to be
uncollectible.

Elaine Company prepared draft financial statements that showed the income before tax for the year ended December 31, 2020
PROBLEM
at P9,000,000. The board of directors authorized the financial statements for issue on March 20, 2021.

A fire occurred at one of Elaine's site on January 15, 2021 with resulting damage amounting to P7,000,000, only P4,000,000 of
which is covered by insurance. The repairs will take place and be paid for in April 2021. The P4,000,000 claim from the
insurance entity will however be received on February 14, 2021.

REQUIRED What amount should be reported as income before tax in the financial statements?

A plant fire loss after a reporting period is a nonadjusting event and its loss should be reported in the period where the fire
occurred.

Therefore, income before tax remains to be amounted to P9,000,000.

 During 2020, Marian Company was sued by a competitor for P5,000,000 for infringement of a patent. Based on the advice of
PROBLEM the legal counsel, the entity accrued the sum of P3,000,000 as a provision in the financial statements for the year ended
December 31, 2020.

Subsequently, on March 15, 2021, the Supreme Court decided in favor of the party alleging infirngement of the patent and
ordered the defendant to pay the aggrieved party a sum of P3,500,000.

The financial statements were prepared by the entity's management on February 15, 2021 and approved by the board of
directors on March 31, 2021.

REQUIRED What amount should be recognized as accrued liability on December 31, 2020 to reflect the event after the reporting period?

An entry during 2020 recognizes the judgment on March 15, 2021 as an adjusting event.
Provision for litigation PHP 3,000,000.00
Estimated litigation liability PHP 3,000,000.00

Since the judgment ruled in favor of the plaintiff, the company is liable to pay damages amounting to P3,500,000. An entry is
made before the approval of financial statements on March 31, 2021.
Provision for litigation PHP 500,000.00
Estimated litigation liability PHP 500,000.00

Therefore, the accrued liability on December 31, 2020 amounts to P3,500,000.

PROBLEM Caroline Company provided the following information on December 31, 2019:

January 15, 2020 - P3,000,000 of accounts receivable was written off due to the bankruptcy of a major customer.

February 14, 2020 - A shipping vessel of Caroline with carrying amount of P5,000,000 was completely lost on the sea due to a
hurricane.

March 11, 2020 - A court case involving Caroline as the defendant was settled and the entity was obligated to pay the plaintiff
P1,500,000. Caroline previously recognized a P1,000,000 liability for the suit because management deemed it probable that the
entity would lose the case.

March 25, 2020 - One of Caroline's factories with a carrying amount of P15,000,000 was completely razed by forest fires that
erupted in its vicinity.

The management completed the draft of the financial statements for 2019 on February 10, 2020.
 On March 20, 2020, the board of directors authorized the financial statements for issue. The entity announced the profit and
other selected information on March 22, 2020.

REQUIRED Prepare adjusting entries on December 31, 2019 for the events after the reporting period.

2019
Dec 31 Provision for doubtful accounts PHP 3,000,000.00
Allowance for doubtful accounts PHP 3,000,000.00
To account for the provision of accounts receivable
to be written off because of customer bankruptcy.

Allowance for doubtful accounts PHP 3,000,000.00

Accounts receivable PHP 3,000,000.00
To record the accounts receivable written off.

The event on February 14, 2020 is a nonadjusting event. The inventory loss should be accounted for on 2020 financial
statements. This needs disclosure on 2019 financial statements.

Provision for litigation PHP 500,000.00

Estimated litigation liability PHP 500,000.00
To account for the increase in litigation liability due
to the court's judgment.

The event on March 25, 2020 is a nonadjusting event. The plant fire loss should be accounted for on 2020 financial
statements. This event does not need disclosure because it happened after the issuance of the financial statements on the
20th.

Carla Company carried a provision of P2,000,000 in the draft financial statements for the year ended December 31, 2019 in
PROBLEM
relation to an unresolved court case.

On January 31, 2020, when the financial statements had not yet been authorized for issue, the case was settled and the court
decided that the final total damages to be paid by the entity at P3,000,000.

What amount should be recognized as an adjustment on accrued liability on December 31, 2019 to reflect the event after the
REQUIRED
reporting period?

Since a provision was already made, we just need to increase it as this is an adjusting event.
 Final judgment PHP 3,000,000.00
Less: Existing provision PHP (2,000,000.00)
Increase in provision PHP 1,000,000.00

Therefore, the accrued liability must be increased by P1,000,000.

PROBLEM Pink Company is completing the preparation of the draft financial statements for the year ended December 31, 2019.

The financial statements are authorized for issue on March 31, 2020.

On January 31, 2020, a dividend of P2,000,000 was declared and a contractual profit share payment of P200,000 was made,
both based on the profit for the year ended December 31, 2019.

On February 15, 2020, a customer went into liquidation having owed the entity P900,000 for the past 5 months. No allowance
has been made against this debt in the draft financial statements.

On March 1, 2020, a manufacturing plant was destroyed by fire resulting in a financial loss of P2,500,000.

What total amount should be recognized in profit or loss for the year ended December 31, 2019 to account for the events after
REQUIRED
the reporting period?

Contractual proft share payment PHP 200,000.00

Provision for doubtful accounts PHP 900,000.00
Adjusting events amount PHP 1,100,000.00

Dividends declared are nonadjusting events but the contractual profit share payment is an adjusting event because a
contractual payment is an evidence of a present obligation at the end of the reporting period.

A customer going to liquidation is an adjusting event since it evidences a potential bankruptcy of the customer at the end of
reporting period.

Therefore, the amount that should be recognized in profit or loss for 2019 as events after reporting period is P1,100,000.
 TOPIC 5: Government Grant
Lecture 01 - Government Grant (PAS 20)

General jutsu:

GOVERNMENT GRANT
PAS 20, paragraph 3, defines government grant as assistance by government in the form of transfer of resources to an entity in
return for part or future compliance with certain conditions relating to the operating activities of the entity.

Classifications of Government Grant

a. Grant related to asset - a government grant whose primary condition is that an entity qualifying for the grant shall purchase,
construct, or otherwise acquire long-term asset.
b. Grant related to income - a government grant other than grant related to asset.

Recognition and measurement

Government grant shall be recognized when there is reasonable assurance that:
a. The entity will comply with the conditions attaching to the grant.
b. The grant will be received.

ACCOUNTING FOR GOVERNMENT GRANT (used deferred income approach)

Government grant shall be recognized as income on a systematic basis over the periods in which an entity recognizes as
expenses the related costs for which the grant is intended to compensate. In other words, the grant is taken to income over one
or more periods in which the related cost is incurred.

a. Grant in recognition of specific expenses

The total amount of grant is allocated as income over three years in pro-rata basis to the costs incurred.

Cash XXX
Unearned income - grant XXX
to recognize the grant received

Unearned income - grant (proportionate to first year) XXX

Grant income XXX
to recognize the grant earned after the expense
agreed upon on the grant.

Expense XXX
Cash XXX
 to recognize the incurring of the specific expense
agreed upon on the grant.

b. Grant related to depreciable asset

Grant related to depreciable asset shall be recognized as income over the periods and in pro-rata basis to the depreciation of the
related asset. The grant should be divided to the number of depreciable years of the asset in order to allocate it.

Cash XXX
Unearned income - grant XXX
to recognize the grant received

Depreciable non-cash asset XXX

Cash XXX
to record the purchase of the non-cash asset subject
to depreciation

Depreciation XXX
Accumulated depreciation XXX
to recognize the depreciation for the year.

Unearned income - grant (proportionate to first year) XXX

Grant income XXX
to recognize the grant earned after the depreciation
agreed upon on the grant.

c. Grant related to non-depreciable asset

Grant related to non-depreciable asset requiring fulfillment of certain conditions shall be recognized as income over the periods
which bear the cost of meeting the conditions. The grant should be divided to the number of periods that the entity will spend
the cost of meeting the conditions.

Non-depreciable asset (in fair value) XXX

Unearned income - grant XXX
to recognize the grant received

Asset to be fulfilled on the non-depreciable asset grant XXX

Cash XXX
to record the purchase of the non-cash asset agreed
upon on the grant.

Depreciation XXX
Accumulated depreciation XXX
 to recognize the depreciation for the year for the asset
agreed upon on the grant.

Unearned income - grant (proportionate to first year) XXX

Grant income XXX
to recognize the grant earned after the depreciation
agreed upon on the grant.

d. Grant receivable as compensation for expenses or losses already incurred

Grant related to expenses or losses already incurred or for the purpose of giving immediate financial support to the entity with
no further related costs shall be recognized as income for the period in which it becomes receivable.

Cash XXX
Grant income XXX
to recognize the grant received

PROBLEM An entity received a government grant under the following independent situations:

1. An entity received a grant of P30,000,000 from the British government in order to defray safety and environmental costs
within the area where the entity is located. The safety and environmental costs are expected to be incurred over four years,
respectively, P2,000,000, P4,000,000, P6,000,000, and P8,000,000.

2. An entity received a grant of P40,000,000 from the American government for the construction of laboratory and research
facility with an estimated cost of P50,000,000 and useful life of 20 years.

3. An entity is granted a large tract of land in Cordillera by the Philippine government with fair value of P50,000,000. The grant
requires that the entity shall construct a factory and employ only personnel residing in the Cordillera region. The cost of the
factory is P80,000,000 with useful life of 25 years.

4. An entity received a grant of P10,000,000 from the Australian government to compensate for massive losses incurred because
of a recent earthquake.

REQUIRED Prepare journal entries for the first year to record each independent government grant.

1 Cash PHP 30,000,000.00

Unearned income - grant PHP 30,000,000.00

Unearned income - grant PHP 3,000,000.00

Grant income PHP 3,000,000.00
 Safety and environmental expenses PHP 2,000,000.00
Cash PHP 2,000,000.00

Pro-rata basis: Expenses Ratio Income

First year PHP 2,000,000.00 10% PHP 3,000,000.00
Second year PHP 4,000,000.00 20% PHP 6,000,000.00
Third year PHP 6,000,000.00 30% PHP 9,000,000.00
Fourth year PHP 8,000,000.00 40% PHP 12,000,000.00
PHP 20,000,000.00 PHP 30,000,000.00

2 Cash PHP 40,000,000.00

Unearned income - grant PHP 40,000,000.00

Laboratory PHP 50,000,000.00

Cash PHP 50,000,000.00

Depreciation PHP 2,500,000.00

Accumulated depreciation PHP 2,500,000.00

Unearned income - grant PHP 2,000,000.00

Grant income PHP 2,000,000.00

3 Land PHP 50,000,000.00

Unearned income - grant PHP 50,000,000.00

Factory PHP 80,000,000.00

Cash PHP 80,000,000.00

Depreciation PHP 3,200,000.00

Accumulated depreciation PHP 3,200,000.00

Unearned income - grant PHP 2,000,000.00

Grant income PHP 2,000,000.00

4 Cash PHP 10,000,000.00

Grant income PHP 10,000,000.00

At the beginning of current year, Optimum Company was granted by a local government authority 5,000 hectares of land
PROBLEM
located near the slums outside the city limits.
 The condition of this grant was that the entity shall clean up this land and lay roads by employing laborers from the village
where the land is located. The government has fixed the minimum wage payable to the workers.

The entire operation will take three years and is estimated to cost P10,000,000. The amount that will be spent are P2,000,000
for first year, P2,000,000 for second year, and P6,000,000 for third year.

The fair value of the land is P12,000,000.

REQUIRED Prepare journal entries for the current year in connection with the grant.

Land PHP 12,000,000.00

Unearned income - grant PHP 12,000,000.00

Unearned income - grant PHP 2,400,000.00

Grant income PHP 2,400,000.00

Land clearing operations PHP 2,000,000.00

Cash PHP 2,000,000.00

Pro-rata basis: Expenses Ratio Income

First year PHP 2,000,000.00 20% PHP 2,400,000.00
Second year PHP 2,000,000.00 20% PHP 2,400,000.00
Third year PHP 6,000,000.00 60% PHP 7,200,000.00
PHP 10,000,000.00 PHP 12,000,000.00

PROBLEM At the beginning of current year, Excelsior Company received a consolidated grant of P12,000,000.

Three-fourths of the grant will be utilized to purchase a college building for students from underdeveloped or developing
countries. The balance of the grant is for subsidizing the tuition costs of those students for four years from the date of grant.

The building was purchased in early part of January and is to be depreciated using straight line over 10 years. The tuition costs
paid in the current year amounted to P600,000.

REQUIRED Prepare journal entries for the current year in connection with the grant.

College building PHP 9,000,000.00

Cash PHP 3,000,000.00
Unearned income - grant PHP 12,000,000.00
 Depreciation PHP 900,000.00
Unearned income - grant PHP 900,000.00
Accumulated depreciation - college building PHP 900,000.00
Grant income PHP 900,000.00

Tuition subsidy expense PHP 600,000.00

Unearned income - grant PHP 750,000.00
Cash PHP 600,000.00
Grant income PHP 750,000.00

At the beginning of current year, Pearl Company purchased a machine for P7,000,000 and received a government grant of
PROBLEM
P1,000,000 toward the capital cost.

The machine is to be depreciated on a straight line basis over 5 years and estimated to have a residual value of P500,000 at the
end of this period.

REQUIRED Prepare journal entries for the current year in connection with the grant using the deferred income approach.

Machine PHP 7,000,000.00

Unearned income - grant PHP 1,000,000.00
Cash PHP 6,000,000.00

Depreciation PHP 1,300,000.00

Unearned income - grant PHP 200,000.00
Accumulated depreciation - machine PHP 1,300,000.00
Grant income PHP 200,000.00

REQUIRED Prepare journal entries for the current year in connection with the grant using the deduction from asset approach.

Machine PHP 7,000,000.00

Cash PHP 7,000,000.00

Cash PHP 1,000,000.00

Machine PHP 1,000,000.00

Depreciation PHP 1,100,000.00

Accumulated depreciation - machine PHP 1,100,000.00
 At the beginning of current year, Apple Company purchased a plating machine for P5,400,000. The entity received a government
PROBLEM
grant of P400,000 toward this capital cost.

The machine is to be depreciated on a 20% reducing balance basis over 10 years. The estimated residual value is P200,000.

REQUIRED Prepare journal entries for the current year in connection with the grant using the deferred income approach.

Year Carrying amount Fixed Rate Depreciation Carrying amount

Acquisition cost PHP 5,400,000.00
Year 1 PHP 5,400,000.00 20.00% PHP 1,080,000.00 PHP 4,320,000.00
Year 2 PHP 4,320,000.00 20.00% PHP 864,000.00 PHP 3,456,000.00
Year 3 PHP 3,456,000.00 20.00% PHP 691,200.00 PHP 2,764,800.00
Year 4 PHP 2,764,800.00 20.00% PHP 552,960.00 PHP 2,211,840.00
Year 5 PHP 2,211,840.00 20.00% PHP 442,368.00 PHP 1,769,472.00
Year 6 PHP 1,769,472.00 20.00% PHP 353,894.40 PHP 1,415,577.60
Year 7 PHP 1,415,577.60 20.00% PHP 283,115.52 PHP 1,132,462.08
Year 8 PHP 1,132,462.08 20.00% PHP 226,492.42 PHP 905,969.66
Year 9 PHP 905,969.66 20.00% PHP 181,193.93 PHP 724,775.73
Year 10 PHP 524,775.73 PHP 524,775.73 PHP 200,000.00

Plating machine PHP 5,400,000.00

Unearned income - grant PHP 400,000.00
Cash PHP 5,000,000.00

Depreciation PHP 1,080,000.00

Unearned income - grant PHP 80,000.00
Accumulated depreciation - machine PHP 1,080,000.00
Grant income PHP 80,000.00

REQUIRED Prepare journal entries for the current year in connection with the grant using the deduction from asset approach

Year Carrying amount Fixed Rate Depreciation Carrying amount

Acquisition cost PHP 5,000,000.00
Year 1 PHP 5,000,000.00 20.00% PHP 1,000,000.00 PHP 4,000,000.00
Year 2 PHP 4,000,000.00 20.00% PHP 800,000.00 PHP 3,200,000.00
Year 3 PHP 3,200,000.00 20.00% PHP 640,000.00 PHP 2,560,000.00
Year 4 PHP 2,560,000.00 20.00% PHP 512,000.00 PHP 2,048,000.00
Year 5 PHP 2,048,000.00 20.00% PHP 409,600.00 PHP 1,638,400.00
Year 6 PHP 1,638,400.00 20.00% PHP 327,680.00 PHP 1,310,720.00
Year 7 PHP 1,310,720.00 20.00% PHP 262,144.00 PHP 1,048,576.00
 Year 8 PHP 1,048,576.00 20.00% PHP 209,715.20 PHP 838,860.80
Year 9 PHP 838,860.80 20.00% PHP 167,772.16 PHP 671,088.64
Year 10 PHP 471,088.64 PHP 471,088.64 PHP 200,000.00

Plating machine PHP 5,000,000.00

Cash PHP 5,000,000.00

Depreciation PHP 1,000,000.00

Accumulated depreciation - machine PHP 1,000,000.00

The grant of P400,000 has already been deducted to the actual cost of plating machine.

Zephyr Company is provided a grant by a foreign government for the purpose of acquiring land for a building site. The grant is a
PROBLEM
zero-interest loan for 5 years evidenced a promissory note.

The loan was granted on January 1, 2021 for P8,000,000. The market rate of interest is 6%. The present value of 1 for five
periods is 0.7473.

REQUIRED Prepare journal entries for 2021 and 2022.

Discount on note
Year Amortization Present value
payable
January 1, 2020 PHP 2,021,600.00 PHP 5,978,400.00
December 31, 2020 PHP 358,704.00 PHP 1,662,896.00 PHP 6,337,104.00
December 31, 2021 PHP 380,226.24 PHP 1,282,669.76 PHP 6,717,330.24
December 31, 2022 PHP 403,039.81 PHP 879,629.95 PHP 7,120,370.05
December 31, 2023 PHP 427,222.20 PHP 452,407.74 PHP 7,547,592.26
December 31, 2024 PHP 452,407.75 PHP 8,000,000.00
PHP 2,021,600.00

2021
Jan 1 Cash PHP 8,000,000.00
Discount on notes payable PHP 2,021,600.00
Notes payable PHP 8,000,000.00
Unearned income - grant PHP 2,021,600.00

Dec 31 Interest expense PHP 358,704.00

Unearned income - grant PHP 358,704.00
Discount on notes payable PHP 358,704.00
Grant income PHP 358,704.00
 2022
Dec 31 Interest expense PHP 380,226.24
Unearned income - grant PHP 380,226.24
Discount on notes payable PHP 380,226.24
Grant income PHP 380,226.24

Tarhata Company received a government grant of P2,000,000 related to a factory building purchased in January 2021 from an
PROBLEM
industrialist identified by a government.

If the entity did not purchase the building, which was located in the slums of the city, it would have been repossessed by the
government agency.

The entity purchased the building for P12,000,000 with useful life of 5 years and no residual value.

On January 1, 2022, the entire amount of the government grant became repayable by reason of noncompliance with conditions
attached to the grant.

REQUIRED Prepare journal entries for 2021 and 2022.

2021
Jan 1 Cash PHP 2,000,000.00
Unearned income - grant PHP 2,000,000.00

Building PHP 12,000,000.00

Cash PHP 12,000,000.00

Dec 31 Depreciation PHP 2,400,000.00

Unearned income - grant PHP 400,000.00
Accumulated depreciation PHP 2,400,000.00
Grant income PHP 400,000.00

2022
Jan 1 Unearned income - grant PHP 1,600,000.00
Loss on repayment of grant PHP 400,000.00
Cash PHP 2,000,000.00

Dec 31 Depreciation PHP 2,400,000.00

Accumulated depreciation PHP 2,400,000.00
 TOPIC 6: Related Party Disclosures
Lecture 01 - Related Party Disclosures (PAS 24)

General jutsu:

RELATED PARTY
Parties are considered to be related if one party has:
a. The ability to control the other party.
Control - the power over the investee or the power to govern the financial and operating policies of an entity so as to
obtain benefits. It is ownership directly through subsidiaries of more than half of the voting power of an entity.
b. The ability to exercise significant influence over the other party.
Significant influence - the power to participate in the financial and operating policy decision of an entity, but not control
of those policies. This may be gained by share ownership of 20% or more.
c. Joint control over the reporting entity.
Joint control - the contractually agreed sharing of control over an economic activity.

EXAMPLES OF RELATED PARTIES

1. Affiliates - the parent, subsidiary, and fellow subsidiaries.
2. Associates - the entities over which one party exercise significant influence; includes the subsidiary or subsidiaries of the
associate.
3. Venturer - in a joint venture; includes the subsidiary or subsidiaries of a joint venture.
4. Key management personnel - those persons having authority and responsibility for planning, directing, and controlling the
activities of the entity, directly or indirectly, including any executive director or nonexecutive director.
5. Close family members of an individual - family members who may be expected to influence or be influenced by that
individual in their dealings with the entity.
6. Individuals owning directly or indirectly an interest in the voting power of the reporting entity that gives them significant
influence over the entity, and close family members of such individuals.
7. Postemployment benefit plan for the benefit of the employees.

RELATED PARTY TRANSACTIONS

A related party transaction is a transfer of resources or obligations between related parties, regardless of whether a price is
charged. PAS 24, paragraph 20, provides the following examples of related party transactions.
1. Purchase and sale of goods.
2. Purchase and sale of property and other asset.
3. Rendering or receiving services.
4. Leases.
5. Transfer of research and development.
6. License agreement.
7. Finance arrangements, including loans and equity contributions in cash or in kind.
 8. Guarantee and collateral.
9. Settlement of liabilities on behalf of the entity or by the entity on behalf of another party.

RELATED PARTY DISCLOSURES

PAS 24, paragraph 12, requires disclosure of related party relationships where control exists irrespective of whether there have
been transactions between the related parties. In other words, relationships between parents and subsidiaries shall be
disclosed regardless of whether there have been transactions between those related parties.

DISCLOSURE OF RELATED PARTY TRANSACTIONS

As a minimum, the disclosures of related party transaction shall include:
a. The amount of the transaction.
b. The amount of outstanding balance, terms and conditions, whether secured or unsecured, and nature of consideration to be
provided in settlement.
c. The allowance for doubtful accounts related to the outstanding balance.
d. The doubtful accounts expense recognized during the period in respect of amount due from related parties.

KEY MANAGEMENT PERSONNEL COMPENSATION

PAS 24, paragraph 16, provides that an entity shall disclose key management personnel compensation in total and for each of
the following categories:
a. Short-term employee benefits
b. Postemployment benefits (e.g. retirement pensions)
c. Other long-term benefits
d. Termination benefits
e. Share based payment transactions (e.g. share options)

Dean Company acquired 100% of Morey Company in the prior year. During the current year, the individual entities included in
PROBLEM
their financial statemenets the following:

Dean Morey
Key officers' salaries PHP 750,000.00 PHP 500,000.00
Officers' expenses PHP 200,000.00 PHP 100,000.00
Loans to officers PHP 1,250,000.00 PHP 500,000.00
Intercompany sales PHP 1,500,000.00

What total amount should be reported as related party disclosures in the notes to Dean Company's consolidated financial
REQUIRED
statements for the current year.

Dean Morey Total

Key officers' salaries PHP 750,000.00 PHP 500,000.00 PHP 1,250,000.00
Loans to officers PHP 1,250,000.00 PHP 500,000.00 PHP 1,750,000.00
 Total related party transactions PHP 2,000,000.00 PHP 1,000,000.00 PHP 3,000,000.00

Therefore, the related party disclosures amount to P3,000,000.

Gibson Company reported the following remuneration and other payments made to the entity's chief executive officer during
PROBLEM
the current year.

Annual salary PHP 2,000,000.00

Share options and other share-based payments PHP 1,000,000.00
Contributions to retirement benefit plan PHP 500,000.00
Reimbursement of travel expenses for business trips PHP 1,200,000.00

REQUIRED What total amount should be disclosed as compensation to key management personnel?

Annual salary PHP 2,000,000.00

Share options and other share-based payments PHP 1,000,000.00
Contributions to retirement benefit plan PHP 500,000.00
Compensation to key management personnel PHP 3,500,000.00

Therefore, compensation to key management personnel is P3,500,000.

PROBLEM During the current year, Brook Company engaged in the following transactions:

Key management personnel compensation PHP 2,000,000.00

Sales to affiliated entities PHP 3,000,000.00

What total amount should be included as related party disclosures in Brook Company's separate financial statements for the
REQUIRED
current year?

Key management personnel compensation PHP 2,000,000.00

Sales to affiliated entities PHP 3,000,000.00
Related party disclosures PHP 5,000,000.00

Therefore, related party disclosures amount to P5,000,000.

 TOPIC 7: Interim Financial Reporting
Lecture 01 - Interim Financial Reporting (PAS 34)

General jutsu:

INTERIM FINANCIAL REPORTING

Interim financial reporting is the preparation and presentation of financial statements for a period of less than one year.
Quarterly interim reports are the most common. However, publicly traded entities are encouraged to provide interim financial
reports at least semiannually and such reports are to be made available not later than 60 days after the end of the interim
period.

COMPONENTS OF AN INTERIM FINANCIAL REPORT

PAS 34, paragraph 8, provides that an interim financial report shall include at a minimum of the following components (all
condensed)
a. Statement of financial position
b. Statement of comprehensive income
c. Condensed statement of changes in equity
d. Selected explanatory notes

PAS 34 allows an entity to publish a set of condensed financial statements or complete set of financial statements in the interim
financial report.

Condensed means that each of the headings and subtotals presented in the entity's most recent annual financial statements is
required but there is no requirement to include greater detail unless this is specifically required.

SELECTED EXPLANATORY NOTES

The selected explanatory notes are designed to provide an explanation of significant events and transactions arising since the
last annual financial statements. Examples of disclosures required in a condensed interim financial report include:
a. Writedown of inventories to NRV and the reversal of such writedown.
b. Recognition of a loss from the impairment of property, plant, and equipment and intangible assets and the reversal of such
an impairment loss.
c. Reversal of any provision for restructuring.
d. Acquisitions and disposal of items of property, plant, and equipment
e. Commitments for the purchase of property, plant, and equipment
f. Litigation settlements
g. Corrections of prior period errors in previously reported financial data.
h. Changes in the economic circumstances that affect fair value of financial assets and financial liabilities.
i. Any debt default or any breach of a debt covenant that has not been corrected subsequently.
 j. Related party transactions
k. Changes in the classification of financial assets.
l. Contingent liabilities and contingent assets.

On March 15, 2015, Rex Company paid property taxes of P180,000 on the factory building for calendar year 2015. On April 1,
PROBLEM
2015, the entity made P300,000 in unanticipated ordinary repairs to plant equipment.

REQUIRED What total amount of these expenses should be included in the quarterly income statement ending June 30, 2015?

Property taxes (April 1 - June 30, 3 months (180,000 x 3/12)) PHP 45,000.00
Unanticipated ordinary repairs PHP 300,000.00
Interim expenses, June 30, 2015, quarterly PHP 345,000.00

The tax covering March 15 to March 30 have been closed already as property taxes on the first quarter of the calendar year.

Therefore, expenses for quarterly ended June 30, 2015 amounts to P345,000.

Bell Company reported P950,000 net income for the quarter ended September 30, 2015 which included the following after-tax
PROBLEM
items:

A P600,000 gain from expropriation realized on April 30, 2015 was allocated equally to the second, third, and fourth quarters of
2015.

A P150,000 loss resulting from a change in inventory valuation method was recognized on August 1, 2015.

In addition, the entity paid P480,000 on February 1, 2015 for 2015 calendar-year property taxes. Of this amount, P120,000 was
allocated to the third quarter of 2015.

REQUIRED For the quarter ended September 30, 2015, what amount should be reported as net income?

Net income PHP 950,000.00

Less: Gain allocated on the previous quarter (600,000 / 3
PHP (200,000.00)
x 1)
Change in accounting policy deducted from net income PHP 150,000.00
Adjusted net income, quarter ended September 30,
PHP 900,000.00
2015
 The P120,000 allocation was already recorded as part of the P950,000 net income.

The P150,000 loss is added back since a change in inventory valuation method does not recognize a loss.

Therefore, net income for the quarter ended September 30, 2015 amounts to P750,000.

Mount Apucao Company operates in the travel industry and incurs costs unevenly through the financial year. Advertising costs
PROBLEM
of P2,000,000 were incurred on March 1, 2015, and staff bonuses are paid at year-end based on sales.

Staff bonuses are expected to be around P20,000,000 for the year. Of that sum, P3,000,000 would relate to the period ending
March 31, 2015.

REQUIRED What amount should be included in the quarterly financial report ending March 31, 2015?

Advertising costs PHP 2,000,000.00

Staff bonuses PHP 3,000,000.00
Quarterly expenses, March 31, 2015 PHP 5,000,000.00

Therefore, quarterly expenses for the quarter ended March 31, 2015 amounts to P5,000,000.

Davao Company prepares quarterly interim financial reports. The entity sells electrical goods and normally 5% of the customers
PROBLEM
claim on their warranty.

The provision in the first quarter was calculated at 5% of sales to date which amounted to P10,000,000. However, in the second
quarter, a design fault was found and warranty claims were expected to be 10% for the whole year. Sales for the second quarter
amounted to P15,000,000.

REQUIRED What amount should be the provision charged in the interim income statement for the second quarter?

Cumulative sales from first to second quarter (10M +

PHP 25,000,000.00
15M)
Multiplied by warranty rate 10%
Required cumulative warranty provision PHP 2,500,000.00
Less: Provision for first quarter (10,000,000 x 5%) PHP (500,000.00)
Provision for second quarter PHP 2,000,000.00

Therefore, provision for second quarter amounts to P2,000,000.

 Verna Company reported profit before tax for the first six months ended June 30, 2015 at P5,000,000. However, the business is
PROBLEM seasonal and profit before tax for the last six months ended December 31, 2015 is almost certain to be P9,000,000. Profit
before tax quals taxable profit for this entity.

The entity operates in a country where income tax on entities is at a rate of 30% if annual profit is below P11,000,000 and a rate
of 35% where annual profit exceeds P11,000,000. These tax rates apply for the entire profit for the year.

What amount should be reported as income tax expense in the interim financial statements for the half year ended June 30,
REQUIRED
2015?

Profit before tax PHP 5,000,000.00

Income tax rate 30%
Income tax expense PHP 1,500,000.00

Therefore, provision for income tax amounts to P1,500,000.