tip p1 presentation - part 2

Practical Accounting 1Practical Accounting 1

L. R. CabarlesL. R. Cabarles

Practical Accounting 1Practical Accounting 1

L. R. CabarlesL. R. Cabarles

Classification of Financial LiabilitiesClassification of Financial Liabilities

1. FL @ FVTPL - Held for trading - Designated

2. FL @ AC

Financial Liabilities Measurement Summary

Category Initial Sub-sequent

Change in FV

FL @ FVTPL

FL @ AC

Change in FV

FL @ FVTPL FV

FL @ AC

Change in FV

FL @ FVTPL FV

FL @ AC FV - TC

Change in FV

FL @ FVTPL FV FV

FL @ AC FV - TC

Change in FV

FL @ FVTPL FV FV

FL @ AC FV - TC AC

Change in FV

FL @ FVTPL FV FV P/L

FL @ AC FV - TC AC

Change in FV

FL @ FVTPL FV FV P/L

FL @ AC FV - TC AC Ignore

Unadjusted AP P5,000,000Purchased – FOB dest.

received 12/24/12 400,000Purchased – FOB SP

shipped 12/28/12 650,000Adjusted AP P6,050,000

Problem No. 60Problem No. 60Problem No. 60Problem No. 60

Answer is letter C

Advertising - 2012 P 1,500Monthly rent (P4,800 x ½)

2,400Additional rent

[(P2.2M-P1.2M) x .05) 50,000Accrued liabilities

P53,900

Answer is letter D

Problems 62 & 63Problems 62 & 63Problems 62 & 63Problems 62 & 63

Fair value of L & RFair value of L & RFair value of L & RFair value of L & RFV of L&R = PV of Cash Flows

Short Term = Face value/Transaction price

Long Term: Interest bearing:

Realistic/Market rate = Face value

Unrealistic/Below market rate:

1) Cash price (Fair value of goods/services)2) PV of cash flows discounted using prevailing interest rate

Non-Interest bearing:

1) Cash price (Fair value of goods/services)2) PV of cash flows discounted using prevailing interest rate

Date Discount Amort.

Payment A.C.

Journal entry – July 1, 2011Equipment P79,000Discount on NP (FV-P69T) 34,472

Note payable P103,472Cash 10,000

Payment A.C.

7/1/11

Payment A.C.

7/1/11 69,000

Payment A.C.

7/1/11 69,000

6/30/12

Payment A.C.

7/1/11 69,000

6/30/12 6,900

Payment A.C.

7/1/11 69,000

6/30/12 6,900 12,934

Journal entries – June 30, 2012Interest expense P6,900

Discount on NP P6,900

Note payable P12,934Cash P12,934

Payment A.C.

7/1/11 69,000

6/30/12 6,900 12,934 62,966

Payment A.C.

7/1/11 69,000

6/30/12 6,900 12,934 62,966

6/30/13

Payment A.C.

7/1/11 69,000

6/30/12 6,900 12,934 62,966

6/30/13 6,297

Payment A.C.

7/1/11 69,000

6/30/12 6,900 12,934 62,966

6/30/13 6,297 12,934

Payment A.C.

7/1/11 69,000

6/30/12 6,900 12,934 62,966

6/30/13 6,297 12,934 56,329

CA, 6/30/12 P62,966Discount amort. 7/1 – 12/31/12:

(P6,297 x 6/12) 3,149CA, 12/31/12

P66,115

Answer No. 62 is letter C

Payment A.C.

7/1/11 69,000

6/30/12 6,900 12,934 62,966

6/30/13 6,297 12,934 56,329

Interest expense - 20121/1 to 6/30 (P6,900 x 6/12) P3,4507/1 to 12/31 (P6,297 x 6/12) 3,149

Total P6,599

Answer No. 63 is letter B

Debt RestructuringDebt Restructuring Debt RestructuringDebt Restructuring

• Asset swap

• Equity swap

• Modification of terms

Modification of TermsModification of TermsModification of TermsModification of Terms

Substantially modified

[(CA old - PV new)/ CA old] => 10% Gain or loss is recognized

Not substantially modified

[(CA old - PV new)/ CA old] < 10% Gain or loss is not recognized

Problem No. 64Problem No. 64Problem No. 64Problem No. 64CA of Old liability P250,000PV of New liability:

PV of P (P150T x .8264) P123,960PV of I (P7.5T x 1.7355) 13,016 136,976

Difference P113,024Percentage = 45%

Asset swap P100,000Equity swap 100,000Modification of terms 113,024Total P313,024

Answer is letter C

Asset swap

CA of liability (P1M x ½) P500,000CA of land ( 400,000)Gain P100,000

Equity swap

CA of liability (P1M x ¼ ) P250,000FV of shares issued (150,000)Gain P100,000

What are compound What are compound financial instruments?financial instruments?What are compound What are compound financial instruments?financial instruments?

Financial instruments that have both a liability and an equity component from the issuer's perspective.

Examples:• Convertible bonds• Bonds issued with detachable

share purchase warrants

Split accounting for compound Split accounting for compound financial instrumentsfinancial instrumentsSplit accounting for compound Split accounting for compound financial instrumentsfinancial instruments

PAS 32 requires that the component parts be accounted for and presented separately.

When to split the components?When to split the components?When to split the components?When to split the components?

The split is made at issuance.

How to split the components?How to split the components?How to split the components?How to split the components?

The equity component is assigned the residual amount.

Issue price with(P2.4M x 1.06) P2,544,000

Less issue price without(P2.4M x 1.045) 2,508,000

Equity component P 36,000

Journal entry

Cash P2,544,000Bonds payable P2,400,000Premium on BP 108,000Share premium-CO 36,000

Answer is letter C

Face value P2,400,000Unamortized bond premium

(P108,000 x 10/15) 72,000Carrying amount, 1/3/12 2,472,000

Journal entry – NO TransferBonds payable P2,400,000Premium on BP 72,000

Share capital P1,440,000Share premium 1,032,000

Answer is letter B

Face value P2,400,000Unamortized bond premium

(P108,000 x 10/15) 72,000Carrying amount, 1/3/12 2,472,000

Journal entry – NO TransferBonds payable P2,400,000Premium on BP 72,000

Share capital P1,440,000Share premium 1,032,000

With Transfer

Share premium-CO 36,000

1,068,000

Classification of LeasesClassification of LeasesClassification of LeasesClassification of Leases

• A finance lease is a lease that transfers substantially all the risks and rewards incidental to ownership of an asset. Title may or may not eventually be transferred.

• An operating lease is a lease other than a finance lease.

Classification of LeasesClassification of LeasesClassification of LeasesClassification of Leases

A simple guide:

Identify the substantial owner

Lessor – Operating lease

Lessee – Finance lease

Usual Indicators of Usual Indicators of Finance Lease (TOLPS)Finance Lease (TOLPS)Usual Indicators of Usual Indicators of Finance Lease (TOLPS)Finance Lease (TOLPS)• Transfer of ownership by the end of the

lease term; • Option to purchase the asset at a price

which is expected to be sufficiently lower than fair value;

• Lease term is for the major part of the economic life of the asset, even if title is not transferred;

• Present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset; and

• Specialized in nature such that only the lessee can use it without major modifications being made.

Lease term/economic life = ?75%

PV of MLP/FV of leased asset = ?90%

Problem No. 67Problem No. 67

Annual lease fee P1,000,000Amortization of lease bonus

(P400,000/4) 100,000Depreciation

[(P2M-P.2M)/10]( 180,000)

Accounting for lease bonus Accounting for lease bonus paid by the lesseepaid by the lesseeAccounting for lease bonus Accounting for lease bonus paid by the lesseepaid by the lessee

Lessee

Prepaid rent; amortize over the lease term

Lessor

Unearned rent; amortize over the lease term

What are initial direct costs?What are initial direct costs?What are initial direct costs?What are initial direct costs?

Initial direct costs are incremental costs that are directly attributable to negotiating and arranging a lease.

Initial Direct CostsInitial Direct CostsInitial Direct CostsInitial Direct CostsCore principle – Included in the CA of the asset

LESSEEOperating – expenseFinance lease – included in the cost of asset

LESSOROperating – deferred and amortized over the LTFinance lease:

Sales-type – included in cost of salesDirect financing – included in net investment

Annual lease fee P1,000,000Amortization of lease bonus

(P400,000/4) 100,000Depreciation

[(P2M-P.2M)/10]( 180,000)

Amortization of IDC(P120,000/4) ( 30,000)

Net rental income P 890,000

Answer is letter C

Finance Lease Accounting Finance Lease Accounting by Lesseesby LesseesFinance Lease Accounting Finance Lease Accounting by Lesseesby Lessees

• Recognize asset and liability• When? - At commencement of the

lease term• How much? - Lower of the FV of the

asset and the PV of the MLP• Discount rate? - interest rate

implicit in the lease, if practicable, or else at the entity's incremental borrowing rate

The commencement of the lease term is the date from which the lessee is entitled to exercise its right to use the leased asset.

Date Payment

Interest Principal

Date Payment

Interest Principal

1/1/11 52,000

Date Payment

Interest Principal

1/1/11 52,0001/1/11 12,000

Date Payment

Interest Principal

1/1/11 52,0001/1/11 12,000 -

Date Payment

Interest Principal

1/1/11 52,0001/1/11 12,000 - 12,000

Date Payment

Interest Principal

1/1/11 52,0001/1/11 12,000 - 12,000 40,000

Date Payment

Interest Principal

1/1/11 52,0001/1/11 12,000 - 12,000 40,0001/1/12 12,000

Date Payment

Interest Principal

1/1/11 52,0001/1/11 12,000 - 12,000 40,0001/1/12 12,000 3,200

Date Payment

Interest Principal

1/1/11 52,0001/1/11 12,000 - 12,000 40,0001/1/12 12,000 3,200 8,800

Date Payment

Interest Principal

1/1/11 52,0001/1/11 12,000 - 12,000 40,0001/1/12 12,000 3,200 8,800 31,200

Date Payment

Interest Principal

1/1/11 52,0001/1/11 12,000 - 12,000 40,0001/1/12 12,000 3,200 8,800 31,2001/1/13 12,000

Date Payment

Interest Principal

1/1/11 52,0001/1/11 12,000 - 12,000 40,0001/1/12 12,000 3,200 8,800 31,2001/1/13 12,000 2,496

Interest expense: 10/1/11-12/31/11 (P3,200x3/12) P 800 1/1/12-9/30/12 (P2,496x9/12) 1,872

2,672Depreciation (P52,000 x .2) 10,400Total P13,072

Answer is letter A

Finance Lease Accounting Finance Lease Accounting by Lessorsby LessorsFinance Lease Accounting Finance Lease Accounting by Lessorsby Lessors

At commencement of the lease term, the lessor should record a finance lease in the SFP as a receivable, at an amount equal to the net investment in the lease.

Net investment in the leaseNet investment in the leaseNet investment in the leaseNet investment in the lease

Net investment (NI) in the lease is the gross investment in the lease discounted at the interest rate implicit in the lease.

Gross investment (GI) in the lease is the aggregate of:

• the minimum lease payments receivable by the lessor under a finance lease, and

• any unguaranteed residual value accruing to the lessor.

Unearned finance income (UFI) is the difference between:

• the gross investment in the lease, and• the net investment in the lease.

UFI = GI - NI

GI = MLP + URV

= P10M

= P11,000,000

NI = PV of MLP + PV of URV

= P8,200,000

P2,800,000

P7,580,000 P620,000+

Answer is letter A

Computation of Profit on SaleComputation of Profit on SaleComputation of Profit on SaleComputation of Profit on Sale

Sales (PV of MLP) P xxCost of sales

(Cost – PV of URV) ( xx)Profit on sale P xx

Sales P7,580,000Cost of sales

(P5M – P620T) (4,380,000)

Sales P7,580,000Cost of sales

(P5M – P620T) (4,380,000)Initial direct costs

( 200,000)Profit on sale P3,000,000

Answer is letter A

UFI = GI - NI

GI = MLP + URV

= P2,500,000

NI = PV of MLP + PV of URV

UFI = GI - NI

GI = MLP + URV

= P2,500,000

NI = PV of MLP+PV of URV+ IDC

= P2,020,000

P480,000

P1,955,000 P65,000+

Answer is letter A

Journal entry FLR P2,500,000

Equipment P1,955,000Cash 65,000Discount on FLR (UFI) 480,000

Initial CA P2,020,000Initial payment ( 500,000)Balance 1,520,000x implicit rate in the lease ?Interest income P ?

P500,000 x PVF = P2,020,000PVF = P2,020,000/P500,000PVF = 4.04

PV of MLP + PV of URV = FV of LA + IDC

Initial CA P2,020,000Initial payment ( 500,000)Balance 1,520,000x implicit rate in the lease .12Interest income P 182,400

Answer is letter B

Sale and LeasebackSale and LeasebackSale and LeasebackSale and LeasebackFinance Lease:• any excess of proceeds over the carrying

amount is deferred and amortized over the lease term.

Operating lease:• SP = FV : the profit or loss should be

recognized immediately • SP < FV : profit or loss should be

recognized immediately• SP > FV : the excess over fair value should

be deferred and amortized over the period of use

If the FV < CA at the time of the transaction - a loss equal to the difference should be recognized immediately.

Except if a loss is compensated for by future rentals at below market price, the loss should be amortized over the period of use

Answer No. 73 is B

Problems 74 & 78Problems 74 & 78Problems 74 & 78Problems 74 & 78

PAS 19R defines service costs as including:

• Current service costs

• Past service costs

• Gains or losses on non-routine settlements

Net interest expense (income)

Net defined benefit liability

(asset), beg. (DBO/PBO – FVPA)

Discount rate, beg.

Components of remeasurements in OCI:

• Actuarial gains and losses on PBO

• Diff. between actual return on plan assets and interest income

• Changes in the asset ceiling (outside of any changes recorded as net interest)

Defined benefit cost

TCI SFP Debit Credit

P/L OCI Dr(Cr) FVPA PBO

12/31/12

Service costs

Current SC

Past SC

Non-routine settle.

Net interest

Exp. - PBO

Inc. - FVPA

Remeasurements

Actuarial - PBO

Non-interest - FVPA

Asset ceiling - N.I.

Contribution

Payment

12/31/13

12/31/12 17,700

Service costs

Current SC

Past SC

Non-routine settle.

Net interest

Exp. - PBO

Inc. - FVPA

Remeasurements

Actuarial - PBO

Non-interest - FVPA

Contribution

Payment

12/31/13

12/31/12 14,500 17,700

Service costs

Current SC

Past SC

Non-routine settle.

Net interest

Exp. - PBO

Inc. - FVPA

Remeasurements

Actuarial - PBO

Non-interest - FVPA

Contribution

Payment

12/31/13

12/31/12 (3,200) 14,500 17,700

Service costs

Current SC

Past SC

Non-routine settle.

Net interest

Exp. - PBO

Inc. - FVPA

Remeasurements

Actuarial - PBO

Non-interest - FVPA

Contribution

Payment

12/31/13

Prepaid/Accrued Pension Expense3,200,000 12/31/12

12/31/12 (3,200) 14,500 17,700

Service costs

Current SC

Past SC

Non-routine settle.

Net interest

Exp. - PBO

Inc. - FVPA

Remeasurements

Actuarial - PBO

Non-interest - FVPA

Contribution

Payment

12/31/13

12/31/12 (3,200) 14,500 17,700

Service costs

Current SC 880

Past SC

Non-routine settle.

Net interest

Exp. - PBO

Inc. - FVPA

Remeasurements

Actuarial - PBO

Non-interest - FVPA

Contribution

Payment

12/31/13

12/31/12 (3,200) 14,500 17,700

Service costs

Current SC 880 880

Past SC

Non-routine settle.

Net interest

Exp. - PBO

Inc. - FVPA

Remeasurements

Actuarial - PBO

Non-interest - FVPA

Contribution

Payment

12/31/13

12/31/12 (3,200) 14,500 17,700

Service costs

Current SC 880 880

Past SC 200

Non-routine settle.

Net interest

Exp. - PBO

Inc. - FVPA

Remeasurements

Actuarial - PBO

Non-interest - FVPA

Contribution

Payment

12/31/13

12/31/12 (3,200) 14,500 17,700

Service costs

Current SC 880 880

Past SC 200 200

Non-routine settle.

Net interest

Exp. - PBO

Inc. - FVPA

Remeasurements

Actuarial - PBO

Non-interest - FVPA

Contribution

Payment

12/31/13

12/31/12 (3,200) 14,500 17,700

Service costs

Current SC 880 880

Past SC 200 200

Non-routine settle. - - -

Net interest

Exp. - PBO

Inc. - FVPA

Remeasurements

Actuarial - PBO

Non-interest - FVPA

Contribution

Payment

12/31/13

P17,700,000 x .12 = P2,124,000

12/31/12 (3,200) 14,500 17,700

Service costs

Current SC 880 880

Past SC 200 200

Net interest

Exp. - PBO 2,124

Inc. - FVPA

Remeasurements

Actuarial - PBO

Non-interest - FVPA

Contribution

Payment

12/31/13

P17,700,000 x .12 = P2,124,000

12/31/12 (3,200) 14,500 17,700

Service costs

Current SC 880 880

Past SC 200 200

Net interest

Exp. - PBO 2,124 2,124

Inc. - FVPA

Remeasurements

Actuarial - PBO

Non-interest - FVPA

Contribution

Payment

12/31/13

P17,700,000 x .12 = P2,124,000

12/31/12 (3,200) 14,500 17,700

Service costs

Current SC 880 880

Past SC 200 200

Net interest

Exp. - PBO 2,124 2,124

Inc. - FVPA

Remeasurements

Actuarial - PBO

Non-interest - FVPA

Contribution

Payment

12/31/13

P14,500,000 x .12 = P1,740,000

12/31/12 (3,200) 14,500 17,700

Service costs

Current SC 880 880

Past SC 200 200

Net interest

Exp. - PBO 2,124 2,124

Inc. - FVPA (1,740)

Remeasurements

Actuarial - PBO

Non-interest - FVPA

Contribution

Payment

12/31/13

P14,500,000 x .12 = P1,740,000

12/31/12 (3,200) 14,500 17,700

Service costs

Current SC 880 880

Past SC 200 200

Net interest

Exp. - PBO 2,124 2,124

Inc. - FVPA (1,740) 2,000

Remeasurements

Actuarial - PBO

Non-interest - FVPA

Contribution

Payment

12/31/13

12/31/12 (3,200) 14,500 17,700

Service costs

Current SC 880 880

Past SC 200 200

Net interest

Exp. - PBO 2,124 2,124

Inc. - FVPA (1,740) 2,000

Remeasurements

Actuarial - PBO

Non-interest - FVPA (260)

Contribution

Payment

12/31/13

12/31/12 (3,200) 14,500 17,700

Service costs

Current SC 880 880

Past SC 200 200

Net interest

Exp. - PBO 2,124 2,124

Inc. - FVPA (1,740) 2,000

Remeasurements

Actuarial - PBO (900)

Contribution

Payment

12/31/13

12/31/12 (3,200) 14,500 17,700

Service costs

Current SC 880 880

Past SC 200 200

Net interest

Exp. - PBO 2,124 2,124

Inc. - FVPA (1,740) 2,000

Remeasurements

Actuarial - PBO (900) (900)

Contribution

Payment

12/31/13

12/31/12 (3,200) 14,500 17,700

Service costs

Current SC 880 880

Past SC 200 200

Net interest

Exp. - PBO 2,124 2,124

Inc. - FVPA (1,740) 2,000

Remeasurements

Asset ceiling - N.I. - -

Contribution

Payment

12/31/13

12/31/12 (3,200) 14,500 17,700

Service costs

Current SC 880 880

Past SC 200 200

Net interest

Exp. - PBO 2,124 2,124

Inc. - FVPA (1,740) 2,000

Remeasurements

TCI 1,464

Contribution

Payment

12/31/13

12/31/12 (3,200) 14,500 17,700

Service costs

Current SC 880 880

Past SC 200 200

Net interest

Exp. - PBO 2,124 2,124

Inc. - FVPA (1,740) 2,000

Remeasurements

TCI 1,464 (1,160)

Contribution

Payment

12/31/13

12/31/12 (3,200) 14,500 17,700

Service costs

Current SC 880 880

Past SC 200 200

Net interest

Exp. - PBO 2,124 2,124

Inc. - FVPA (1,740) 2,000

Remeasurements

TCI 1,464 (1,160) (304)

Contribution

Payment

12/31/13

Journal entry:

Pension expense (P/L) P1,080,000 Interest expense 384,000

Remeasurement gain (OCI)P1,160,000P/A PE 304,000

12/31/12 (3,200) 14,500 17,700

Service costs

Current SC 880 880

Past SC 200 200

Net interest

Exp. - PBO 2,124 2,124

Inc. - FVPA (1,740) 2,000

Remeasurements

TCI 1,464 (1,160) (304)

Contribution

Payment

12/31/13

Journal entry (Alternative):

Pension expense (P/L) P1,464,000 Remeasurement gain (OCI)P1,160,000P/A PE 304,000

304,000 TCI

12/31/12 (3,200) 14,500 17,700

Service costs

Current SC 880 880

Past SC 200 200

Net interest

Exp. - PBO 2,124 2,124

Inc. - FVPA (1,740) 2,000

Remeasurements

TCI 1,464 (1,160) (304)

Contribution

Payment

12/31/13

12/31/12 (3,200) 14,500 17,700

Service costs

Current SC 880 880

Past SC 200 200

Net interest

Exp. - PBO 2,124 2,124

Inc. - FVPA (1,740) 2,000

Remeasurements

TCI 1,464 (1,160) (304)

Contribution 1,100

Payment

12/31/13

12/31/12 (3,200) 14,500 17,700

Service costs

Current SC 880 880

Past SC 200 200

Net interest

Exp. - PBO 2,124 2,124

Inc. - FVPA (1,740) 2,000

Remeasurements

TCI 1,464 (1,160) (304)

Contribution 1,100 1,100

Payment

12/31/13

Journal entry:

P/A PE P1,100,000 Cash P1,100,000

Cont. 1,100,000 304,000 TCI

12/31/12 (3,200) 14,500 17,700

Service costs

Current SC 880 880

Past SC 200 200

Net interest

Exp. - PBO 2,124 2,124

Inc. - FVPA (1,740) 2,000

Remeasurements

TCI 1,464 (1,160) (304)

Payment

12/31/13

12/31/12 (3,200) 14,500 17,700

Service costs

Current SC 880 880

Past SC 200 200

Net interest

Exp. - PBO 2,124 2,124

Inc. - FVPA (1,740) 2,000

Remeasurements

TCI 1,464 (1,160) (304)

Payment (1,500)

12/31/13

12/31/12 (3,200) 14,500 17,700

Service costs

Current SC 880 880

Past SC 200 200

Net interest

Exp. - PBO 2,124 2,124

Inc. - FVPA (1,740) 2,000

Remeasurements

TCI 1,464 (1,160) (304)

Payment (1,500) (1,500)

12/31/13

12/31/12 (3,200) 14,500 17,700

Service costs

Current SC 880 880

Past SC 200 200

Net interest

Exp. - PBO 2,124 2,124

Inc. - FVPA (1,740) 2,000

Remeasurements

TCI 1,464 (1,160) (304)

Payment (1,500) (1,500)

12/31/13 (2,404)

12/31/12 (3,200) 14,500 17,700

Service costs

Current SC 880 880

Past SC 200 200

Net interest

Exp. - PBO 2,124 2,124

Inc. - FVPA (1,740) 2,000

Remeasurements

TCI 1,464 (1,160) (304)

Payment (1,500) (1,500)

12/31/13 (2,404) 16,100

12/31/12 (3,200) 14,500 17,700

Service costs

Current SC 880 880

Past SC 200 200

Net interest

Exp. - PBO 2,124 2,124

Inc. - FVPA (1,740) 2,000

Remeasurements

TCI 1,464 (1,160) (304)

Payment (1,500) (1,500)

12/31/13 (2,404) 16,100 18,504

Cont. 1,100,000 304,000 TCI

2,404,000 12/31/13

12/31/12 (3,200) 14,500 17,700

Service costs

Current SC 880 880

Past SC 200 200

Net interest

Exp. - PBO 2,124 2,124

Inc. - FVPA (1,740) 2,000

Remeasurements

TCI 1,464 (1,160) (304)

Payment (1,500) (1,500)

12/31/13 (2,404) 16,100 18,504

No. 74-B

No. 75-A

No. 76-B

No. 77-C

No. 78-A

TypesTypesTypesTypes

• Equity-settled • Fair value at grant date

• Cash-settled • Fair value at each reporting date

• Cash or equity settled • Split accounting, being a

compound financial inst.

Cumulative exp., Year 2Equity (P7,600 x 2/3) P 5,067Liability (1,000 x P55 x 2/3) 36,667

41,734Cumulative exp., Year 1

Equity (P7,600 x 1/3) P 2,533Liability (1,000 x P52 x 1/3) 17,333

19,866

Expense – Year 2 P21,868

Answer is letter A

Computation of equity component:

FV share alternative(1,200 x P48) P57,600

FV of cash alternative(1,000 x P50) (50,000)

Equity component P 7,600

Answer is letter D

Answer is letter C

Current tax expense(Taxable profit x tax rate) P xx

Change in DTL (Ending – Beginning):Increase xxDecrease ( xx)

Change in DTA (Ending – Beginning):Increase ( xx)Decrease xx

Total tax expense (APST x tax rate) Pxx

Computation of tax expenseComputation of tax expense

Journal entry - CTE

Income tax expense PxxIncome tax payable Pxx

Journal entry – Increase in DTL

Income tax expense PxxDeferred tax liability Pxx

Journal entry – Increase in DTA

Deferred tax asset PxxIncome tax expense Pxx

Accounting profit P4,500,000Excess tax depreciation ( 3,000,000)Litigation accrual 450,000Rent received in advance 250,000Interest income on LTCD ( 100,000)Taxable profit 2,100,000x tax rate .35Current tax expense P 735,000

Answer is letter A

CA Tax base

Diff. Remarks

Property 10M

Plant 5M

Inventory 4M

Receivables

Payables 6M

Cash 2M

Taxable temporary difference (TTD)CA of asset > Tax baseCA of liability < Tax base

Deductible temporary difference (DTD)CA of asset < Tax baseCA of liability > Tax base

CA Tax base

Diff. Remarks

Property 10M 7M

Plant 5M

Inventory 4M

Receivables

Payables 6M

Cash 2M

CA Tax base

Diff. Remarks

Property 10M 7M 3M

Plant 5M

Inventory 4M

Receivables

Payables 6M

Cash 2M

CA Tax base

Diff. Remarks

Property 10M 7M 3M TTD

Plant 5M

Inventory 4M

Receivables

Payables 6M

Cash 2M

CA Tax base

Diff. Remarks

Plant 5M 4M

Inventory 4M

Receivables

Payables 6M

Cash 2M

CA Tax base

Diff. Remarks

Plant 5M 4M 1M

Inventory 4M

Receivables

Payables 6M

Cash 2M

CA Tax base

Diff. Remarks

Plant 5M 4M 1M TTD

Inventory 4M

Receivables

Payables 6M

Cash 2M

CA Tax base

Diff. Remarks

Plant 5M 4M 1M TTD

Inventory 4M 6M

Receivables

Payables 6M

Cash 2M

CA Tax base

Diff. Remarks

Plant 5M 4M 1M TTD

Inventory 4M 6M 2M

Receivables

Payables 6M

Cash 2M

CA Tax base

Diff. Remarks

Plant 5M 4M 1M TTD

Inventory 4M 6M 2M DTD

Receivables

Payables 6M

Cash 2M

CA Tax base

Diff. Remarks

Plant 5M 4M 1M TTD

Receivables

Payables 6M

Cash 2M

CA Tax base

Diff. Remarks

Plant 5M 4M 1M TTD

Receivables

3M 4M 1M

Payables 6M

Cash 2M

CA Tax base

Diff. Remarks

Plant 5M 4M 1M TTD

Receivables

3M 4M 1M DTD

Payables 6M

Cash 2M

CA Tax base

Diff. Remarks

Plant 5M 4M 1M TTD

Receivables

3M 4M 1M DTD

Payables 6M 6M - -

Cash 2M

CA Tax base

Diff. Remarks

Plant 5M 4M 1M TTD

Receivables

3M 4M 1M DTD

Payables 6M 6M - -

Cash 2M 2M - -

CA Tax base

Diff. Remarks

Plant 5M 4M 1M TTD

Receivables

3M 4M 1M DTD

Payables 6M 6M - -

Cash 2M 2M - -

Increase in DTL (P4M x .35) P1.40MIncrease in DTA (P3M x .35) (1.05M)Deferred tax provision P0.35M

Answer is letter D

January 4 P -April 8 200,000June 9 150,000July 29 -December 31 200,000Share premium, 12/31 P550,000

Answer is letter D

Journal entry, January 4

Cash P1,000,000Share capital P1,000,000

Journal entry, April 8

Cash P700,000Share capital P500,000Share premium 200,000

Journal entry, June 9

Cash P300,000Share capital P150,000Share premium 150,000

Journal entry, July 29

Treasury shares P200,000Cash P200,000

Journal entry, December 31

Cash P400,000Treasury shares P200,000Share premium-TS 200,000

Equity, 1/1 P6,350,000PS retirement (5T x P11) ( 55,000)TS acquisition (5T x P12) ( 60,000)Share split -TS re-issuance (2T x P8) 16,000Profit for the year 300,000Equity, 12/31 P6,551,000

Answer is letter B

Net income (2009-2011) P630,000Dividends declared (2009-2011) ( 200,000)RE, 1/1/12 430,000Prior period error

(P40,000 x .65) ( 26,000)Change in policy effect

(P70,000 x .65) ( 45,500)RE, 1/1/12 – as adjusted 358,500Net income – 2012

(P480,000 x .65) 312,000Dividends declared-2012

( 200,000)Retained earnings, 12/31/12 P470,500

Answer is letter D

Unadjusted retained earnings (P400,000)Reduction in other assets ( 150,000)Reduction in PPE ( 350,000)Adjusted retained earnings ( 900,000)Existing share premium 300,000Minimum reduction of SC (P600,000)

Answer is letter D

Profit to OS

WA Outs. OS

Profit to OS

WA Outs. OS

Profit for 2010 (f) P1,500,000PS dividend (P1.25M x .085) ( 106,250)Profit to OS P1,393,750

Profit to OS

WA Outs. OS

Basic P1,393,750

Profit for 2010 (f) P1,500,000PS dividend (P1.25M x .085) ( 106,250)Profit to OS P1,393,750

Profit to OS

WA Outs. OS

Basic P1,393,750 1,000,000

Profit to OS

WA Outs. OS

Basic P1,393,750 1,000,000 P1.39

Incremental EPSIncremental EPS

Increase in Profit to OS

Increase in WA outstanding OS

Test for dilution:

If incremental EPS < Basic EPS- Most likely dilutive

If incremental EPS > Basic EPS- Most likely antidilutive

Incremental EPSIncremental EPS

Increase in Profit to OS

Increase in WA outstanding OS

Options P0

Convertible BondsNet interest exp.

(P5M x .07 x .6) P210,000Shares to be issued

(P5M/P1T x 50) 250,000P 0.84

Profit to OS

WA Outs. OS

Basic P1,393,750 1,000,000 P1.39

Exercise of options

Profit to OS

WA Outs. OS

Basic P1,393,750 1,000,000 P1.39

Exercise of options

Shares to be issued (a) 100,000TS acquired [(100T x P15)/P20) ( 75,000)Incremental shares 25,000

Profit to OS

WA Outs. OS

Basic P1,393,750 1,000,000 P1.39

Exercise of options

25,000

Shares to be issued (a) 100,000TS acquired [(100T x P15)/P20) ( 75,000)Incremental shares 25,000

Profit to OS

WA Outs. OS

Basic P1,393,750 1,000,000 P1.39

Exercise of options

25,000

1,393,750

Profit to OS

WA Outs. OS

Basic P1,393,750 1,000,000 P1.39

Exercise of options

25,000

1,393,750 1,025,000

Profit to OS

WA Outs. OS

Basic P1,393,750 1,000,000 P1.39

Exercise of options

25,000

1,393,750 1,025,000 1.36

Profit to OS

WA Outs. OS

Basic P1,393,750 1,000,000 P1.39

Exercise of options

25,000

1,393,750 1,025,000 1.36

Bond conversion

Profit to OS

WA Outs. OS

Basic P1,393,750 1,000,000 P1.39

Exercise of options

25,000

1,393,750 1,025,000 1.36

Bond conversion 210,000

Profit to OS

WA Outs. OS

Basic P1,393,750 1,000,000 P1.39

Exercise of options

25,000

1,393,750 1,025,000 1.36

Bond conversion 210,000 250,000

Profit to OS

WA Outs. OS

Basic P1,393,750 1,000,000 P1.39

Exercise of options

25,000

1,393,750 1,025,000 1.36

1,603,750

Profit to OS

WA Outs. OS

Basic P1,393,750 1,000,000 P1.39

Exercise of options

25,000

1,393,750 1,025,000 1.36

1,603,750 1,275,000

Profit to OS

WA Outs. OS

Basic P1,393,750 1,000,000 P1.39

Exercise of options

25,000

1,393,750 1,025,000 1.36

1,603,750 1,275,000 1.26

Profit to OS

WA Outs. OS

Basic P1,393,750 1,000,000 P1.39

Exercise of options

25,000

1,393,750 1,025,000 1.36

1,603,750 1,275,000 1.26

Answer is letter C

Acc. depreciation, 1/1/12(P528,000 x 3/8) P198,000

Depreciation for 2012[(P528T – P198T – P48T)/3] 94,000

Acc. depreciation, 12/31/12 P292,000

Answer is letter A

2010 2011 2012

Inventory, beg

Purchases

Inventory, end

Inc (Dec) in profit

2010 2011 2012

Inventory, beg

Purchases

Inventory, end 100,000 150,000 200,000

Inc (Dec) in profit

2010 2011 2012

Inventory, beg

Purchases

Inventory, end 100,000 150,000 200,000

COS (100,000)

Inc (Dec) in profit

2010 2011 2012

Inventory, beg

Purchases

Inventory, end 100,000 150,000 200,000

COS (100,000)

Inc (Dec) in profit 100,000

2010 2011 2012

Inventory, beg 100,000

Purchases

Inventory, end 100,000 150,000 200,000

COS (100,000)

2010 2011 2012

Purchases

Inventory, end 100,000 150,000 200,000

COS (100,000) (50,000)

2010 2011 2012

Purchases

Inventory, end 100,000 150,000 200,000

COS (100,000) (50,000)

Inc (Dec) in profit 100,000 50,000

2010 2011 2012

Inventory, beg 100,000 150,000

Purchases

Inventory, end 100,000 150,000 200,000

COS (100,000) (50,000)

2010 2011 2012

Purchases

Inventory, end 100,000 150,000 200,000

COS (100,000) (50,000) (50,000)

2010 2011 2012

Purchases

Inventory, end 100,000 150,000 200,000

COS (100,000) (50,000) (50,000)

Inc (Dec) in profit 100,000 50,000 50,000

Answer is letter D

Unadjusted net income P250,000a) Purchases – under ( 100,000)b) Inventory - under 150,000c) Business taxes - under ( 50,000)d) Rent income – over

(P30,000 x 4/6) ( 20,000)e) Insurance expense - over

(P120,000 x 6/12) 60,000Adjusted net income P290,000

Answer is letter B

When is an asset current?When is an asset current?When is an asset current?When is an asset current?An asset shall be classified as current when it

satisfies any of the following criteria:• it is expected to be realized in, or is

intended for sale or consumption, in the entity’s normal operating cycle;

• it is held primarily for the purpose of being traded;

• it is expected to be realized within 12 months after the reporting period; or

• it is cash or a cash equivalent (as defined in PAS 7) unless restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period.

When is a liability current?When is a liability current?When is a liability current?When is a liability current?A liability shall be classified as current

when it satisfies any of the following criteria:

• it is expected to be settled in the entity’s normal operating cycle;

• it is held primarily for the purpose of being traded;

• it is due to be settled within 12 months after the reporting period; or

• the entity does not have an unconditional right to defer settlement of the liability for at least 12 months after the reporting period.

Answer No. 92 is letter AAnswer No. 93 is letter D

=P385T

=P788T

=P275T

=P308T

Answer is letter C

Unadjusted profit P10.0MAdd (deduct) adjustments: Unrealized loss on AFS (OCI) .5M Prior period adjustment (RE) 2.0M Translation gain (OCI) ( 4.5M) Realized RS (RE) ( 1.0M)Adjusted profit P

Answer is letter C

Adjusted profit P 7.0MOther comprehensive income Unrealized loss on AFS ( .5M) Translation gain 4.5M 4.0MComprehensive income P11.0M

Simple GuideSimple Guide

Accruals : + EndingDeferrals: + Beginning

Answer is letter B

Answer is letter A

Net increase in equity P267,500Contributions from owners ( 150,000)Distributions to owners 25,000Net income P 142,500

Answer is letter C

Operating

a. P59,200c. ( 7,400)e. 4,500g. 12,600 i. ( 5,300)j. 3,700l. 1,900n. 5,000 p. ( 2,300)

71,900

Ans. #100 D

Investing

b. (98,000)f. 7,000 k. ( 9,600)

(100,600)

Ans. #101 C

Financing

d. 37,100 h. (36,000)m. 18,000

19,100

Ans. #102 A

Cash provided by operating P 71,900Cash used in investing ( 100,600)Cash provided by financing 19,100Net decrease in cash (P 9,600)

Answer is letter D

Cash balance beginning (q) P20,300Net decrease in cash

( 9,600)Cash balance ending P10,700

Answer No. 104 is B

Cash P 3.5MInventory (P27M x 300/270) 30.0MPPE (P9M x 300/150) 18.0MTotal assets 51.5MCurrent liabilities ( 7.0M)Noncurrent liabilities ( 5.0M)Equity 39.5MShare capital (P4M x 300/100) ( 12.0M)Retained earnings (balance) P27.5M

Answer is letter B

Problem No. 106Problem No. 106Problem No. 106Problem No. 106Net MI, 1/1 – constant peso

(P150T x 150/125) P 180,000Increase in MI restated 2,000,000Decrease in MI restated (1,500,000)Net MI, 12/31– constant peso

680,000Net MI, 12/31 – nominal peso 400,000Purchasing power loss P 280,000

Answer is letter A

Computation of purchasing power loss:

Net M.I., end of CY – constant peso xxNet M.I., end of CY – nominal peso (xx)

xxLOSS: Net monetary asset (MA > ML)GAIN: Net monetary liability (MA < ML)

Monetary items - money held and items to be received or paid in money

Constant peso – inflation adjusted

Nominal peso – not adjusted for inflation

Sales (P350T x 112/109) P359,633Less cost of sales: Inventory, beg. P 30,962 Purchases 226,055 TGAS 257,017 Inventory, end. ( 31,596) 225,421Gross profit 134,212Dep.– bldg. (P34T x 112/100) ( 38,080)Dep.– equip. (P85T) ( 19,040)Dep.– equip. (P30T) ( 6,340) Other exp. (P48T x 112/109) ( 49,321)Constant peso profit P 21,431

Inventory, beg. (P28,750 x 112/104)

Purchases (P220,000 x 112/109)

Inventory, end. (P30,750 x 112/109)Dep. Equip. – P85,000

(P23,000 x 85/115 x 112/100)

Dep. Equip. – P30,000(P23,000 x 30/115 x 112/106)

Answer is letter D

Debit Credit

Accounts payable P100,000

Accounts receivable P120,000

Building 400,000

Share Capital 760,000

Cash 60,000

Equipment 160,000

Land 50,000

Notes payable 280,000

Retained earnings 100,000

Total P790,000 P1,240,000

Answer is letter C

Prepaid InsuranceBeginning 5,600

Ending 6,400

Prepaid InsuranceBeginning 5,600

Payment 2,500

Ending 6,400

Prepaid InsuranceBeginning 5,600 Adjustment

Payment 2,500

Ending 6,400

Prepaid InsuranceBeginning 5,600 1,700 Adjustment

Payment 2,500

Ending 6,400

Answer is letter B

AJEInsurance expense P1,700

Prepaid insurance P1,700

Original amount:(P900/2 x 12) = P5,400

Original journal entry:

Cash P5,400Rent income P5,400

Answer is letter C

AJE normally reversedAJE normally reversedAJE normally reversedAJE normally reversed

• Accrual of income

• Accrual of expenses

• Prepayment – expense method

• Unearned item – income method

Journal entry, 12/31

Interest receivable P1,800Interest income P1,800

Journal entry, 4/1

Cash P2,400Interest receivable P1,800Interest income 600

Answer No. 111 is letter C

When is a segment When is a segment reportable? reportable? When is a segment When is a segment reportable? reportable?

10% of RRA thresholds

• Revenue

• Result – Profit or loss

• Assets

When is a segment reportable?When is a segment reportable? When is a segment reportable?When is a segment reportable?

Revenue Threshold

Its reported revenue, from both external customers and intersegment sales or transfers, is 10 per cent or more of the combined revenue, internal and external, of all operating segments

Minimum revenue (P40M x .1)= P4MReportable segments: 1, 2 and 3

Profit or Loss Threshold

The absolute measure of its reported profit or loss is 10 per cent or more of the greater, in absolute amount, of

(i) the combined reported profit of all operating segments that did not report a loss and

(ii) the combined reported loss of all operating segments that reported a loss.

Minimum profit (P10M x .1) = P1MReportable segments: 1, 2, 3 and 4

Assets Threshold

Its assets are 10 per cent or more of the combined assets of all operating segments.

Minimum assets (P80M x .1) = P8MReportable segments: 1, 2 and 3

Problem No. 113Problem No. 113 Problem No. 113Problem No. 113 Profit or Loss Threshold

The absolute measure of its reported profit or loss is 10 per cent or more of the greater, in absolute amount, of

(i) the combined reported profit of all operating segments that did not report a loss and

(ii) the combined reported loss of all operating segments that reported a loss.

Minimum profit or loss (P45M x .1) = P4.5MReportable segments: A, B, C and E

(P10M)

Answer is letter C

Sales – Division 1 P6,000,000

Traceable opex (3,800,000)

Allocated indirect opex(P1,000,000 x .2) ( 200,000)

Profit – Division 1 P2,000,000

Answer is letter A

MeasurementMeasurementMeasurementMeasurement

At the time of classification as held for sale

Immediately before the initial classification of the asset as held for sale, the carrying amount of the asset will be measured in accordance with applicable PFRSs

After classification as held for sale

Non-current assets or disposal groups that are classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell.

Impairment

An impairment loss is recognized in the profit or loss for any initial and subsequent write-down of the asset or disposal group to fair value less costs to sell.

Subsequent increases in FV

A gain for any subsequent increase in fair value less costs to sell of an asset can be recognized in the profit or loss to the extent that it is not in excess of the cumulative impairment loss that has been recognized in accordance with PFRS 5 or previously in accordance with PAS 36.

No depreciation

Non-current assets or disposal groups that are classified as held for sale shall not be depreciated.

Answer is letter A

Loss from operations (P899,000)Loss on disposal of assets

( 50,000)Total loss ( 949,000)x (1 - .35) .65Loss from D.O. (P 616,850)

Answer is letter C

Unadjusted net income P10,000,000Add (deduct) adjustments: Allocated gain (P1.2M/3) ( 400,000) Change in policy effect 3,000,000Adjusted net income P12,600,000

Answer is letter A

Investment PropertyInvestment PropertyInvestment PropertyInvestment Property

Section 16.7 states that:

Investment property whose fair value can be measured reliably without undue cost or effort shall be measured at fair value at each reporting date with changes in fair value recognised in profit or loss.

Otherwise, an entity shall account for all other investment property as property, plant and equipment using the cost-depreciation-impairment model in Section 17.

Answer No. 147 is letter D

GoodwillGoodwillGoodwillGoodwillSection 18.2 states that:

If an entity is unable to make a reliable estimate of the useful life of an intangible asset, the life shall be presumed to be ten years.

CA of goodwill, 12/31/12(P5M x 8/10) P4M

Answer No. 120 is letter D

Government GrantsGovernment GrantsGovernment GrantsGovernment GrantsSection 24.4 states that:

An entity shall recognise government grants as follows:

(a) A grant that does not impose specified future performance conditions on the recipient is recognised in income when the grant proceeds are receivable.

(b) A grant that imposes specified future performance conditions on the recipient is recognised in income only when the performance conditions are met.

(c) Grants received before the revenue recognition criteria are satisfied are recognised as a liability.

Answer is letter A

Answer is letter B

Current service cost P12,000Expected return on PA ( 5,000)Actuarial loss on PA 1,000Pension expense P 8,000

Answer is letter A

• Focus on concepts, not only on procedures;

• Exemplify concepts through illustrative problems;

• Reinforce concepts through solving practice questions and quizzers;

• Preserve and sustain technical concepts learned; and more importantly,

• ALWAYS PRACTICE MORE and MORE!

Suggested approach in Suggested approach in studying P1 (FERPS)studying P1 (FERPS)Suggested approach in Suggested approach in studying P1 (FERPS)studying P1 (FERPS)

tip p1 presentation - part 2

objectives text

datediscount amort

objective text

obje text

pv of cash flowsshort

realisticmarket rate

rate non

expense p6

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