FA3 Cabrera

CHAPTER 30
Presentation of General-Purpose
Financial Statements
Questions
Q3 Refer to page 1569 and page 1570.

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Q3 Refer to page 1569.

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Interim Financial Reporting 37-1
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Q3 Refer to page 1574 and 1575.

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CHAPTER 31
Statement of Financial Position
Questions
Q31-1 Three elements, as defined by the PASB, are contained in a statement

of financial position: assets, liabilities, and equity. These elements
mea-sure the worth of an enterprise at a given point in time. The
statement of financial position thus reports what resources an enterprise
has and who has claim against those resources. Two other elements,
investments by owners and distribution to owners, are related to the
equity element. Information concerning the change in equity is often
contained in a separate statement that supplements the statement of
financial position.
Q31-2 In order to meet the definition of an asset, an item need not be

associated with certain future benefit. To acknowledge the uncertainty
inherent in business, the definition of an asset stipulates that the future
benefit need be only probable.
Q31-3 Some liabilities, such as accounts payable and long-term debt, are
denominated in precise monetary terms. However, the amounts of
many liabilities must be estimated based on expectations about future
events.
Q31-4 a. Assets are classified as current if

(1) the asset will be realized in cash during the normal operating
cycle of the business or 1 year, whichever is longer, or
(2) the asset will be sold or consumed within a normal operating
cycle or 1 year, whichever is longer.
b. Liabilities are classified as current if liquidation of the liability is
expected to require
(1) the use of current assets or
(2) the creation of other current liabilities.
Q31-5 a. Cash is classified as noncurrent when it is a part of a fund that

will be used to discharge noncurrent obligations. Such funds
include bond retirement funds, pension funds, and preferred stock
redemption funds. Cash to be used for the acquisition of land,
buildings, and equipment or cash received on long-term deposits
from customers would also be reported as noncurrent.
b. Receivables not reportable as current assets include those arising
from unusual transactions, such as the sale of land, buildings, and
equipment or advances to affiliates or employees that would not
be collectible within 12 months.
Q31-6 If a short-term loan is expected to be refinanced or paid back with the
proceeds of a replacement loan, the existing short-term loan is not
classified as current. This is true as long as the intent of the company
is to refinance the loan on a long-term basis and the company’s intent
is evidenced by an actual refinancing after the statement of financial
position or by the existence of an explicit refinancing agreement.
Q31-7 Contingent liabilities could or could not give rise to actual obligations;
estimated liabilities are known to exist but the amount is not definitely
known. A company could, for example, win or lose a lawsuit, but it is
actually liable for income tax. The exact amount of the income tax is
unknown until the final tax return is completed. The tax liability could
have to be estimated at the time financial statements are prepared.
Q31-8 Offset balances are used to adjust the gross amount of statement of
financial position items to arrive at proper valuations. For example,
allowance for bad debts is properly offset against the gross amount of
accounts receivable to show the net amount estimated collectible. It is
generally not proper to offset an asset account against a liability or
owners’ equity account because such an offset would not be for the
purpose of correctly valuing either account but rather to condense
financial data at the expense of adequate disclosure.
Q31-9 Assets are usually presented in the order of their liquidity, with the
most liquid items listed first.
Q31-10 There are at least four types of notes used by management to support
the financial statements and provide users with additional relevant
information. They can be classified as follows:
(a) Summary of significant accounting policies
(b) Additional information, both numerical and descriptive, to
support summary totals included in the financial statements
(c) Information about items that does not meet the recognition
criteria but that is still useful to decision makers
(d) Supplementary schedules required by the PASB or the SEC to
fulfill the full disclosure principle
Q31-11 Many assets are reported at historical cost, which is usually less than
market value, and other assets (such as homegrown goodwill) are not
included in the statement of financial position at all. Accordingly, the
statement of financial position numbers are often a very poor
reflection of what a company is worth. Typically, a going concern is
worth significantly more than the reported book value of equity.
Q31-12 The statement of financial position provides information about the

nature and amounts of investments in enterprise resources, obligations
to enterprise creditors, and the owners’ equity in net enterprise
resources. That information not only complements information about
the components
of income, but also contributes to financial reporting by providing a
basis for (1) computing rates of return, (2) evaluating the capital
structure of the enterprise, and (3) assessing the liquidity and financial
flexibility of the enterprise.
Q31-13 Financial flexibility is the ability of an enterprise to take effective

actions to alter the amounts and timing of cash flows so it can respond
to unexpected needs and opportunities. An enterprise with a high
degree of financial flexibility is better able to survive bad times, to
recover from unexpected setbacks, and to take advantage of profitable
and unexpected investment opportunities. Generally, the greater the
financial flexibility, the lower the risk of enterprise failure.
Q31-14 Some situations in which estimates affect amounts reported in the

statement of financial position include:
(a) allowance for doubtful accounts.
(b) depreciable lives and estimated salvage values for plant and
equipment.
(c) warranty returns.
(d) determining the amount of revenues that should be recorded as
unearned.
Q31-15 Liquidity describes the amount of time that is expected to elapse until
an asset is converted into cash or until a liability has to be paid. The
ranking of the assets given in order of liquidity is:
(1) (d) Short-term investments.
(2) (e) Accounts receivable.
(3) (b) Inventories.
(4) (c) Buildings.
(5) (a) Goodwill.
Q31-16 The major limitations of the statement of financial position are:

(a) The values stated are generally historical and not at fair value.
(b) Estimates have to be used in many instances, such as in the
determination of collectibility of receivables or finding the
approximate useful life of long-term tangible and intangible
assets.
(c) Many items, even though they have financial value to the
business, presently are not recorded. One example is the value
of a company’s human resources.
Q31-17 (a) Trade accounts receivable should be stated at their estimated

amount collectible, often referred to as net realizable value. The
method most generally followed is to deduct from the total
accounts receivable the amount of the allowance for doubtful
accounts.
(b) Land is generally stated in the statement of financial position at
cost.
(c) Inventories are generally stated at the lower of cost or net
realizable value.
(d) Trading securities (consisting of ordinary shares of other
companies) are stated at fair value.
(e) Prepaid expenses should be stated at cost less the amount
apportioned to the previous accounting periods.
Q31-18 Battle is incorrect. Retained earnings are a source of assets, but are
not an asset itself. For example, even though the funds obtained from
issuing a note payable are invested in the business, the note payable is
not reported as an asset. It is a source of assets, but it is reported as a
liability because the company has an obligation to repay the note in
the future. Similarly, even though the earnings are invested in the
business, retained earnings is not reported as an asset. It is reported as
part of equity because it is, in effect, an investment by owners which
increases the ownership interest in the assets of an entity.
Q31-19 The notes should appear as non-current liabilities with full disclosure
as to their terms. Each year, as the profit is determined, notes of an
amount equal to two-thirds of the year’s profits should be transferred
from the non-current liabilities to current liabilities until all of the
notes have been liquidated.
Q31-20 (a) Allowance for doubtful accounts receivable should be deducted

from accounts receivable in current assets.
(b) Merchandise held on consignment should not appear on the
consignee’s statement of financial position except possibly as a
note to the financial statements.
(c) Advances received on sales contract are normally a current
liability and should be shown as such in the statement of financial
position.
(d) Accumulated other comprehensive income should be shown as
part of equity.
(e) Land should be reported in property, plant, and equipment unless
held for investment.
(f) Merchandise out on consignment should be shown among current
assets under the heading of inventories.
(g) Franchises should be itemized in a section for intangible assets.
(h) Accumulated depreciation of plant and equipment should be
deducted from the plant and equipment accounts.
(i) Materials in transit should not be shown on the statement of
financial position of the buyer, if purchased f.o.b. destination.
Exercises
E31-1 Cash Inflow

Operating (Outflow)
(d) Cash collected from customers P13,400
(b) Cash paid for interest (600)
(f) Cash paid for income taxes (1,850)
Total P10,950
Investing
(a) Cash received from sale of a building P4,200
Financing
(c) Cash paid to repurchase shares of stock (treasury
stock) P(1,100)
(e) Cash paid for dividends (930)
Total P(2,030)
E31-2 Company A start-up, high-growth

Company B cash cow
Company C steady state
E31-3 Noncash
Investing Financing (Disclose only)
(a) P(40,000) P 0 P 80,000
(b) 0 0 67,000
(c) 0 0 100,000
(d) 0 56,000
(30,000)
Total P(40,000) P26,000
E31-4 (a) Not cash equivalent because it is an equity investment; no maturity date.
(b) Cash equivalent of $5,700 because time to maturity at date of purchase was less
than three months.
(c) Cash of $3,400.
(d) Not cash equivalent because time to maturity at date of purchase was greater
than three months.
P5,700 + P3,400 = P9,100
E31-5 Cash flow from operating activities P6,200

Cash flow from investing activities (9,400)
Cash flow from financing activities 5,000
Net decrease in cash P1,800
Cash balance, beginning of year 2,800
Cash balance, end of year P4,600
E31-6 1. Accounts Receivable 750

Service Revenue 750
2. Utilities Expense 520
Utilities Payable 520
3. Depreciation Expense 400
Accumulated Depreciation—Dental Equipment 400
Interest Expense 500
Interest Payable 500
4. Insurance Expense (P15,000 X 1/12) 1,250
Prepaid Insurance 1,250
5. Supplies Expense (P1,600 – P400) 1,200
Supplies 1,200
E31-7 (a) Ending balance of supplies P 900

Add: Adjusting entry 950
Deduct: Purchases 850
Beginning balance of supplies 1,000
(b) Total prepaid insurance 4,800 (P400 X 12)
Amount used (6 X P400) 2,400
Present balance 2,400
The policy was purchased six months ago (August 1, 2014)
(c) The entry in January to record salaries paid was

Salaries Expense 1,800
Salaries Payable 900
Cash 2,700
The “T” account for salaries payable is
Salaries Payable
Paid 900 Beg. Bal. ?
January
End Bal. 800

The beginning balance is therefore
Ending balance of salaries payable P 800
Plus: Reduction of salaries payable 900
Beginning balance of salaries payable P1,700
(d) Service revenue P2,000

Cash received 1,600
Unearned revenue reduced P 400
Ending unearned revenue January 31, 2015 P 750

Plus: Unearned revenue reduced 400
Beginning unearned revenue December 31, 2014 P1,150
E31-8 (a) Wages Expense 2,900

Wages Payable 2,900
(b) Utilities Expense 600
Accounts Payable 600
(c) Interest Expense (P60,000 X 8% X 400
1/12)
(d) Telephone Expense 117
Accounts Payable 117
E31-9 (a) LIGAYA CORP.

Statement of Profit or Loss and Other Comprehensive Income
(Cash Basis)
For the Year Ended December 31,
2014 2015
Sales P290,000 P515,000
Expenses 225,000 282,000
Net income P 65,000 P233,000
(b) LIGAYA CORP.
(Accrual Basis)
For the Year Ended December 31,
2014 2015
Sales* P480,000 P445,000
Expenses** 277,000 265,000
Net income P203,000 P180,000
*2014: P290,000 + P160,000 + P30,000 = P480,000

2015: P355,000 + P90,000 = P445,000
**2014: P185,000 + P67,000 + P25,000 = P277,000
2015: P40,000 + P170,000 + P55,000 = P265,000
E31-10 1. Depreciation Expense (P250 X 3) 750

Accumulated Depreciation—
Equipment 750
2. Unearned Rent Revenue (P6,300 X 1/3) 2,100
Rent Revenue 2,100
3. Interest Expense 500
4. Supplies Expense 2,150
Supplies (P2,800 – P650) 2,150
5. Insurance Expense (P300 X 3) 900
Prepaid Insurance 900
Problems
P31-1 JOHANN COMPANY

December 31, 2015
Assets
Non-current assets
Long-term investments
Land held for future use P175,000
Property, plant, and equipment
Building P730,000
Less: Accum. depr.—
building 160,000 P570,000
Office equipment 265,000
Less: Accum. depr.—office 105,000 160,000 730,000
equipment
Intangible assets
Goodwill 80,000
Other identifiable assets 90,000 170,000
Total non-current assets 1,075,000
Current assets
Inventories, at lower of 401,000
average
cost or net realizable value
Accounts receivable 357,000
Less: Allowance for doubtful
accounts 17,000 340,000
Prepaid expenses 12,000
Trading securities—at fair 120,000
value
Cash 260,000
Total current assets 1,133,000
Total assets P2,208,000
Equity and Liabilities
Equity
Share capital—ordinary, P1
par, authorized 400,000
shares, issued 290,000 P290,000
shares
Share premium—ordinary 180,000 P470,000
Retained earnings 794,000*
Total equity P1,264,000
Non-current liabilities
Bonds payable 500,000
Add: Premium on bonds
payable 53,000 553,000
Pension obligation 82,000
Total non-current P635,000
liabilities
Current liabilities
Notes payable (due next year) 125,000
Accounts payable 135,000
Rent payable 49,000
Total current liabilities 309,000
Total liabilities 944,000
Total equity and liabilities P2,208,000
*P2,208,000 – P944,000 – P470,000
P31-2 Current assets

Inventories at lower-of-cost (determined
using FIFO) or net-realizable-value
Finished goods P 52,000
Work-in-process 34,000
Raw materials 187,000 P273,000
Accounts receivable (of which P50,000 is 161,000
pledged as collateral on a bank loan)
Less: Allowance for doubtful accounts 12,000 149,000
Interest receivable [(P40,000 X 6%) X 8/12] 1,600
Trading securities at fair value 29,000
(cost, P31,000)
Cash 92,000*
Less: Cash restricted for plant expansion (50,000) 42,000
Total current assets P494,600
*An acceptable alternative is to report cash at P42,000 and simply report the
cash restricted for plant expansion in the investments section.
P31-3 (a) AGNES COMPANY
Statement of Financial Position (Partial)
December 31, 2015
Current assets
Inventories P161,000*
Accounts receivable P91,300**
accounts 7,000 84,300
Prepaid expenses 9,000
Cash 30,476***
* Inventories P171,000
Less: Inventory received on consignment 10,000
Adjusted inventory P161,000
** Accounts receivable balance P89,000
Add: Accounts reduced from January collection
(P23,324 ÷ 98%) 23,800
112,800
Deduct: Accounts receivable in January 21,500
Adjusted accounts receivable P91,300
*** Cash balance P40,000

Add: Cash disbursement after discount
[(P35,000 X 98%)] 34,300
74,300
Less: Cash sales in January (P30,000 – P21,500) 8,500
Cash collected on account 23,324
Bank loan proceeds (P35,324 – P23,324) 12,000
Adjusted cash P30,476
Current liabilities
Notes payable P55,000a
Accounts payable 113,000b
Total current liabilities P168,000
a Notes payable balance P67,000

Less: Proceeds of bank loan 12,000
Adjusted notes payable P55,000
b Accounts payable balance P61,000

Add: Cash disbursements P35,000
Purchase invoice omitted (P27,000 – P10,000) 17,000 52,000
Adjusted accounts payable P113,000
(b) Adjustment to retained earnings balance:

Add: January sales discounts
[(P23,324 ÷ 98%) X .02] P476
Deduct: January sales P30,000
January purchase discounts (P35,000 X 2%) 700
December purchases 17,000
Consignment inventory 10,000 (57,700)
Change (decrease) to retained earnings P(57,224)
P31-4 WALTER CORPORATION

December 31, 2015
Assets
Non-current assets
Long-term investments
Investments in bonds P299,000
Investments in capital shares 277,000
Total long-term investments P576,000

Land 260,000
Buildings P1,040,000
Less: Accum. Depreciation 352,000 688,000
Equipment 600,000
Less: Accum. Depreciation 60,000 540,000
Total property, plant, and
equipment 1,488,000
Intangible assets
Franchise 160,000
Patent 195,000
Total intangible assets 355,000
Total non-current assets 2,419,000
Current assets
Inventories 597,000
accounts 25,000 410,000
Trading securities 153,000
Cash 197,000
Total current assets 1,357,000
Total assets P3,776,000

Equity
Share capital—ordinary P1,000,000
(P5par)
Retained earnings* 130,000
Accumulated other
comprehensive income 80,000
Less: Treasury shares 191,000
Total equity P1,019,000
Bonds payable P1,000,000
Long-term notes payable 900,000
Provision for pensions 80,000
Total non-current liabilities 1,980,000
Current liabilities
Short-term notes payable P90,000
Dividends payable 136,000
Accrued liabilities 96,000
Total current liabilities 777,000
Total liabilities 2,757,000
Total equity and liabilities P3,776,000
* Computation of Retained Earnings:

Sales P7,900,000
Investment revenue 63,000
Cost of goods sold (4,800,000)
Selling expenses (2,000,000)
Administrative expenses (900,000)
Interest expense (211,000)
Net income P52,000
Beginning retained earnings P78,000

Net income 52,000
Ending retained earnings P130,000
Or ending retained earnings can be computed as follows:
Total equity (P3,776,000 – P2,757,000) P1,019,000

Add: Treasury shares 191,000
Less: Share capital and Accum. other 1,080,000
comprehensive income
Ending retained earnings P130,000
Note to instructor: There is no dividends account. Thus, the 12/31/15 retained
earnings balance already reflects any dividends declared.
P31-5 MJ Corporation
December 31, 2016
Assets Liabilities
Current assets: Current liabilities:
Cash P8,500 Accounts payable P3,400
Investment securities 5,250 Current portion of
Accounts receivable, bonds payable 2,500
net 21,350 Loan due on demand
Inventory 31,000 7,000
Land held for resale 8,000 Dividends payable 15,000
Other current assets 10,200 Other 2,000
Total current assets P84,300 Total current
liabilities P29,900
Noncurrent assets: Long-term liabilities:
Investments P2,750 Bonds payable P7,500
Property, plant, and Other liabilities 15,750
equipment, net 56,800 Total long-term
Restricted cash: liabilities 23,250
For preferred stock 19,000 Total liabilities 53,150
For equipment 4,000 Owners’ Equity
Advance to company Preferred stock 19,000
president 4,000 Common stock 50,000
Other noncurrent Retained earnings 66,800
assets 13,600 Less treasury stock (4,500)
Total noncurrent Total owners’ equity P131,300
assets P100,150 Total liabilities and
Total assets P184,450 owners’ equity P184,450
COMPUTATIONS:
Cash: P12,500  P4,000 (a)
Investment securities: P8,000  P2,750 (b)
Land held for resale: P8,000 (h)
Other current assets: P14,200  P4,000 (c)
Property, plant, and equipment: P64,800  P8,000 (h)
Restricted cash: P19,000 (g)
P4,000 (a)
Investments: P2,750 (b)
Advance to company president: P4,000 (c)
Current portion of bonds payable: P2,500 (d)
Loan due on demand: P7,000 (e)
Dividends payable: P15,000 (f)
Bonds payable (long-term): P10,000  P2,500 (d)
Other long-term liabilities: P32,750  P2,500 (d)  P7,500(d)  P7,000 (e)
Preferred stock: P19,000 (g)
Retained earnings: P81,800  P15,000 (f)
Treasury stock: formerly shown incorrectly as a noncurrent asset
Q31-6 (a) 22,642 (f) 145,372 (k) 78,145

(b) 129,515 (g) 159,991 (l) 468,770
(c) 380,465 (h) 21,842 (m) 441,732
(d) 295,772 (i) 43,911 (n) 792,514
(e) 88,484 (j) 65,753
Q31-7 (a) Report the amount as a subtraction in the Equity section of the statement of
financial position.
(b) Note disclosure.
(c) Report the detail in the statement of profit or loss and other comprehensive
income or as a note disclosure.
(d) Report the amount in the statement of financial position as Allowance for
Bad Debts.
(e) Contingent liability mentioned in the body of the statement of financial
position, but no amount recognized because the contingency is not described
as being probable. Note description of the potential liability.
(f) Report the amount in the statement of profit or loss and other comprehensive
income.
(g) Report the amount as a long-term asset.
(h) Note disclosure.
(i) No financial statement disclosure.
(j) Note disclosure.
(k) No financial statement disclosure. No financial statem
Q31-8 Note 1. Summary of Significant Accounting Policies

Receivables. An allowance account is provided for the estimated uncollectible
accounts.
Inventories. Inventory is valued using the LIFO method. If the Company had
used the FIFO inventory method, the ending inventory would be
reduced by P50,000 and net income for the year would be reduced
by P35,000 after taxes. Consignment inventory is carried as an asset
by Delta until it is sold by the consignee.
Equipment. The Company depreciates its equipment using the straight-line
method. The current value of the equipment is P525,000.
Note 2. Receivables
The receivables amount of P126,000 includes the following balances:
Customers’ accounts P70,000

Customers’ notes 30,000
Advances to sales representatives 10,000
Advance to president of company 25,000
Total P135,000
Less allowance for bad debts 9,000
Net receivables P126,000
Note 3. Anticipated Merger

The Board of Directors is discussing a merger with another chemical company.
No final decision has been made as of the date these statements are being
issued; however, it is anticipated that additional shares of stock will be issued as
part of any merger.
Note 4. Notes Payable
The Company borrowed P350,000 on a 10-year note at 14% interest. The note is
due on July 1, 2023. Equipment has been pledged as collateral for the loan. The
terms of the note prohibit any additional long-term borrowing without the
express permission of the note holders. Because of a need for additional
financing next year, management is planning to make such a
request.
CHAPTER 32
Statement of Profit or Loss and

Other Comprehensive Income
Questions
Q32-1. Two approaches can be used to measure income: the capital maintenance
approach and the transaction approach. The capital maintenance approach
uses the statement of financial position elements to determine the change in
total equity after eliminating any investments and withdrawals of resources by
owners. The transaction approach determines income by analyzing individual
transactions and events and their effect on related assets, liabilities, and
owners’ equity. Although the method of determining income differs, both
approaches arrive at the same total income figure if the same attributes and
measurements are used. However, the transaction approach produces more
detail as to the composition of income than does the capital maintenance
approach.
Q32-2. The objectives of reporting income for income tax purposes and for
financial reporting to users are not the same. Those formulating income tax
laws are usually concerned with fairness among taxpayers and with their
ability to pay taxes. Users, on the other hand, are concerned with a measure
that distinguishes between a return on investment and a return of investment.
They want a measure that matches expenses against recognized revenue. In
most cases, the same accounting method can be used for both purposes. This
will reduce both the cost and the confusion of using more than one accounting
method for the same transaction. In some cases, however, the generally
accepted accounting method is different from that required by income tax
regulations. This results in a temporary difference between the tax return and
the books and gives rise to interperiod income tax allocation.
Q32-3. Measurement methods that could be applied to net assets in the capital
maintenance approach to income determination are as follows:
(a) The historical cost of net assets acquired in exchange transactions, reduced
by an allowance for their use.
(b) The historical cost of net assets acquired in exchange transactions, reduced
by an allowance for their use and adjusted for a change in price levels
since original acquisition.
(c) The current value of net assets acquired in exchange transactions as
determined by either their replacement or market values.
(d) Some variation of the above (a through c) but including in assets all
resources and claims to resources, not just those acquired in exchange
transactions.
Q32-4. Revenues and expenses are related to the ongoing major or central activities of
a business and are reported at gross amounts. Gains and losses are associated
with peripheral and incidental transactions and events and are reported as the
difference between the selling price and the book value (often the depreciated
cost). These classification and display distinctions will depend on the specific
circumstances and activities of an enterprise.
Q32-5. The following two factors must be considered when deciding at what point
revenues and gains should be recognized: (a) The resources from the
transaction are either already realized in cash or claims to cash or are readily
realizable in cash, and (b) the revenues and gains have been earned through
substantial completion of clearly identified tasks and activities. Both factors
are usually met when merchandise is delivered or services are rendered to
customers. This is referred to as the point of sale.
Q32-6. There are three specific exceptions to the general rule that were discussed in
the chapter. They are recognizing revenue (a) at the point of completed
production, (b) at the time of cash collection, and (c) at various points in
time during the operating cycle (e.g., percentage-of-completion method). The
justification for the use of these exceptions is that, in each case, the realization
and earning criteria established by the IASB are met.
Q32-7. “Comprehensive income is the change in equity of a business enterprise

during a period from transactions and other events and circumstances from
nonowner sources. It includes all changes in equity during a period except
those resulting from investments by owners and distributions to owners.”1 Net
income is the reported income as required by AFRS. Currently, IFRS does not
require all components of comprehensive income to be disclosed in the
statement of profit or loss and other comprehensive income. For example, it
does not include the effect of error corrections, asset valuation changes, or
some effects of accounting changes.
Q32-8. Some situations in which application of different accounting methods or

estimates lead to comparison problems include:
(a) Inventory methods—weighted average vs. FIFO,
(b) Depreciation Methods—straight-line vs. accelerated,
(c) Accounting for long-term contracts—percentage-of-completion vs.
completed-contract,
(d) Estimates of useful lives or salvage values for depreciable assets,
(e) Estimates of bad debts,
(f) Estimates of warranty costs.
Q32-9. The transaction approach focuses on the activities that have occurred during a
given period and instead of presenting only a net change, a description of the
components that comprise the change is included. In the capital maintenance
approach, only the net change (income) is reflected whereas the transaction
approach not only provides the net change (income) but the components of
income (revenues and expenses). The final net income figure should be the
same under either approach given the same valuation base.
Q32-10. Earnings management is often defined as the planned timing of revenues,

expenses, gains and losses to smooth out bumps in earnings. In most cases,
earnings management is used to increase income in the current year at the
expense of income in future years. For example, companies prematurely
recognize sales before they are complete in order to boost earnings. Earnings
management can also be used to decrease current earnings in order to increase
income in the future. The classic case is the use of “cookie jar” reserves, which
are established by using unrealistic assumptions to estimate liabilities for such
items as sales returns, loan losses, and warranty costs.
Q32-11. Earnings management has a negative effect on the quality of earnings if it

distorts the information in a way that is less useful for predicting future cash
flows. Within the Conceptual Framework, useful information is both relevant
and a faithful representation. However, earnings management reduces the
reliability of income, because the income measure is biased (up or down)
and/or the reported income is not representationally faithful to that which it is
supposed to report (e.g., volatile earnings are made to look more smooth).
Q32-12. Income is increases in economic benefits during the accounting period in the
form of inflows or enhancements of assets or decreases of liabilities that result
in increases in equity, other than those relating to contributions from
shareholders.
Q32-13. (1) Interest expense is reported on the statement of profit or loss and other
comprehensive income between income from operations and income
before income taxes.
(2) Income tax expense is reported between income before income tax and
income from continuing operations on the statement of profit or loss and
other comprehensive income.
Q32-14. The “nature of expense” classification uses a natural expense approach (such as
direct labor incurred, advertising expense, depreciation expense) without
having to make arbitrary allocations.
Q32-15. (a) The remaining book value of the equipment should be depreciated over the
remainder of the five-year period. The additional depreciation (P425,000)
is not a correction of an error and is not shown as an adjustment to retained
earnings. The change is considered a change in estimate.
(b) The loss should be shown as an other income and expense item.
(c) The write-off should be shown as an other income and expense item.
(d) Interest expense should be shown as a deduction from Income from
operations.
(e) A correction of an error should be considered a prior period adjustment and
the beginning balance of Retained Earnings should be restated, if
material.
(f) The cumulative effect of the change is reported as an adjustment to
beginning retained earnings. Prior years’ statements are recast on a basis
consistent with the new standard.
Q32-16. GABRIEL COMPANY

For the Year Ended 2015
(in thousands of Philippines)
Net income P150
Unrealized gain related to revaluation of buildings 10
Unrealized loss related to available-for-sale securities (35)
Items not recognized on the statement of profit or loss and (25)
other comprehensive income
Total comprehensive income P125
Exercises
E32-1. DIAMOND CO.

Statement of profit or loss and other comprehensive income
For the Year 2015
Sales P540,000
Cost of goods sold 330,000
Gross profit 210,000
Selling expenses P120,000
Administrative expenses 10,000
Income before income tax 80,000
Income tax 25,000
Net income P 55,000
Earnings per share P0.55*
*P55,000 ÷ 100,000 shares.
Note: The increase in value of employees is not reported.
E32-2. (a) Other income and expense = P800,000 – P500,000 – P220,000 = P80,000
(b) Financing costs = P220,000 – P200,000 = P20,000
(c) Income tax = P200,000 – P100,000 = P100,000
(d) Discontinued operations = P100,000 – P90,000 = (P10,000)
(e) Other comprehensive income = P120,000 – P90,000 = P30,000
E32-3. 1. Income from operations = P100,000 – P55,000 – P10,000 + P30,000 =

P65,000
2. Income before income tax = P65,000 – P5,000 = P60,000
3. Net income = P60,000 – (P60,000 X 20%) = P48,000
E32-4. Income before income tax = P430,000 – P20,000 = P410,000

Net income = P410,000 – (P410,000 X 30%) = P287,000
E32-5. Income from continuing operations P10,600,000

Discontinued operations
Loss from operation of discontinued
restaurant division (net of tax) P315,000
Loss from disposal of restaurant division
(net of tax) 189,000 (504,000)
Net income P10,096,000
Earnings per share
Income from continuing operations P1.06
Discontinued operations, net of tax (0.05)*
Net income P1.01
*Rounded
E32-6. P1,000,000 – 250,000 P3.95 per share

=
190,000
E32-7. (a) Net income (Dividend revenue) P3,000,000

(b) Net income P3,000,000
Unrealized holding gain 4,000,000
Comprehensive income P7,000,000
(c) Unrealized holding gain (Other comprehensive P4,000,000
income)
(d) Accumulated other comprehensive income,
January 1, 2015 P0
Unrealized holding gain 4,000,000
Accumulated other comprehensive income,
December 31, 2015 P4,000,000
E32-8. Cash Collected Amount of

or Collectibility Work Revenue to Be
Reasonably Assured? Completed? Recognized
a. No Yes P0
Yes No 0
Yes Yes 170,000
Total revenue to be recognized this year P170,000
E32-9. Net assets, end of period P345,000

Net assets, beginning of period 170,000
Increase in net assets P175,000
Deduct investment by owners 100,000
Income P75,000
E32-10. Net assets, end of period P345,000

Net assets, beginning of period 170,000
Increase in net assets P175,000
Deduct investment by owners 100,000
Income, financial capital maintenance P75,000
Deduct increase necessary to maintain physical 65,000
capital
Income, physical capital maintenance P10,000
E32-11. 2016 2015 2014

Sales P5,000 P3,000 P2,000
Oil and gas exploration 700 1,200 1,500
expense
Income before income P4,300 P1,800 P500
taxes
Income tax expense (30%) 1,290 540 150
Net income P3,010 P1,260 P350
Problems
P32-1. (a)The receipt of an order from a customer does not constitute realization, nor
does it qualify as an earnings activity. Therefore, no revenue is recognized.
(b) There has been no sale of the asset to support the recognition of revenue.
Production remains to be performed, followed by sale of the finished
product. Accretion may give rise to revenue in certain instances in which it
can be objectively determined and the product has a ready market at a
definite price.
(c) The rendering of services is the earning activity, and it is assumed that a
valid claim exists against the client. The recognition criteria are met.
(d) The appreciation in value of the land is generally not recognized because it
is not yet realized.
(e) The receipt of cash meets the realization criteria; however, the revenue is
generally not reported as earned because the product has not yet been
delivered. Some argue that an estimate of the costs incurred to honor the
certificate can be made so that revenue could be recognized at the time of
certificate sale.
(f) Collection of cash on the subscriptions is realization. However, the earning
activity has yet to take place.
(g) The retirement of debt at less than the recorded liability results in the
recognition of a gain. The retirement of the debt meets the recognition
criterion for gains.
P32-2. (a) The revenue is unearned in 2016. The credit is to the liability account
Unearned Rent Revenue.
(b) Revenue of P60,000 is to be recognized in 2016: P10,000 in cash plus a
note for P50,000. In addition, interest revenue of P3,000 is recognized in
2016 (P50,000 × 0.12 × 1/2 year). The P3,000 interest revenue to be
earned in 2017 will not be recorded until 2017.
(c) Transactions in a company’s own stock are not considered an income-
generating activity. The amount received above par is credited to
Additional Paid-In Capital.
(d) Because a claim against the customer (an asset) is created when the
merchandise is shipped and actions to prepare and ship the inventory are
felt to represent the earning activity, revenue is recognized at the time of
sale. In theory, the possibility of return should be evaluated and recorded
as a reduction of revenue if some return is probable and the value of the
return can be estimated. Similarly, the probability of a customer’s taking
a cash discount should be considered and a reduction made to revenue for
estimated cash discounts. In practice, both sales returns and cash
discounts are usually not recorded until they actually occur.
(e) This is a difficult one. As discussed in Chapter 8, under the provisions of

SAB No. 101 the SEC generally does not allow the recognition of revenue
until title transfers. In such a case, the receipt of the 15% down payment
would be recorded as a debit to Cash and a credit to a liability such as
Deposit Liability.
(f) The initial agreement does not represent a claim against the client until the
contract is at least partially complete. Because part of the work was
accomplished in 2016, a portion of the revenue could be recognized in
2016 on a percentage basis. However, because the bulk of the work will
be done in 2017, revenue could be deferred until the audit is completed
and billed.
P32-3. (a) Immediate recognition. The future benefits of the new drug are highly
uncertain.
(b) Direct matching. The warranty costs are anticipated expenses that are
directly related to revenues.
(c) Systematic and rational allocation. The lease agreement benefits several
accounting periods in a systematic and rational way.
(d) Direct matching. Labor associated with assembling a product is matched
with revenues and reported in the period the goods are sold.
(e) Systematic and rational allocation. The delivery trucks are expected to
benefit several accounting periods in a systematic and rational way.
(f) Immediate recognition. The advertising indirectly helps to generate
revenues and is not related to specific revenues.
P32-4. (a) Subtracted or included in determining net purchases in the Cost of Goods
Sold section
(b) Other revenues and gains
(c) Other revenues and gains
(d) Other expenses and losses
(e) Either extraordinary items or other expenses and losses depending on
whether unusual and infrequent
(f) Operating expenses—selling expenses
(g) Discontinued operations
(h) Deduction from income from continuing operations before income taxes
(i) Other revenues and gains
(j) Subtraction from sales
(k) Other expenses and losses
(l) Cost of goods sold (an item entering into cost of goods manufactured)
(m) Operating expenses—general and administrative
(n) Cost of goods sold
P32-5. (a) Discontinued operations:

Loss from operations of discontinued
business component (including gain on
disposal of P23,000) P(187,000)
Income tax benefit 56,100 P(130,900)
(b) If Jessie Manufacturing were reporting using the accounting standards of
the Philippines, it would also disclose information about sales and
operating profits for the continuing and discontinued operations. This
additional information allows financial statement users to compare the
relative size and operating profitability of the continuing and discontinued
operations. This practice is also similar to the reporting requirements of
PAS 35.
P32-6. 1. 2016 2015 2014

Reported net income P128,000 P119,000 P98,000
Divided by (1 – tax rate) ÷ 0.70 ÷ 0.70 ÷ 0.70
Reported income before tax P182,857 P170,000 P140,000
Add back old cost of goods sold 25,000 29,000 31,000

P207,857 P199,000 P171,000
Subtract new cost of goods sold 19,000 21,000 24,000
Revised income before tax P188,857 P178,000 P147,000
Tax expense (0.3) 56,657 53,400 44,100
Revised net income P132,200 P124,600 P102,900
2. The adjustment to January 1, 2014, Retained Earnings would
summarize the effect of the different inventory valuation methods for
all years prior to 2014. The amount of the adjustment would be a
P9,100 increase [P13,000 × (1 – 30% tax effect)].
P32-7. 1. The unrealized losses on available-for-sale securities will decrease

comprehensive income because the value of the securities decreased
during the year. The currency translation adjustment will decrease
comprehensive income because the value of the currencies of Cabrera’s
subsidiaries weakened relative to the Philippine peso. The deferred loss
on derivatives adjustment will decrease comprehensive income.
2. Cabrera Incorporated
Statement of Comprehensive Income
For the Year Ended December 31, 2016
Net income P17,650
Unrealized losses on available-for-sale securities (1,285)
Foreign currency translation adjustment (287)
Deferred loss on derivatives adjustment (315)
Comprehensive income P15,763
P32-8. 1. Lim Inc.

Schedule of Corrected Net Income
Reported net income (profit and loss) P12,760
Add: Change in amortization expense P3,100
Gain on sale of land 17,420
Interest revenue 3,900 24,420
Less: Increased depreciation— P6,400

change in estimate
Loss on sale of equipment 2,490
Extraordinary casualty loss 25,310 34,200
Corrected net income P2,980
2. Lim Inc.
Retained Earnings Statement
Retained earnings, January 1, 2016 P76,843
Add: Net income 2,980
P79,823
Deduct: Dividends declared 12,000
Retained earnings, December 31, 2016 P67,823
3. All items except dividends declared during the year would be reported
on the statement of profit or loss and other comprehensive income and
included in net income. Extraordinary items would be reported
separately after income from continuing operations.
CHAPTER 33
Statement of Changes in Equity
Questions
Q33-1 Historically, par value was equal to the market value of the shares at issuance.
Par value was also sometimes viewed by the courts as the minimum
contribution by investors. These days, par values for common stocks are
usually set at very low values (less than $1), so the importance of par value
has decreased substantially.
Q33-2 Preferred stock is stock that carries certain preferences over common stock,
such as prior claims to dividends and liquidation preferences. Often, preferred
stock has no voting rights or only limited voting rights, and dividends are
usually limited to a stated percentage or amount. The special rights of a
particular issue of preferred stock are set forth in the articles of incorporation
and in the preferred stock certificates issued by the corporation.
Q33-3 The difference between the purchase price and the selling price of treasury
stock is properly excluded from the income statement because treasury stock
transactions cannot be considered to give rise to a gain or a loss. Gain or loss
arises from the utilization of assets or resources by the corporation in
operating and investing activities. Because the recognition of treasury stock as
an asset is discouraged, transactions in treasury stock are considered capital
transactions between the company and its stockholders and thus do not give
rise to a gain or a loss.
Q33-4 Mandatorily redeemable preferred shares should be reported in the statement of

financial position as a liability.
Q33-5 When a corporation writes a put option on its own shares, the corporation
typically receives cash. In return, the corporation agrees to repurchase shares
of its own stock at a set price at some future date if those shares are offered
for sale by the option holder.
Q33-6 If an error is discovered in the current year, it is corrected with a correcting

entry. If a material error is discovered in a year subsequent to the error, the
error is corrected by a prior-period adjustment whereby the beginning balance
in Retained Earnings is adjusted. Some errors are counterbalancing (e.g.,
inventory errors) and may need no correction.
Q33-7 State incorporation laws are written to prevent corporations from wrongfully
borrowing money and then funneling that money to shareholders. One device
to prevent this is to restrict the payment of cash dividends to the amount of
retained earnings. Retained earnings can also be restricted by private debt
agreements in which lenders constrain the ability of a borrowing company to
pay cash dividends.
Q33-8 The three types of unrealized gains and losses shown as direct equity
adjustments are:
 Peso currency translation adjustment. This adjustment arises from
the change in the equity of foreign subsidiaries (as measured in terms
of U.S. dollars) that occurs as a result of changes in foreign currency
exchange rates.
 Unrealized gains and losses on available-for-sale securities. Available-
for-sale securities are those that were not purchased with the
immediate intention to resell but will be held for an indefinite time.
Unrealized gains and losses arise because these securities must be
reported on the statement of financial position at their fair market
value.
 Unrealized gains and losses on derivatives. Unrealized gains and
losses from market value fluctuations of derivative instruments that
are intended to manage risks associated with future sales or
purchases are deferred to allow for proper matching.
CHAPTER 34
Statement of Cash Flows
Questions
Q34-1 Cash flow from operations can offer a clearer picture of a company's
performance than does net income when:
• A company reports large noncash expenses, such as write-offs,
depreciation, and provisions for future obligations. Earnings may
give an overly pessimistic view of the firm.
• A company is growing rapidly. Reported earnings may be positive,
but operations are actually consuming rather than generating cash.
• A company badly needs to report favorable earnings, as is
the case before a major loan application or before a stock
offering. In these cases, cash flow from operations

provides an excellent reality check for reported earnings
Q34-2 Operating activities include those transactions and events that enter into the
determination of net income. Cash receipts from selling goods or from
providing services are the major cash inflows for most businesses. Major
cash outflows include payments to purchase inventory and to pay wages,
taxes, interest, utilities, rent, and similar expenses.
Investing activities are the purchase and sale of land, buildings, and equipment
and the purchase and sale of financial instruments not intended for trading
purposes.
Financing activities include transactions and events whereby cash is obtained
from or repaid to owners (equity financing) and creditors (debt financing).
Q34-3 The normal pattern of cash flow is

• Operating—positive
• Investing—negative
• Financing—either positive or negative
Q34-4 The direct method reports all operating cash receipts and cash payments. The
difference between cash receipts and payments is the net cash flow from
operations. The indirect method begins with net income as reported on the
statement of profit or loss and other comprehensive income, adjusts for any
noncash items (such as depreciation), and converts the accrual amounts to a
cash basis. The result of this reconciliation process is net cash flow from
operations, which will be exactly the same amount as derived using the direct
method.
Q34-5 Many users favor the direct method because it is a straightforward approach
that is easy to understand. Most accountants prefer the indirect method
because it is easy to apply and because it helps explain or reconcile the
differences between net cash flow from operations and net income. Because
accountants already have to report net income, it is easier for them to start
with that number and convert it to net cash flow from operations rather than
use the direct method
Q34-6 When the direct method is used, depreciation expense is omitted from the
calculation of cash from operating activities because it is a noncash expense.
When the indirect method is used, depreciation expense is added back to net
income because depreciation was subtracted in the original computation of net
income.
Q34-7 A loss on the sale of a long-term asset is omitted from the calculation of cash
from operating activities when using the direct method. When the indirect
method is used, the loss is added back to net income because the loss was
subtracted in the original computation of net income. In both cases, any effects
of the sale of the long-term asset are removed from the computation of
operating cash flow; cash received from the sale of long-term assets is
reported as an investing activity.
Q34-8 Significant noncash investing and financing transactions (e.g., the purchase of
land by issuing capital stock) are to be reported in the notes to the financial
statements or in a separate schedule accompanying the cash flow statement.
Because these transactions do not affect cash, they should not be reported on
the statement of cash flows itself.
Q34-9 The statement of profit or loss and other comprehensive income details the
transactions that occurred in temporary accounts that are summarized in the
retained earnings account. The statement of cash flows provides information
relating to transactions that occurred in the cash account for the period.
Q34- Cost of goods sold, combined with the change in the inventory balance,
10 reveals how much inventory was purchased during the year. Inventory
purchases, coupled with the change in the accounts payable balance for the
year, are used to calculate the amount of cash paid for inventory purchases.
Q34- The purpose of a statement of cash flows is to provide relevant

11 information about the cash receipts and cash payments of an
enterprise during a period. It differs from the statement of
financial position and the statement of profit or loss and other
comprehensive income in that it reports the sources and uses of
cash by operating, investing, and financing activity
classifications. While the statement of profit or loss and other
comprehensive income and the statement of financial position are
accrual basis statements, the statement of cash flows is a cash
basis statement—noncash items are omitted.
Q34- Operating activities involve the cash effects of transactions that
12 enter into the determination of net income. Investing activities
include making and collecting loans and acquiring and disposing
of debt and equity instruments; property, plant, and equipment and
intangibles. Financing activities involve liability and equity
items and include obtaining capital from owners and providing
them with a return on (dividends) and a return of their investment
and borrowing money from creditors and repaying the amounts
borrowed.
Q34- a. Net income is adjusted downward by deducting P5,000

13 from P90,000 and reporting cash provided by operating

activities as P85,000.
b. The issuance of the share capital is a financing activity. The
issuance is reported as follows:
Cash flows from financing activities
Issuance of share capital P1,150,000
c. Net income is adjusted as follows:
Cash flows from operating
activities
Net income P90,000
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation expense 14,000
Amortization 5,000
Net cash provided by operating P109,000
activities
d. The increase of P20,000 reflects a noncash investing and
financing activity. The increase in Land is reported in a
footnote to the statement of cash flows as follows:
Noncash investing and financing activities were the
purchase of land through issuance of P20,000 of long-term
debt.
Q34- Free cash flow = P860,000 – P75,000 – P30,000 = P755,000.

14
Exercises
E34-1 Cash
Operating Inflow
(Outflow)
(d) Cash collected from customers P13,400
(b) Cash paid for interest
(600)
(f) Cash paid for income taxes
(1,850)
Total P10,950
Investing
(a) Cash received from sale of a building P4,200
Financing
(c) Cash paid to repurchase shares of stock P(1,100)
(treasury stock)
(e) Cash paid for dividends (930)
Total P(2,030)
E34-2 Noncash
Investing Financing (Disclose only)
(a) P0 P80,000
P(40,000)
(b) 0 67,000
0
(c) 0 100,000
0
(d) 0 56,000
(30,000)
Total P26,000
P(40,000
)
E34-3 Accounts receivable, beginning P1,375

Plus: Sales 10,000

Cash available for collection P11,375
Less: Accounts receivable, ending
(1,400)
Cash collected from customers P9,975
E34-4 Statement of Profit or Loss and Statement of

Other Comprehensive Income Adjustment Cash Flows
s
Sales P7,800 + 320 P8,120
Cost of goods sold (3,100) + 180
(3,130)
– 210
Interest expense (450) + 80 (370)
Depreciation (600) + 600 0
expense
Net income P3,650 P4,620
Direct Method:
Cash collected from customers P8,120
Cash paid for inventory purchases (3,130)
Cash paid for interest (370)
Net cash flow from operating activities P4,620
E34-5 Statement of Profit or Loss and Statement of

Other Comprehensive Income Adjustments Cash Flows
Sales P7,800 + 320 P8,120
Cost of goods sold (3,100) + 180 (3,130)
– 210
Interest expense (450) + 80 (370)
Depreciation (600) + 600 0
expense
Indirect Method:
Net income P3,650
Plus: Depreciation 600

Plus: Decrease in accounts receivable 320
Plus: Decrease in inventory 180
Less: Decrease in accounts payable (210)
Plus: Increase in interest payable 80
Net cash flow from operating activities P4,620
E34-6 Reported income tax expense P32,000

Less: Increase in deferred tax liability (3,500)
Taxes owed for current year operations P28,500
Less: Increase in income taxes payable (390)
Cash paid for income taxes P28,110
E34-7 PPE, beginning P124,000

Less: PPE sold during the year 28,000
Ending PPE without purchase of new PPE P96,000
PPE, ending P134,000

Less: Ending PPE without purchase of new 96,000
PPE
Cash paid to purchase new PPE P38,000
This assumes that all PPE purchases were for cash.
E34-8 Retained earnings, beginning P106,000

Plus: Net income 10,000
Ending retained earnings without dividend declarations P116,000
Less: Actual ending retained earnings 112,000
Dividends declared during the year P4,000
Dividends declared during the year P4,000
Plus: Decrease in dividends payable 250
Cash paid for dividends this year P4,250
E34-9 (a) P14,000 of cash used to purchase equipment; P16,000 of cash provided
from sale of equipment. Both are investing activities. (Note: The P2,000
loss on sale would be added to net income when using the indirect
method.)
Equipment
Beginning balance 62,000 Sale of equipment 21,000
Purchase of equipment 14,000
Ending balance 55,000
(b) No cash is provided or used by depreciation; however, P4,100 is added to

net income for yearly depreciation in showing net cash flow provided by
operations when using the indirect method
Accumulated Depreciation
Sale of equipment 3,000 Beginning balance 12,800
Depreciation for year 4,100
Ending balance 13,900
(c) P5,000 (P25,000 – P20,000) of cash used to pay off a portion of long-term
debt, a financing activity.
(d) P4,000 (P16,000 – P12,000) of cash provided from issuance of common
stock, a financing activity.
E34- Cash flows from operating activities:

10
Net income P35,500
Adjustments:
Depreciation expense P7,000
Increase in accounts receivable (2,150)
Decrease in accounts payable (2,500)
Increase in inventories (4,500)
Increase in other current liabilities 2,000
Decrease in prepaid insurance 800 650
Net cash provided by operating activities P36,150
E34- Cash Flow Statement

11
Operating Activities
Net income P40,000
Increase in accounts receivable (10,000)
Increase in accounts payable 7,000 1,000
Net cash provided by operating activities 41,000
Investing Activities
Purchase of equipment
(8,000)
Financing Activities
Issue notes payable P20,000
Dividends (5,000)
Net cash flow from financing activities 15,000
Net change in cash (P41,000 – P8,000 + P15,000) P48,000
Free Cash Flow = P41,000 (Net cash provided by operating activities) –
P8,000 (Purchase of equipment) – P5,000 (Dividends) = P28,000.
E34- Sale of land and building P191,000

14
Purchase of land
(37,000)
Purchase of equipment (53,000)
Net cash provided by investing P101,00
activities 0
Problems
P34-1 Aranes and Cruz

Statement of Cash Flows (Indirect Method)
Cash flows from operating activities:
Net income P22,000
Adjustments:
Decrease in accounts receivable 2,800
Increase in inventory (14,400)
Decrease in prepaid expenses 1,250
Increase in accrued expenses 2,300
Decrease in accounts payable (10,450)
Net cash flow provided by operating activities P18,500
Cash flows from investing activities:
Purchase of furniture* P(3,200)
Net cash used in investing activities (3,200)
Cash flows from financing activities:
Investment by Ryan Bond P2,200
Withdrawal by Trent Wallin (15,000)
Net cash used in financing activities (12,800)
Net increase in cash and cash equivalents P2,500
Cash and cash equivalents at beginning of year 12,500
Cash and cash equivalents at end of year P15,000
* Total cost of furniture was $24,500; a long-term note for $21,300 was issued for
the balance.
P34-2 1. Dec. 31 Prepaid rent = Jan. 1 Prepaid rent + Cash paid for rent – Rent
expense
Dec. 31 Prepaid rent =P8,000 + P27,000 – P22,000
Dec. 31 Prepaid rent = P13,000
2. Note that wages payable increased by $6,000 during the year. This is
evidenced by the addition of the change in wages payable. As a result, the
beginning balance in the wages payable account was P17,000 (P23,000 –
P6,000).
3. Dec. 31 Inventory = Jan. 1 Inventory + Inventory purchased on account –
Cost of goods sold
P54,000 = P41,000 + P230,000 – Cost of goods sold
Cost of goods sold = P217,000
4. Dec. 31 Wages payable = Jan. 1 Wages payable + Wages expense – Cash
paid for wages
P23,000 = P17,000 + Wages expense – P81,000
Wages expense = P87,000
5. Net income = Sales – Cost of goods sold – Wages expense – Rent expense –
Other expenses
Net income = P485,000 – P217,000 [from part (3)] – P87,000 [from part (4)]
– P22,000 – P121,000
Net income = P38,000
6. Dec. 31 Accounts receivable = Jan. 1 Accounts receivable + Sales on account
– Cash collected from customers
P72,000 = P65,000 + P485,000 – Cash collected from customers
Cash collected from customers = P478,000
7. Dec. 31 Accounts payable = Jan. 1 Accounts payable + Inventory purchased
on account – Cash paid for inventory
P44,000 = P52,000 + P230,000 – Cash paid for inventory

Cash paid for inventory = P238,000
P34-3 1. 2016 2015

+Depreciation expense 57,000 51,000
–Increase in other current assets/
+Decrease in other current assets (60,000) (30,000)
+Increase in current liabilities/
–Decrease in current liabilities 55,000 (20,000)
Net cash from operating activities P111,000 P51,000
2. 2016 2015
Cash P85,000 P115,000
Other current assets 480,000 420,000
Current liabilities 325,000 310,000
2016 2015
Net income 59,000 50,000
–Increase in other current assets/
+Decrease in other current assets (60,000) (30,000)
–Decrease in current liabilities 15,000 20,000
3. 2016 2015
Cash P85,000 P115,000
Other current assets 480,000 380,000
Current liabilities 325,000 270,000
2016 2015
Net income P59,000 50,000
+Decrease in other current assets (100,000) 10,000
–Decrease in current liabilities 55,000 (20,000)

4.
As these examples illustrate, cash from operations can be manipulated easily by
delaying payments or purchases until after the end of the period. However, the
examples also illustrate that total cash flow cannot be manipulated—total cash
flow for the years 2016 and 2015 is P162,000 in all three examples. The
manipulations only have the effect of shifting cash flow from one period to
another.
P34-4 1. 2016 2015 2014 2013

Net income P90 P90 P90 P90
+Depreciation expense 40 40 40 40
±Change in accounts receivable (15) 30 0 (20)
±Change in inventory (10) 25 (15) 5
±Change in accounts payable 30 0 (20) 15
Net cash from operating activities P135 P185 P95 P130
2. “Cash flow” (net income + depreciation) is P130 each year.
3. When working capital (current assets – current liabilities) is relatively constant,

the net cash from operations is about the same as the cash flow measure. This is
the case in 2016 and 2013 in the example. Firms that are not growing would
expect to have a stable level of working capital. For such firms, “net income +
depreciation” is a reasonable approximation for cash flow from operations.
If working capital is increasing, part of the cash generated by operations must be
used to finance the additional working capital. This will cause cash flow from
operations to be less than “net income + depreciation.” This is the case in 2009 in
the example. Working capital is often increasing in high-growth firms and in
firms that are having trouble collecting receivables or moving inventory.
If working capital is decreasing, extra cash is freed up in addition to the cash
generated by operations. This will cause cash flow from operations to be greater
than “net income + depreciation.” This is the case in 2010 in the example.
Working capital can be decreased by any combination of the following
actions: increase receivable collection efforts, reduce inventory levels,
allow payable levels to increase.
P34-5 1. Nova, Inc.

Statement of Cash Flows (Direct Method)
Cash flows from operating activities:
Cash receipts from customers P698,600(a)
Cash payments for:
Inventory P367,800 (b)
Operating expenses 176,800 (c)
Interest expense 3,800 (d)
Income taxes 33,600 (e) 582,000
Net cash provided by operating activities P116,600
Cash flows from investing activities:

Sale of long-term investments P12,800 (f)
Sale of equipment 3,000 (g)
Purchase of equipment (12,000)(h)
Net cash provided by investing activities 3,800
Cash flows from financing activities:

Sale of treasury stock P6,000 (i)
Long-term note principal payment (8,000)(j)
Net cash used by financing activities (2,000)
Net increase in cash and cash equivalents P118,400
Cash and cash equivalents at beginning of year 58,000
Cash and cash equivalents at end of year P176,400
COMPUTATIONS:
(a) Cash receipts from customers:
Accounts receivable at beginning of year P26,600
Add: Sales on account 704,000
Total accounts to be collected P730,600
Less: Accounts receivable at the end of year 32,000
Total cash received from customers P698,600
(b) Cash payments for inventory:

Inventory at end of year P21,000
Add: Cost of goods sold 368,000
Total goods available for sale P389,000
Less: Inventory at beginning of year 25,400
Purchases for the year on account P363,600
Add: Accounts payable at the beginning of year 11,200
Total accounts to be paid 374,800
Less: Accounts payable at the end of year 7,000
Total cash paid for inventory P367,800
(c) Cash payments for operating expenses:

Operating expenses P185,000
Less: Noncash item: Depreciation expense (7,000)
Less: Interest expense reported separately (2,800)
Add: Prepaid insurance at the end of year 5,600
Less: Prepaid insurance at beginning of year (4,000)
Total cash paid for operating expenses P176,800
(d) Cash payments for interest:

Interest expense P2,800
Add: Interest payable at beginning of year 2,000
Less: Interest payable at end of year (1,000)
Total cash paid for interest P3,800
(e) Cash payments for income taxes:

Income tax expense P37,600
Add: Income taxes payable at beginning of year 8,000
Less: Income taxes payable at end of year (12,000)
Total cash paid for income taxes P33,600
(f) Cash receipts from sale of long-term investments:

Long-term investments at beginning of year P16,800
Less: Long-term investments at end of year 6,000
Long-term investments sold during year P10,800
Add: Gain on sale of long-term investments 2,000
Total cash receipts on sale of long-term investments P12,800
(g) Cash receipts from sale of equipment P3,000

[As given in problem, loss on sale (P1,000) would affect net
income but not cash flow from sale.]
(h) Cash payments to purchase equipment:

Equipment at beginning of year P66,000
Less: Equipment sold 10,000
Total P56,000
Equipment at end of year 80,000
Difference is amount of equipment purchased P24,000
Paid for by issuing common stock (P10,000 + P2,000) 12,000*
Total cash paid to purchase equipment P12,000
* The issuance of common stock (including the increase in Paid-ln Capital) is
a significant financing activity but does not involve cash, and so it is not
reported directly on the cash flow statement.
(i) Cash receipts from sale of treasury stock:

Treasury stock (at cost) at beginning of year P20,000
Less: Treasury stock (at cost) at end of year 10,000
Treasury stock sold during year P10,000
Less: Reduction in retained earnings since treasury stock
sold at less than cost 4,000
Total cash receipts from sale of treasury stock P6,000
(j) Cash payments to reduce long-term notes payable:

Long-term notes payable at beginning of year P24,000
Long-term notes payable at end of year 16,000
Total cash payments to reduce principal amounts of long- P8,000
term
2. The lack of dividend payment may not seem appropriate under the current
circumstances for Nova, Inc. The cash balance has increased to more than three
times the beginning-of-the-year balance. Furthermore, this increase has
resulted primarily from operating activities, and the receivable and payable
balances seem reasonable. It appears that Nova has the necessary cash and is
in a good cash flow position to consider paying a cash dividend. It may be,
however, that the company is planning other future activities, such as plant
expansion, that would require considerable cash. Under those circumstances, the
company may not wish to pay cash dividends this year.
P34-6 (a) LOEL CORPORATION


Cash flows from operating activities
Net income P55,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Patent amortization 2,500
Loss on sale of equipment
3,000*
Increase in current liabilities 13,000
Increase in current assets (other than cash) 6,500
(25,000)
Cash flows from investing activities

Sale of equipment 9,000
Addition to building
(27,000)
Investment in debt securities
(16,000)
Net cash used by investing activities
(34,000)

Issuance of bonds 50,000
Payment of dividends
(25,000)
Purchase of treasury shares
(11,000)
Net cash provided by financing activities 14,000
Net increase in cash
P41,500a
* [P9,000 – (P20,000 – P8,000)]
a
An additional proof to arrive at the increase in cash is provided as
follows:
Total current assets—end of period P301,500 [from part

(b)]
Total current assets—beginning of (235,000)
period
Increase in current assets during the 66,500
period
Increase in current assets other than
cash (25,000)
Increase in cash during year P 41,500
(b) LOEL CORPORATION

December 31, 2015
Assets
Non-currents assets
Long-term investments P6,000
Land P30,000
Building (P20,000 + P7,000) P47,000
Less: Accum. Depreciation
(P0,000 + P,000) 113,000
34,000
Equipment (P0,000 – P0,000) 70,000
Less: Accum. Depreciation
(P1,000 – P,000 + P,000)
12,000 58,000
Total property, plant, and 201,000
equipment
Intangible assets
Patents (P0,000 – P,500) 37,500
Total non-current assets 254,500
Current assets 301,50
0b
Total assets P556,00
0

Equity
Share capital—ordinary P180,000

Retained earnings (P4,000 + P5,000 – 74,000
P5,000)
Less: Treasury shares
11,000
Total shareholders’ equity P243,000
Bonds payable (P00,000 + P0,000) P150,000
Current liabilities (P50,000 + P3,000) 163,00
0
Total liabilities
313,000
Total equity and liabilities P556,00
0
Au: Is it correct. Pls confirm
b
The amount determined for current assets could be computed last
and then is a “plug” figure. That is, total liabilities and equity is
computed because information is available to determine this
amount. Because the total assets amount is the same as total
liabilities and equity amount, the amount of total assets is
determined. Information is available to compute all the asset
amounts except current assets and therefore current assets can be
determined by deducting the total of all the other asset balances
from the total asset balance (i.e., P556,000 – P37,500 – P201,000 –
P16,000). Another way to compute this amount, given the
information, is that beginning current assets plus the P25,000
increase in current assets other than cash plus the P41,500 increase
in cash equals P301,500.
P34-7 (a) LILY INC.

Net income P32,000
Adjustments to reconcile net income to
net cash provided by operating
activities
Gain on sale of investments
(3,400)
Increase in account receivable (P41,600 – (20,400)
P21,200) (12,800)

Sale of investments 15,000
Purchase of land (18,000)
Net cash used by investing activities
(3,000)

Issuance of ordinary shares 20,000
Retirement of notes payable (16,000)
Payment of cash dividends
(8,200)
Net cash used by financing activities
(4,200)
Net increase in cash 12,000

Cash at beginning of year 20,000
Cash at end of year P32,000
Noncash investing and financing activities were the purchase of land through
issuance of P30,000 of bonds.
(b) LILY INC.

December 31, 2010
Assets Equity and Liabilities
Investments P20,400 (1) Share capital—
Plant assets 70,000 (2) ordinary P120,00 (6)

(net) 0
Land 88,000 (3) Retained 47,000 (7)
earnings
Accounts 41,600 Long-term notes
receivable 32,00 payable 25,000 (4)
Cash 0
P252,00 Bonds payable 30,000 (5)
0
Accounts
payable 30,000
P252,00
0
(1) P32,000 – (P15,000 – P3,400)

(2) P81,000 – P11,000
(3) P40,000 + P18,000 + P30,000
(4) P41,000 – P16,000
(5) P0 + P30,000
(6) P100,000 + P20,000
(7) P23,200 + P32,000 – P8,200
(c) Cash flow information is useful for assessing the amount, timing,
and uncertainty of future cash flows. For example, by showing
the specific inflows and outflows from operating activities,
investing activities, and financing activities, the user has a better
understanding of the liquidity and financial flexibility of the
enterprise. Similarly, these reports are useful in providing feedback
about the flow of enterprise resources. This information should
help users make more accurate predictions of future cash flow. In
addition, some individuals have expressed concern about the
quality of the earnings because the measurement of the income
depends on a number of accruals and estimates which may be
somewhat subjective. As a result, the higher the ratio of cash
provided by operating activities to net income, the more comfort
some users have in the reliability of the earnings. In this problem
the ratio of cash provided by operating activities to net income is
60% (P19,200 ÷ P32,000).
CHAPTER 35
Additional Aspects of Financial Reporting –

Accounting Policies, Changes in
Accounting Estimates and Errors
Essay Questions
Q35-1. a. A change in principle – a different generally accepted accounting
principle or procedure is adopted.
b. A change in estimate – a prior estimate is changed based upon more

current and improved information.
c. An accounting error – facts existing at the time of an event or

exchange transaction were incorrectly recorded or a transaction was not
recorded at all.
Q35-2. A pro forma amount is an “as if” earnings amount; required only with respect
to reporting the effects of changes in accounting principle (that require current
application) to satisfy the qualitative characteristic of comparability.
Q35-3. An accounting change involves a change in accounting (a) principle, (b)

estimate, or (c) entity. It is made with intent and by decision. An accounting
error involves incorrect application of accounting principles and estimates, and
mathematical errors. Accounting errors usually are made inadvertently and
are not planned.
Q35-4. The book value is treated as if it were the new original cost. The revised
residual value is subtracted from the book value, resulting in revised
depreciable cost, the basis for subsequent depreciation.
Q35-5. A company could justify a change in accounting principle on the grounds that
the new principle is preferable to the old. One example would be a change
from LIFO to FIFO, because the change results in a more meaningful
matching of costs with revenues. Another example would be a change from
completed-contract method to percentage-of-completion method.
Q35-6. Since accounting involves periodic reporting and matches costs as expenses
against revenues, it necessarily involves estimation. Changes in estimates are
inevitable as new events occur, more experience is acquired, or additional
information is obtained. Some examples of changes in accounting estimates
include a change in the estimated useful life of an asset, a change in estimated
warranty costs because of a newly discovered defect, a change in the estimated
amount of uncollectible accounts receivable, and a change in the estimated
amount of recoverable mineral reserves.
A company accounts for a change in accounting estimate in the period of
change if it affects that period only, or in the period of change and future
periods if it affects both. A change in accounting estimate does not require a
cumulative effect adjustment or prior period restatement.
Q35-7. A material error of a prior period that is discovered in the current period is
accounted for as a prior period adjustment (restatement) and therefore is
excluded from net income. On the current period financial statements, the
company reports the error (net of related income tax effects) as an adjustment
to the beginning balance of retained earnings. When comparative statements
are presented, it makes adjustments to the affected items on the statements of
profit or loss and other comprehensive income and to the retained earnings
balances, as well as the balances of the affected statement of financial position
accounts for all periods reported. In addition, the company discloses the
nature of the error in previously issued financial statements and the effect of
its correction on net income and the related earnings per share amounts for
each year reported.
Q35-8. A counterbalancing (self-correcting) error results from failure to properly

allocate an expense or revenue item between two consecutive accounting
periods. No error remains in retained earnings or other statement of financial
position accounts at the end of the second period because the total revenue and
total expense to that date are correct. However, the interim reports are
incorrect.
A noncounterbalancing (not self-correcting) error continues to affect the

account balances and reports beyond a two-year period.
This distinction is significant in the analysis of errors because the correcting

entry depends upon whether the error is counterbalancing or
noncounterbalancing, as well as upon when the error is corrected relative to
when the error was made.
Q35-9. Errors that affect only a company’s statement of financial position are mainly
classification errors. These include classifying a long-term note receivable as
a current receivable and failing to include the current portion of long-term debt
in current liabilities.
Q35-10. Errors that affect only a company’s statement of profit or loss and other
comprehensive income usually result from misclassification of items.
Examples of this include combining interest revenue with sales revenue and
including selling expenses in cost of goods sold.
Q35-11. One example of an error that is counterbalanced in the following period is the
failure to accrue an interest liability in the current period when the interest is
to be paid in the next period. The effect of this error in the current period is to
understate interest expense and thus overstate net income and retained
earnings, and to understate interest payable. In the following period when the
interest is paid and treated as an expense, interest expense is overstated and net
income is understated by the same amount as it was overstated in the previous
period. Therefore, at the end of the second period, retained earnings is
correctly stated.
Another example of an error that is counterbalanced in the following period is
the overstatement of ending inventory under a periodic inventory system. In
the current period, cost of goods sold is understated, which results in net
income and retained earnings being overstated. In the following period,
however, beginning inventory is overstated, so cost of goods sold is overstated
and net income is understated, which results in retained earnings being
correctly stated at the end of the second period.
Q35-12. One error that is not counterbalanced in the following period is the expensing
of a depreciable fixed asset in the period it is purchased. In the year of
purchase, expenses are overstated, assets are understated, depreciation expense
is understated, and accumulated depreciation is understated. The
understatement of the asset and depreciation expense will continue over the
life of the asset. The statement of financial position accounts (Asset,
Accumulated Depreciation, and Retained Earnings) will only be correct upon
the disposal of the asset.
Another noncounterbalancing error is the failure to record properly a bond
discount or premium. This causes interest expense to be incorrectly reported
and liabilities and net income to be incorrect for the life of the bonds.
Q35-13. If discovery occurs in 2015, a prior period adjustment is recognized to correct
the overstatement of 2014 net income, and wage expense is reduced to correct
overstatement in 2015. If discovery occurs in 2016, no entry is needed
because the overstatement of 2014 income affecting retained earnings is offset
by the understatement of 2015 income. The errors have counterbalanced.
Q35-14. a. Affects statement of profit or loss and other comprehensive income only:
(1) Interest revenue credited to dividend income, or vice versa.
(2) Loss on sale of equipment debited to operating expense, or vice

versa.
b. Affects statement of financial position only:
(1) Credit long-term liability amount to short-term liability, or vice versa.
(2) Credit premium on par value shares to the share capital amount, or
vice versa.
c. Affects both statement of profit or loss and other comprehensive
income and statement of financial position:
(1) Error in merchandise inventory.
(2) Error in prepaid expense (e.g., prepaid expense recorded as expense).
Q35-15. Effect of Error On

Net Owners’
Income Equity
Assets Liabilities
a. Ending inventory for 2014
understated:
2014 financial statements .......... – – 0 –
2015 financial statements .......... + 0 0 0
b. Ending inventory for 2015

overstated:
2015 financial statements .......... + + 0 +
2016 financial statements .......... – 0 0 0

c. Failed to record depreciation in

2014:
2014 financial statements .......... + + 0 +
2015 financial statements .......... 0 + 0 +
d. Failed to record revenue collected in

advance at end of 2014 (was
reported as revenue):
2014 financial statements .......... + 0 – +
2015 financial statements .......... – 0 0 0
Q35-16. A change in accounting principle occurs when one generally accepted

accounting principle is adopted in place of the one used previously for
reporting purposes. A change in estimate results from new events occurring,
more experience being acquired, or additional information being obtained that
necessitates a revision of an accounting estimate previously made. It is often
difficult to distinguish between a change in principle and a change in estimate
because they are interdependent. For example, a change in the estimated
productive use of equipment may cause a change in the method of
depreciating that equipment. A company accounts for a change in accounting
principle as a cumulative effect in the year of change, with a few exceptions,
and accounts for a change in estimate prospectively. A company accounts for
a change in accounting principle that is associated with a change in estimate
prospectively.
Q35-17. The following changes in accounting principle require prior period restatement
(retroactive adjustment) instead of cumulative effect disclosure: (1) a change
from the LIFO method of inventory pricing to another cost flow method; (2) a
change in the method of accounting for long-term construction-type contracts;
(3) a change to or from the full-cost method of accounting, used in the
extractive industries, (4) a change from retirement-replacement-betterment
accounting to depreciation accounting, for railroad track structures; and (5) a
change from the fair value method to the equity method for investments in
ordinary shares. The reason for restating prior periods for these changes
instead of showing the cumulative effect in the current year is that the size of
the cumulative effect of the change may be so much greater than operating
income that including it in the statement of profit or loss and other
comprehensive income might appear to reduce the significance of income
from operations. Prior period restatement is also required when a change is
made to a new accounting principle in order to conform to requirements set
forth in PAS.
Q35-18. PAS 34 defines the principles to be followed in reporting accounting changes

in interim statements. If a company makes a cumulative effect type of
accounting change during the first interim period, it includes the cumulative
effect of the change on retained earnings at the beginning of the year in the net
income of the first interim period. However, if a company makes a cumulative
effect type of change in other than the first interim period, it restates the prior
interim periods by applying the newly adopted principle to those interim
periods, and reports the cumulative effect of the change on retained earnings at
the beginning of the year in the restated net income of the first interim period.
For those changes in accounting principle for which the cumulative effect
cannot be determined, disclosure of the change is necessary but no
adjustments are required if the change occurs in the first interim period. If a
company makes the change in other than the first interim period, it restates the
financial statements of the prechange interim periods by applying the newly
adopted accounting principle to those prechange interim periods.
Q35-19. A company corrects errors even after they have counterbalanced whenever it
presents for comparative purposes financial statements affected by the error.
Otherwise, the errors may cause financial statements to be misleading to users
by distorting trends and financial ratios.
Exercises
E35-1. The cited items are reported as follows:

1. Change in accounting principle; exception to general rule; prior period
restatement; at the beginning of the period, increase retained earnings and
inventory; assuming rising prices during the period, net income and assets
are higher than they otherwise would have been.
2. Change in accounting estimate; general rule; revise periodic depreciation
charge based on current book value, estimated residual value, and new
estimate of remaining service life for current and future periods; no effect
at the beginning of the period; depreciation expense is higher and net
income and assets are lower than they otherwise would have been in the
current period.
3. Change in accounting estimate; general rule; revise periodic depreciation

for the current and future periods; usually a change from accelerated
depreciation to straight-line depreciation will increase income and assets
but it may decrease income and assets if all assets are near the end of their
useful lives.
4. Change in accounting estimate; general rule; charge to income in current
period; decrease income and current assets.
5. Included in income of the current period; therefore, income and assets
increase.
6. Correction of accounting error; general rule; prior period adjustment;
increase assets and retained earnings at the beginning of the period;
during the period, more depreciation will be charged than otherwise
would have been.
7. Charge to current income; decrease assets and net income.
restatement; probably increase assets and retained earnings at the
beginning of the period; during the period, assets and net income probably
will be higher than they otherwise would be.
E35-2. The cited items are reported as follows:

1. Change in accounting principle; exception to general rule since
cumulative effect not determinable; disclosure of the effect of the change
on results of operations (including per share data) for the period of change
and prior period profit if affected; if prices are rising, cost of goods sold is
higher and net income lower than they otherwise would be in the current
period.
period; decrease net income and assets.
3. Include in income of the current period; decrease net income and assets.
and future periods; decreases net income and current assets in the current
period.
5. Change in accounting estimate; general rule; a change from straight-line
to double-declining-balance depreciation will decrease assets and net
income; during the current period, depreciation expense is probably
higher and net income and assets lower than they otherwise would have
been.
6. Change in accounting estimate (contingency); general rule; charge to
current income; decrease assets and net income.

restatement; probably decrease retained earnings and assets at the
beginning of the period; during the period, net income and assets are
probably lower than they otherwise would have been.
E35-3.
Requirement 1
The total change in cost of goods sold prior to 2015 of P180,000 (P85,000 +
P50,000 + P45,000) decreases the value of the inventory by that amount. The
inventory value using the FIFO cost flow assumption was greater than it
would have been had the average cost flow assumption been used since the
FIFO assumption charged lower costs to cost of goods sold and left the higher
costs in inventory. The journal entry is:
Retained earnings – prior period adjustment
due to change from FIFO to Average cost ................ 126,000
Income taxes receivable ............................................... 54,000
Inventory ............................................................... 180,000
Requirement 2
Comparative Statements of Profit or Loss and Other Comprehensive Income
2015 2014
Revenues P1,750,000 P1,500,000
Expenses (1,050,000) (945,000)
Income before income taxes P 700,000 P 555,000
Income tax expense (210,000) (166,500)
Net income P 490,000 P 388,500
Earnings per ordinary share (100,000 shares) P4.90 P3.89
Pro forma amounts assuming the new cost

flow assumption is applied retroactively:
Net income P490,000 P388,500 a
Earnings per ordinary share P4.90 P3.89
a
(P600,000 – P45,000) x (1 – 0.30)
Note: Inventory has been valued using the average cost flow assumption in
2015. In prior years, inventory was valued using the FIFO cost method. The
new method of inventory valuation was adopted to . . . (state justification for
change in accounting principle) . . . and has been applied retroactively to
inventory valuations of prior years. The pro forma amounts shown on the
statement of profit or loss and other comprehensive income have been adjusted
for the effect of retroactive application of the new method on inventory and
related income taxes.
E35-4.
Requirement 1
Inventory .............................................................. 6,000
Retained earnings (P6,000 x 0.70) ................. 4,200
Income taxes payable (P6,000 x 0.30) ........... 1,800
Requirement 2
Comparative Statements of Profit or Loss and Other Comprehensive Income
2015 2014
Revenues P300,000 P270,000
Cost of goods sold (55,000) (39,000)
Other expenses (70,000) (75,000)
Income before income taxes P175,000 P156,000
Net income P109,200
P122,500
Earnings per share (15,000 shares) P7.28

P8.17
Requirement 3
Comparative Retained Earnings Statements
Beginning unadjusted retained earnings P105,000 a P 0

Plus: Prior period adjustment (net of income
taxes of P1,800) 4,200 0
Adjusted beginning retained earnings P109,200 P 0
Add: Net income 122,500 109,200
Ending retained earnings P231,700 P109,200
a
(P270,000 – P120,000) x 0.70
E35-5. 1. Purchases .............................................................. 10,000

Retained earnings .......................................... 10,000
2. Machinery ............................................................. 2,000

Accumulated depreciation: Machinery .......... 400
or
Machinery ............................................................. 2,000
Retained earnings.................................................. 400

Accumulated depreciation: Machinery .......... 400
3. If the error is discovered after the first wage payment for the year, which
is most likely, the entry would be:
Retained earnings.................................................. 2,000
Wages expense .............................................. 2,000
4. Rent expense ......................................................... 4,000

5. If discovered during the following year:

Allowance for doubtful accounts ................... 5,000
If discovered after the accrual for uncollectibles is made at the end of the
following year:
Bad debt expense ........................................... 5,000
6. Retained earnings.................................................. 11,000

Discount on note receivable........................... 11,000
or
Retained earnings.................................................. 21,000 a
Discount on note receivable........................... 21,000 a
To correct sale.
Discount on note receivable .................................. 10,000 b

Retained earnings .......................................... 10,000 b
To correct interest revenue in the first year.
a
P121,000 – (P121,000 x 0.826446)
b
10% x (P121,000 – P21,000)
E35-6. Assets Liabilities Owner’s Equity Net Income

1. + NE + +
2. NE – + +
3. – NE – –
4. NE – + +
5. + NE + +
6. NE – + +
7. – NE – –
8. NE – + +
9. + + + +
10. + NE + +
E35-7.
Requirement 1
Computation of correct income:
2013 2014 2015
Reported net income P20,000 P25,000 P23,000
Prepaid expenses:
Add back expense in year paid 500 900 1,100
Deduct expense in year incurred (500) (900)
Accrued expenses:
Deduct expense in year incurred (800) (700) (950)
Add back expense in year paid 800 700
Revenue received in advance
(unearned):
Deduct revenue from year (300) (400) (1,300)
received
Add revenue in year earned 300 400
Revenue earned but not received
(accrued):
Deduct revenue from year (600) (1,000)
received
Add revenue in year earned 600 1,000 1,200
Corrected net income P20,000 P25,800 P22,250
Requirement 2
The following individual journal entries may be used to correct the errors.
Prepaid expenses:
Prepaid expense .................................................... 1,100
Expense.......................................................... 1,100
Expense ................................................................. 900
Retained earnings .......................................... 900
Accrued expenses:
Expense ................................................................ 950

Liability ......................................................... 950
Expense.......................................................... 700
Revenue received in advance (unearned):

Revenue ................................................................ 1,300
Liability ......................................................... 1,300
Revenue ......................................................... 400
Revenue earned but not received (accrued):
Asset ..................................................................... 1,200
Revenue ......................................................... 1,200
Revenue ................................................................ 1,000
Alternatively, the following compound journal entry could be made (assuming

the expense account corrections can be offset).
Prepaid expenses .......................................................... 1,100
Accounts receivable ..................................................... 1,200
Expenses ...................................................................... 50
Revenue ....................................................................... 700
Accrued expenses ................................................. 950
Unearned revenue ................................................. 1,300
Requirement 3
The following individual journal entries may be used to correct the errors in
2016:
Expense ................................................................. 1,100
Expense.......................................................... 950
Revenue ......................................................... 1,300
Revenue ................................................................ 1,200
Alternatively, the following compound journal entry could be made (assuming
the expense account corrections can be offset).
Expenses ............................................................... 150
Revenue ......................................................... 100
E35-8.
Requirement 1
Current receivables ............................................... 90,000 *
Retained earnings – prior period
adjustment due to change in method
in accounting installment sales ................... 90,000
* P70,000 + P20,000
Requirement 2
2014 2015
Net income ...................................................... P100,000 b P130,000 a
Pro forma net income ...................................... 100,000 b 130,000 c
a
P100,000 + P30,000
b
P80,000 + P20,000
c
P100,000 + P30,000
E35-9.
Requirement 1
This is a change in accounting estimate and will require no retroactive
restatement. It can be assumed that the depreciation expense of P10,000 taken
up in 2015 already considered the remaining method depreciation cost or book
value under the old method at the beginning of that year, the remaining useful
life and salvage value, if any. Hence, there is no entry needed to record the
accounting change.
Requirement 2
There will be no change in the reported earnings for 2014. The amount to be
reported is P50,000.
Requirement 3
The 2015 annual report will disclose the change from accelerated method to
straight-line depreciation and the difference in amounts under the two
methods.
E35-10.
Requirement 1
This is a change in accounting principle because the method of inventory is
being changed and therefore, the retroactive approach must be used. This
approach means that (a) an entry must be made for the catch-up adjustment as
of the beginning of the year of change, (b) the comparative statements must be
restated to the new basis to be comparable, and (c) the beginning balance of
retained earnings for all years reported must be adjusted for any change effect
prior to those years. Pro forma reporting is not required.
Requirement 2
Analysis of the accounting change:
To January 1, 2014, increase in retained earnings = (P30,000 – P20,000) =
P10,000 pretax (P7,000 after tax)
To January 1, 2015, increase in retained earnings = (P70,000 – P40,000) =
P30,000 pretax (P21,000 after tax)
For 2014:
Beginning inventory effect
P30,000 – P20,000 =................. P10,000 increase in CGS under FIFO
Ending inventory effect
P70,000 – P40,000 =................. P30,000 decrease in CGS under FIFO
Net effect on CGS..................... P20,000 decrease in CGS under FIFO
(Therefore pretax income is P20,000 higher under FIFO, and net income is
P14,000 higher).
For 2015:
Beginning inventory effect
P70,000 – P40,000 =................. P30,000 increase in CGS under FIFO
Ending inventory effect
P76,000 – P44,000 =................. P32,000 decrease in CGS under FIFO
Net effect on CGS..................... P 2,000 decrease in CGS under FIFO
(Therefore pretax income is P2,000 higher under FIFO, and net income is
P1,400 higher).
January 1, 2015 (year of change) – To record the catch-up adjustment:

Inventory (adjust to beginning FIFO basis:
P70,000 – P40,000)............................................ 30,000
Deferred income tax (P30,000 x 30%) .......... 9,000
Retained earnings, adjustment due to
accounting change [P30,000 x
(100% – 30%)]............................................ 21,000
Requirement 3
FIFO Basis
2014 2015
Comparative statement of financial position:
Inventory, FIFO .............................................. P 70,000 P 76,000
Retained earnings (below) .............................. 157,000 177,000
Comparative statement of profit or loss and

other comprehensive income for year:
Net income:
2014: Restated to FIFO basis (P80,000,
given + P14,000, Req. 2) ........... P 94,000
2015: (Given, FIFO basis) ...................... P 90,000
Earnings per share (10,000 shares) ... P9.40 P9.00
Comparative retained earnings statement:
Beginning balance (2015, given),
as previously stated .......................... P120,000 P136,000*
Cumulative effect of accounting change . 7,000 21,000
Beginning balance restated ............... 127,000 157,000
Net income (FIFO basis from above) ...... 94,000 90,000
Dividend declared and paid (given) ......... (64,000) (70,000)
Ending balance ........................................ P157,000
P177,000
* December 31, 2014 RE balance = P12,000 + P80,000 – P64,000 = P136,000
Requirement 4
Footnote to the comparative statements:
During 2015, the firm changed from LIFO to FIFO for inventory accounting
purposes because FIFO more realistically measures income. The change
increased 2014 net income P14,000 (P1.40 per share) and 2015 net income
P1,400 (P0.14 per share).
E35-11. Accounting treatment for the cited events:

1. Change in accounting estimate; general rule; financial statements from all

prior periods are not restated retroactively.
2. Correction of an accounting error; general rule; prior period adjustment.
3. Change in accounting estimate; general rule; same treatment as in (1).
4. There is no change in accounting principle. The adoption of the
accelerated depreciation method on the new type of machine does not
constitute change in accounting principle because the nature of transaction
differs in substance from previously occurring transactions.
5. Correction of an accounting error; general rule; prior period adjustment.
E35-12. 1. Retained earnings.................................................. 6,300

Accumulated depreciation: Machinery ................ 700
Machinery ...................................................... 7,000
or
Machinery ...................................................... 7,000
Accumulated depreciation: Machinery ................ 700
2. Construction in progress ....................................... 22,000
Note to Instructor: This assumes that no physical inventory was taken,
which is consistent with the discovery of the error in 2015.
3. Inventory ............................................................... 10,000 a
a
(3,000  12,000) x P40,000
Problems
P35-1.
Requirement 1
Correcting entries:
a. Prior period adjustment correction
(patent amortization, 2013) ............................... 3,000
Patent amortization, expense, 2014 ...................... 3,000
Patent ............................................................. 6,000
b. No correcting entry because this error self corrected by the end of 2013.
For the 2014 comparative financial statements (which include 2013), the
P4,000 inventory (beginning) overstatement (for 2013) would have to be
incorporated into the 2013 statements for comparability reasons.
c. Accumulated depreciation (P600 x 5 yrs.). .......... 3,000
Depreciation expense, 2014 .......................... 600
Prior period adjustment, correction
(depreciation, P600 x 4 yrs.) ...................... 2,400
Computations:
Depreciation recorded per year (P26,000  10 yrs.) ... P2,600
Correct amount of depreciation per year
[(P26,000 – P6,000 = P20,000)  10 yrs.] ................ 2,000
Depreciation overstatement per year ........................... P 600
d. Prior period adjustment, correction (wages) ......... 1,500
Wage expense, 2014...................................... 1,500
e. Cash shortage (expense) ....................................... 1,000
f. To correct the entry made in January 2014:
Repair expense, 2014 ........................................... 7,000
Machinery ..................................................... 7,000
Presumably the company recorded depreciation based on the balance in
the machinery account; therefore, depreciation on this P7,000 was
included in depreciation expense for 2014. The excess depreciation must
be reversed in 2014.
Accumulated depreciation (P7,000 
6 years remaining) ............................................. 1,167
Depreciation expense, 2014 .......................... 1,167
g. The difference between the cost and selling price of treasury shares is
properly recorded as a change in contributed capital. A corporation
cannot recognize a gain (loss) by dealing in its own share capital.
Gain on sale of treasury shares ............................. 3,000
Contributed capital from treasury
share transactions ....................................... 3,000
Requirement 2
2014
Tentative pretax income (given) .............................................. P85,000
Corrections:
a. Patent amortization (debit) ............................................... (3,000)
b. No effect on net income ................................................... -0-
c. Depreciation expense (credit)........................................... 600
d. Wage expense (credit) ...................................................... 1,500
e. Cash shortage (debit)........................................................ (1,000)
f. Repair expense (debit) ...................................................... (7,000)
Depreciation correction (credit) ....................................... 1,167
g. Gain (debit) ...................................................................... (3,000)
Correct 2014 pretax income ............................................. P74,267
P35-2.
Requirement 1
Correcting and adjusting entries:
a. December 31, 2014 – To correct the account related to machine:
Prior period adjustment, correction (machine) ..... 3,200
Machine (original cost) ........................................ 10,000
Depreciation expense, 2014.................................. 800
Accumulated depreciation: (P800 x 5 yrs.) ... 4,000
Land .............................................................. 10,000
Computations:
Annual depreciation: (P10,000 – P2,000 = P8,000)  10 yrs. = P800.
Prior period adjustment: P800 x 4 yrs. = P3,200.
b. December 31, 2014 – To correct all accounts affected by the discount on

the long-term investment of P2,000 (i.e., P20,000 – P18,000). The
carrying amount of the bond should be increased each year from P18,000
(cost) to P20,000 (maturity value) at the end of 2012. The amortization
credit should be to investment revenue; P200 per year (i.e., P2,000  10
years, straight-line):
LT investment bonds (P200 x 3 yrs.) ................... 600

Investment revenue, 2014 ............................. 200
Prior period adjustment (bond discount)
(P200 x 2 years) ......................................... 400
c. The 2014 beginning inventory (periodic system) is overstated by P7,000.

Income for 2013 was overstated by the same amount. The beginning
inventory account has not been closed for 2014.
Prior period adjustment, correction (inventory) ... 7,000
Inventory, beginning 2014 ............................ 7,000
d. Because the purchase was not recorded at the proper time, December 18,
2013, pretax income for 2013 was overstated by P11,000. Also, the error
caused 2014 purchases to be overstated.
Prior period adjustment, correction (purchases) ... 11,000
Purchases, 2014 ............................................. 11,000
Requirement 2
Restatement of 2014 pretax income:
Pretax income tentatively computed .......................................... P160,000
a. Depreciation expense, 2014 (understated) .......................... (800)
b. Investment revenue, 2014 (understated) ............................. 200
c. Inventory 2014, beginning (overstated) .............................. 7,000
d. Purchases, 2014 (overstated) .............................................. 11,000
Correct pretax income, 2014 .............................................. P177,400
P35-3. a. To correct the 2015 beginning inventory, which is incorrect because the
2014 ending inventory was incorrect, and to correct 2015 purchases
(which are overstated):
Inventory, beginning, 2015................................... 12,000
Purchases, 2015 ............................................. 12,000
Notes: 2014 income was correct because the errors in 2014 purchases
and 2014 ending inventory offset each other in 2014.
Also, no correction is needed to accounts payable (although it
was understated at the end of 2014) because the payable would
not exist after payment was made in January 2015.
b. To correct the error in 2014 income due to the understatement of 2014

purchases, and to correct for the consequent overstatement of 2015
purchases:
* Prior period adjustment, error correction
(for 2014 income) .............................................. 18,000
Purchases, 2015 ............................................. 18,000
Accounts payable were understated in 2014 but are correct in 2015

because payment has been made.
c. To correct the error in 2014 net income which was overstated because bad
debt expense was not recorded in 2014. Also, the allowance account
must be corrected:
(for 2014 income) .............................................. 2,000
Allowance for doubtful accounts .................. 2,000
d. To correct the error in 2014 income, due to the understatement of selling

expense, and the consequent overstatement of 2015 selling expense:
(selling expense) ................................................ 5,000
Selling expense, 2015 .................................... 5,000
The liability for selling expense was understated at the end of 2014, but it
is correct in 2015 after the cash payment.
e. To correct the error in 2014 income because of the understatement of

wage expense, and to correct 2015 wage expense:
(wages) .............................................................. 4,000
Wage expense, 2015...................................... 4,000
Although wages payable was understated at the end of 2014, it is correct

in 2015 after the January 2014 payment.
f. To correct the understatement of 2014 income because 2014 insurance

expense was overstated, and to correct 2015 insurance expense:
Insurance expense, 2015 ....................................... 600
Prior period adjustment, error correction
(insurance) .................................................. 600
Prepaid insurance at the end of 2015 is correct should be zero.
g. To correct the overstatement of 2014 income due to income tax expense

not recorded until 2015, and correction of 2015 income tax expense
(overstated):
(income tax) ....................................................... 2,400
Income tax expense, 2015 ............................. 2,400
Income tax payable was understated at the end of 2014; however, 2015
income tax payable is correct because it has been paid.
h. To correct the overstatement of 2014 income due to the failure to record

depreciation expense in 2014, and to correct accumulated depreciation.
(depreciation) .................................................... 9,000
Accumulated depreciation ............................. 9,000
* Closed directly to retained earnings.
P35-4.
Requirement 1
This case involves correction of an accounting error.
Analysis of the effects:
Asset recorded, equipment .......................................... None
Asset that should have been recorded, equipment ....... P9,000
Depreciation recorded on equipment .......................... None
Depreciation that should have been recorded
per year on equipment (SL: P9,000  10 yrs.) ..... P 900
Cumulative depreciation through 2014 (P900 x 4) ..... P3,600
Error in statement of profit

or loss and other
comprehensive income:
2011 2012 2013 2014
Reported net income ...... P11,000 P22,000 P30,000 P33,000
To correct net income
(tax effect disregarded):
2011 error correction .. + 9,000
Annual depreciation
correction ................ – 900 – 900 – 900 – 900
Correct net income ..... P19,100 P21,100 P29,100 P32,100
Requirement 2
To correct the current account balances, December 31, 2014:
Asset, equipment .................................................. 9,000
Prior period adjustment*
[P9,000 – (P900 x 3)] ................................. 6,300
Accumulated depreciation, equipment
(2009, 2010 & 2011) .................................. 2,700
* Closed to retained earnings.
December 31, 2014 – Adjusting entry for 2014 depreciation:
Depreciation expense ........................................... 900
Accumulated depreciation, equipment .......... 900
Requirement 3
Presentation on 2014 financial statements (retroactive approach, prior periods
corrected):
Comparative statement of financial position:

2013 2014
Asset, equipment (Note 6) ............................... P9,000 P9,000
Accumulated depreciation, equipment ............ (2,700) (3,600)
Book value ............................................... P6,300 P5,400
Retained earnings statement:

2013 2014
Beginning balance, as previously stated .......... P xx P xx
Adjustments to retained earnings .................... 7,200* 6,300 †
P xx P xx
* P6,300 + P900 = P7,200 alternatively, [P9,000 – (P900 x 2) = P7,200)].
†
The amount recorded in the 2014 entry, covering years before 2014.

other comprehensive income:
2013 2014
Depreciation expense, equipment (Note 6)...... P 900 P 900
Net income:
2013 (P30,000 – P900) ............................. 29,100
2014 (P33,000 – P900) ............................. 32,100
Earnings per share (100,000 shares) ................ P0.291 P0.321
Note 6: Correction of accounting error – During 2014 it was discovered that

the cost of equipment acquired in 2011 was debited to expense at that time.
As part of the correction of the error, it was necessary to restate 2013 financial
statements to report depreciation expense for 2013 which was not reported as
a result of the error. Accordingly, 2013 net income is P900 less and the book
value of equipment reported above for 2013 is P6,200 more (i.e., P9,000 –
P2,700) than previously reported in 2013. Retained earnings at December 31,
2013 is P6,300 (i.e., P9,000 – P2,700) more than previously reported.
P35-5.
Requirement 1
2015 Depreciation before accounting change:
(P10,000 – P1,000) x 2/6............................................................... P3,000
2015 Depreciation after accounting change:

Book value, January 1, 2015 = P10,000 – (P9,000 x 3/6) = P5,500
2015 depreciation = (P5,500 – P2,000) x 4/10
(at January 1, 2015, four years remaining) .................................... P1,400
2015 entry to record depreciation:

Depreciation expense ........................................... 1,400
December 31, 2015 Accumulated depreciation balance:

2014 depreciation (P9,000 x 3/6) ................................ P4,500
2015 depreciation ........................................................ 1,400
2015 ending Accumulated depreciation ............... P5,900
Requirement 2
Red Company
Statements of Profit or Loss and Other Comprehensive Income
For Years Ended December 31
2014 2015
Revenues ......................................................... P40,000 P50,000
Expenses and other losses other than
depreciation and tax ..................................... (25,000) (35,000)
Depreciation expense ....................................... (4,500) (1,400)
Net income before tax ..................................... 10,500 13,600
Income tax expense (30%) .............................. (3,150) (4,080)
Net income ...................................................... P 7,350 P 9,520
Income on a per share basis: P0.074 P0.095

P35-6.
Requirement 1
This is a change in accounting estimate and should be accounted for by using
the current approach (i.e., the “catch-up” adjustment is recorded in the year of
change and reported on the statement of profit or loss and other
comprehensive income) as well as prospective approach.
Requirement 2
a. Prior years’ income will not be adjusted because the change from SYD to
SL method is considered a change in accounting estimate.
b. To record SL depreciation for 2014:

Depreciation expense ........................................... 3,500 **
Accumulated depreciation, equipment .......... 3,500 **
** Cost P68,000
Less: Accumulated depreciation, SYD 34,000
Net book value, 1.1.05 P34,000

P34,000 – P13,000
2014 depreciation (SL) = = P3,500
6
Requirement 3
2013 2014
Comparative statement of financial position,

December 31:
Equipment (at cost).......................................... P68,000 P68,000
Accumulated depreciation (Note 4)
2014 SYD (from above) .................................. (34,000)
2014 SL (P34,000 + P3,500) ........................... (37,500)
Carrying value ................................................. P34,000 P30,500
other comprehensive income for year:
Income prior to depreciation and accounting
change (given) .......................................... P55,000 P57,500
Depreciation expense ....................................... SYD (7,000) SL (3,500)
Net income ...................................................... P48,000 P54,000
Earnings per share (100,000 shares) ................ P0.48 P0.54
Note 4: Change in accounting method – During 2014 the company changed
the method of depreciating some of its equipment from sum-of-the-years’-
digits to straight-line. The change was made to achieve a more realistic
matching of expense and revenue.
P35-7.
Requirement 1
a. Client’s entries:
Building ................................................................ 60,000
Notes payable ................................................ 60,000
Depreciation expense: Building

(P60,000  30) ................................................... 2,000
Accumulated depreciation: Building ............ 2,000
Correct entries:
a
Building ................................................................ 40,981
Discount on notes payable .................................... 19,019
Notes payable ................................................ 60,000
a
P60,000 x 0.683013
Depreciation expense: Building .......................... 1,366 b

Interest expense .................................................... 4,098 c
Discount on notes payable ............................. 4,098
b
P40,981  30
c
Interest computed using effective interest method: 10% x P40,981
Entries to correct error:

Building ......................................................... 19,019
Accumulated depreciation: Building ................... 634

Interest expense .................................................... 4,098
Depreciation expense: Building ................... 634
Discount on notes payable ............................. 4,098
b. Retained earnings ................................................. 40,000

Cost of goods sold ......................................... 40,000
To correct error from prior year.
Cost of goods sold ................................................ 15,000

Inventory ....................................................... 15,000
To correct error in current year.
Retained earnings ................................................. 18,000

Salaries and wages expense ........................... 18,000
To correct error in salary and wage accrual in 2014.
Salaries and wages expense .................................. 10,000
Salaries and wages payable ........................... 10,000
To accrue salaries and wages at December 31, 2015.
Requirement 2
a. See Requirement 1.a. of this solution for the incorrect entries that were
made and the correct entries that should have been made.
Discount on notes payable (total discount
of P19,019 less amount of P4,098 amortized
for 2015) ............................................................ 14,921
Accumulated depreciation: Building ................... 634
d
Building ......................................................... 19,019
d
Correction of interest expense understatement of P4,098 less
depreciation overstatement of P634
b. The error from 2014 was counterbalanced by the end of 2015, so it can be
ignored.
Inventory ....................................................... 15,000
c. The error from 2013 and 2014 were counterbalanced by the end of 2014
and 2015; respectively, so they can be ignored.
Salaries and wages payable ........................... 10,000
P35-8.
Requirement 1
2013 2014
Reported net income P27,000 P35,000
Subtract ending inventory overstatement (5,000) (2,000)
Add beginning inventory overstatement 5,000
Subtract wages payable when incurred (700) (800)
Add wages payable when expensed 700
Subtract bad debts (1,300) (400)*
Add back prepayments in year recorded as expense 500 200
Subtract prepayments in year expense is incurred (500)
Correct net income P20,500 P37,200
* The effect on income is only P400 because no
accounts were written off during 2014.
Requirement 2
2015
Jan. 1 Retained earnings 4,300
Prepaid expense 200
Inventory 2,000
Wages payable 800
Allowance for doubtful accounts 1,700
P35-9.
Requirement 1
(1) Allowance for uncollectible accounts................... 10,000
Administrative expenses ............................... 10,000
To reflect reduction in loss experience rate.
(2) (a) Allowance for change in value of AFS
securities ..................................................... 3,000
Unrealized holding gain (loss) on
AFS securities (equity) ....................... 3,000
(b) Unrealized decline in value of securities-
available-for-sale (equity) .......................... 19,000
Allowance for change in value of
AFS securities ..................................... 19,000
To reduce securities-available-for-sale to
market valuation.
(3) Retained earnings ................................................. 4,000
Cost of sales ......................................................... 2,100
Merchandise inventory .................................. 6,100
To adjust for overstatements in opening
and closing inventories.
(4) Equipment ............................................................ 12,000
Operating expenses............................................... 1,100
Accumulated depreciation: Equipment ........ 2,200
To adjust for misposting of equipment
purchase in 2014.
(5) Accumulated depreciation: Equipment ............... 17,500
Equipment ..................................................... 15,000
Other income ................................................. 2,500
To adjust for misposting of equipment sale.
(6) Prepaid expenses .................................................. 900
Operating expenses............................................... 900
To adjust for nonrecognition of prepaid
expense in 2014.
(7) Ordinary shares .................................................... 60,000
Capital in excess of par ................................. 60,000
To adjust for capital contributed in
excess of par value.
Requirement 2
Eagle Corporation
Computation of Corrected Net Income
For Years Ended December 31, 2015 and 2014
2015 2014
Debit Debit
(Credit) (Credit)
Reported income P(220,000) P(195,000)
Change in accounts receivable loss
experience rate from 2% to 1% (10,000) –
Ending merchandise inventories overstated:
December 31, 2014 (4,000) 4,000
December 31, 2015 6,100
Misposting of equipment purchase:
Decrease in operating expenses – (10,900)
2014
Increase in operating expenses – 1,100
2015
Misposting of proceeds of equipment sold (2,500)
Recognition of prepaid insurance 900 (1,800)
Corrected net income P(228,400) P(203,700)
P35-10. a. Truck .................................................................... 40,000

b. 2013: P8,000 (P40,000 / 5)

2014: P8,000
P35-11. 2013 2014
Reported net income ........................................ P 90,000 P 95,000
2013 overstated ending inventory .................... (8,000) 8,000
2014 overstated ending inventory.................... (5,000)
2013 insurance expense overstated .................. 16,000
2014 insurance expense understated ................ (4,000)
2013 understated depreciation expense ........... (12,000)
2013 overstated expense on building ............... 22,500
2014 understated depreciation expense on
building .................................................... (2,500)
2013 understated wages expense ..................... (7,000)
2014 overstated wages expense ....................... 7,000
Corrected net income ....................................... P101,500 P 98,500
P35-12. Correcting Entries:
a. Truck .................................................................... 20,000

Depreciation expense [(P20,000 – 2,000) / 8] ...... 2,250
Accumulated depreciation (P2,250 x 3) ........ 6,750
b. Interest expense .................................................... 1,503

Machinery ..................................................... 6,340
Client’s Entry:
January 1, 2013
Machinery............................................................. 20,000
Notes payable ................................................ 20,000
Correct Entries:
2013
Jan. 1 Machinery 13,660
Discount on note payable 6,340
Note payable 20,000
Dec. 31 Interest expense 1,366

Discount on note payable
[0.10 (P13,660] 1,366
2014
Dec. 31 Interest expense 1,503
Discount on note payable
[0.10 (P13,660 + P1,366)] 1,503
P35-13. a. + c. – e. + g. + i. +
b. + d. + f. + h. – j. +
Multiple Choice Questions

MC35-1. A MC35-16. B MC35-31. B MC35-46. A
2. A 17. C 32. C 47. D
3. C 18. B 33. A 48. C
4. A 19. A 34. A 49. A
5. D 20. A 35. B 50. C
6. A 21. D 36. A 51. B

7. C 22. C 37. D 52. A
8. C 23. B 38. A 53. B
9. D 24. A 39. B 54. C
10. D 25. C 40. D 55. B
11. C 26. C 41. D 56. C

12. C 27. B 42. B 57. B
13. C 28. C 43. A 58. D
14. A 29. D 44. A 59. C
15. C 30. B 45. C 60. D
CHAPTER 36
Operating Segment Reporting

Essay Questions
Q36-1. Consolidation presents the account balances of a business combination without
regard for the individual component companies that comprise the organization.
Thus, no distinction can be drawn as to the financial position or operations of the
separate enterprises that form the corporate structure. Without a method by
which to identify the various individual operations, financial analysis cannot be
well refined.
Q36-2. The word “disaggregated” refers to a whole that has been broken apart. Thus,
disaggregated financial information is the data of a reporting unit that has been
broken down into components so that the separate parts can be identified and
studied.
Q36-3. For reportable business segments, a considerable amount of information must be

disclosed including the following:
a. Revenues
b. Operating profit or loss
c. Identifiable assets
d. Aggregate amount of depreciation, depletion, and amortization expense
e. Capital expenditures
f. Equity in the net income from an investment in the net assets of
unconsolidated subsidiaries and other equity investees
g. Types of products and services produced
h. Accounting policies relevant to the segment information
i. Amount of intersegment sales or transfers as well as the basis of accounting
being used
j. Reconciliation of revenues, profits and losses, and identifiable assets with
consolidated totals
k. Method of allocation used for common costs
l. Any effect created by a change in accounting principle
m. Explanation of any unusual or infrequently occurring items included in
operating profits and losses
Q36-4. The Revenue Test: A segment is considered significant if its revenues amount to
10 percent or more of the combined revenues of all business segments.
Revenues (for this test) include all operations revenues and intersegment
transfers except for interest income on intersegment loans and advances (unless
the segment is principally of a financial nature).
The Operating Profit or Loss Test: A segment is considered significant if its

operating profit or loss is 10 percent or more of the greater (in absolute terms) of
the combined operating profits of all profitable segments or the combined
operating losses of all segments reporting a loss. All directly traceable expenses
are subtracted in determining operating profit and loss figures along with an
allocation of common costs incurred by the company.
The Identifiable Assets Test: A segment is considered significant if its

identifiable assets comprise 10 percent or more of the combined identifiable
assets of all business segments.
A business segment need only meet any one of the above tests to be considered
of significant size to warrant separate disclosure.
All of the segments of a company that do not meet any of these three tests should
be combined and disclosed as an aggregate figure along with the disaggregated
information for the reportable segments.
Q36-5. To determine a business segment’s operating profit or loss, operating expenses

are merely subtracted from revenues. The operating expenses should include all
directly traceable expenses as well as a portion of any common operating
expenses incurred for the segments by the corporation as a whole. Common
expenses should be allocated to the individual segments on some logical basis.
Q36-6. Corporation operating expenses that are not directly traceable to a single segment
should be assigned to the segments on a logical basis. Allocation bases such as
square footage, cubic footage, total revenues, employee hours, etc. can be used
depending upon the nature of the expense. For convenience, many expenses are
often assigned based on sales or sales less traceable costs. General corporation
expenses which are unrelated to the segments should not be allocated to them.
Q36-7. According to PAS 14, “identifiable assets of a business segment are those
tangible and intangible enterprise assets that are used by the business segment,
including (i) assets that are used exclusively by that business segment and (ii) an
allocated portion of assets used jointly by two or more business segments.
Assets used jointly by two or more segments shall be allocated among the
industry segments on a reasonable basis.”
Q36-8. Both the revenue test and the identifiable assets test are based on a 10 percent
criterion. In each case, segment totals are determined to arrive at a figure for the
enterprise as a whole. Each segment balance is then compared to this
accumulated total based on a 10 percent standard for required disclosure.
Q36-9. To ensure that sufficient business segments are being disclosed, PAS 14
established an additional reporting requirement: the business segments being
separately disclosed must generate at least 75 percent of the total sales made to
unaffiliated customers. If this standard is not met, enough additional segments
must be disclosed to reach this level although they failed to meet even one of the
three tests of significance.
Q36-10. Only two tests are applied in determining significant geographic segments: a
revenue test (which does not include any intersegment transfers) and an
identifiable assets test. Once again, only one test need be met for a segment to
be considered of significant size to warrant disclosure. Both tests are based on a
10 percent criterion.
Q36-11. The volume of a company’s export sales must be separately presented if it

constitutes 10 percent or more of the total sales made to unaffiliated customers.
Q36-12 After the company decides on the segments for possible disclosure, a
quantitative test is made to determine whether the segment is significant enough
to warrant actual disclosure. A segment is identified as a reportable segment if it
satisfies one or more of the following tests.
(a) Its revenue (including both sales to external customers and intersegment
sales or transfers) is 10% or more of the combined revenue (sales to
external customers and intersegment sales or transfers) of all the
company’s operating segments.
(b) The absolute amount of its operating profit or operating loss is 10% or
more of the greater, in absolute amount, of
1. the combined operating profit of all operating segments that did
not incur an operating loss, or
2. the combined loss of all operating segments that did incur loss.
(c) Its identifiable assets are 10% or more of the combined identifiable
assets of all segments.
In applying these tests, two additional factors must be considered. First, segment
data must explain a significant portion of the company’s business. Specifically,
the segmented results must equal or exceed 75% of the combined sales to
unaffiliated customers for the entire company. This test prevents a company
from providing limited information on only a few segments and lumping all the
rest into one category.
Second, the profession recognized that reporting too many segments may
overwhelm users with detailed information. The PASB decided that 10 is a
reasonable upper limit for the number of segments that a company must disclose.
Q36-13 PFRS requires that a company report:
(a) General information about its operating segments.
(b) Segment profit and loss and related information.
(c) Segment assets and liabilities.
(d) Reconciliations (reconciliations of total revenues, income before income
taxes, and total assets and liabilities).
(e) Information about products and services and geographic areas.
Q36-14 An operating segment is a component of an enterprise:

(a) That engages in business activities from which it earns revenues and
incurs expenses.
(b) Whose operating results are regularly reviewed by the company’s chief
operating decision maker to assess segment performance and allocate
resources to the segment?
(c) For which discrete financial information is available that is generated
by or based on the internal financial reporting system.
Information about two operating segments can be aggregated only if the segments
have the same basic characteristics related to the: (1) nature of the products and
services provided, (2) nature of the production process, (3) type or class of
customer, (4) methods of product or service distribution, and (5) nature of the
regulatory environment.
Q36-15 One of the major reasons for not providing segment information is that
competitors will then be able to determine the profitable segments and enter that
product line themselves. If this occurs and the other company is successful, then
the present shareholders of Ligaya Inc. may suffer. This question should
illustrate to the student that the answers are not always black and white.
Disclosure of segments undoubtedly provides some needed information, but
some disclosures are confidential.
Exercises
E36-1. Memorandum
To: Maria dela Cruz

From: I.M. Student
Subject: Major Customers according to PAS 14
Since Filipinas Company revenues total P109,500,000, revenue from any
single customer equal to or greater than 10% of this amount, or P10,950,000,
is a major customer in accordance with PAS 14. Filipinas must disclose this
fact, including the total amount of revenues from each such customer. Since
Cebu, Inc. and Davao Company are both subsidiaries of Vismin Company, all
three companies are summed to determine whether they represent a major
customer. Given the above guidelines, there are three major customers.
Manila Company (revenues, P16,000,000),

Vismin Company (revenues, P13,000,000 [P8,000,000 + P4,000,000 +
P1,000,000]), and
Philippine government (revenues, P14,000,000)
Filipinas must report that it has three major customers, and that sales to each
are P16,000,000, P14,000,000 and P13,000,000 respectively. Filipinas does
not have to disclose the identity of the major customers.
Since no single foreign government accounts for revenue greater than

P10,950,000, separate disclosure is not required.
A sample disclosure for Filipinas Company financial statements would be as

follows:
Major Customers
The Company has three major customers which represent revenues of
P43,000,000 of the Company’s total revenues. The three customers generate
revenues to Filipinas of P16,000,000; P14,000,000 and P13,000,000,
respectively.
E36-2. Requirement 1
Since all the groups within the Health care products divisions are considered
operating segments, each must be considered as a potentially reportable
segment. Each group and the other two divisions must be examined as to
whether they meet the quantitative thresholds to require separate disclosure.
The revenue test is to report all operating segments with revenues (including
external and internal revenues) greater than 10% of (P10,200 + P500 + P2,000
+ P700) = P1,320.
Pharmaceuticals, Consumer Health Care, and the Food Products division meet
this threshold. (Note that the Food products division does not meet the
threshold if intersegment sales were not considered.)
The profits test is 10% x P2,300 = P230. Pharmaceuticals and Medical

Devices meet the threshold.
The segment assets test is 10% x P21,000 = P2,100. Pharmaceuticals,

Consumer Health Care, and Agricultural Products meet the threshold.
Thus all five operating segments meet one or more of the threshold quantities.
All five are reportable segments.
Requirement 2
Operating Segments Financial Information:
Consumer
health Medical Agricultural Food
(Amounts in 000s) Pharmaceuticals care devices products products Totals
Total segment
revenues P 6,500 P3,000 P1,200 P1,000 P1,700 P13,400
Intersegment
revenues 500 – – – 700 1,200
Depreciation &
amortization 300 100 100 150 100 750
Segment profit 1,800 200 (400) 200 100 1,900
Segment assets 10,000 3,500 1,500 4,000 2,000 21,000
Expenditures for
segment assets 400 200 100 200 200 1,100
Reconciliations
Reconciliations for revenues, income before income taxes, total assets and
other significant items are as follows:
Revenues
Total revenues for reportable segments ....................... P13,400
Other revenues ............................................................. 100
Less: Intersegment revenues ....................................... (1,200)
Total company reported revenues ................................ P12,300
Profit or loss
Total profit for reportable segments ............................. P1,900
Elimination of intersegment profits ............................. (50)
Unallocated amounts:
Other corporate expenses ............................................. (350)
Company total income before income taxes ................ P1,500
Assets
Total assets for reportable segments ............................ P21,000
Other unallocated assets ............................................... 1,000
Company total assets .................................................... P22,000
Other significant items

Segment Company
Totals Adjustments Totals
Expenditures for assets ..................... 1,100 200 1,300
Depreciation and amortization ......... 750 50 800
Initially all operating segments are examined using the quantitative thresholds
to identify reportable segments.
Operating Total Segment Operating Identifiable

segments Revenues Profit (Loss) Assets
A P 620 P 200 P 400
B 100 20 80
C 340 70 300
D 190 (30) 140
E 180 (25) 180
F 70 10 120
G 120 (20) 140
All others 380 (25) 140
Totals P2,000 200 P1,500
Thus, any operating segment with revenues equal to or greater than P200
million is a reportable segment (segments A and C). Any segment with
identifiable assets greater than P150 million is a reportable segment (segments
A, C, and E). The total operating profit for all the segments with operating
profits totals P300 million, thus any segment with an operating profit or loss
equals to or greater than an absolute amount of P30 million is a reportable
segment (Segments A, C, and D). Thus, segments A, C, D, and E are
reportable segments without regard to the aggregation criteria.
Requirement 2
Reportable segments must provide information on separate segments whose
sum of revenue is at least 75 percent of the firm’s total revenue. Segments A,
C, D, and E have revenue of P1,330 million, which is only 66.5% of the total
revenue. If a majority of the aggregation criteria are met by two segments,
they can be aggregated for purposes of identifying reportable segments.
Segments A and B are candidates for combining, but they have only 2 of the 5
criteria in common; thus they cannot be aggregated. Since segments F and G
are similar on four of the five criteria, they meet the majority test and can be
aggregated as a reportable segment as follows:
Segment F + G 190 (10) 300
With F + G considered a reportable segment, the total revenues included in

reportable segments increases to P1,520, of 76% of the total. The 75 percent
requirement has been met.
Requirement 3
If any major customer contributes 10 percent or more to a firm’s revenues, this
fact must be disclosed, including the total amount of revenues from each such
customer, and the segment or segments reporting the revenues. The Philippine
government contributes over 10% of Andres’ revenues and must be reported.
Neither of the other significant customers are major customers under the PAS
14 criterion.
An example disclosure:
Major Customers
Revenues from one customer of Andres Corporation’s segments A and C
represents approximately P220 million of the company’s total revenues.
E36-4. Star Drug Company

Business Segment Financial Results
For Year Ended December 31, 2014
Reportable Operating All

Segments Other
Total
X Y Segments Results
Segment revenues (sales) P26,000 P12,000 P 90,000
P52,000
Segment profit (pretax) P12,000 a P 9,000 b P 1,000 c P 22,000
P38,500 P22,000 P110,000
Segment sales
a P52,000 – P30,000 – P10,000

b
P26,000 – P12,500 – P4,500
c
P12,000 – P7,500 – P3,500
E36-5. Merry Diversified Company
Reportable Operating All

Segments Other
Total
X Y Segments Results
Segment revenues (sales) P24,400 P14,180 P 90,000
P51,420
Segment profit (pretax) P14,640 a P 9,000 b P 3,760 c P 27,400
General corporate expenses (4,000)
Income before
income taxes P 23,400
Segment assets P28,740 P21,960 P121,000
P70,300
General corporate assets 9,000
Total assets at
December 31, 2014 P130,000
a P51,420 – P36,780 operating expenses
b
P24,400 – P15,400 operating expenses
c
P14,180 – P10,420 operating expenses
Determination of reportable segments (see the working papers that follows):
a. Revenue Test. Since the sales of Segment D (P63,900) are more than
10% (P100,000 x 0.10 = P10,000) of the sales for all business
segments, Segment D is considered to be a reportable segment.
b. Profit Test. Since the profits of Segment D (P21,500) and Segment E
(P3,600) are more than 10% (P35,000 x 0.10 = P3,500) of the total
profit for all business segments, both Segment D and Segment E are
reportable segments.
c. Asset Test. Since the assets of Segment A (P15,100) and Segment D
(P87,900) are more than 10% (P145,000 x 0.10 = P14,500) of the
combined assets of all operating segments, Segment A and Segment D are
reportable segments.
d. The combined revenues of Segments A, D, and E are P82,200, which is

more than 75% of the company revenues (P100,000 x 0.75 = P75,000).
Based on the above tests, Segments A, D, and E are the reportable segments
and Segments B and C should be combined for reporting purposes.
Radiant Diversified Company

Working Paper for Segment Reporting
(not required)
All Operating Segments Segment

A B C D E Totals
Total revenues
(sales) P 8,800 P 9,000 P63,900 c P100,000
P 9,200 P 9,100
P 3,300 P 3,200 P 3,400 P21,500 d P 3,600 d P 35,000 a
Segment profit
P15,100 e P13,900 P14,300 P87,900 e P13,800 P145,000 b
Segment assets
a
P28,000 pretax income + P7,000 general corporate expenses (not allocated so segment profit is
increased)
b
P155,000 total assets – P10,000 general corporate assets (not allocated)
c
Segment D meets the revenue test
d
Segment D and E meet the profit test
e
Segment A and D meet asset test
Requirement 2
Radiant Diversified Company
Reportable Operating Segments All Other Total

A D E Segments Results
Segment revenues (sales) P 9,200 P63,900 P 9,100 P17,800 P100,000

Segment profit (pretax) P 3,300 P21,500 P 3,600 P 6,600 P 35,000
Pretax income P 28,000
Segment assets at
P15,100 P87,900 P13,800 P28,200 P145,000
December 31,
2014
Corporate assets 10,000
Total assets at
P155,000
December 31,
2014
E36-7 It should be emphasized that because a company discloses its segmental results,
this does not diminish the necessity for providing consolidated results as well.
Sometimes individuals become confused because they believe that employment
of segmental reporting means that consolidated statements should not be
presented. There appears to be a need to provide both types of information. The
consolidated results provide information on overall financial position and
profitability, while the segmental results provide information on the specific
details which comprise the overall results.
E36-8 P600 + P650 + P250 + P275 + P225 + P200 + P700 = P2,900 = total revenue.
P2,900 X 10% = P290.
Lilibeth, Ken, and Mona meet this test, since their revenues equaled or
exceeded P290.
E36-9 P90 + P25 + P50 + P34 + P150 = P349 = total profits of profitable segments.
P349 X 10% = P34.90.
Lilibeth, Ken, Velvet, and Mona meet this test, since their absolute profit or
loss is equal to or greater than P34.90.
Problems
P36-1. Revenues from a single customer must be disclosed if the amount is 10 percent or
more of sales to unaffiliated customers. For this company, the amount can be
determined as follows:
Sales to Outsiders
Mango ......................................................................... P123,000
Piña.............................................................................. 81,000
Chico ........................................................................... 95,000
Caimito ........................................................................ 77,000
Total ..................................................................... P376,000
Minimum ..................................................................... 10%
Requires Disclosure ..................................................... P 37,600
P36-2. Revenues from outsiders as well as intersegment transfers are included in the revenues
for industry segment reporting purposes.
Clothing Linen Shoes
Revenues ............................... P1,500,000 P1,400,000 P1,000,000
Operating expenses ............... 900,000 200,000 400,000
Income before allocation ...... P 600,000 P1,200,000 P 600,000
Percentage ............................. 25% 50% 25%
Allocated expenses
P300,000 ............................ P75,000 P150,000 P75,000
Operating profit (income less
allocation) .......................... P525,000 P1,050,000 P525,000
P36-3. Sales
Sporting goods........................................ P 900,000 20%
Furniture ................................................. 2,475,000 55%
Paper ....................................................... 1,125,000 25%
Total ................................................ P4,500,000 100%
Allocation of Common Costs (corporate expenses, interest expense, and income taxes
are not included)
Sporting goods 20% x P400,000 = P 80,000
Furniture 55% x P400,000 = 220,000
Paper 25% x P400,000 = 100,000
Operating Profit or Loss

Traceable Allocated
Sales Expenses Expenses Profit Loss
Sporting goods .......... P 900,000 P 400,000 P 80,000 P 420,000
Furniture ................... 2,475,000 900,000 220,000 1,355,000
Paper ......................... 1,125,000 1,050,000 100,000 P25,000
Totals ................... P1,775,000 P25,000
Since the operating profits (P1,775,000) are larger in an absolute sense than the single
operating loss, this figure is used as the basis for the operating profit or loss test. Thus,
an operating profit or loss of P177,500 (10%) is necessary in order to require
disclosure. The sporting goods segment meets this standard as does the furniture
segment. The paper segment does not.
P36-4. Revenue Test (Interest on intersegment loans is omitted except for finance segment)
(numbers in thousands)
Segment Revenues Percentage
Plastics P 6,425 63.7% (reportable)
Metals 2,286 22.7% (reportable)
Lumber 738 7.3%
Paper 455 4.5%
Finance 186 1.8%
Total P10,090 100.0%
Operating Profit or Loss Test (Common costs of P1,250,000 are assigned based on the
revenue percentages above. Interest expense is included for finance segment.)
Traceable Common Operating Operating
Segment Revenues Costs Costs Profit Loss
Plastics P6,425 P3,914 P796.25 P1,714.75
Metals 2,286 1,612 283.75 390.25
Lumber 738 916 91.25 P 269.25
Paper 455 579 56.25 180.25
Finance 186 103 22.50 60.50
Total P2,165.50 P 449.50
Since P2,165.50 is larger in absolute terms than P449.50, it will serve as the basis for
testing. Each of the operating profit and loss figures will be compared to P2,165.50 (in
an absolute sense).
Plastics P1,714.75 / P2,165.50 = 79.2% (reportable)
Metals P 390.25 / P2,165.50 = 18.0% (reportable)
Lumber P 269.25 / P2,165.50 = 12.4% (reportable)
Paper P 180.25 / P2,165.50 = 8.3%
Finance P 60.50 / P2,165.50 = 2.8%
Identifiable Assets Test (includes intangible as well as tangible assets; intersegment

loans are only included for the finance segment)
Plastics P 1,363 21.3% (reportable)
Metals 3,347 52.3% (reportable)
Lumber 314 4.9%
Paper 609 9.5%
Finance 768 12.0% (reportable)
Totals P 6,401 100.0%
The plastic and metals segments meet all three tests and are, therefore, reportable.
Lumber and finance each meet only one of the three tests but that is sufficient for
disclosure to be required.
P36-5. Requirement 1
Fantasy Corporation
Revenues
Sales (net) P600,000
Interest revenue 3,000
Total revenues P603,000
Expenses
Cost of goods sold P323,700
Administrative and office salaries 43,000
Miscellaneous office expenses 2,300
Bad debts expense 6,000
Advertising expense 40,000
Sales salaries and commissions 59,000
Delivery expense 25,000
Property taxes 7,000
Interest expense 8,800
Loss from tornado 10,000
Income tax expense 14,160
Total expenses (569,960)
Net income P 33,040
Earnings per share (10,000 ordinary shares):

Net income P3.30
Requirement 2
Fantasy Corporation
(not required)

B C Other Totals Unallocated Totals
Total revenues (sales) P360,000 P150,000 P90,000 P600,000 P 0 P600,000
Operating expenses
Cost of goods sold P198,000 P 78,000 P47,700 P323,700 P 0 P323,700
Sales salaries 27,000 12,000 8,000 47,000 0 47,000
Sales commissions 7,200 3,000 1,800 12,000 0 12,000
Bad debts expense 3,600 1,500 900 6,000 0 6,000
Delivery expense 16,000 5,000 4,000 25,000 0 25,000
Advertising expense 18,200 9,800 7,000 35,000 5,000 40,000
Administrative and
office salaries 15,000 14,000 10,000 39,000 4,000 43,000
Property taxes 4,000 2,000 1,000 7,000 0 7,000
Misc. office expenses 0 0 0 0 2,300 2,300
Depreciation expense 15,000 6,000 4,000 25,000 6,000 31,000
Total operating
expenses P304,000 P131,300 P 84,400 P 519,700 P 17,300 P 537,000
Segment profit P 56,000 P 18,700 P 5,600 P 80,300 P(17,300) P 63,000
Segments assets P890,000 P370,000 P210,000 P1,470,000 P130,000 P1,600,000
Fantasy Corporation
Reportable Operating Segments All
Other Total
B C Segments Results
Segment revenues (sales) P360,000 P150,000 P 90,000 P600,000
Segment profit (pretax) P 56,000 P 18,700 P 5,600 P 80,300
Interest revenue 3,000
Interest expense (8,800)
Segments assets at
December 31, 2014 P890,000 P370,000 P210,000 P1,470,000
General corporate assets 130,000
Total assets at
December 31, 2014 P1,600,000
Requirement 3
Segment profit is total revenue less operating expenses. In computing segment profit,
none of the following items has been added or deducted: general corporate expenses,
interest revenue, interest expense, tornado loss, income taxes.
Depreciation for Divisions B and C was P15,000 and P6,000, respectively. Capital
expenditures of Divisions B and C amounted to P50,000 and P27,000, respectively, in
2014 and are included in the total company assets at year-end.
Requirement 4
Segment Profit
Profit margin before income taxes =
Segment Revenues (Sales)
P56,000
Division B: P360,000 = 15.6%
P18,700
Division C: = 12.5%
P150,000
P5,600
Other Divisions: = 6.2%
P90,000
These ratios reveal that the two reportable divisions (A and B) have higher profit
margin than the other operating divisions. This may indicate less efficiency in the
control of costs and expenses in the other divisions.
P36-6. Jerry Conglomerate Company

(not required)

A B Other Totals Unallocated Totals
Total revenues (sales) P120,000 P138,000 P42,000 P300,000 P 0 P300,000
Operating expenses:
Cost of goods sold P 49,000 P 70,000 P21,000 P140,000 P 0 P140,000
Depreciation expense 11,200 12,600 4,200 28,000 2,000 30,000
Other operating
expenses 22,680 21,600 9,720 54,000 6,000 60,000
Total operating
expenses P 82,880 P104,200 P 34,920 P222,000 P 8,000 P230,000
Segment profit P 37,120 P 33,800 P 7,080 P 78,000 P (8,000) P 70,000
Segments assets P890,000 P370,000 P210,000 P1,470,000 P130,000 P1,600,000
Jerry Conglomerate Company

Reportable Operating Segments All

Other Total
A B Segments Results
Segment revenues (sales) P120,000 P138,000 P 42,000 P300,000
Segment profit (pretax) P 37,120 P 33,800 P 7,080 P 78,000
Note: Of the P30,000 total depreciation expense, P2,000 is related to general corporate
activities. The remaining depreciation expense is allocated to Segments A and B and
the other operating segments in the amounts of P11,200, P12,600, and P4,200
respectively.
Segment profit is total revenues less operating expenses. Income taxes, depreciation
expense, and other operating expenses related to general corporate activities have not
been deducted in the computation of operating profits.
P36-7 Computations are given below which furnish some basis of comparison of the two
companies:
Plain Henry
Co. Co.
Composition of current assets
Inventories 63% 45%
Receivables 24% 27%
Cash 13% 28%
100% 100%
Computation of various ratios

Current ratio (P910 ÷P300) 3.03 to 1 (P1,140 ÷ P350) 3.26 to 1
Acid-test ratio (P120 + P220)
÷ P300 1.13 to 1 (P320 + P302) ÷ P350 1.78 to 1
Accounts receivable turnover 4.23
(P930 ÷ P220) times (P1,500 ÷ P302) 4.97 times
1.14a 1.74b
Inventory turnover times times
Cash to current liabilities
(P120 ÷ P300) .40 to 1 (P320 ÷ P350) .91 to 1
a b
(P930 X .70) ÷ P570 (P1,500 X .60) ÷ P518
Henry Co. appears to be a better short-term credit risk than Plain Co. Analysis of
various liquidity ratios demonstrates that Herring Co. is stronger financially, all other
factors being equal, in the short-term. Comparative risk could be judged better if
additional information were available relating to such items as net income, purpose of the
loan, due date of current and non-current liabilities, future prospects, etc.
P36-8 (a) Determination of reportable segments:
1. Revenue test: 10% X P785,000* = P78,500. Only Segment C (P580,000) meets this test.
*P40,000 + P75,000 + P580,000 + P35,000 + P55,000
2. Operating profit test: 10% X (P11,000 + P75,000 + P4,000 + P7,000) = P9,700.

Segments A (P11,000), B (P15,000 absolute value), and C (P75,000) all meet this
test.
3. Identifiable assets test: 10% X P730,000** = P73,000. Segments B (P80,000) and C

(P500,000) meet this test.
**P35,000 + P80,000 + P500,000 + P65,000 + P50,000

(b) Disclosures required by PFRS:
A B C Other Totals
External Revenues P40,000 P 55,000 P480,000 P 90,000 P665,000
Intersegment
Revenues 20,000 100,000 120,000
Total Revenues 40,000 75,000 580,000 90,000 P785,000
Cost of Goods Sold 19,000 50,000 270,000 49,000
Operating
Expenses 10,000 40,000 235,000 30,000
Total Expenses 29,000 90,000 505,000 79,000
Operating Profit
(Loss) P11,000 P(15,000) P75,000 P11,000 P82,000
Identifiable Assets P35,000 P80,000 P500,000 P115,000 P730,000
Reconciliation of revenues
Total segment revenues P785,000
Revenues of immaterial segments (90,000)
Elimination of intersegment revenues (120,000)
Revenues from reportable segments P575,000
Reconciliation of profit or loss

Total segment operating profit P82,000
Profits of immaterial segments (11,000)
Profits from reportable segments P71,000
Reconciliation of assets
Total segment assets P730,000
Assets of immaterial segments (115,000)
Assets from reportable segments P615,000

MC36- 1. B MC36-11. C MC36-21. C MC36-31. D
2. C 12. B 22. B 32. C
3. C 13. B 23. C 33. A
4. E 14. E 24. C 34. D
5. C 15. D 25. B 35. D
6. D 16. B 26. A
7. C 17. B 27. B
8. C 18. A 28. D
9. C 19. C 29. A
10. C 20. B 30. D
CHAPTER 37
Interim Financial Reporting
Questions
Q37-1. Interim reporting is the process of formally publicly disclosing information at
interim periods during a company’s fiscal year. Interim reporting is important
because it provides more timely information than annual reporting.
Q37-2. Statement of profit or loss and other comprehensive income items that are
separately classified should be reported in full in the interim period in which
they occur. They are not allocated among interim periods because they are not
associated with the revenue of the periods.
Q37-3. An interim financial report can be a summary. It does not have to be a

complete set of detailed financial statements. However, it must include at
least the following items:
1. Sales, income taxes, and net income.
2. Disposal of a segment of a business and extraordinary, unusual or
infrequently occurring items.
3. Primary and fully diluted earnings per share.
4. Seasonal revenue, costs, or expenses.
5. Significant changes in estimates or provisions for income taxes.
6. Changes in accounting principles or estimates.
7. Significant changes in financial position.
Q37-4. In regard to the reporting of its inventories in interim reports, a company using
an estimation technique must report the method used and any significant
adjustments resulting from the reconciliation with the annual physical
inventory. A permanent loss (and any subsequent recovery) due to inventory
decline must be recognized in accordance with lower of cost or market
procedures. Finally, when a company uses a standard cost accounting system,
the accounting for all variances must follow routine annual procedures and
any significant unexpected purchase price or volume variances should be
disclosed.
Q37-5. A company matches expenses not directly associated with product sales
during an interim period against revenues using a variety of bases. In this
regard, (a) expenses affecting more than one interim period are allocated to
the interim periods on the basis of time expired, benefits received, or activity
associated with the periods; (b) expenses identified only with activities of the
current interim period are allocated to that period; and (c) gains and losses
incurred in an interim period are recognized in that period.
Q37-6. (a) The accounting procedures used in the preparation of a company’s

interim reports are similar to those for its annual reports in that a year-to-
date trial balance is taken, the trial balance is entered on a worksheet or
other working paper, year-to-date adjusting entries are recorded on the
worksheet, and financial statements are prepared.
(b) The interim accounting procedures differ in that the determination of the
interim ending inventory is based on an estimate rather than a physical
inventory, the interim adjusting entries are usually not entered into the
accounts, and closing entries are not usually made at the end of each
interim period.
Exercises
E37-1. Since management estimates the total bonus amount for the year will be
P500,000, and this expense relates equally to each quarter, then the bonus
expense is allocated one-fourth to each quarter. The first quarter allocation is
P125,000. The logic of using the P500,000 estimate rather than the 2014
actual of P440,000 is that management’s estimate is viewed as a better
predictor of what the actual bonus will be than the 2014 amount. Since the
bonus is compensation to management for work completed during the year,
and presuming that the management work effort is evenly distributed
throughout the year, it is appropriate to allocate an equal amount to each
quarter.
E37-2. The first quarter tax computations are:

Pretax accounting income .......................................................... P100,000
Appropriate tax rate ................................................................... x 0.35
Income tax expense ................................................................... P 35,000
At the end of the second quarter, the estimated annual tax rate is reduced to
30%. The total income tax expense obligation for the combined two quarters
is determined:
Pretax accounting income .......................................................... P250,000
Appropriate tax rate ................................................................... x 0.30
Total income tax expense to date............................................... P 75,000
The amount to be recorded as income tax expense in the second quarter is the
difference between the total year-to-date amount of obligation, less the
amount recognized in prior interim periods:
Total income tax expense to date............................................... P75,000
Income tax expense recorded in earlier periods ......................... 35,000
Income tax expense to be reported in second period ................. P40,000
As of the end of the second quarter, the total amount of income tax expense
recorded is P75,000.
E37-3. 1. A 6. D
2. B 7. B
3. C 8. A
4. A 9. B
5. A
E37-4. Mayumi Company

Interim Statement of Profit or Loss and Other Comprehensive Income
(1) (2)
For 6-Month Period For Second Quarter
Ended June 30, 2014 Ended June 30, 2014
Sales (net) P340,000 P190,000
Gross profit P150,000 P 90,000
Operating expenses
Selling expenses P50,000 P32,000
General expenses 20,000 9,400
Depreciation expense 18,000 (88,000) 10,000 (51,400)
Pretax operating income P 62,000 P 38,600
Other items
Dividend revenue P 1,000 P 400
Interest revenue 500 500
Interest expense (2,100) (600) (1,100) (200)
Net income P 43,000 P 27,000
Earnings per share (20,000 shares) P2.15 P1.35

E37-5. BV Company
Schedule of Computed Income Tax Expense
For Quarters Ended March 31, June 30,
September 30, and December 31
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.

1. Estimation of annual pretax
income (as shown in exercise)
Actual income (year-to-date) P20,000 P42,000 P60,000 P82,000
Estimated remaining income 60,000 44,000 21,000 –
Estimated annual income P86,000 P81,000 P82,000
P80,00
0
2. Estimated effective income tax
rate
20% x P 50,000 P10,000 P10,000 P10,000 P10,000
35% x (P80,000 – P50,000) 10,500
35% x (P86,000 – P50,000) 12,600
35% x (P81,000 – P50,000) 10,850
35% x (P82,000 – P50,000) 11,200
Estimated total income tax P20,500 P22,600 P20,850 P21,200
Effective income tax rate:

Estimated total income tax
= Estimated annual pretax = 25.6% 26.3% 25.7% 25.9%
income
3. Estimated income tax for the
first quarter P5,120 (P20,000 x 25.6%)
Estimated income tax for the
first 6 months P11,046 (P42,000 x 26.3%)
first 9 months P15,420 (P60,000 x 25.7%)
entire year P21,200 [P82,000 x 25.9% = P21,238, but use
P21,200 estimated total income tax
for the year (see Requirement 2)]
4. Estimated income tax expense
for each quarter:
(P5,120 – P0) P 5,120
(P11,046 – P5,120) P 5,296
(P15,420 – P11,046) P 4,374
(P21,200 – P15,420) P 5,780
Problems
P37-1. Requirement 1
The determination of sales and costs of sales is in accordance with the
preferred method. The underapplied fixed overhead is appropriately deferred
as an asset. The results of the first quarter are exactly on schedule with the
budget, thus no volume variance is expected at year-end.
The selling, general and administrative expenses are handled in an appropriate

manner. These costs cannot be related directly with the product, and they
were incurred at budgeted amounts. They should be expensed as period costs
when incurred, or possibly be allocated among interim periods based on time
expired, estimated benefit received, or activity associated with the periods.
The warehouse fire is an ordinary item. It should be reported in the interim

period in which it occurs. Notes should also be included in the interim report
explaining the nature of the loss.
Given there is a reported operating loss, but that the firm is on budget to report
an operating profit, a negative tax expense should be reported in the interim
report. The operating loss of P50,000 has a negative effect of P50,000 x 0.35,
or P17,500. This amount should be reported as a credit, reducing the net loss
reported. It would also be helpful to provide explanatory notes that indicate
that the firm is on budget for the year, and that an operating profit is expected.
Earnings per share amounts are required to be reported. If there is a complex

capital structure, primary and fully diluted earnings per share must be
reported.
Requirement 2
Interim reports are usually comparative reports with the current quarter
compared with the same quarter a year earlier, and the year to date reported
and compared with the year to date a year earlier. Also, as noted above in
Requirement 1, several areas should have note disclosures providing
additional explanation. A very important and needed explanation would deal
with the fact that the firm is on budget and expects to earn a profit for the year.
This is especially important since the data will show an operating loss for the
quarter even after the suggested changes in Requirement 1 are made.
Requirement 3
Interim financial reporting does not need to be a complete set of financial
statements, although it is acceptable to present a complete set of financial
statements. Interim reports can consist of only summarized financial data. If
a firm elects to present only summarized financial data, the following data
should be reported, as a minimum:
1. Sales, income taxes, and net income.
2. Disposal of a segment of a business and extraordinary, unusual or
infrequently occurring items.
3. Basic and fully diluted earnings per share.
4. Seasonal revenue, costs, or expenses.
5. Significant changes in estimates or provisions for income taxes.
6. Changes in accounting principles or estimates.
7. Significant changes in financial position.
P37-2. Note to Instructor: Students must use the gross profit method of estimating
inventory to solve this problem. This method is discussed in Chapter 10 –
Volume I of this series.
Blossom Company
For Quarter Ended March 31, 2014
Sales (net) P50,000

Cost of goods sold
Inventory, January 1, 2014 P 5,000
Purchases (net) 30,000
Cost of goods available for sale P35,000
Less: Inventory, March 31, 2014 (7,500)
Cost of goods sold (P50,000 x (27,500)
0.55)
Gross profit (P50,000 x 0.45) P22,500
Operating expenses
Selling expenses P 6,800
General and administrative 5,880
expenses
Total operating expenses (12,680)
Operating income (pretax) P 9,820
Other items
Interest revenue 180
Income before income taxes P10,000
Income tax expense (3,000)
Net income P 7,000
Blossom Company
Interim Statement of Financial Position
March 31, 2014
Assets
Cash P 900
Accounts receivable (net) 3,500
Inventory 7,500
Prepaid insurance 4,400
Note receivable (due 1/1/2016) 6,000
Interest receivable 180
Land 3,000
Buildings and equipment (net) 35,100
Liabilities and Shareholders’ Equity

Accounts payable P 9,100
Income taxes payable 3,000
Ordinary shares, P1 par 6,600
Premium on ordinary shares 12,400
Retained earnings (P22,480 + P7,000) 29,480
Total liabilities and shareholders’ P60,580
equity
Note to Instructor: The following adjustments have been made to the

Selling Expenses and General and Administrative Expenses control
accounts as well as to certain other statement of profit or loss and other
comprehensive income and statement of financial position accounts.
These would NOT be recorded in the general journal, but are shown in
journal entry form for illustrative purposes.
General and administrative expenses (given) 500

Accounts receivable (net) 500
To record bad debts.
Selling expenses (P900 x 1/3) 300

General and administrative expenses (P900 x 2/3) 600
Buildings and Equipment (net) (P36,000  10 x 900
1/4)
To record depreciation expense.
General and administrative expenses (P4,800 x 1/3 x 1/4) 400

Prepaid insurance 400
To record expired insurance.
Interest receivable (P6,000 x 0.12 x 1/4) 180

180
Interest revenue
To record accrued interest on note
receivable.
Income tax expense (P10,000 pretax income x 0.30) 3,000
To record estimated income taxes.
Totals: Selling expenses = P6,500 + P300 = P6,800
General and administrative expenses = P4,380 + P500 + P600 + P400 = P5,880
Palmera Corporation
For Quarter Ended March 31, 2014
Sales P100,000
Cost of goods sold
Inventory, January 1, 2014 P10,000
Purchases (net) 59,000
Less: Inventory, March 31, (12,000)
2014
Cost of goods sold (P100,000 x (57,000)
0.57)
Gross profit (P100,000 x 0.43) P 43,000
Operating expenses
Selling expenses P12,450
General and administrative 11,650
expenses
Income before income taxes P 18,900
Income tax expense (5,670)
Net income P 13,230
Palmera Corporation
Interim Statement of financial Position
March 31, 2014
Assets
Cash P 9,800
Inventory 12,000
Land 16,000
Buildings and equipment P108,000
Less: Accumulated depreciation (37,800) 70,200

Ordinary shares, P1 par 13,200
Additional paid-in capital 24,800
Retained earnings (P44,900 + P37,230) 58,130
equity
Note to Instructor: The following adjustments have been made to the

Selling Expenses and General and Administrative Expenses control
accounts as well as to certain other statement of profit or loss and other
comprehensive income and statement of financial position accounts.
These would NOT be recorded in the general journal, but are shown in
journal entry form for illustrative purposes.
General and administrative expenses 600

Prepaid insurance (P9,600  4 x 1/4) 600
Selling expenses (P1,800 x 1/4) 450

General and administrative expenses (P1,800 x 3/4) 1,350
Accumulated depreciation (P108,000  15 x 1,800
1/4)
Income tax expense (P18,900 pretax income x 0.30) 5,670

Totals: Selling expenses = P12,000 + P450 = P12,450
General and administrative expenses = P9,700 + P600 + P1,350 = P11,650
P37-4. Note to Instructor: Students must use the retail inventory method (average
cost) of estimating inventory to solve this problem. This method is discussed
in Chapter 10 – Volume I of this series.
Requirement 1
Worksheet on following page. Explanations are given below.
(a) Bad debts expense = P600

(b) Rent expense, P2,400 x 4/12 = P800
(c) Interest revenue, P5,000 x 14% x 3/12 = P175
(d) Depreciation expense: Buildings, P80,000  25 x 6/12 = P1,600
Depreciation expense: Equipment, P18,000  10 x 6/12 = P900
(Continuation of explanations in on page 37-12.)

37-107 Solutions Manual to Accompany Financial Accounting and Reporting
(Volume III)
Requirement 1 (Continued)
Sky Company
Worksheet
For First 6 months Ended June 30, 2015
Statement of Profit
or Loss and Other
Comprehensive Retained Earnings St
Trial Balance Adjustments Income Statement
Account Titles Debit Credit Debit Credit Debit Credit Debit Credit
Cash 10,200
Allowance for doubtful accounts 400 (a) 600
Note receivable (due 4/1/2016) 5,000
Inventory (1/1/2015) 23,000 23,000
Prepaid rent (warehouse) 2,400 (b) 800
Land 12,000
Buildings 80,000
Equipment 18,000
Accumulated depreciation:
Buildings and equipment 23,000 (d) 2,500
Note payable (due 10/1/2015) 6,000
Bonds payable, 12% (due
1/1/2016) 25,000
Premium on bonds payable 960 (f) 48
Ordinary shares, P0.50 par 5,000
Retained earnings 22,968 22,968
Sales (net) 120,000 120,000
Purchases (net) 77,920 77,920
Operating expenses 24,208 (a) 600
267,428 267,428 (b) 800
(d) 2,500 28,108
Requirement 1 (Continued)
Sky Company
Worksheet
Statement of
Profit or Loss
and Other Retained Statement of
Trial Balance Adjustments Comprehensiv Earnings Financial Position
e Income Statement
Account Debi Credi Debit Credit Debi Credit Debit Credit Debit Credit
Titles t t t
Interest (c) 175 175
receiv
able
Interest (c) 175 175
revenu
e
Interest (e) 195 195
expen
se
(f) 1,452 1,452
Interest (e) 195
payabl
e
(f) 1,500 1,695
5,770 5,770
Inventory (g) 29,500 (g) 29,500
(6/30/2
015)
130,675 149,675
Income (h) 4,237 4,237
tax
expen
se
Income (h) 4,237 4,237
tax
payabl
e
134,912 149,675
Net 14,763 14,763
incom
e
-0- 37,731
Retained 37,731 37,731
earnin
gs,
6/30/2
015
Totals 10,007 10,007 149,675 149,675 37,731 37,731 171,175 171,175
37-110 Solutions Manual to Accompany Financial Accounting and
Reporting (Volume III)
Continuation of explanations (from page 37-10).
(e) Interest expense, P6,000 x 13% x 3/12 = P195
(f) Interest payable, P25,000 x 12% x 6/12 = P1,500
Amortization of premium on bonds payable, P960  10 x 6/12 = P48
Interest expense, P1,500 – P48 = P1,452
(g) Inventory:
Cost Retail
Beginning inventory P24,000 P 40,000
Markups 2,100
Goods available P63,720 P108,000
Less: Sales (net) (58,000)
Ending inventory at retail P 50,000
Cost % (P63,720  P108,000) x 0.59
Ending inventory at cost P29,500
(h) Income taxes:
P149,675 – P370,675 = P19,00 pretax income (first 6 months)
P19,000 + P20,000 = P39,000 estimated annual pretax income
P20,000 x 15% + P19,000 x 30% = P3,000 + P5,700 = P8,700 estimated
annual income taxes
P8,700  P39,000 = 22.3% estimated effective income tax rate
P19,000 x 22.3% = P4,237 estimated income taxes for first 6 months
Requirement 2
Sky Company
For April 1 through June 30, 2015
and 6 Months Ended June 30, 2015
(b) (a)
3 Months 6 Months Ended
4/1 Through 6/30/06 June 30, 2015
Sales (net) P 58,000 P120,000
Cost of goods sold
Inventory, beginning P 24,000 P 23,000
Cost of goods available for sale P 63,720 P100,920
Inventory, ending (29,500) (29,500)
Gross profit P 23,780 P 48,580
Operating expenses (14,034) (28,108)
Other items
Interest expense (bonds) P (726) P (1,452)
Interest expense (note) (195) (195)
Interest revenue 175 175
Total other items (746) (1,472)
Net income P 6,763 P 14,763
Note to Instructor: With the exception of the beginning inventory and earnings per
share, the amounts listed in the statement of profit or loss and other comprehensive
income for April 1 through June 30, 2015 are derived by deducting the amounts listed
in the first-quarter statement of profit or loss and other comprehensive income from the
related amounts listed in the 6-month statement of profit or loss and other
comprehensive income.
Requirement 3
Sky Company
Interim Statement of Retained Earnings
Retained earnings, January 1, 2015 P25,968*

P40,731
Less: Dividends (P0.30 x 10,000 ordinary shares) (3,000)
Retained earnings, June 30, 2015 P37,731
* P25,968 = P22,968 + P3,000 (dividends previously deducted)

Requirement 4
Sky Company
June 30, 2015
Assets
Cash P 10,200
Accounts receivable P14,700
Less: Allowance for doubtful accounts (1,000) 13,700
Note receivable (due April 1, 2016) 5,000
Inventory (June 30, 2015) 29,500
Prepaid rent (warehouse) 1,600
Total current assets P 60,175
Land 12,000
Buildings P80,000
Equipment 18,000
Liabilities
Interest payable 1,695
Note payable (due October 1, 2015) 6,000
Total current liabilities P 24,032
Bonds payable, 12% (due January 1, 2016) P25,000
Premium on bonds payable 912 25,912
Total liabilities P 49,944
Shareholders’ Equity
Ordinary shares, P0.50 par P 5,000
Retained earnings, June 30, 2015 37,731
Total shareholders’ equity P 94,731
equity
Requirement 1
Worksheet on following page. Explanations are given below.
(a) Bad debts expense = P450

(b) Interest revenue, P4,000 x 12% x 4/12 = P160
(c) Insurance expense, P960 x 6/12 = P480
(d) Depreciation expense: buildings, P55,000  25 x 6/12 = P1,100
Depreciation expense: equipment, P20,000  8 x 6/12 = P1,250
(e) Rent revenue, P1,800 x 5/12 = P750
(f) Amortization of discount on bonds payable, P600  5 x 6/12 = P60
Interest payable, P12,000 x 10% x 6/12 = P600
Interest expense, P600 + P60 = P660
(g) Inventory:
P90,000 x (1 – 0.45) = P49,500 cost of goods sold
P18,000 beginning inventory + P55,000 purchases = P73,000 cost of
goods available
P73,000 – P49,500 = P23,500 ending inventory
(h) Income taxes:
P114,410 – P104,860 = P9,550 pretax income (first 6 months)
P9,550 + P12,450 = P22,000 estimated annual pretax income
P20,000 x 15% = P3,000
P2,000 x 30% = P600
(P3,000 + P600)  P22,000 = 16.4% estimated effective income tax rate
P9,550 x 16.4% = P1,566 estimated income taxes for first 6 months
37-116 Solutions Manual to Accompany Financial Accounting and Reporting
(Volume III)
Requirement 1 (continued)
Bride Company
Worksheet
Statement of
Profit or Loss and
Other Retained Statement of
Trial Balance Adjustments Comprehensive Earnings Financial Position
Income Statement
Account Debit Credit Debit Credi Debit Credit Deb Credit Debit Credit
Titles t it
Cash 7,200 7,200
Accounts 10,300 (a) 450 9,850
receiva
ble
Note 4,000 4,000
receiva
ble (due
9/1/201
4)
Inventory 18,000 18,000
(1/1/20
14)
Prepaid 960 (c) 480 480
insuran
ce
Property 80,000 80,000
and
equipm
ent
Accumulat 20,000 (d) 2,350 22,350
ed
depreci
ation
Accounts 8,000 8,000
payable
Dividends 3,200 3,200
payable
Unearned 1,800 (e) 750 1,050
rent
Bonds
payable 12,000 12,000
, 10%
(due
1/1/201
7)
Discount 600 (f) 60 540
on
bonds
payable
Ordinary 8,000 8,000
shares,
P1 par
Premium 34,580 34,580
on
ordinary
shares
Retained 26,400 26,400
earning
s
Sales (net) 90,000 90,000
Purchases 55,000 55,000
(net)
Selling 19,750 (d) 1,250 21,000
expens
es
Administra 8,170 (a) 450 10,200
tive
expens
es
203,980 203,980 (c) 480
(d) 1,100
Requirement 1 (continued)
Bride Company
Worksheet
Statement of Profit or
Loss and Other
Comprehensive Retained Earnings
Trial Balance Adjustments Income Statement
Account Titles Debit Credit Debit Credit Debit Credit Debit Credit
Interest receivable (b) 160
Interest revenue (b) 160 160
Rent revenue (e) 750 750
Interest expense (f) 660 660
Interest payable (f) 600
4,850 4,850
Inventory (6/30/2014) (g) 23,500 (g)
104,860 114,410
Income tax expense (h) 1,566 1,566
Income tax payable (h) 1,566
106,426 114,410
Net income 7,984 7,984
-0- 34,384
Retained earnings, 6/30/2014 34,384
Totals 6,416 6,416 114,410 114,410 34,384 34,384 1
37-119 Solutions Manual to Accompany Financial Accounting and
Reporting (Volume III)
Requirement 2
Bride Company
Interim Statement of profit or loss and other comprehensive income
For April 1 through June 30, 2014
and 6 Months Ended June 30, 2014
(b) (a)
3 Months 6 Months Ended
4/1 Through 6/30/05 June 30, 2014
Sales (net) P50,000 P90,000
Cost of goods sold
Beginning inventory P22,000 P18,000
Cost of goods available P50,000 P73,000
Ending inventory (23,500) (23,500)
Gross profit P23,500 P40,500
Operating expenses
Selling expenses P12,200 P21,000
Administrative expenses 5,990 10,200
Total operating expenses (18,190) (31,200)
Other items
Interest revenue P 120 P 160
Rent revenue 450 750
Interest expense (330) (660)
Total other revenues and
expenses 240 250
Income tax expense (866) (1,566)
Net income P 4,684 P 7,984
Note to Instructor: With the exception of the beginning inventory, the amounts listed
in the statement of profit or loss and other comprehensive income for April 1 through
June 30, 2014 are derived by deducting the amounts listed in the first-quarter statement
of profit or loss and other comprehensive income from the related amounts listed in the
6-month statement of profit or loss and other comprehensive income.
Requirement 3
Bride Company
Interim Statement of Retained Earnings
Retained earnings, January 1, 2014 P26,600*
P37,584
Less: Dividends (P0.40 x 8,000 common shares) (3,200)
Retained earnings, June 30, 2014 P34,384
Reconstruction of Accounts 38-120
* P29,600 = P26,400 + P3,200 (dividends previously deducted)

Requirement 4
Bride Company
June 30, 2014
Assets
Cash P 7,200
Accounts receivable (net) 9,850
Note receivable (due September 1, 2014) 4,000
Inventory (June 30, 2014) 23,500
Prepaid insurance 480
Total current assets P 45,190
Property and equipment P80,000
Liabilities
Interest payable 600
Unearned rent 1,050
Bonds payable, 10% (due January 1, 2017) P12,000
Less: Discount on bonds payable (540) 11,460
Total liabilities P 25,876
Shareholders’ Equity
Ordinary shares, P1 par P 8,000
Premium on ordinary shares 34,580
Retained earnings, June 30, 2014 34,384
Total shareholders’ equity P 76,964
Total liabilities and shareholders’ equity P102,840

MC37- 1. D MC37-11. B MC37-21. A MC37-31. C
2. C 12. C 22. B
3. A 13. B 23. D
4. A 14. C 24. B
5. A 15. C 25. D
6. B 16. D 26. B
7. C 17. B 27. B
8. D 18. C 28. A
9. D 19. B 29. C
10. D 20. C 30. D
CHAPTER 38
Reconstruction of Accounts
Questions
Q38-1. Under cash-basis accounting, a company records revenues when it collects
cash from sales and records expenses when it pays cash for its operations. To
convert its cash-basis accounting records to an accrual-based statement of
profit or loss and other comprehensive income, the company must adjust its
cash receipts to convert them to sales revenues and must adjust its cash
payments to convert them to cost of goods sold and operating expenses.
Q38-2. Accrual accounting is the process of relating the financial effects of

transactions, events, and circumstances having cash consequences to the
period in which they occur rather than when the cash receipt or payment
occurs. This process is related to the matching principle, which states that to
determine the income of a company for an accounting period the company
computes the total expenses involved in obtaining the revenues of the period
and relates these total expenses to (matches them against) the total revenues
recorded in the period.
Exercises
E38-1.
Requirement 1
Yan Company
a
Sales revenue P53,000
Cost of goods sold (30,800)
b
Gross profit P22,200

Operating expenses
c
Depreciation expense P 1,200
d
Other operating expenses 10,000
Total expenses (11,200)
Net income P11,000
a
P51,300 collections from customers + P5,900 ending accounts receivable –
P4,200 beginning accounts receivable
b
P30,600 payments to suppliers + P5,600 beginning inventory – P6,300
ending inventory + P7,000 ending accounts payable – P6,100 beginning
accounts payable
c
P12,000 equipment  10 years
d
P12,700 operating cost payments – P3,600 ending prepaid rent (P7,200  2)
+ P900 salaries payable
Requirement 2
Yan Company
December 31, 2015
Assets
Current Assets
Cash P 4,700
Inventory 6,300
a
Prepaid rent 3,600
Property and Equipment
Equipment P12,000
Less: Accumulated depreciation (6,000)
b
Total property and 6,000

equipment
Total Assets P26,500
Liabilities
Current Liabilities
Salaries payable 900
Total Liabilities P 7,900
Owners’ Equity
c
J. Yan, Capital P18,600
Total Liabilities and Owners’ Equity P26,500
a
P7,200  2
b
P4,800 + P1,200
c
P13,600 beginning capital + P11,000 net income – P6,000 withdrawals
E38-2. a. Collections from customers (P000’s)

Sales P710
Add: Accounts receivable, beginning 48
758
Less: Accounts receivable, end 54
P704
b. Payments for inventory

Cost of goods sold P340
Add: Inventory, end 80
420
Less: Inventory, beginning 84
Purchases 336
Add: Accounts payable, beginning 42
378
Less: Accounts payable, end 47
Payments for inventory P331
c. Payments to employees
Salary expense P 50
Add: Salary payable, beginning 21
71
Less: Salary payable, end 23
Payments to employees P 48
d. Payments to other employees / service provider

Other expenses P150
Add: Accrued liabilities, beginning P 11
Prepaid expenses, end 3 14 P164
Less: Accrued liabilities, end P 8
Prepaid expenses, end 2 10
Payment to other service providers / suppliers P154
e. Acquisition of plant assets

Plant assets, net, beginning P185
Add: Depreciation provision 60
P125
Plant assets, net, end 225
Plant assets acquired P100
f. Proceeds from sale of long-term investment

Long-term investments, beginning P 90
Less: Long-term investment, end 75
Decrease P 15
Since no gain or loss was reported in the statement of profit or loss and
other comprehensive income, the investment must have been sold at cost.
g. Long-term notes payable, beginning P 68

Less: Long-term notes payable, end 66
Payment P 2
h. Ordinary shares, beginning P 37

Ordinary shares, end 40
Additional issue P 3
i. Cash dividends
Retained earnings, beginning P246
Add: Net income 110
P356
Retained earnings, end 272
Dividends paid P 84
Summary: (Indirect Method)

Net income P110
Add: Depreciation 60
Total P170
Add (Deduct):
Increase in Accounts receivable (6)
Decrease in Inventory 4
Increase in Prepaid expenses (1)
Increase in Accounts payable 5
Increase in Salary payable 2
Decrease in Accrued liabilities (3)
Cash flows from operations P171 *

Sale of long-term investments P 15
Purchase of plant assets (100)
Cash flows from investing activities P (85)

Payment of long-term notes payable P (2)
Issuance of ordinary shares 3
Payment of cash dividends (84)
Cash flows from financing activities P(83)
Net increase in cash P 3
* (Direct Method)
E38-3.
Requirement 1
Supplies expense, Nov. 30 P1,000
Supplies expense, Dec. 31 3,000
Supplies purchased P2,000
Supplies expense per trial balance P3,000

Supplies expense per statement of profit or loss and other comprehensive
income 2,000
Adjustment for unused supplies P1,000
Requirement 2
Prepaid insurance, Nov. 30 P6,000
Prepaid insurance, Dec. 31 4,250
Adjustment to expired insurance P1,750
Requirement 3
Payment for wages P15,000
Requirement 4
Rent revenue earned (P2,000 + P3,000 – P1,000) P4,000
AJE recorded:
Unearned revenue 4,000
Rent revenue 4,000
E38-4. Reported net income P30,000

Advance from customer recorded as sale (1,000)
Unused supplies 750
Interest expense (600)
Corrected net income under accrual accounting P31,150
E38-5. ETC Company

Sales revenue ................................................... P160,000

Cost of goods sold ........................................... 72,500
Gross profit on sales ........................................ P 87,500
Operating expenses
Depreciation expense: equipment ........... P 2,000
Other operating expenses ......................... 42,500
Total operating expenses ................... 44,500
Net income ...................................................... P 43,000
E38-6. Lilo Company
Sales revenue ................................................... P485,000

Cost of goods sold ........................................... 205,000
Gross profit on sales ........................................ P280,000
Operating expenses
Depreciation expense: equipment ........... P 51,000
Other operating expenses ......................... 144,600
Total operating expenses ................... 195,600
Net income ...................................................... P 84,400
Problems
P38-1. Requirement 1 (See page 14-8.)
Requirement 2
Sunny Sales
Sales P162,000
Cost of goods sold
Inventory, 1/1/2015 P 12,500
Purchases 125,500
Less: Inventory, 12/31/2015 (16,300)
Cost of goods sold (121,700)
Gross profit on sales P 40,300
Operating expenses
Salaries expense P 4,850
Rent expense 4,800
Office expense 3,100
Auto expense 4,300
Income from operations P 22,250
Other item
Interest expense (790)
Net income P 21,460
Sunny Sales
December 31, 2015
Assets
Current Assets
Cash P 5,700
Inventory 16,300
Property and Equipment
Equipment P12,000
Less: Accumulated depreciation (7,500)
Total property and equipment 4,500

Liabilities
Current Liabilities
Salaries payable 1,800
Interest payable 140
Total current liabilities P10,640
Long-term Liabilities
Notes payable 8,000
Total Liabilities P18,640
Owners’ Equity
a
S. Torres, Capital P17,060
Total Liabilities and Owners’ Equity P35,700
a
P19,100 beginning balance + P21,460 net income – P23,500 withdrawals
38-129 Solutions Manual to Accompany Financial Accounting and Reporting (Volume
III)
Requirement 1 Sunny Sales
Worksheet
12/31/05 Balances Transactions Adjustments Statement of Profit or Stat

Loss and Other
Comprehensive Income
Account Titles Debit Credit Debit Credit Debit Credit Debit Credit De
Cash 2,300 (a) 173,200 (b) 169,800
Accounts receivable 10,400 (a) 10,400 (c) 9,200
Inventory 12,500 12,500
Equipment 8,000 (b) 4,000 1
Accumulated depreciation 6,500 (f) 1,000
Accounts payable 6,400 (b) 6,400 (d) 8,700
Salaries payable 1,200 (b) 1,200 (e) 1,800
S. Torres, capital 19,100
33,200 33,200
Sales (a) 152,800 (c) 9,200 162,000
Notes payable (b) 2,000 (a) 10,000
Purchases (b) 117,000 1 (d) 8,500 125,500
Salaries expense (b) 3,050 3 (e) 1,800 4,850
Rent expense (b) 4,800 4,800
S. Torres, withdrawals (b) 23,500 2
Interest expense (b) 650 (g) 140 790
Office expense (c) 3,100 2 3,100
Auto expense (b) 4,100 (d) 200 4,300
343,000 343,000
Depreciation expense (f) 1,000 4 1,000
Interest payable (g) 140
20,840 20,840
Inventory (12/31/2014) 16,300 1
156,840 178,300 6
Net income 21,460
178,300 178,300 6
1 P123,100 – P6,100 in beginning accounts payable
2 P3,400 – P300 in beginning accounts payable
3 P4,250 – P1,200 in beginning salaries payable
4 (P8,000  10) + [(P4,000  10) x ½ ]
Cash Basis of Accounting / Single Entry to Accrual Basis of Accounting 14-130
P38-2. Revolutionary Corporation

For 2014
Sales P342,000
Cost of sales
Purchases P250,000
Inventory, end 50,000 200,000
Gross profit P142,000
Operating expenses
Salaries P 85,000
Rent 12,000
Bad debt 3,000
Miscellaneous expense 10,000
Depreciation 3,000 113,000
Operating income P 29,000
Interest expense 3,600
Net income P 25,400
Revolutionary Corporation
December 31, 2014
Assets
Current Assets
Cash P 56,000
Accounts receivable P22,000
Less: Allowance for doubtful 3,000 19,000
accounts
Merchandise inventory 50,000
Prepaid rent 2,000
Noncurrent Assets
Equipment P 30,000
Less: Accumulated depreciation 3,000
Net 27,000
Liabilities
Current Liabilities
Notes payable 40,000
Interest payable 3,600
Accrued salaries payable 5,000
Total Liabilities P 78,600
Share capital P 50,000
Retained earnings 25,400
Total Shareholders’ Equity P 75,400
Total Liabilities and Shareholders’
Equity P154,000
P38-3.
Requirement 1
a. Sales P73,000
b. Cost of goods sold (P7,000 + P63,000 – P6,000) P64,000
c. Insurance expense (P5,000 + P5,000 – P7,500) P 2,500
d. Wage expense (P10,000 – P5,000 + P3,000) P 8,000
Requirement 2
a. Accounts receivable .............................................. 73,000
Sales ............................................................... 73,000
b. Inventory, December 31 ........................................ 6,000

Cost of sales .......................................................... 64,000
Purchases ....................................................... 63,000
Inventory, November 30 ................................ 7,000

MC38- 1. C MC38- 6. B
2. A 7. B
3. C
4. C
5. B
CHAPTER 39
Financial Reporting and Changing Prices
Questions
Q39-1. A general price-level change is an increase or decrease in the overall level of
prices of goods and services throughout the economy. It is measured by using
a general price-level index such as the Gross National Product Implicit Price
Deflator or the Consumer Price Index for all Urban Consumers.
A specific price change is an increase or decrease in the price of a specific

good or service in the economy. It may be measured through the application
of direct pricing or indexing methods.
Q39-2. A general price-level index is constructed by the government and is designed

to indicate how much the overall level of prices in the economy has changed
over time. The index is calculated based on changes that occur over time in
the prices of a predetermined “market basket” of goods and services. A base
period is selected and assigned an index number of 100. All other periods in
the index are then assigned index numbers that relate to the base. The GNP
Deflator and the CPI-U are examples of general price-level indexes in the
United States.
Q39-3. A monetary item is either cash, assets that represent a fixed number of pesos
to be received, or obligations that represent a fixed number of pesos to be
paid. A nonmonetary item is any financial-statement item that is not monetary
in nature. Cash, accounts receivable, accounts payable, and interest payable
are examples of monetary items. Examples of nonmonetary items include
inventory, plant assets, obligations under product warranties, and ordinary
shares.
Q39-4. The following methods may be used to determine an asset’s current cost:
1. Direct pricing. This method requires the use of current market prices (as
indicated by current invoice prices, vendors’ price lists, current standard
manufacturing costs, or appraisals).
2. Indexing. This method requires the use of an appropriate specific price
index to restate the asset’s historical cost.
Q39-5. Refer to page 1864.
Q39-6. Refer to pages 1864 to 1865.
Q39-7. Refer to pages 1865 to 1866.
Q39-8. Refer to page 1868.
Q39-9. Current cost accounting, one form of current value accounting, is a system in
which the attribute measured in financial statements is current cost, and the
measuring unit is the nominal peso. In a system of current cost accounting, an
asset is measured at the amount a company would currently have to spend to
acquire the same asset in its existing condition. Current costs, as opposed to
historical costs, are used to measure the elements of financial statements, and
holdings gains and losses are reported as the specific prices of a company’s
assets and liabilities change.
Q39-10. Holding gains and losses in a system of current cost accounting are items that
occur as a result of changes in the current cost of an asset while it is simply
held over time. In a current cost system, holding gains and losses are reported
in the period in which the current cost of an asset changes, even though the
asset might not have been sold during that period.
Exercises
E39-1. 1. 200 / 80 6. 200 / 200 11. 200 / 195

2. 200 / 195 7. 200 / 195 12. 200 / 195
3. 200 / 64 8. 200 / 200 13. 200 / 194
4. 200 / 200 9. 200 / 112 14. 200 / 195
5. 200 / 192 10. 200 / 167 15. 200 / 200
E39-2.
(a) Unrealized holding gain for 2013 is P20,000.
P120,000 – P100,000 = P20,000
(b) Unrealized holding gain, adjusted for inflation, for 2013 is

P10,000.
P120,000 – (P100,000 x 1.10) = P10,000
1.10 = 121 / 110

(c) In part (a) we are saying that Lana Company is better off by P20,000 as a
result of holding the land throughout 2013 (despite the fact that the
company did not sell the land). In part (b) we are saying that Lana
Company is better off by only P10,000 as a result of holding the land.
The specific price of the land rose by 20% during 2013, but the general
price level rose by 10%. Thus, only half of the P20,000 holding gain can
properly be viewed as a real holding gain. The other half is a fictional
holding gain due to inflation.
E39-3. 1. Historical cost accounting:

2013: No gain or loss (because no sale occurred).
2014: P20,000 gain (P60,000 – P40,000 = P20,000).
2. Current cost accounting:
2013: P5,000 gain (P45,000 – P40,000 = P5,000).
2014: P15,000 gain (P60,000 – P45,000 = P15,000).
E39-4.
Love Company
Current Cost Statement of Profit or Loss and Other Comprehensive Income
For 2013
Sales P28,000
Current operating income 5,500
Realized holding gain (P22,500 – P15,000) 7,500
Conventional income 13,000
Unrealized holding gain (P7,500 – P5,000) 2,500
Net income P15,500
Problems
P39-1. Requirement (a)
Fuego Company
Combined Statement of Income and Retained Earnings
Historical Cost / Nominal Peso Basis
For 2013
Sales P300,000
Cost of goods sold:
Beginning inventory P 30,000
Purchases 150,000
Goods available 180,000
Ending inventory 20,000 160,000
Gross margin on sales 140,000

Operating expenses P 40,000
Depreciation expense 10,000 50,000
Income before taxes 90,000
Net income 54,000
Retained earnings, Jan. 1 -0-
Less: Dividends 14,000
Retained earnings, Dec. 31 P 40,000
Requirement (b)
Fuego Company
Historical Cost / Nominal Peso Basis
December 31, 2013
Assets
Cash* P 25,000
Accounts receivable** 75,000
Inventory 20,000
Land 50,000
Equipment P 80,000
Accounts payable*** P 30,000

Ordinary shares 170,000
Retained earnings (see solution part a) 40,000
Total shareholders’ equity 210,000
_____________
* P10,000 + P225,000 – P120,000 – P40,000 – P36,000 – P14,000 = P25,000
** P300,000 x 25% = P75,000
*** P150,000 x 20% = P30,000
Requirement (c)
Fuego Company
Current Cost / Nominal Peso Basis
For 2013
Sales P300,000
Operating expense P40,000
Depreciation expense* 11,000 51,000
Current operating income 23,000
Realized holding gain** 31,000
Conventional income 54,000
Unrealized holding gain*** 33,000
Net income 87,000

Less: Dividends 14,000
Retained earnings, Dec. 31 P 73,000
_____________
* (P80,000 + P96,000)  2 = P88,000; P88,000  8 = P11,000
** Realized holding gain for 2013:
Inventory sold (P190,000 – P160,000) P30,000
Equipment used (P11,000 – P10,000) 1,000
Total P31,000
***Unrealized holding gain for 2013:
Inventory on hand (P24,000 – P20,000) P 4,000
Land on hand – net (P65,000 – P50,000) 15,000
Equipment on hand – net (P84,000 – P70,000) 14,000
Total on Dec. 31 P33,000
Less: Unrealized holding gain, Jan. 1 -0-
Amount to recognize in 2013: P33,000
Requirement (d)
Fuego Company
Current Cost / Nominal Peso Basis
December 31, 2013
Assets
Cash P 25,000
Inventory 24,000
Land 65,000
Equipment P 96,000

Ordinary shares 170,000
Retained earnings (see solution part c) 73,000
Requirement (e)
The major conceptual differences are (1) in the current cost/nominal peso
statements, the elements are measured at current costs, not historical costs,
and (2) in the current cost/nominal peso statements, the holding gain (realized
and unrealized) is separately measured and reported.
P39-2. Requirement (a)
Fuego Company
Schedule Showing Computation of Purchasing Power Loss
For 2013
Nominal Conversion Constant

Peso Basis Factor* Peso Basis
Net monetary items, Jan. 1 P10,000** 1.1025 P11,025
Add: Sources of net monetary
items:
Sales 300,000 1.05 315,000

Deduct: Uses of net
monetary items:
Purchases (150,000) 1.05 (157,500)
Operating expenses (40,000) 1.05 (42,000)
Income tax expense (36,000) 1.05 (37,800)
Dividends (14,000) 1.00 (14,000)
Net monetary items, Dec. 31,
actually on hand P70,000***
Net monetary items, Dec. 31,
that should be on hand if
no purchasing power
gain or loss exists P74,725
Purchasing power loss
(P70,000 – P74,725) P(4,725)
_____________
* Conversion factors: 220.5 / 200 = 1.1025
220.5 / 210 = 1.05
220.5 / 220.5 = 1.00
**Net monetary items, Jan. 1: Cash P10,000
Net monetary items, Jan. 1 P10,000
***Net monetary items, Dec. 31: Cash P25,000
Accounts payable (30,000)
Net monetary items, Dec. 31 P70,000
Requirement (b)
Fuego Company
Historical Cost / Constant Peso Basis
For 2013
Sales (P300,000 x 1.05) P315,000

Cost of goods sold:
Beginning inventory (P30,000 x 1.025) P 33,075
Purchases (P150,000 x 1.05) 157,500
Goods available 190,575
Ending inventory (P20,000 x 1.05) 21,000 169,575
Operating expenses (P40,000 x 1.05) 42,000
Depreciation expense (P10,000 x 1.1025) 11,025 53,025
Income tax expense (P36,000 x 1.05) 37,800
Income before purchasing power loss 54,600
Purchasing power loss (see solution part a) (4,725)
Net income 49,875

Less: Dividends (P14,000 x 1.00) 14,000
Retained earnings, Dec. 31 P35,875
Requirement (c)
Fuego Company
Historical Cost / Constant Peso Basis
December 31, 2013
Cash P 25,000
Inventory (P20,000 x 1.05) 21,000
Land (P50,000 x 1.1025) 55,125
Equipment (P80,000 x 1.1025) P88,200
Less: Accumulated depreciation
(P10,000 x 1.1025) (11,025) 77,175

Ordinary shares (P170,000 x 1.1025) 187,425
Retained earnings (see solution to part b) 35,875
Requirement (d)
The major conceptual differences are (1) in the historical cost/constant peso
statements, the elements are measured using the constant peso measuring unit,
not the nominal peso measuring unit, and (2) in the historical cost/constant
peso statements, the purchasing power loss is measured and reflected in net
income.
MC39-1. B MC39- 6. B MC39-11. B

2. C 7. B 12. C
3. A 8. A 13. D
4. A 9. A 14. B
5. A 10. A 15. A

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CHAPTER 30

Q3 Refer to page 1569 and page 1570.

Q3 Refer to page 1569.

Q3 Refer to page 1570.

Q3 Refer to page 1571.

Q3 Refer to page 1572.

Q3 Refer to page 1572.

Q3 Refer to page 1573.

Q3 Refer to page 1574.

Q3 Refer to page 1574 and 1575.

Q31-1 Three elements, as defined by the PASB, are contained in a statement

Q31-2 In order to meet the definition of an asset, an item need not be

Q31-4 a. Assets are classified as current if

Q31-5 a. Cash is classified as noncurrent when it is a part of a fund that

Q31-12 The statement of financial position provides information about the

Q31-13 Financial flexibility is the ability of an enterprise to take effective

Q31-14 Some situations in which estimates affect amounts reported in the

Q31-16 The major limitations of the statement of financial position are:

Q31-17 (a) Trade accounts receivable should be stated at their estimated

Q31-20 (a) Allowance for doubtful accounts receivable should be deducted

E31-1 Cash Inflow

E31-2 Company A start-up, high-growth

E31-5 Cash flow from operating activities P6,200

E31-6 1. Accounts Receivable 750

E31-7 (a) Ending balance of supplies P 900

(c) The entry in January to record salaries paid was

End Bal. 800

(d) Service revenue P2,000

Ending unearned revenue January 31, 2015 P 750

E31-8 (a) Wages Expense 2,900

E31-9 (a) LIGAYA CORP.

Net income P203,000 P180,000

*2014: P290,000 + P160,000 + P30,000 = P480,000

E31-10 1. Depreciation Expense (P250 X 3) 750

P31-1 JOHANN COMPANY

P31-2 Current assets

*** Cash balance P40,000

a Notes payable balance P67,000

b Accounts payable balance P61,000

(b) Adjustment to retained earnings balance:

P31-4 WALTER CORPORATION

Property, plant, and equipment

Equity and Liabilities

* Computation of Retained Earnings:

Beginning retained earnings P78,000

Total equity (P3,776,000 – P2,757,000) P1,019,000

Q31-6 (a) 22,642 (f) 145,372 (k) 78,145

Q31-8 Note 1. Summary of Significant Accounting Policies

Customers’ accounts P70,000

Note 3. Anticipated Merger

Statement of Profit or Loss and

Q32-7. “Comprehensive income is the change in equity of a business enterprise

Q32-8. Some situations in which application of different accounting methods or

Q32-10. Earnings management is often defined as the planned timing of revenues,

Q32-11. Earnings management has a negative effect on the quality of earnings if it

Q32-16. GABRIEL COMPANY

E32-1. DIAMOND CO.

E32-3. 1. Income from operations = P100,000 – P55,000 – P10,000 + P30,000 =

E32-4. Income before income tax = P430,000 – P20,000 = P410,000

E32-5. Income from continuing operations P10,600,000

E32-6. P1,000,000 – 250,000 P3.95 per share

E32-7. (a) Net income (Dividend revenue) P3,000,000

E32-8. Cash Collected Amount of