REVIEW QUESTIONSLiabilities and Current Liabilities

Answer the following questions:

1. What are liabilities?2. What are the characteristics of liabilities?3. How are liabilities valued on the balance sheet?4. What are the two classifications of liabilities?5. What are current liabilities?6. What are examples of current liabilities?7. What are estimated liabilities? Give examples of estimated liabilities.8. What are provisions?9. What amounts are included as provision for restructuring?10. What are the accounting treatments for contingent liabilities and contingent assets?

Classroom Exercises on Current Liabilities

Journalize the following:

1. ABS Corporation offered P50 cash rebates on a particular model of hand-held hair dryers. To receive the rebate, customers must mail in a rebate certificate enclosed in the package plus the cash register receipt. Previous experience indicates that 30% of the coupons will be redeemed. One million hair dryers were sold in 2011 and total payments to customers were P225,000.

2. GMA Corporation began including one coupon in each package of candy that it sells and offering a toy in exchange for P10 and five coupons. The toys cost GMA Corp. P18 each. GMA Corp. bought 15,000 toys. It is estimated that 60% of the coupons will be redeemed. For year 2011, GMA Corp. sold 110,000 packages of candy with a selling price of P20 per package. Only 30,000 coupons were redeemed during 2011.

3. ETC Company, a supplier of in-home health care products introduced a new therapeutic chair carrying a two –year warranty against defects. Estimates based on industry experience indicate warranty costs of 3% of sales during the first 12 months following the date of sale and 4% the next 12 months. During December 2011, its first month of operations, ETC Co. sold P2 million of the chairs. Assume that the company incurs P61,000 for repairs during 2012.

4. HBO Boutique sold 1,000 gift certificates to customers during 2011 for P500 each. Certificates having a sales value of P400,000 were redeemed during the year. It is estimated that 8% of the certificates issued will not be redeemed by reason of expiration.

5. AXN Chemical Company sells combustible chemicals in expensive reusable containers. Customers are charged a deposit for each container delivered and receive a refund when the container is returned. Deposits collected on containers delivered in 2011 were P300,000. Deposits are forfeited if containers are not returned within one year. Ninety percent of the containers were returned within the allotted time. Deposits charged are twice the actual cost of containers. The inventory of containers remains on the company books until deposits are forfeited.

6. RPN Company motivates its sales manager by giving him bonus. The following information are available for year 2011:

Income before bonus and tax P1,100,000Bonus rate 10%Income tax rate 32%

a. Bonus is 10% of income before bonus and tax.b. Bonus is 10% of income after bonus but before tax.c. Bonus is 10% of income before bonus but after tax.d. Bonus is 10% of income after bonus and tax.

7. MAXX Publications collects magazine subscriptions from customers at the time subscriptions are sold. Subscription revenue is recognized over the term of the subscription. MAXX Publications collected P20 million in subscription sales during their first year of operations. At the end of the year, only ¼ of the subscription was earned.

8. An employee filed a P2M lawsuit against FOX Company for damages suffered when one of FOX’s plants exploded a year ago. FOX’s legal counsel expects the company will lose the lawsuit and estimate the loss to be between P500,000 and P1,000,000.

Homework on Current Liabilities

1. In an effort to increase sales, Ana Company inaugurated a sales promotional campaign on June 30, 2011. Ana Co. placed a coupon redeemable for a premium in each package of cereal sold. Each premium cost Ana Co. P20. To receive a premium, a customer must present five coupons. Ana Co. estimates that only 60% of the coupons issued will be redeemed. For the six months ended December 31, 2008, the following information are available:

Packages of cereal sold – 160,000Premiums purchased – 12,000Coupons redeemed – 40,000

What is the estimated liability for premiums claims outstanding on December 31, 2011?

2. On January 2, 2011, Ben Company began marketing a new soft drink. To help promote the soft drink, management is offering a special gift, a T-shirt, to each customer who returns 10 bottle caps. Ben Co. estimates that out of the 250,000 bottles sold in 2008, only 80% will be redeemed. On December 31, 2011, the following information are collected:

Units AmountT-shirts purchased 18,000 P1,800,000T-shirts distributed 15,000

What is the premium liability on December 31, 2011?

3. Cora Company manufactures a special product. To promote the sale of the product, a premium is offered to customers who send in three wrappers and remittance of P25. The distribution cost per premium is P5. Data for the premiums are:

2010 2011Sales P4,000,000 P5,000,000Premium purchase at P80 each 400,000 416,000Number of premiums distributed 4,000 5,500Number of premiums to be distributed in next period 200 500

What is the premium expense in 2011?

4. Dan Company sells washing machines that carry a three-year warranty against manufacturer’s defects. Based on company experience, warranty costs are estimated at P300 per machine. During 2011, Dan Co. sold 2,400 washing machines and paid warranty costs of P170,000.

What amount of warranty expense should Dan Co. report in its income statement for the year ended December 31, 2011?

5. On April 1, 2011, Eva Company began offering a new product for sale under a one-year warranty. Of the 5,000 units in inventory at April 1, 2011, 3,000 units had been sold by June 30, 2011. Based on its experience with similar products, Eva estimated that the average warranty cost per unit sold would be P80. Actual warranty costs incurred from April 1 through June 30, 2011 were P70,000.

At June 30, 2011, what amount should Eva Co. report as estimated warranty liability?

6. In 2010, Fred Company began selling new line of products that carry a two-year warranty against defects. Based upon past experience with other products, the estimated warranty costs related to peso sales are as follows: first

year of warranty – 2%; second year of warranty – 5%. Sales and actual warranty expenditures for 2007 and 2008 are presented below:

2010 2011Sales P5,000,000 P7,000,000Actual warranty costs 100,000 300,000

What is the estimated liability on December 31, 2011?

7. Gem Department Store sells gift certificates redeemable only when merchandise is purchased. These gift certificates have an expiration date of two years after issuance date. Upon redemption or expiration, Gem recognizes the unearned revenue as realized. Information for 2011 are as follows:

Unearned revenue, 1/1/2011 P650,000Gift certificates sold 2,250,000Gift certificates redeemed 1,950,000Expired gift certificates 100,000Cost of goods sold 60%

On December 31, 2011, what amount should Gem report as unearned revenue?

8. Hope Department Store sells gift certificates redeemable for store merchandise that expire one year after their issuance. Hope has the following information pertaining to its gift certificate sales and redemptions:

Unredeemed at January 1, 2011 P750,0002011 sales 2,500,0002011 redemptions of prior year sales 250,0002011 redemptions of current year sales 1,750,000

Hope’s experience indicates that 10% of gift certificates sold will not be redeemed.

In its December 31, 2011 statement of financial position, what amount should Hope report as unearned revenue?

9. Jay Company sells office equipment service contracts agreeing to service equipment for a two-year period. Cash receipts from contracts are credited to unearned service contract revenue and service contract costs are charged to service contract expense as incurred. Revenue from service contracts is recognized as earned over the lives of the contract. Additional information for the year ended December 31, 2011 are as follows:

Unearned service contract revenue at January 1, 2011 P600,000Cash receipts from service contracts sold 980,000Service contract revenue recognized 860,000Service contracts expense 520,000

What amount should Jay Company report as unearned service contract revenue at December 31, 2011?

10. Kay Company sells major household appliance service contracts for cash. The service contracts are for a one-year, two-year or three-year period. Cash receipts from contracts are credited to unearned service contract revenue. This account had a balance of P720,000 at December 31, 2011 before year-end adjustment. Service contract costs are charged as incurred to the service contract expense account which had a balance of P180,000 at December 31, 2011. Outstanding service contracts at December 31, 2008 expire as follows:

During 2012 P150,000During 2013 225,000During 2014 100,000

What amount should be reported as unearned service contract revenue in Kay’s December 31, 2011 statement of financial position?

11. Lyn Company sells subscriptions to a specialized directory that is published semi-annually and shipped to subscribers on April 15 and October 15. Subscriptions received after the March 31 and September 30 cut-off dates are held for the next publication. Cash from subscribers is received evenly during the year and is credited to deferred revenue from subscriptions. Data relating to 2011 are as follows:

Deferred revenue from subscriptions balance on January 1, 2011 P1,500,000Cash receipts from subscribers 7,200,000

What amount should Lyn report as deferred revenue from subscription in its December 31, 2011 statement of financial position?

12. Mon Video Company sells 1 and 2 year subscriptions for its video of the month business. Subscriptions are collected in advance and credited to sales. An analysis of the recorded sales activity revealed the following:

2010 2011Sales P420,000 P500,000Less: Cancellations 20,000 30,000Net sales P400,000 P470,000

Subscription expirations2010 P120,0002011 155,000 P130,0002012 125,000 200,0002013 140,000

P400,000 P470,000

What amount should Mon Video Company report as unearned subscription revenue in its December 31, 2011 statement of financial position?

13. On December 31, 2011, Ned Company was a defendant in a pending lawsuit. The suit arose from the alleged defect of a product that Ned sold in 2010. In the opinion of Ned’s attorney, it is probable that Ned will have to pay P500,000 and it is reasonably possible that Ned will have to pay P600,000 as a result of this lawsuit.

What amount of accrued liability should Ned report on its December 31, 2011 statement of financial position?

14. During 2011, Olga Company became involved in a tax dispute with the BIR. At December 31, 2011, Olga Company’s tax advisor believed that an unfavorable outcome was probable and a reasonable estimate of additional tax was P500,000 but could be as much as P650,000. After the 2011 financial statements were issued, Olga received and accepted a BIR settlement offer of P550,000.

What amount of accrued liability would Olga Co. report in its December 31, 2011 statement of financial position?

15. Pio Company sells its products with reusable expensive containers. The customer is charged a deposit for each container delivered and receives a refund for each container returned within two years after the year of delivery. Information for 2011 is as follows:

Containers held by customers at January 1, 2011 from deliveries in2009 P75,0002010 215,0002011 390,000

Containers returned in 2008 from deliveries in 2009 P45,0002010 125,0002011 143,000

Required: Prepare all indicated entries in 2011 in connection with the containers. Compute the liability for containers on December 31, 2011.

16. Quayle Company has an incentive compensation plan under which a branch manager receives a bonus of 10% . Branch income for 2011 is P1,650,000 before bonus and tax. The tax rate is 35%.

Compute the bonus received by the branch manager under the following cases:a. Bonus is 10% of branch income before bonus and tax.b. Bonus is 10% of branch income after bonus but before tax.c. Bonus is 10% of branch income before bonus but after tax.d. Bonus is 10% of branch income after bonus and after tax.

REVIEW QUESTIONSNon-Current Liabilities

Answer the following questions:

1. What are non-current liabilities?2. What are examples of non-current liabilities?3. What is a bond?4. What is the difference between a bond indenture and a bond certificate?5. What are the different types of bonds? Briefly describe each.6. What is the amortization method prescribed in PAS No. 39?7. What are bond issue costs? How is this amortized?8. How are notes payable initially measured? After initial recognition, how shall notes payable be measured9. How is a long term zero interest note payable valued on the balance sheet?10. What is the effect of amortizing discount on note payable on interest expense?

Classroom Exercises on Notes Payable

Journalize the following:

1. On January 1, 2011, Acacia Inc., a product labeling and graphics firm, borrowed P700,000 cash from ABC Bank and issued a three - year 12% promissory note. Interest is payable semi-annually every June 30 and December 31.

2. On January 1, 2011, Apitong Company acquired an equipment for P600,000 payable in two annual equal installments every December 31 of each year. Apitong Company signed an interest bearing note for P600,000. Interest of 12% is payable annually on the unpaid balance.

3. On January 1, 2011, Narra Company purchased a package-labeling machine from DEF Company by issuing a 12% P700,000 three-year note that requires interest to be paid annually. Prevailing market rate is 14%.

4. On January 1, 2011, Ipil Company acquired a machinery with cash price of P750,000 for P1,000,000. Ipil Co. paid P200,000 and signed a non –interest bearing promissory note for the balance which is payable in 4 equal installments every December 31 of each year.

5. On January 1, 2011, Molawin Company acquired a building for P5M. Molawin Company paid P500,000 down and signed a non – interest bearing note for the balance which is payable in 3 equal annual installments every December 31 of each year. Assume prevailing interest rate is 12%.

6. On January 1, 2011, Banuyo Company acquired a tract of land for P5,250,000. Banuyo Co. paid P1,250,000 down and signed a non-interest bearing note for the balance which is due on January 1, 2014. The prevailing interest rate for this type of note was 12%.

Homework on Notes Payable

Journalize the following:

1. Cameron Inc. constructed for Harmon Distributors a warehouse that was completed and ready for occupancy on January 2, 2011. Harmon paid for the warehouse by issuing a P900,000 four year note that required 7% interest to be paid on December 31 of each year. The warehouse was custom-built for Harmon, so its cash price was not known. By comparison with similar transactions, it was determined that an appropriate interest rate was 10%.

2. American Company acquired a packaging machine from Barton Corporation. Barton completed the construction of the machine on January 1, 2011. In payment for the P4 million machine, American Company issued a four year interest bearing note to be paid in four equal payments at the end of each year. Interest is 10% of the unpaid balance to be paid at the end of each year. Assume prevailing interest rate is 10%.

3. At the beginning of 2011, VHF Industries acquired a machine with a cash price of P6,074,700 by issuing a 4 year note, non-interest bearing note in the face amount of P8 million. The note is payable in four annual installments of P2 million at the end of each year.

4. On January 1, 2011, Ellen Company purchased land for P200,000 by issuing a 5-year non interest bearing promissory note payable in 5 equal annual payments on every December 31 of each year. The prevailing market rate for a note of this kind is 11%.

5. On January 1, 2011, Greene Company purchased equipment for P250,000. The company paid P50,000 and signed a non-interest bearing note for the balance which is due after 3 years. Prevailing interest rate is 11%.

Classroom Exercises on Bonds Payable

1. Issuance of Bonds on Interest Payment Date – Discount

On December 31, 2011, ABS Company issues a two- year 8% P 2,000,000 face value bonds at a price that will yield a 10% effective interest rate. Interest is payable semi-annually on June 30 and December 31. Required: Prepare all pertinent entries.

2. Issuance of Bonds on Interest Payment Date – Premium

On December 31, 2011, CBN Company issues a three - year 12% P2,000,000 face value bonds at a price that will yield a 10% effective interest rate. The interest is payable annually every December 31.

Required: Prepare all pertinent entries.

3. Issuance of Bonds Between Interest Payment Dates – Discount

On February 1, 2011, GMA Company sells a two-year 8% P2,000,000 face value bonds at a price that will yield a 10% effective interest rate. The bonds are dated December 31, 2010. Interest is payable semi-annually on June 30 and December 31.

Prepare: Prepare all pertinent entries.

4. Issuance of Bonds Between Interest Payment Dates – Premium

On March 1, 2011, RPN Company sells a three-year 12% P2,000,000 face value bonds at a price that will yield a 10% effective interest rate. The bonds are dated December 31, 2010. Interest is payable annually every December 31.

Prepare all pertinent entries.

5. Bond Retirement on Maturity Date

Assume that P2,000,000 face value bonds are sold on January 1, 2008 with 12% interest payable every July 1 and December 31. It will mature on December 31, 2011.

Prepare entry to record the bond retirement together with the payment of last semi-annual interest.

6. Bond Retirement Prior to Maturity Date

Assume that P10,000,000 face value bonds are sold on April 1, 2011 and mature on April 1, 2016 with 12% interest payable semi-annually on April 1 and October 1. The bonds yield 10%. All the bonds are retired on August 1, 2013 at 98.

Prepare all necessary journal entries.

7. Partial Bond Retirement Prior to Maturity Date

IBC Company is building a new gymnasium at a cost of P4,000,000. It received a down payment of P1,000,000 from local businesses to support the project and need to borrow P3,000,000 to complete the project. It therefore decided to issue P3,000,000 of 10.5 % 10-year bonds. These bonds were issued on January 1, 2011 and pay interest annually every January 1. The bonds yield 12%. On July 1, 2013, half of the bonds were retired at P1,600,000 plus accrued interest.

Prepare all necessary journal entries.

8. Convertible Bonds

HBO Corporation issued P2,000,000 of 8% bonds on October 1, 2011 due on October 1, 2016 at 105. The interest is to be paid twice a year on April 1 and October 1. When the bonds were issued, the prevailing market rate is 10% without the conversion privilege. HBO Corporation closes its books annually on December 31.

Each P1,000 bond is convertible into 8 shares of P100 par value common stock. On January 1, 2013, 1,000 bonds are converted into ordinary shares. At this time, the share has a market value of P150 per share and the bonds are quoted at 102.

Prepare journal entries on October 1, 2011 and January 1, 2013.

9. Bonds With Warrants

On January 1, 2011, NBN Corporation issued 3,000 10-year bonds of 12% P1,000 face value each with warrants to acquire ordinary shares at P50 per share. The interest on the bonds is payable annually every December 31.

Each bond contains one warrant which can be used to acquire 5 shares of P40 par value ordinary shares. It is estimated that without warrants the bonds would sell at P98. The bond price with warrants is 105. All warrants are exercised on December 31, 2011.

Prepare entries in connection with bond issuance and exercise of warrants.

10. Bond Refunding

The records of ABC Corporation on January 1, 2011 show the following accounts:Premium on bonds payable P150,000Bond issue cost 90,000Accrued interest 540,000Bonds payable due January 2015 interest at 12% payable semi-annually on January 1 and July 1

9,000,000

On January 1, 2011, the following took place: Cash of P11,700,000 was made available from the sale of P12,000,000 of 10-year 10% bonds. Cash from the new issue was used for the retirement of the 12% bonds at a call price of 102.

Prepare the pertinent entries

11. Amortization of Bond Issue Costs Using Effective Interest Method

On January 1, 2011, CNN Company issued a 3-year bond with face value of P1,000,000 and a 9% stated rate. The bonds mature on January 1, 2014 and interest is payable annually on December 31. The bonds are issued with an effective yield of 10%. The company also paid bond issue costs. Because of the bond issue costs, the adjusted effective rate is 11%.

Required:a. Compute for the bond issue cost.b. Prepare the amortization table using effective interest method.c. Prepare all pertinent entries.

Homework on Bonds Payable

1. The records of Amy Company show the following information on December 31, 2011:Bonds Payable P2,000,000Discount on bonds payable 100,000Ordinary Share Capital – 100,000 shares authorized ; 40,000 shares issued, P100 par

4,000,000

Accumulated Profits 1,000,000

The bonds are convertible into 7 ordinary shares for every P1,000 bond. On December 31, 2011, the entire bond issue was converted and on this date, the market value of the share is P120 and the bonds P102.

Required: Prepare the journal entry for the conversion of the bonds on December 31, 2011.

2. On February 1, 2011, Maxine Inc. issued a P2,500,000 of 12% bonds at 104 which are due on January 31, 2016. In addition, each P1,000 bond was issued 15 detachable warrants each of which entitled the bondholder to purchase for P50 one ordinary share of Maxine Inc. with a par value P25. On February 1, 2011, the fair market value of the ordinary share was P40 per share, the fair market value of the warrant was P4 and the fair market value of the bond ex-warrant was 101.

What amount should the corporation record on February 1, 2011 as carrying value of the bonds?

3. During 2011, Donna Company incurred the following costs in connection with the issuance of bonds:Printing and engraving P50,000Legal expenses 275,000Fees paid to independent accountants for registration information 35,000Commissions paid to underwriters 300,000

What amount should be recorded as bond issue cost to be amortized over the term of the bonds?

4. On January 1, 2011, Edith Co. sold 12% bonds with a face value of P500,000. The bonds mature in 5 year and interest is paid semi-annually on June 30 and December 31. The bonds were sold for P538,500 to yield 10%.

Using the effective interest method, how much is interest expense for year 2011?

5. On July 1, 2011, Rodiel Company issued 200 of its 10% P1,000 bonds at a price that will yield a 12% effective interest plus accrued interest. The bonds are dated April 1, 2011 and mature on April 1, 2019. Interest is payable semi-annually on April 1 and October 1.

What amount did Cora receive from the bond issuance?

6. On January 1, 2011, Helen Company issued its 10% bonds in the face amount of P4,000,000 which mature on January 1, 2017. The bonds were issued for P4,540,000 to yield 8%. Helen uses the effective interest method of amortizing bond premium. Interest is payable annually on December 31.

At December 31, 2011, what is the adjusted unamortized bond premium of Helen Co.?

7. On July 1, 2009, Nimpha Inc. issued 9% bonds in the face amount of P1,000,000 which mature on July 1, 2018. The bonds were issued for P939,000 to yield 10%. Nimpha uses the effective interest method of amortizing bond discount. Interest is payable annually on June 30.

At June 30, 2011, what is Nimpha’s adjusted unamortized bond discount?

8. On January 1, 2011, Mavic Co. sold P500,000 of its 10% bonds for P442,648 to yield 12%. Interest is payable semi-annually on January 1 and July 1.

What amount should Mavic Company report as interest expense for the six months ended June 30, 2011?

9. Gina Industries Inc. issued P2,000,000 of 8% debentures on May 1, 2010 and received cash totaling P1,774,526. The bonds pay interest semi-annually on May 1 and November 1. The maturity date on these bonds is November 1, 2018. The firm uses the effective interest method. The bonds were sold to yield an effective interest rate of 10%.

Calculate the total amount of discount or premium amortization during the first year (5/1/10 through 4/30/11) these bonds were outstanding.

10. On June 1, 2010, Neil Bottling Company sold P500,000 in long-term bonds for P438,800. The bonds will mature in 10

years and have a stated interest rate of 8% and a yield rate of 10%. The bonds pay interest annually on May 31 of each year. The bonds are to be accounted for under the effective interest method.

Calculate the carrying amount of the bonds at December 31, 2011.

REVIEW QUESTIONSAccounting Changes

1. What is the objective of PAS No. 8?2. What are accounting policies? Give examples.3. What is a change in accounting estimate? Give examples.4. What are prior period errors?5. What is the meaning of retrospective application?6. What is the meaning of prospective application?7. How are changes in accounting policies applied?8. How are changes in accounting estimates applied?9. How are changes in reporting entity applied?10. How are material prior period errors corrected in the financial statements?

Classroom Exercises on Accounting Changes

1. Pink Panther Company purchased a machine on January 1, 2008 for P3,000,000. At the date of acquisition, the machine had a life of six years with no salvage value. The machine is being depreciated on a straight line basis. On January 1, 2011, Pink Panther Company determined that the machine had a useful life of eight years from the date of acquisition with no salvage value. What should be the depreciation for the year 2011?

2. During 2011, Mr. Bean Company decided to change from FIFO method of inventory valuation to the weighted average method. Inventory balances under each method were as follows:

FIFO Weighted AverageJanuary 1 P710,000 P770,000December 31 790,000 830,000

Ignoring income tax, in its year 2011 statement of retained earnings, what amount should Mr. Bean Co. report as the effect of the accounting change?

3. On January 2, 2010 Mr. Simpson Company acquired Bart Inc.’s ordinary shares to be held as “available for sale,” as follows:

Date Interest Acquisition cost BV acquired Excess of costJan. 1, 2010 15% 2,500,000 2,000,000 500,000Jan. 1, 2011 30% 5,000,000 4,000,000 1,000,000

The excess of cost is attributable to investee’s undervalued depreciable assets with remaining life of 5 years.

Bart reported the following net income and dividends:

Net income Cash dividends2010 2,000,000 700,0002011 3,000,000 1,200,000

Prepare necessary journal entries in 2010 and 2011.

Homework on Accounting Changes

1. On January 1, 2008, Carrot Company purchased a machine for P2,640,000 and depreciated it by the straight line method using an estimated life of 8 years with no salvage value. On January 1, 2011, Carrot Company determined that the machine had a useful life of 6 years from the date of acquisition and will have a salvage value of P240,000. An accounting change was made in 2011 to reflect these additional data.

How much is accumulated depreciation for this machine on December 31, 2011?

2. During 2011, Dish Company determined that machinery previously depreciated over a seven-year life had a total estimated useful life of only five years. An accounting change was made in 2011 to reflect the change in estimate. If the change had been made in 2010, accumulated depreciation would have been P800,000 at December 31, 2010 instead of P600,000. As a result of this change, the 2011 depreciation expense was P50,000 greater. The income tax rate was 35%.

What amount of adjustment should be made on retained earnings to effect the change in estimated useful life of the machinery?

3. On January 1, 2009, Egg Company purchased for P2,400,000 a machine with a useful life of ten years and no salvage value. The machine was depreciated by the double declining balance method and the carrying amount of the machine was P1,536,000 on December 31, 2010. Egg Co. changed to the straight line method on January 1, 2011. Egg Co. can justify the change.

What should be the depreciation expense on this machine for the year ended December 31, 2011?

4. On January 1, 2011, Bread Company changed its inventory cost flow method to FIFO from LIFO for both financial statement and income tax reporting purposes to comply with the new standard. The change resulted in a P600,000 increase in the beginning inventory at January 1, 2011.

Prepare a journal entry to effect this change.

Classroom Exercises on Non-Current Asset Held for Saleand Discontinued Operations

1. On March 31, 2009, Bailey Company has a building with a cost of P5,000,000 and accumulated depreciation of P3,900,000. The company commits to a plan to sell the building by January 7, 2010. On March 31, 2009, the building has an estimated selling price of P1,000,000, and it is estimated that selling costs associated with the disposal of the building will be P150,000. On December 31, 2009, the estimated selling price of the building has increased to P1,500,000, with estimated selling costs remaining at P150,000.

Required:Make the journal entries necessary to recorda. the initial classification of the building as held for sale on March 31, 2009, andb. any adjustment necessary on December 31, 2009.

2. On April 1, 2009, Graphitic Company has machinery with a cost of P2,500,000 and accumulated depreciation of P1,900,000. On April 1, Graphitic decided to sell the machine within one year. As of April 1, 2009, the machine had an estimated selling price of P250,000 and remaining useful life of 2 years. It is estimated that selling costs associated with the disposal of the machine will be P25,000. On December 31, 2009, the estimated selling price of the machine had increased to P375,000, with estimated selling costs increasing to P40,000.

a. Make the entry to record the initial classification of the machine as held for sale on April 1, 2009.b. Determine the carrying value of the machinery – held for sale on December 31, 2009.

3. An entity is planning to dispose of a collection of assets. The entity designates these assets as a disposal group. The carrying amount of these assets immediately before classification as held for sale was P20 million. Upon being classified as held for sale, the assets were revalued to P18 million. The entity feels that it would cost P1 million to sell the disposal group. What would be the carrying amount of the disposal group in the entity's statement of financial position after its classification as held for sale?

4. Determine if the following activities are discontinued operations. All companies have their financial year end at December 31. Explain your answers.

a. Springtime Company has three product groups which are reported as separate segments: baby’s clothes, baby dolls and office equipment. In June 2007, management decided to dispose of one of its subsidiaries, Jolli, included in the baby doll segment. In mid September, management announced its plan to dispose of Jolli. Jolli is selling baby dolls all over Asia and is profitable.

b. Summer Company has four segments: soft drinks, ice cream, real estate and insurance. Management has decided to discontinue producing ice cream containing nuts. Instead, it will add ice cream containing fruits to its assortment.

c. The processed meat division, one of the segments of Fall Corporation has been operating at a loss since 2005. In 2008, the board of directors has been discussing during several of its meetings whether to dispose of this segment. The board cannot agree whether to continue the segment’s activities. In its October 2008 board meeting, the board members finally agree to dispose of at least some of the facilities within the processed meat division in the remaining quarter of the year. In 2009, some other facilities within the segment would probably be disposed of.

d. In September 2008, the management of Winter Company decided to close one of its three facilities in the United States as it is much cheaper to produce its products in the Philippines. The facilities are included in the cosmetics segment together with the facilities in the United States, Spain and the Philippines. Management has already formalized the plan and informed its employees of its decision.

e. Four Seasons Inc. has four different business segments. One of the segments is producing desiccated coconut candies. The factories where these are produced are located in fields where the coconut trees are grown. These are situated in Southern Luzon. In November 2008, management decided to dispose of this segment and worked out a detailed plan for the disposal. Management announced its plan to the press after its January 2009 board meeting.

5. Feather Corporation has four segments: telecommunications, biomedical research, IT consulting and cars. The car segment is deemed inconsistent with the long term direction of the company, which is to concentrate on products and services for the “new economy”.

On September 30, 2009, the board of directors voted in favor of a disposal plan which would either try to sell off the car segment as a whole or, if not successful by the end of 2009, dispose of the assets in the segment in a piecemeal fashion. An announcement of the plan was made the same day. A month later the company enters into a legally binding sales agreement with one of the major car producers in the world. The parties expect the sale to be completed in February 2010.

The following information for the car segment is available for the financial year 2009.

Carrying amount at September 30

Recoverable amount at September 30

Carrying amount at December 31

Assets P9,000,000 P8,000,000 P8,000,000Liabilities 4,000,000 4,000,000 4,000,000Equity 5,000,000 4,000,000 4,000,000

Revenue 6,000,000Operating expenses 2,500,000Financial expenses 500,000

The sales agreement obliges management of Feather Corporation to terminate the employment of certain employees in the car segment. The expected termination cost is P800,000. The necessary adjustment to the amounts above has not yet been made.

Required:

As you are aware, information relating to a discontinued operation should be presented separately from continuing operations. You should now prepare the income statement for the car segment (the discontinued operation) for year 2009. Assume a corporate tax of 30%.

Also comment on what other information must be given regarding the discontinued operation.

Homework on NCA-Held-for-Sale and Discontinued Operations

1. On May 1, 2009 Ruby Corporation approved a plan to dispose of a business segment. It is expected that the sale will occur on March 31, 2010. On December 31, 2009, the carrying amount of the net assets of the segment was P3,000,000 and the net recoverable amount was P2,700,000. During 2009, the company paid employee severance and relocation costs of P150,000 as a direct result of the discontinued operation. The revenues and expenses of the discontinued segment during 2009 were:

Revenues ExpensesJanuary 1 to April 30 P2,250,000 P3,000,000May 1 to December 31 1,050,000 1,350,000

How much will be reported as loss from ordinary activities of the discontinued segment for the year 2009?

2. On October 1, 2009 Jasper Corporation approved a formal plan to sell a business segment. The sale will occur on March 31, 2010. The segment had operating income of P2,000,000 from January 1 to September 30 and P375,000 for the quarter ended December 31, 2009. On December 31, 2009, the carrying amount of segment was P3,000,000 and the recoverable amount was P3,750,000. The income tax rate is 30%.

How much will be reported as income from ordinary activities of the discontinued segment, net of tax for the year 2009?

3. On January 1, 2009, Emerald Company entered into an agreement to sell the assets and product line of a business segment. The sale was consummated on December 31, 2009 and resulted in a gain on disposition of P1,125,000. The segment’s operations resulted in income before tax of P375,000 in 2009 and P562,500 in 2008. The income tax rate is 30%.

In the comparative income statements for 2009 and 2008, how much should Emerald Company report as income from ordinary activities of the discontinued segment for the period ending 2009 and 2008?

4. Onyx Company had net income of P2,295,000 for the year ended December 31, 2009 after giving effect to the following events which occurred during the year. The decision was made January 2 to discontinue the plastics manufacturing segment. The plastics manufacturing segment was sold June 30. Operating loss from January 1 to June 30 for the plastics manufacturing segment amounted to P150,000 before tax benefit. Plastics manufacturing equipment with a book value of P1,500,000 was sold for P1,837,500. The tax rate was 30%.

For the year ended December 31, 2009, how much was Onyx Company’s after tax income from continuing operations?

5. Silver Company considers a restructuring plan to commit a disposal of its garment machine and its financial implication. The carrying amount of the machine is P188,700. The machine’s value in use before the reclassification is P180,000. ESL expects the fair value of the machine is P184,000 while its cost to sell is P24,000. Determine impairment loss.

6. Diamond Manufacturing Group has a disposal group held for sale with the following details:Goodwill P 306,000Property, plant and equipment 840,000Intangible assets 480,000Investment property 254,700Carrying amount of disposal group P1,880,700

The investment property is measured by using the fair value model, and its fair value is P225,000 at the date of the disposal group being reclassified as held for sale under PFRS 5. Other assets have already been re-measured in accordance with the applicable accounting standards before the reclassification as held for sale. The fair value less costs to sell of the disposal group is P1,500,000.

Determine impairment loss and evaluate the financial implication of the reclassification of the disposal group as held for sale.

7. On January 1, 2009, Gold Company acquired a motor vehicle with an estimated useful life of 10 years at P1,200,000 (with no residual value and depreciated on a straight-line basis). After the receipt of the vehicle 5 days later, ATA decided to sell it. The planned disposal fulfilled the criteria under PFRS 5, and the fair value less estimated costs to sell is also around P1,200,000.

At year-end of 2009, ATA decided to withdraw the sale and use the vehicle for its own use.

Calculate the income statement effect of the changes to a plan of sale assuming that at year-end the estimated recoverable amount is (a) P1,125,000 or (b) P900,000.

REVIEW QUESTIONSCash Basis and Accrual Basis

1. When are revenues recognized under the accrual basis?2. When are expenses recognized under the accrual basis?3. What are the three expense recognition criteria under accrual basis?4. When are revenues recognized under the pure cash basis?5. When are expenses recognized under the pure cash basis?6. How are property assets treated under the pure cash basis?7. What is the modified cash basis?8. What is the extent of modifications that may be done under the modified cash basis?9. How are accrual basis financial statements prepared from cash basis records?10. What are the procedures when converting from cash basis to accrual basis?

CLASSROOM EXERCISES CUSTOMER LOYALTY PROGRAMMES

Awards supplied by the entity

1. A grocery retailer operates a customer loyalty programme. It grants programme members loyalty points when they spend a specified amount on groceries. Programme members can redeem the points for further groceries. The points have no expiry date. In one period, the entity grants 100 points. Management expects 80 of these points to be redeemed. Management estimates the fair value of each loyalty point to be P1 per unit and defers revenue of P100.

At the end of the first year, 40 of the points have been redeemed in exchange for groceries. In the second year, management revises its expectations. It now expects 90 points to be redeemed altogether. During the second year, 41 points are redeemed. In the third year, a further nine points are redeemed and management continues to expect that only 90 points will ever be redeemed.

Compute the revenue earned for year 1, year 2 and year 3.

Awards supplied by a third party.

2. A retailer of electric goods participates in a customer loyalty programme operated by an airline. It grants programme members one air travel point with each P1 they spend on electrical goods. Programme members can redeem the points for air travel with the airline, subject to availability. The retailer pays the airline P0.009 for each point.

In one period, the retailer sells electrical goods for consideration totaling P1 million. It grants 1 million points. The retailer estimates that the fair value of a point is P0.01.

1. How much is the allocation of consideration to travel points?2. When is revenue from loyalty awards recognized?3. If the retailer has collected the consideration allocated to the points on its own account, how

much is the revenue allocated to them?

4. If the retailer has collected the consideration on behalf of the airline, how much is the revenue allocated to them?

REVIEW QUESTIONSSingle Entry Bookkeeping System or Incomplete Records

1. What is the double entry bookkeeping system?2. What is the single entry bookkeeping system?3. What are the characteristics of a single entry system?4. What are the usual books maintained under the single entry system? Briefly describe each.5. What documents may be used in determining the cash balance?6. What documents may be used in determining the receivables balance?7. What documents may be used in determining the payables balance?8. How is owner’s equity determined under the single entry system?9. How is net income computed under the single entry system?10. How is the income statement prepared under the single entry system?

REVIEW QUESTIONSStatement of Cash Flow

1. What is the statement of cash flows?2. What is the objective of a statement of cash flows?3. How might a statement of cash flows be used?4. What is the meaning of ‘cash equivalent’?5. What are the examples of cash equivalents? 6. What are the required classifications of cash flows under PAS 7?7. What the two methods of reporting cash flows from operating activities?8. Explain the differences between the direct method and indirect method of reporting cash flows from operating activities.9. Explain the treatment of non-cash investing and financing transactions.10. Explain the treatment of the following in a statement of cash flows:

Dividend received Dividend paid Interest received Interest paid Income taxes

Classroom Exercises on Statement of Cash Flows

1. At December 31, 2011, Actfin Company had the following balances in the accounts it maintains at Security Bank:

Checking account No. 401 P1,200,000Checking account No. 402 (150,000)Money market account 750,000BSP treasury bill, 90 days due March 1, 2012 450,000Time deposit 120 days due January 31, 2012 600,000

In its December 31, 2011 statement of financial position, what amount should Actfin report as cash equivalents?

2. The following information is available from the accounting records of Acmod Corporation for the year ended December 31, 2011:

Cash received from customers P7,500,000Rent received 150,000Interest received 75,000

Cash paid to suppliers and employees 4,500,000Taxes paid 300,000Interest paid on long term debt 600,000Cash dividends paid 750,000

How much is the net cash provided by operating activities for 2011?

3. The income statement of Actwo Company for 2011 contains the following:Revenue from sales P5,000,000Cost of goods sold 3,000,000Selling expenses 250,000Depreciation and amortization 200,000Salaries 300,000Finance cost 50,000Income tax expense 400,000Net income 800,000

▪ All sales were for cash except a P50,000 sale resulting in the acceptance for one-year 12% note receivable and a P100,000 sale resulting in the acceptance of a tract of land valued at P100,000.

▪ Accrued salaries at December 31, 2010 and 2011 were P50,000 and P40,000 respectively.▪ Finance cost includes P5,000 of amortization of bond discount.▪ Income tax expense includes P50,000 of deferred tax liability.

How much is the cash provided by operating activities during 2011?

4. Actpri Corporation reported net income of P1,500,000 for 2011. Changes occurred in several balance sheet accounts during 2011 as follows:

Investment in ACT Company shares carried on the equity basis P55,000 increaseAccumulated depreciation, caused by major repair to project equipment 21,000 decreasePremium on bonds payable 14,000 decreaseDeferred tax liability 18,000 increase

In the 2011 cash flow statement, how much is the reported net cash provided by operating activities?

5. During 2011, Audpra Company has the following activities related to its financing operations:

Payment for the early retirement of long-term bonds payable (carrying amount is P3,800,000)

P3,700,000

Payment in 2011 of cash dividend declared in 2010 to preference shareholders 300,000Carrying amount of convertible preference shares converted into ordinary shares 600,000Proceeds from sale of treasury shares (carrying amount at cost, P430,000) 500,000

In the 2011 cash flow statement, how much is the net cash used in financing activities?

6. The following information pertains to Actdev Company for the year ended December 31, 2011:

Ending Balances Beginning Balances

Accounts receivable P10,000 P12,000Allowance for bad debts 2,900 2,500Sales for the year 50,000Net income for the year 5,000Bad debt expense for the year 1,000Write-off of uncollectible amounts for the year 600Cash expenses for the year 44,000

How much is the net cash flows from operating activities?

7. Advacost Company entered into the following transactions during the year:

Purchase of trading securities P500,000Sale of trading securities 220,000Purchase of available-for-sale securities 900,000Sale of available-for-sale securities 470,000

Advacost had no investment securities at the beginning of the year. The cost of the trading securities sold was P300,000; the cost of the available-for-sale securities sold was P150,000. The market value of the remaining securities on December 31 was as follows: trading securities, P310,000; available-for-sale securities, P460,000. The net income for the year was P1,000,000. Assume that net income does not include any noncash items except for those related to investment securities.

Compute (1) cash flow from operating activities (2) cash flow from investing activities.

Homework on Statement of Cash Flows

Blest Corporation provides the following data:

Blest CorporationIncome Statement

For the year ended December 31, 2011

RevenueSalesInterestGain on sale of plant

TotalExpenses

Cost of goods soldWages and salaries expenseDepreciation – plant and equipmentFinance CostOther expenses

Income before taxIncome tax expenseIncome after tax

P 960,000240,000

50,0008,000

152,000

P1,600,00010,000

8,000P1,618,000

1,410,000P208,000 60,000

P 148,000

Blest CorporationComparative Statements of Financial Position as at:

Cash and cash equivalentsAccounts receivableInterest receivableInventoryPrepaid expensesPlant and equipmentInvestmentsIntangibles

Accounts payableWages and salaries payable

December 31, 2007P 120,000

140,000300

130,00016,000

300,00024,000

-P730,300

P 84,0008,000

December 31, 2008P 109,100

158,000200

140,00019,000

330,00028,000

30,000P814,300

P 90,00010,000

Increase (Decrease)

P( 10,900)18,000

(100)10,000

3,00030,000

4,000 30,000

6,0002,000

Accrued interestOther expenses payableIncome tax payableLong-term borrowingsShare capitalAccumulated Profit

-6,000

38,000120,000400,000

74,300P730,300

4003,600

48,000140,000400,000

122,300P814,300

400(2,400)10,00020,000

- 48,000

Additional information extracted from the company’s records:

1. Plant that had a written-down of P20,000 was sold for P28,000.2. New equipment purchased for cash amounted to P100,000.3. Investments of P4,000 and intangibles of P30,000 were acquired for cash.4. A borrowing of P20,000 was made during the year and received in cash.5. Dividends paid in cash were P100,000.

Required:

Prepare a cash flow statement for the year ended December 31, 2011 using the:a. direct methodb. indirect method

REVIEW QUESTIONS Interim Reporting

Answer the following questions:

1. What is “interim financial reporting”?2. Explain the two views in presenting financial statements. Which view is generally acceptable?3. What are the components of an Interim report?4. Explain the presentation of interim financial statements.5. Explain the treatment of contingencies in interim reporting.6. Explain the treatment of uneven cost in interim reporting.7. Explain the treatment of a change in accounting policy in interim reporting.8. Explain the treatment of year-end bonuses in interim reporting.9. Give examples of disclosures required in a condensed interim financial report.10. Explain the treatment of inventory in interim reporting.

CLASSROOM EXERCISES ON INTERIM REPORTING

1. Psalm Company is in the process of developing its first quarter interim report. It has developed the following condensed trial balance of March 31, 2011:

Cash P1,000,000Accounts receivable 2,000,000Inventory 1,500,000Prepaid insurance 400,000Note receivable 5,000,000Land 1,500,000Building and Equipment 18,000,000Accounts payable P8,500,000Share capital 5,000,000Share premium 4,000,000Retained earnings 9,500,000Sales 25,000,000Purchases 17,000,000Selling expenses 3,200,000Administrative expenses 2,400,000

P52,000,000 P52,000,000

Additional information:1. Uncollectible accounts typically average 1% of net sales.2. On January 1, 2011, building and equipment have an average life of 10 years. One-third of the account balance

consists of assets related to selling activities. The company uses the straight line method.3. The note receivable is dated January 1, 2011, matures on January 1, 2013, and carries a 12% interest rate.

Interest will be collected annually starting January 1, 2012.4. On January 1, 2011, the company had purchased a one-year insurance policy debiting the payment to prepaid

insurance.5. The gross profit method is used to determine the interim inventory. Historical gross profit has averaged 40% of

net sales.6. Assume the income tax rate is 35% and the income tax will be paid on or before April 15, 2012.

Require:Prepare an income statement for the first quarter ending March 31, 2011 and a statement of financial position on March 31, 2011 for Psalm Company.

2. Trisha Company prepares quarterly and year to date interim reports. The interim income statement for the quarter ended March 31, 2011 is as follows:

Sales P7,500,000Cost of sales (4,500,000)Gross income 3,000,000Dividend income 300,000Total income 3,300,000Selling expenses (900,000)General expenses (500,000)Depreciation (400,000)Interest expense (100,000)Income tax (400,000)Net income P1,000,000

On June 30, 2011, the company accountant completed a worksheet in preparing the year to date income statement. The worksheet showed the following income statement accounts:

Sales 20,000,000Interest revenue 250,000Dividend revenue 500,000Cost of sales 11,500,000Selling expenses 2,500,000General expenses 1,100,000Depreciation 700,000Interest expense 300,000Income tax expense 1,300,000

Required:1. Prepare a year to date income statement for the first 6 months of 2011.2. Prepare an interim income statement for the second quarter of 2011.

Classroom Exercises on Presentation of Financial Statements

1. Indicate the proper classification or presentation of the following items. Use the following classifications.

A.

Current assets D. Noncurrent liabilities

B. Noncurrent assets E. EquityC.

Current liabilities F. Notes to financial statements

1. Deficit2. Available for sale securities3. Revaluation surplus4. Cash dividends payable5. Investment in associates6. Provisions for warranty7. Sinking fund8. Leasehold improvement9. Long-term refundable deposit10. Land held for future plant site11. Retained earnings appropriated12. Correction of error made last year when computing amortization resulting to understatement of

income previous year.13. Stock dividends payable14. Treasury stock15. Franchise16. Fully depreciated machinery still in use.17. Advances to affiliated companies18. Accrued interest on notes payable19. Share capital20. Accrued commission income

2. The following is Precious Company’s July 31, 2011 trial balance:

Cash overdraft P150,000Accounts receivable, net P525,000Inventory 870,000Prepaid expenses 180,000Land held for sale 1,500,000Property, plant and equipment, net 1,425,000Accounts payable and accrued expenses 480,000Share capital 375,000Share premium 2,250,000Retained earnings ________ 1,245,000Total P4,500,000 P4,500,000

Checks amounting to P450,000 were written to suppliers and recorded on July 30, 2011, resulting in a cash overdraft of P150,000. The checks were mailed on August 10, 2011. Land held for resale was sold for cash on August 10, 2011.

Precious issued its financial statements on August 31, 2011. In its July 31, 2011 statement of financial position, what amount should Precious Co. report as current assets?

3. Emerald Company provides the following on December 31, 2011:

Trade payable P300,000Cash dividends payable 150,000Dividends in arrears 75,000Accrued expenses 15,000Unearned interest income 7,500Mortgage payable 225,000Customers’ deposit 30,000Appropriation reserve 37,500Income tax withheld 22,500Income tax payable 45,000

What amount should be reported as total current liabilities?

4. When preparing a draft of its December 31, 2011 balance sheet, Jasper Corporation reported net assets totaling P13,125,000. Included in the asset section of the statement of financial position were the following:

Treasury shares of Jasper at cost, which approximates market value on December P375,000

Idle machinery 150,000Cash surrender value of life insurance on corporate executives 225,000Allowance for decline in value of inventory 75,000

At what amount should Jasper’s net assets be reported in the December 31, 2011 statement of financial position?

5. Onyx Company’s trial balance of income statement accounts for the year ended December 31, 2011 was as follows:

Net sales P12,000,000Cost of sales P7,200,000Marketing and distribution expenses 1,762,500General and administrative expenses 1,125,000Finance cost 187,500Adjustment due to prior period error 300,000Gain on sale of equipment 750,000Total P10,575,000 P12,750,000

How much was the income before tax from continuing operations?

6. Ruby Corporation’s trial balance of income statement accounts for the year ended December 31, 2011 included the following:

Sales P4,500,000Cost of goods sold P1,800,000General expenses 450,000Loss on sale of land 270,000Commission expense 300,000Interest income 150,000Freight out 90,000Loss on earthquake 300,000Doubtful accounts 90,000 ________

P3,300,000 P4,650,000

In Ruby’s income statement for 2011, what is the income from continuing operations?

7. The expenses other than finance cost of Pearl Company for 2011 is 40% of cost of sales but only 20% of sales. Finance cost is 5% of sales. The amount of purchases is 120% of cost of sales. Ending inventory is twice as much as the beginning. The income after tax of 35% for the current year is P487,500.

What is the amount of sales for 2011?

Homework on Presentation of Financial Statements

The summarized general trial balance of Worthy Company, a manufacturing company, for the year ended 30 June 2011 is detailed below:

Dr CrAccumulated depreciation – land and buildings 36 000Accumulated depreciation – plant and equipment 564 000Administration expenses 252 000Allowance for doubtful debts 14 000Bank loans 66 000Cash on deposit, at call 150 000Cash on hand 4 000Cost of goods sold 2 987 000Current tax payable 25 000Deferred tax 135 000Distribution expenses 86 000

Dividends 150 000Dividends reinvested 30 000Employee benefit provisions 93 000Finished goods 714 000Goodwill 870 000Income tax expense 85 000Interest 6 000Interest 44 000Investments revaluation reserve, 30 June 2010 35 000Land and buildings 257 000Land revaluation reserve, 30 June 2010 15 000Listed investments (available for sale) 225 000Other borrowing expenses 4 000Other debtors 93 000Other loans 570 000Patents 45 000Plant and equipment 1 260 000Raw materials 188 000Retained earnings, 30 June 2010 326 000Revaluation increment on available-for-sale investments 10 000Revaluation increment on land 50 000Sales and marketing expenses 820 000Sales of goods P4 469 000Share capital, 30 June 2010 1 541 000Share issue 120 000Short-term borrowings 50 000Tax on investment revaluation increment P3 000Tax on land revaluation increment 15 000Trade creditors 510 000Trade debtors 450 000Warranty provision 37 000

Additional information▪ P30 000 of bank loans is repayable within one year.▪ P110 000 of other loans is repayable within one year.▪ Employee benefit provisions include P62 000 payable within one year.▪ The warranty provision is in respect of a nine-month warranty given on certain goods sold.

Required

Prepare the statement of financial position, statement of comprehensive income and statement of changes in equity of Worthy Company for the year ended 30 June 2011 in accordance with the requirements of PAS 1, using statement captions that a listed company is likely to use.