BA 118.1 EXERCISES ON IFRS FOR SMEs I. Financial Statements Presentation

A. The following balance sheet was prepared by the accountant for Logan Farms Corp., an SME

which has for financial reporting adopted the IFRS for SMEs:

Additional information: 1) Cash is held in a checking account and a savings account with balances of $69,450 and

$202,050, respectively. The cash in the savings account will be used to support operations in the event of a crop failure.

2) A loan to the president for $180,000 that is to be repaid in quarterly installments of $15,000 is included in "Accounts receivable." Other accounts receivable are considered to be 95% collectible.

3) Inventories include: Finished products $390,000 Supplies 19,500 Storage buildings (net of $30,480 depreciation) 91,500

Total $501,000 4) "Land, buildings, and equipment" includes 5 tractors that were purchased near the end of

the year for $360,000 (shown net of a $300,000, 5-year loan used to buy the tractors). The balance of the account consists of land that was purchased for $1,200,000 and buildings that were purchased for $255,000 (shown net of depreciation of $63,000).

5) Included in "Accounts payable" are $105,000 of advances from customers for delivery of goods in August of the next year.

6) The company has 90,000 shares of $5 par common stock issued and outstanding. The common stock was originally sold for $7 per share, and the premium was included in "Retained earnings."

Logan Farms Corp. Balance Sheet

December 31, 2007 Assets Cash ................................................... $ 271,500

Investment securities .................................. 315,000

Accounts receivable .................................... 270,000

Inventories ............................................ 501,000

Total current assets ................................. $1,357,500

Land, buildings, and equipment ......................... 1,452,000

Total assets ........................................... $2,809,500

Liabilities and Stockholders' Equity Accounts payable ....................................... $ 342,420

Estimated losses from future crop failures ............. 360,000

Salaries payable ....................................... 150,000

Total current liabilities ............................ $ 852,420

10% Bonds payable (due in 10 years) .................... 525,000

Capital stock .......................................... 450,000

Retained earnings ...................................... 982,080

Total liabilities and stockholders' equity ............. $2,809,500

7) After reading a U.S. Meteorological Service report, the president believes that next year will be a bad crop year due to freak hailstorms and estimates the company will lose about $360,000. An appropriation of Retained Earnings has been made for this amount.

8) The investment securities are financial assets held for trading. REQUIREMENT Using the balance sheet and the additional information, prepare a properly classified and corrected balance sheet.

B. Maricel Corp. reported the following pre-tax amounts for the year ending December 31, 2008:

Operating income PHP588,000 Gain on sale of equipment 9,000 Interest expense 6,000 Loss from operating a discontinued business component 157,500 Loss from sale of business component 225,000 Extraordinary gain 120,000 Adjustment for inventory overstatement in 2003 31,500

The income tax rate applicable to Maricel Corp. is 30%.

REQUIREMENT Prepare a partial income statement for the year ending December 31, 2008, beginning with "Income from continuing operations before income taxes." Include the presentation of earnings per share, assuming 50,000 shares were outstanding during the year.

C. Chickenjoy, Inc., presents the following comparative balance sheets and income statement (all amounts in thousands of pesos):

Chickenjoy, Inc. Balance Sheet

December 31, 2008 & 2007 2008 2007 Cash PHP 66 PHP 36 Accounts receivable 138 96 Inventory 206 168 Building & Equipment 266 246 Accumulated Depreciation (70) (54)

Total Assets PHP 606 PHP 492

Accounts payable PHP 90 PHP 68 Income tax payable 16 20 Common stock 406 326 Retained earnings 94 78

Total Equities PHP 606 PHP 492

Sales PHP 536 Cost of goods sold 396

Gross profit PHP 140 Operating

Expenses: expenses:

Depreciation PHP 22 Incomes taxes 18 Other1 56 96

Net income PHP 44

1Includes interest paid in cash of PHP23.

See information regarding Chickenjoy, Inc. above. The following additional information is provided:

1) Fully depreciated equipment costing PHP6,000 was abandoned on the first business day of 2008.

2) A building to store materials was acquired for PHP26,000. 3) A stock dividend of PHP20,000 was declared and distributed as was a cash dividend of

PHP8,000. 4) Additional stock was sold during 2008 for cash.

REQUIREMENTS

Compute the following: 1) Cash received from customer 2) Cash paid to purchase inventory 3) Cash paid for income taxes 4) Cash from sale of common stock

II. Financial Instruments A. During 2011, the 1st year of operations, Monkey Company purchased the following equity

securities: COST MARKET VALUE – 12/31/2011 MARKET VALUE – 12/31/2012

Security 1 2,200,000 1,400,000 900,000 Security 2 700,000 1,000,000 1,100,000 Security 3 1,600,000 1,500,000 1,600,000 Security 1 2,000,000 2,500,000 1,200,000

Security One and Security Two are held for trading and Security Three and Security Four are measured as at fair value through other comprehensive income by election. During 2011, Monkey sold 50% of Security One for PHP 1,000,000 and 50% of Security Four for PHP 1,300,000.

REQUIREMENT

Prepare all indicated entries for 2011 and 2012.

B. On January 1, 2011, Benefit Co. purchased bonds with face value of PHP 4,000,000 for PHP 3,649,600 in order to collect contractual cash flows that are solely payments of principal and interest. The bonds are purchased to yield 10% interest. The nominal interest rate on the bonds is 8% payable annually every December 31. On December 31, 2012, as a result of a change in the business model for managing financial assets, the entity decided to reclassify bonds from amortized cost to fair value. On such date, the carrying amount of the bonds investment is PHP 3,744,016 after discount amortization using the effective interest method. The market value of the bonds on January 1, 2013 is 105.

REQUIREMENT Prepare all indicated entries for 2011, 2012 and 2013.

C. Beyonce Company had the following transactions:

2011 August 1: Purchased 1,000 shares of Sasha Fierce Co. for PHP 60,000 October 1: Purchased 8,000 shares of Sasha Fierce Co. for PHP 560,000 2012 July 1: Purchased 6,000 shares of Sasha Fierce Co. for PHP 480,000 August 1: Sold 5,000 shares of Sasha Fierce Co. for PHP 500,000. FIFO is used 2013 February 1: Received 50% stock dividend

November 1: Received stock rights to purchase one new share at PHP60 for every 5 rights tendered. On this date, the right is quoted at PHP 10

December 1: Sold all stock rights at PHP15 per right

REQUIREMENTS 1) Prepare journal entries to record the transactions. Any stock rights are accounted for

separately. 2) Prepare a summary of the noncurrent investments in Sasha Fierce Company shares by block

of acquisition, stating the number of shares and total cost for each block.

D. The following transactions pertain to the Frederic Company: 1) Purchased 20,000 ordinary shares of Chopin Company for PHP 2,400,000 representing

20% interest on January 1, 2011. The net assets of Chopin are fairly stated at PHP 8,000,000.

2) Chopin Company reported a net income of PHP 1,500,000 for 2011. 3) Received a 10% stock dividend from Chopin Company. 4) Chopin Company reported a net loss of PHP 300,000 for 2012. 5) Chopin Company paid a cash dividend of PHP 500,000 to ordinary shareholders on

December 31, 2012. 6) Sold 5,500 ordinary shares of Chopin at PHP 200 per share on December 31, 2012

resulting to loss of significant influence. 7) The quoted market price of Chopin share is PHP 180 on December 31, 2012.

REQUIREMENT Prepare journal entries to record the transactions under the equity method and cost method as allowed by the PFRS for SMEs.

E. On January 1, 2011, Sephora and Sisters, Inc. entered into a two-year PHP 4,000,000

variable interest rate loan at the prevailing interest date of 12%. In 2012, the interest rate is equal to the prevailing interest rate at the beginning of the year. The principal loan is payable on December 31, 2012 and the interest is payable on December 31 of each year. On January 1, 2011, Sephora and Sisters, Inc. entered into a ‘receive variable, pay fixed’ interest swap agreement with a speculator bank. The interest swap agreement is designated as a cash flow hedge.

REQUIREMENTS Prepare all indicated entries for 2011 and 2012 in connection with the loan and the resulting derivative contract under each of the following independent scenarios:

1) The prevailing interest rate on January 1, 2012 is 14%. 2) The prevailing interest rate on January 1, 2012 is 11%.

Round off present value factors to three decimal points.

III. Inventories and Long-Term Assets A. Michelbob Co. and its subsidiaries own the following properties accounting for in

accordance with PFRS for SMEs. Land held for undetermined use 5,000,000 Vacant building owned and to be leased out under an operating lease 3,000,000 Property held by a real estate firm subsidiary in the ordinary course of Business 2,000,000 Property held for use in production 4,000,000 Building owned by a subsidiary and for which the subsidiary provides Security and maintenance services to the lessees 1,500,000 Land leased by Michelbob to a subsidiary under an operating lease 2,500,000 Property under construction for use as an investment property 6,000,000 Land held for future factory site 3,500,000 Machinery leased out by Michelbob to an unrelated party under an Operating lease 1,000,000

REQUIREMENTS 1) Compute the total investment property that will be shown in the consolidated

statement of financial position of Michelbob Company and its subsidiaries. 2) Indicate the classification of the assets that are excluded from investment property.

B. One of the most critical steps in recording the acquisition of assets is the determination of

the cost assigned to the asset. Data related to assets acquired by the Manic Manufacturing Company are as follows: 1) Machine A was purchased at a list price of $92,000; terms 1/10, net 30. The machine

invoice was paid after the discount period. Transportation charges were $1,270; installation costs were $920; and the cost of a trial run was $960. Normal repairs and maintenance for the first year were $410.

2) Machine B could be purchased for five annual payments of $6,332 or $29,400 in cash. Manic elected to purchase Machine B under the instalment plan. Other related acquisition costs totalled $175.

3) On May 12, 2008, Depressan Company offered to sell land to Manic for $62,000; the offer was rejected. On June 29, 2,125 shares of Manic common stock were issued in exchange for the land. The par value of the stock was $20 per share; the market value of the stock was $32 per share at the time of purchase. Manic's management was confident the land would be worth at least $64,000 to the company.

4) The company purchased equipment under a deferred payment contract – $40,000 down payment and 30 semi-annual payments of $5,000. Assume a 12% interest rate.

REQUIREMENT Determine the acquisition cost for each of the assets.

C. Quattro Enterprises Inc. developed a new machine for manufacturing baseballs. Because the machine is considered very valuable, the company had it patented. The following expenditures were incurred in developing and patenting the machine.

(a) Purchases of special equipment to be used solely for

development of the new machine $182,000

(b) Research salaries and fringe benefits for engineers and scientists 17,100 (c) Cost of testing prototype 23,600 (d) Legal costs for filing for patent 12,700 (e) Fees paid to government patent office 2,500 (f) Drawings required by patent office to be filed with patent application 4,700

Quattro elected to amortize the patent over its legal life. At the beginning of the second year, Quattro Enterprises paid $24,000 to successfully defend the patent in an infringement suit. At the beginning of the fourth year Quattro determined that the remaining estimated useful life of the patent was five years. REQUIREMENT Journalize the above transactions for Quattro Enterprises Inc. for the first five years of the life of the patent. Include any amortization or depreciation for each period. D. Prepare any adjusting entries on December 31, 2011 for each of the following independent

scenarios: 1) Machine A listed at PHP 4,500,000 was acquired on April 1, 2011 in exchange for PHP

5,000,000 face value bonds maturing on April 1, 2021. The accountant recorded the acquisition by a debit to machinery and a credit to bonds payable for PHP 5,000,000. The bonds are unquoted. Straight line depreciation was recorded based on a 5-year life and amounted to PHP 600,000 for 9 months.

2) Machine D was acquired on January 10, 2011 in exchange for a past due account receivable of PHP 4,200,000 on which an allowance of 20% was established at the end of 2010. The fair value of the machine on January 10 was estimated at PHP 3,300,000. The machine was recorded by a debit to machinery and a credit to accounts receivable for PHP 4,200,000. No depreciation was recorded on Machine D because it was never installed for use. In March, the machine was exchanged for 30,000 shares of the entity having a market value of PHP 120 per share. The treasury shares account was debited for PHP 4,200,000, the book value of Machine D.

E. Luzon Company has 4 cash generating units (CGUs). One CGU has been experiencing

significant losses in prior years. Thus, it becomes necessary to determine an impairment for the CGU. On December 31, 2011, the assets of the CGU at carrying amount are:

Cash 10Mn Accounts receivable 20Mn Inventory 30Mn PPE, net 50Mn Goodwill 5Mn

It is reliably determined that the value in use of the CGU on December 31, 2011 is PHP 100Mn.

REQUIREMENTS 1) Determine the impairment loss of the CGU, if any. 2) Prepare the entry to record any impairment loss.

F. Center Company, an SME in the Philippines, had the following intangible assets before 2011.

The entity is preparing its financial statements using the PFRS for SMEs for the first time for the year ended December 31, 2011. The cost of intangibles had been charged to operations when acquired. The following intangibles were accounted for in this manner. Acquisition Date Useful Life Cost Copyright January 1, 2007 20 400,000 Goodwill July 1, 2008 15 360,000 Patent January 1, 2009 10 500,000

REQUIREMENTS

1) Prepare the correcting entry to record the intangible assets on January 1, 2011. 2) Prepare the entry to record amortization of intangible assets for 2011.

IV. Liabilities and Equity A. Orvis Company reported liabilities totalling PHP1,230,000 as of December 31, 2007. The

following information relates to those liabilities: (a) Orvis reported a PHP100,000 bank loan payable. However, Orvis intends to repay this loan on January 10, 2008. (b) Orvis has reported a PHP40,000 liability for the estimated cost of future warranty repairs based on product sales for the past year. (c) Orvis is being sued for PHP350,000 by a disgruntled employee. Orvis' attorney thinks that it is possible that Orvis will lose the case. Orvis has not yet recorded any liability for this potential loss. (d) Orvis receives consulting services from a local CPA. Expected services by the CPA for the coming year will cost PHP35,000. No liability has been recorded. (e) Orvis has reached an agreement with a major customer. Orvis expects to provide services totalling PHP400,000 over the coming three years. The customer has already paid Orvis PHP100,000. No liability has been recorded.

REQUIREMENT After considering these items, what should be the total of Orvis' reported liabilities?

B. On November 1, 2011, Grande Co. declared a property dividend of equipment payable on

March 1, 2012. On that date, the carrying amount of the equipment is PHP 3,000,000 and the fair value is PHP 2,500,000. However, the fair value less costs to sell to distribute the equipment is PHP 2,200,000 on December 31, 2011 and PHP 2,000,000 on March 1, 2012.

REQUIREMENTS 1) Determine the amount of dividend payable on December 31, 2011. 2) What is the amount at which the equipment is measured on December 31, 2011? 3) What amount of loss is recognized in profit or loss on March 1, 2012? C. Jason Inc. uses leases as a means of selling its equipment. On January 1, 2005, the company

leased a machine to Jeremy Manufacturing Inc. The cost of the machine to Jason was $78,450. The fair market value (which was the sales price) was $101,184 at the time of the lease. Annual lease payments are $13,500 and are payable in advance for 12 years. At the end of the lease term, title to the machine will pass to Jeremy Manufacturing.

REQUIREMENTS 1) Provide the entries required on Jason's books to record the lease and the first payment. 2) Compute the manufacturer's profit to be recognized by Jason in the first year of the lease. 3) Provide the entry required on Jason's books to recognize interest revenue at the end of the

first year. Round computations to the nearest dollar.

D. On January 1, 2005, Franklin Industries leased equipment on an eight-year term at $15,000 annual rental payments, paid in advance. There is a bargain purchase option on December 31, 2012 (end of lease), of $24,000. The economic life of the equipment is estimated to be 15 years. The interest rate is 12%.

REQUIREMENTS 1) Give the necessary entries for 2005 assuming all payments after the initial payment are

made on December 31. 2) Give the entry at December 31, 2012, assuming the option is permitted to lapse and that

there is no residual value because of obsolescence. Assume 2012 amortization entries have been made.

E. Compute for total shareholders’ equity given the following accounts in the post-closing trial

balance of Sergei Inc. on December 31, 2011: Ordinary share capital (PHP 50 par) (6,000,000) Investment in equity securities, cost 200,000 Share premium-ordinary, in excess of par (5,000,000) Share premium-ordinary, from sale of treasury (1,000,000) Preference share capital (PHP 25 par) (5,000,000) Retained earnings, unappropriated (4,000,000) Retained earnings, appropriated (2,500,000) Treasury ordinary shares-20,000, at cost 1,500,000 Dividends payable (200,000)

The dividend on cumulative preference share is 10%. The preference share has a preference in liquidation of PHP 50.

V. Topics in Revenue and Expense Recognition A. Papajack Co., an SME, sold goods with list price of PHP 1,000,000 to a customer on normal

credit terms of 30 days interest-free credit. Ten days after the sale, the customer paid the entity PHP 690,000 in full as final settlement of a debt that arose from the sale of the goods. The amount received from the customer included PHP 50,000 VAT. The settlement amount is net of the following discounts: PHP 200,000 trade discount, PHP 100,000 volume rebate and PHP 10,000 prompt settlement discount. How is much the revenue from the sale?

B. Tita Swarding Inc., an SME had the following borrowings during 2011. The borrowings were made for general purposes but the proceeds were used to finance the construction of a new building.

PRINCIPAL INTEREST 12% bank loan 3,000,000 360,000 14% bank loan 5,000,000 700,000

The construction began on January 1, 2011 and was completed on December 31, 2011. Expenditures on the building were made as follows:

January 1 2,000,000 June 30 2,000,000 December 31 1,000,000 REQUIREMENT

Compute the cost of the building. C. Balahura, Inc. compensates its employees for certain absences. Employees can receive one

day vacation plus one day sick leave for each month worked during the year. Unused vacation days may be carried forward, but unused sick leave expires within the year of employment. Employees are compensated according to their current pay rate. The following data were taken from the records for the year 2008.

Earned Carry Starting Sick Leave Forward Vacation Days Current Pay Employee Date Taken 2008 1/1/08 Taken 2008 per Day X. Lim 1/6/06 5 0 7 $70 K. Chiu 6/2/07 10 6 3 60 M. Salvador 11/4/08 5 0 0 48 M. Guidicelli 7/28/08 2 0 1 79

REQUIREMENT Compute the amount that should be reported as a liability for compensated absences on December 31, 2008. D. On January 1, 2011, Mo Company granted 100 share appreciation rights to each of its 500

employees on condition that the employees remain in its employ for the next 3 years. No employees left the entity during the 3-year vesting period. The employees exercised their share appreciation rights as follows:

December 31, 2013 100 employees December 31, 2014 250 employees December 31, 2015 150 employees The fair value and intrinsic value of the share appreciation right are as follows: FAIR VALUE INTRINSIC VALUE December 31, 2011 15 December 31, 2012 18 December 31, 2013 20 15 December 31, 2014 21 20 December 31, 2015 15 25 The intrinsic value of the share appreciation right on the date of exercise is the amount paid out to the employees.

REQUIREMENT Determine the compensation expense for each year from 2011 to 2015 as a result of the share appreciation rights.

E. The following data relate to the defined benefit pension plan of the Trueblood Corp. for the

years 2007-2009: Net Periodic Employer Benefits Paid Actual Return

Year Pension Cost Contributions to Retirees on Fund Assets 2007 $255,000 $300,000 $105,000 $120,000 2008 300,000 300,000 114,000 150,000 2009 315,000 300,000 120,000 156,000

At December 31, 2006, the books of Trueblood Corp. reflected accrued pension cost of $30,000. The fair value of pension fund assets at that date was $1,380,000. The pension fund is administered by an independent trustee. REQUIREMENTS 1) Prepare the summary journal entries relating to the pension plan that would be required on

the books of Trueblood Corp. for 2007, 2008, and 2009. 2) Determine the balance of the prepaid/accrued pension cost account at December 31, 2009. 3) Compute the fair value of pension fund assets as of December 31, 2009.

VI. Topics in Disclosure

A. Radford Appliances computed a pre-tax financial loss of $60,000 for the first year of its operations ended December 31, 2008. Analysis of the tax and book basis of its liabilities disclosed $80,000 in accrued warranty expenses on the books that had not been deductible from taxable income in 2008, but would be deductible in future years when the warranty expenses were paid.

The future warranty payments are expected to occur in the following pattern:

2009 $14,000 2010 36,000 2011 18,000 2012 12,000

$80,000 The enacted tax rates for this year and the next four years are as follows:

2008 40% 2009 35% 2010 32% 2011 30% 2012 30%

REQUIREMENTS 1) Prepare a schedule showing the reversal of the temporary difference and the computation

of income taxes payable and deferred tax assets or liabilities as of December 31, 2008. 2) Prepare journal entries to record income taxes payable and deferred income taxes. 3) Prepare the income statement for Radford beginning with "Income from continuing

operations before income taxes" for the year ended December 31, 2008.

B. Scriabin, Inc. has the following outstanding liabilities as of December 31, 2009:

Accounts payable PHP 456,000 Accrued expenses 376,650 Bank loan 1 2,594,000 Bank loan 2 9,460,000 Bank loan 3 1,345,700

The following are excerpts from the liability section of the notes to financial statements:

Bank loan 1 was granted on December 31, 2004 and the principal is payable in ten equal annual installments.

Bank loan 2 will mature on September 30, 2010. Scriabin, Inc. is currently negotiating with Rosario Bank in order to refinance the loan.

Bank loan 3 is a 10-year loan from Salamat Bank. This loan contains a loan covenant that requires semi-annual financial reporting and a minimum current ratio of 2. On the June 30, 2009 financial statements, Scriabin, Inc. reported current ratio of 1.234. After long negotiations, including wining and dining with the bank officials, Salamat agreed to forgive

Scriabin, Inc. and give them one more chance. The agreement was formalized in a contract dated March 26, 2010.

Scriabin, Inc.’s Board of Directors authorized the issuance of the December 31, 2009 financial statements on April 1, 2010.

REQUIREMENTS 1) Compute the amount of non-current liabilities to be reported on Scriabin, Inc.’s December

31, 2009 financial statements. 2) Draft excerpts of Scriabin’s notes to the financial statements relating to the transactions

above. Indicate the appropriate heading per note. Do not include the note on summary of significant accounting policies.

C. Prepare the related-party disclosures in the December 31, 2011 financial statements of Prokofiev Inc. given the following data:

1) The group of companies, Prokofiev Inc., is controlled by Mr. Prokofiev (who is also the Managing Director). He also owns 90% of the shares.

2) 10% of the shares are held by remaining directors and the head accountant. 3) 2011 total compensation of the Board of Directors: PHP 313,000, up by 19% versus 2010. 4) 2011 total compensation of the Management Committee: PHP 195,000, down by 3% versus

2010. 5) 2011 receivables from associates: PHP 46,146, down by 52% versus 2010. 6) 2011 payables associates: PHP 92,126 down by 11% versus 2010. 7) Sale of goods with associates is at PHP 112,000 in 2011 and PHP 29,000 in 2010. 8) Purchase of goods from associates is at PHP 951,000 in 2011 and PHP 101,000 in 2010. 9) Loan to the Corporate Secretary in the amount of PHP 350,000. The 3-year loan has been

issued on April 2, 2008. Interest of 4% p.a. is paid monthly. No existing receivables related to this loan exist in the books as at December 31, 2011.

10) Purchase of services from associates is at PHP 81,000 in 2011 and PHP 76,000 in 2010. 11) As a result of several reorganizations, 14 employees transferred from Prokofiev Inc. to its

associate, Ilyich Co. on September 6, 2011. 12) Loan to Nikola Inc., an associate, of PHP 980,000. Principal amount is payable after 5 years

from issuance. Loan has been issued on December 1, 2010. Interest at 8% p.a. has been paid diligently every November 30 beginning November 30, 2011.