CHAPTER 7

INVENTORIES AND BIOLOGICAL ASSETS

Definition of Inventories

PAS2, paragdelines inventories as folows

eventones and which aro heild for sale in the ordinary course of busin the process production
for such sales, or in the font of moterich or supplies to be cated in the production process or in
the rendering of services"

Inventories encompass goods purchased and held for resale including for example,
merchandive purchased by a retallarand held for rescle, or land and other property heid for
resule byla divion entily and real estate Developer Inventories diko hp finished goods omdiced
goods in process and materials and supplies owaiting use in thepmauction process.

in case of service provider, inventories include the cost of the service for which the entity has
not ver recognized the related revenue. The cost of service consists pemonty of the lobos and
other cost of personnel directly engaged in providing the service, including supervisory
personnel and attributable overhead

Classes of Inventories

7hventones are broadly classified into two, namely inventories of a trading concem and
inventores of manufacturing concen

radid bana one that buy and selk goods in the same purchasea. The tem 2 mods generally
applied to goods held by o trading concern

Ammanula twing concem is one that buys goods which are altered or covered inlo 27nuthint
form before they are made available for sale. The terms "finished-goods" goods in procem yow
materials" and "factory gumanufacturing supplies" refer to inventories of a nianulochsing
concem.

Finished goods are completed products which are ready for sale. Finished goods have been
assigned their full share of manufacturing costs

Goods in process or work in process are partially completed products which require. hather
process or work, before they can be sold,

Rave materials are goods that are to be used in the production process. No work of process has
been done on them as yet by the company inventorying them, Broadly raw materiais cover all
materials used in the manufacturing operations but frequently this is restricted to materials that
will be physically incorporated in the production of niden good annat can be traced directly to
the end of the product of the production pro

ractory or manulachueng suppiles are similar to raw materials but their relationship to the sect
these supplies may be referred to as indirect materials ndrect because they are not physically
incorporated in the products being lachand, However, there are other manufacturing supplies
like paint and nais which become part of the finished product but since the amounts involved are
insignificant it is improeticol to aftempt to allocate their costs directly to the product these
supplies tind thes way into the product cost os part of the manufacturing overhead

rectory supplies are embraced in the ferm "inventories"because they are currently Consumed
the production of goods to be sold in the ordinary course of business

Goods includible in the Inventory

3 As a run of goods to which the ently has the shall be regardless of location. Where the has
already passed brom the seat me boye the goods toen part of the inventory of the latter.

the phease "passirig of title" is a legal language which means the point of time at which
ownership changes"

Therofons, the legal test is as follows is the entity the owner of the goods to be inventored if the
answer is in the affirmative, the goods shoebe includes in me Inventory the answer is in the
negative, the goods shall be excluded that the Invenfory

Applying the legal fest goods owned and on hiand, goods in transit and sold POS Destination,
goods in moral cand purchased FOB Shipping Point, goods out on consignment goods in me
hands of solesmen or agents, and goods held by customers on approvdi or on trial, are all
includible in inventory.

Exception to the Legal Test

Installment contracts may provide for retention of title by the seller until the sing price is fully
collecteti following the legal test, the goods sold on installment base are stil the property of the
seller and therefore normally includible in his inventory

However, in such a cate, it is an accepted accounting procedure to record the Installment sale
as erregular sale involving defered income on the part of the soller and as a regular purchase of
the port of the buyer. Thus, the goods sold on installment are incided in the inventory of the
buyer and excluded from that of the seller the legattest to the contrary notwithstanding

This is a clear example of economic substance prevailing over legal form.

Who is the Owner of Goods in Transit?

This will chutsenur on the tents, whether FOB destination or FOB Shipping Point, FOB 3 means
then on DIODK

Under füb destination, owrenship of the goods purchased is transferred only upon receipt of the
good by the buyer of the point of destination, thus, under this the goods in transit are still the
property of the seller.

Accordingly, the seller shall legally be responsible for freight charges and other oxpenses up to
the point of destination.

On the other hand, if the term is FOB Shipping Point, ownership is transferred upon shipment of
the goock and therefore, the goods in fransit are the property of the buyer.

Accordingly the buyer shall legally responsible for the freight charges and other expenses from
the point of shipment to the point of destination.

In practice, during an accounting period, the accountant normally records purchases wier goods
are received and sales when goods are shipped, regardless of the precise monent of which fitte
passed.

This procatione is expedient and no material misstatements occur in the financial dotements
because title usually passes in the same accounting period.

However, the accountant should carefully analyze the invoice terms of goods that are in transit
of the end of the accounting period to determine who has legal title.

Accordingly, adjustments are in order if errors are committed in recording purchases and sales

frade Discounts and Cash Discounts

bade discounts and cuctions both the or cofotog pnce in onde to conve at the Envoice price
which is the amount actually chargets to the buyer fme bode discounts are not recorded

The purpose of trade discounts la to encourage trading or increase sales. Trade dicount ato
suggest to the buyer the price of which the goods may be sold

Coil discounts are deductions from the invoce pace when payment made willin the discount
perect the purpose of cosh discounts is to encourage promp payment

Cash discounts are recorded as purchase discount by the buyer and sales decounk by the
seller, Purchase discounts is deducted from purchases to ative of net purchases and soles
discounts is deducted from sales to arrive at net sales revenue
Rustration of merchandise purchases is P500.000 less 20% and 10% with chill Sentes
of5/10/30

the meant that trade oncourts are 20% and 10%, and the cash discounts is 50% if poyment s
made in 10 days. The full amount of the invoice il palid if the payment made after 10 days and
within the credit period of 30 days

List price

Fist rode discount (20x500.000)

P500,000

Balarice

1100.000

Sercond frade discount 10% x 400.000

400.000

Invoice price

140.000

Cath discount (5%x 360.000

F360,000

Payment within the discount period

118.000

The entry to record the purchase in

2342,000

Purchases

Accounts Plovable

P360.000

P360.000
Note that the hode discounts are not recorded. The entry to record the payment of the invoice
within the discount period is

Accounts Payable

Cash

360.000

Purchase discounts

342.000

Methods of Recording Purchases

18.000

There are two methods of recording purchases namely:

1. Gross Mettiod-Purchases and accounts payable are recorded of gross.

2. Nef Method-Purchaves and accounts payable are recorded at nel

Ilustration-Gross Method

Purchcan of condive on account 1200.000, 2710 1/30

Accesos Proyu

P200.000

9200.000

3. Авинные раenient made withes the discount penod

Account Povable

Conh

Punchicase Decond

200.000

196.000
3. Assume payment is made beyond the discount period

4000

Accounts Payable

Cash

Ilustration-Net Method

200.000

1. Purchase of merchandise on account, P200,000 2/10/30

Purchasm

Accounts Poyatie

P196,000

P196,000

7. Assulie payment is made within the discount period.

Accounts Poyabile

196.000

Cash

196.000

3. Assume payments made beyond the discount period,

Accounts Payable

Purchase Discourts Lost

196.000

Cash

4.000
200.000

The purchase discount lost account is classified as other expense.

4. Assume it is the end of accounting period, no payment is made and the discount period has
expired

Purchase Decounts Lost

Accounts Payable

4,000

4,000

Gross Method vs. Net Method

The cost measured under the net method represents the cash equivalent price on the date of
payment and therefore the theoretically correct historical cost

However, in practice, most entities record purchases of gross invoice amount

Technically, the gross method violates the matching principle because discounts are recorded
only when faken of when cash is paid rather than when purchases that give rise to the discounts
are made.

Moreover, this procedure does not allocate discounts faken between goods sold and goods on
hand.

Despite its theoretical shortcomings. the gross method is supported on practical grounds move
convenient than the net method from a bookkeeping standpoint

Moreover, if applied consistently over fine, it usually produces no matenal errors in the financial
Holemens,
Weighted Average

Units

Unit Cost

Total Cost

Jon 1 Beginning balance

5,000

200

P1,000,000

10 Purchase

5.000

250

150

1,250.000

30 Purchase

16.000

150

1300.0001

2.400.000

31 Purchase reluma

12.0001

24.000

14.330.4000

Weighted Average unil cost (P4.350.000/24.000 unih

181.25

Cost of ending inventory (18,000 x 181.25)

P3.262.500

Specific identification
Specific identification means that specific costs altributed to identifiod items of inventory. The
cost of the inventory is determined by simply multiplying the units on hand by their actuor unt
cost. This requires records which will clearly determine the actual costs of goods on hand

PAS2, porograph 23, provides that this method is appropriate for inventories that are
segregated for a specific project and the inventories that are not ordinanty interchangeable

The specific identification method may be used in either periodic of perpetual inventory systern

the major argument for this method is that the flow of the inventory cost corresponds with the
actual physical flow of the goods. With specific identification, there is an actual determination of
cost of units sold and on hand.

The major argument against this method is that it is very costly to implement even with high-
speed computers.

Standard Costs

Standard costs are "predetermine product costs established on the bass of normal Invel of
materials and supplies, labor, efficiency and capacity utilization"

Observe that a standard cost is predetermined, and once determined, is applied to all inventory
movements inventories, goods available for sale, purchases and goods sold or placed in
production.

PAS 2, paragraph 21, states that the standard cost method may be used for convenience if the
results approximate cost. However, the standard set should be realistically attainable and are
reviewed and revised regularly in the light of current conditions,

Standard costing is taken up in a higher accounting subject and is not discussed further in these
materials

Direct Method

The cost of goods solo i computed as follows

ewerzory January

P 4,500,000

Nal Puecticuty

P24.500.000
Goods Avaliable for ke

5,300,000

wentory-December 31

P19.200.000

Cost of Goods Sold

Note that under direct method, the inventory, whether beginning or ending. presented of the
lower amount.

Allowance Method

the cost of goods sold a computed as follows:

Inventory January 1 of cost

Net Purchases

P 5.000.000

Goods Available for Sale

P25.000.000

Inventory December 31

P19.000.000

Cost of Goode Scold before inventory weiledown

200.000

Los-on Inventor downl

€19,200,000

Cost of Ganch Suld after inventory writedown

P 700.000
Requered allowance December 31 (6.000.000-5.300.000)

Required alowance Jonuary 115.000.000-4.500.000

Increase in allowance

The increase in allowance is recorded by debiling "loss on inventory weltedown" and crediting
"allowance for inventory witedown"

Note that whether direct method or allowance method, the cost of goods sold must be the same

Illustration 3: Assume the following data for the curent year:

Inventory-January

Cost

Net Realzucie volue

4.500.000

Net Purchases

Inventory-December 31:

Cost

Not Reallzable Value

5,900.000

Direct Method - Cost of Goods Sold

Inventory-January 1

Nel Purchas

P 4.500.000

Goods Available for Sole

P24.500.000

Inventory-December 31
Cost of Goods Sold

18,600,000

Definition of Terms

Sological as oreng animals and living plons

Agriculture proctices the harvested product of an enfily's biological αι

Harvest & the detachment of produce from a biological quet or the cessation of a biological
asset's life processes.

Examples of Biological Assets

The following table provides examples of biological assets, agricultural produce and products
that are the result of processing after harvest.

Biological Assel

1. Sheep

2. Trees in plantation forest

3. Thont

4. Dairy cattle

Bushes

7. Vines

froit trem

Agricultural Produce

Wool

Felled trees

Harvested cone

Carcass
Leat

Grapes

Picked frult

Product After Harvest

Yam corpet

Logs, lumber

Sugar

Milk

Cheese

Sausage, cured ham

Tea, cured tobacco

Wine

Processed frui

Again, the measurement of biological assets and agricultural produce is covered by PAS 41 and
the measurement of products affer harvest is covered by PAS 2 on inventories.

Agricultural Activity or Simply "Agriculture

This is the management by an entity of the biological transformation and harvest of biological
assets for sole or for convension into agricultural produce or into additional biological ensets

Examples of Agricultural Activity

Agricultural actisly covers a diverse range of activities such as the following

1. Raising livestock

2. Annual or perennial cropping

3. Cultivating orchards and plantations

4. Flonculture

5. Aquaculture, including fish farming

Features of Agricultural Activity

Certain common features of agricultural activity are as follows,

Capability to change-Living animals and plants are capable of biological Transformation.

b. Management of change-The agricultural activity must be "managed to

facilitate the biological transformation by enhancing or at least stabilizing conditions necessary

for the process to take place, for example, nutrient level moisture, temperature, fertility and light.

C. Measurement of change-The change in quality or quantity brought by biological

fransfommation or harvest is measured and monitored as a routine management function

Conservative and Average Cost

Cost

Retail

Beginning inventory

Net purchases

P180:000

P250,000

Additional markup

1,020.000

1,575,000

Markup-cancelation

200.000

GAS-conservative
P1,200.000

Markdown

Cost ratio (1.200.000/2.000.0001

140.000

Markdown concelotion

P1.200.000

15.000

GAS-average

P1.875,000

Cost ratio (1.200.000/1.875.000)

Soles

P1,450.000

150.000

Employee discounts

40,000

Spoilage and breakage

35.000

[Link]

Ending inventory of retail

P400.000

Conservative cost (400.000 x 60%)

P240.000
Average cost (400.000 x 64%

P 254,000

The "cost of sales" under the two approaches is computed ordinarily as follows:

Conservative

Average

Goods Avaliable for Sale

P1,200,000

P1.200.000

Ending inventory

240.000

256500

Cost of Sales

F960,000

944,000

Observe the difference between the conservative approach and average cost approach

The corservative approach includes net markup and excludes net markdown in determining the
cost ratio in order to arrive at conservative cost. Notice that the conservative cost is lower than
the average cost or market. Thus, this approach a alio known as the lower of average cost or
market.

On the other hand, the average cost approach includes both net markup and net markdown in
determining the cost ratio.

The reason for such an approach is to arrive at an inventory that will approximate cz equal to
historical cost
PAS 2, paragraph 22, provides that the percentage used under the retail method sholl take into
corisideration that has been marked down to below its original seling price. An average
percentage for each retail department is often used..

This means that the average cost approach shall be applied in conjunction with the retall
Inventory method. Of course, the standard requires either the FIFO or average method as a
cost formula.

ethods of Recording Credit Sales

1. Gross Method-The accounts receivable and sales are recorded of gross amount of the
invoice. This is the common and widely used method because it a simple to apply

2. Net Method-The accounts receivable and sales are recorded at net amount of the invoice,
meaning the invoice price minus the cash discount

lustration Gross Method

11 Scale of merchandise for P100.000/terms 5/10/30

Accounts Receivable

P100.000

Safes

P100.000

2. Assume collection is made within the discount period.

Cash

95.000

Sales Discounts

5.000

Accounts Receivable

3 Asume collection is mode beyond the discount period.

Cash
Accounts Receivatile

100.000

100.000

Illustration-Nel Method

1 Sale of merchandise for P100,000, terms 5/10, n/30.

Accounts Receivable

P 95,000

Sotes

P 95.000

2. Assume collection is made within the discount period,

Cash

Accounts Receivable

95,000

95.000

3. Assume collection is made beyond the discount period.

Cash

Accounts Receivable

95,000

Sales Discounts Forfeited

5.000

The sales discounts forfeited account is classified as other income.

Cost Formulas
Wherinventorse one sold the coming amount of those inversaries shot recognlend as expense
in the period in which the related revenue i recognized

Accordingly. The objective in accounting for inventiones is the proper determination of cost and
consequently, the cost of goods sold

PAS 2, paragraph 25, expressly provides that the cost of inventories shall be determinable by
using either

fiet in tout mos

D. Weighted av

Again, PAS 2 does not permill onvermore the use of the kast in fint out (UFC as an affermative
founulain measuring cost of inventories. However, UFO is discussed for thecretical or
conceptual purposes

Flest in. First out (FO)

The FIFO method avsumes that "the goods first purchased are first sold and corsequently the
goods remaining in the inventory of the end of the period one those most receritty purchased or
produced

In other words, the FIFO in accordance with the ordinary merchandising procedure that the
goods are sold in order they are purchasect. The rule is "first come first sold

The inventory & thus expressed in terms of recient or new prices while the cost of good sold us
representative of eattler or old prices.

The method lavors the statement of linancial position in that the Inventory is stated at cument
replacement cost

The onection the method is that there is improper matching of cast against revenue becaure the
goods told are stated at earlier or older prices resulting in tolimerit of coat of ities.

Accordingly in a peract of inflation or rising prices, the FIFO method would result to the higheid
net income. However, in a period of defiation or declining prices. The PRO method would result
to the lowed net income

lustration: Assume the following data

Units

Unit Cost
Total Cost

Soles lin units)

Jan. Beginning balance

800 200

P160,000

8 Sale

500

18 Punchase

700

210

147.000

22 Sve

500

31

Purchase

500 220

110.000

The ending inventory is 700 units

FIFO-Periodic

Urve Cost

200

216
F42,000

From Jan 31 Punctise

500

200

110.000

7001

112.000

Accordingle the cost of goods sold is computed as follows

Viventory Jonay

F160.000

Purchases (147.000-110.000

257.000

Goods Available for Sale

P417000

nvertory-January 31

152.00

Crist of Goods Sold

245.000

This requires ther preparation of stock cord.

FIFO-Perpetual

Purchases

Sales
Balance

Date

Units

Cost

Totol Cost

Unil Total

Urills

Cost

Cost

Unit Cost

Total Cost

Units

Jon

800200

160,000

700

210

147000

500

200

100.000

300200
40,000

300200

60,000

300

200

60.000

500 210

700 210

14/000

22

31

500 220

110.000

105.000

200210 P 42.000

200-210 P 42.000

500

220

110.000

Note well that under FIFO-periodic and FIFO perpetual, the inventory costs are the same in both
cases the January 31 inventory & P152.000

The cost of goods sold is determined from the stock card as follows:
January 8 S

P100,000

2005,000)

165,000

Cost of Gooty Sold

F265,000

Weighted Average-Periodic

The cost of the beginning inventory plus the fatal cost of purchases during the period divided by
the total unit purchased plus those in the beginning inventary to get a weighted average unit
cost. Such weighted average unit cost is then multiplied by the units on hand to derive the
inventory value.

In other words, the average unit cost is computed by dividing the total cost of goous available
for sale by the total number of units available for sale.

LIFO - Perpetual

Chapter7

This requires the preparation of stock cnid

Pode 35

Purchases

Unit Total

Sales

Unit

Total Cost

Balance

Unit Cost
Date

Units

Cost

Cost

Units

Cost

Units

Total Cost

800

200

160,000

500

200

100,000

60.000

16 700 210

347,000

22

300 200

60.000

200 210

147.000
700 210

147.500

100 200

20.000

40.000

31

500 200

110000

40.000

500 220 110.000

None wes that uporodic and UFO-perpetual differ in inventory value. Under UFO periodic the
January 21 inventory & P40.000 and under UFO perpetual, the January 31 inventory is
P150.000.

Another illustration: The following data are extracted from the records of an entily relating to an
inventory item.

Units

Unit Cost

Total Cost

Jan, 1 Beginning balarice

5,000

200

10 Purchase

5.000

250
1.250.000

15 Sale

(7,000)

16 Sale returns

1,000

30 Purcice

16,000

150

2400/000

31 Purchase refums

12.0001

150

300.000

18.002

FIFO-whether periodic or perpetual

Jan. 10 Purchase

30 Purchas

Units

4,000

Unit Cost

250

Total Cait
P1,000,000

14,000

150

2,100.000

18.000

73.100.000

The January 30 purchase of 16.100 units is reduced by the purchase returns of 2,000 units or
net purchase of 14.000 units. Note that under HFC perpetual, the sales returns of 1.000 units on
January te would be casted back to inventory of the latest purchase unit cost of P250 before
sale.

Moving Average

Units

Unit Cost

Total Col

Jon 1 Beginning balonce

5.000

200

P1,000.000

10 Purchase

5.000

250

250.00

Balance
10.000

225

P2.250.000

15 Sole

12,0001

225

[Link]

Balance

3.000

225

P675.000

1,000

225

225.000 P900,000

4.000

225

16,000

150

400.000

20.000

165

2.000
150 167

18.000

P3,000.000

Closerve that the moving average unit cost changes every time there is a new purchase or a
purchase retums. The moving average unit cost is not affected by a sale or a tale retums

In an ideal perpetual system, the stock cards are kept to reflect and control both units and costs.
Consequently, the entity would be able to know the inventory on hand at a particular moment in
time.

In recent years the widespread use of computers has enabled practically all large trading and
manufacturing entities to maintain a perpetual inventory system. With computers the entities can
conveniently and effectively store and retrieve large amount of inventory data,

When the perpetual system is used, a physical count of the units on hand should at least be
made once a year or af frequent intervals to confirm the balances appearing on the stock cards.

The argument for the weighted average method is that it is reintively eaty to ope especially with
computers. Moreover, the weighted average method produces Inventory valuation that
approximates cument volve if there is a rapid femover of inventory

the argument against the weighted average method is that there may be o considerable log
between the current cost and inventory valuation since the average unit cost involves ectly
purchases. When prices are thing, the Inventory valuation bethan cument cost.

Lost In First Ouf (UFO)

The LIFO method lassumes that "the goods last purchased are list sold and comequently the
goods remaining in the inventory of the end of the period ore those first pachased or produced.

The inventory is thus expressed in terms of earlier or old prices and the cost of goods sold it
representative of recent or new prices.

The UPO favon the income statentent because there is matching of cument cost ogning current
revenue, the cost of goods solt being expressed in terms of current or recent cost

The objection of the L'is that the inventory is stated at earlier or older prices and therefore there
may be a significant lag between inventory valuation and current replacement cost
Moreover the ace of UFO permits income monipulation such as by motung year-end purchases
designed to preserve existing inventory layers. At times these purchases may not even be in the
best economic interest of the entity.

Actually, an o perod of sing prices, the UFO method would result to the lowest net income in a
period of declining prices. the LIFO method would result to the highest net income

in the preceding ustration, the cost of 700 units under the LIFO is computed os follows:

Relative Sales Price Method

When different commodities ore purchased of a lump sum, the single cost apportioned aiming
the conmocities based on the respective sales peces Acted to the phinvoons that case
proportionate to selling price

for ristance predicts and Care purchased of basket pace of P3,000.000 Assume that the solo
products have the following sales price: A, 500.000 500.000 and CP3000:000

The cost of each product a computed as follows

Product A

500.000

Product B

1.500.000

Product C

5/50 3.000.000

P300.000

15/50 3.000.000

900.000

30/50x3,000,000

1,800,000

P2.000.000
QUESTIONS

18. What is the cost formula in measuring the cost of inventories

Explain briefly me torowing cost methods:

HEO

b. Weighted ovenge

Specific identification

20 UFO allowed in measuring the cost of inventory

21. When & specific identification method appropriate in determining col of anvectones

22 Explain standard costs.

23 Explain the relative soles price method of allocating inventory cost.

Measurement of Inventory

PAS 2. paragraph v provides that inventories shall be measured at the lower of cost and net real

berebut at the lower of cost and net realizatile value is now AFROWN OS LCNRV

Nel Realizable Valve

Nef realeable value of NITV & the estimated selling price in the ordinary course of Duvnest less
the estimated cost of completion and the estimated cost necessary to make the tale

The cost of inventories may not be recoverable if those inventories are damaged, it they have
become wholly or partially obsolete, or if their selling prices have declined.

The cost of inventories may also not be recoverable if the estimated cost of completion or the
estimated cost to sell has increased

The practice of wetting inventories down below cost to nel realizuble value is consistent with the
view that assets shall not be carried in excess of amounts expected to be realized from their
sale or use.

the lost in vertory welectown as Included in the computation of cost of goods soles The
allowance for inventory weltedown is presented as a deduction from the wentory
Inventory-December 31, 2024. at cod

Allowance for werdory wetedowns

P800.000

Net Realrable Vive

Continuing the illustration assume on December 31. 2025, the fatat cost of the Inventory is
11,000.000 and the net realizable value is P990.000.

Direct Method

Again, under this method, the inventory is simply recorded of the lower amount. Thus, the entry
to record the wentory on December 31, 2025

nweifary-December 31, 2025 Income Sumahoy

P990,000

Allowance Molhod

Cost

P1,000,000

Not Realizable Value

990.000

Required allowance December 31, 2025

P 10.000

Allowance balance December 31, 2024

115,000 円

Decrease in allowance

5.000

The decrease in allowance is a reversal of the previous inventory writedown and recorded as
follows:
Allowarice for inventory writedown

Gain on reversal of inventory willedown

5.000

5,000

The gain on revenical of inventory wriledown is presented as a deduction from the cost of goods
sollt

This a in accordurice with the standard which provides that "the amount of any reversal of any
weetedown of inventory arising from an increase in net realizable value shall be recognized as a
reduction in the amount of inventory recognized as on expense in the period in which the
reversal occurs

Illustration 2: Assume the following data for the current year:

Inventory-January

Cost

Nef Realitzable Value

P5.000.000

Net Purchases

4.500.000

Inventory-December 31

Gost

Net Realizable Valve

Gain or Loss

A gain or loss arising on initiat recognition of a biological asset at fair value kels cost to sell and
any subsequent changes in the fair value less costs to sell shall be included in profit or loss.

A loss micy atlse omitial recognition of a biological asset because costs to sell cre deducted in
determining fair value less costs to sell of a biological amet
A gain may arise on initial recognition of a biological asset, for example, when calf is born.

A gain or loss arising from initial recognition of agricultural produce at falt value ren costs to sell
sticall be included in profit or loss.

A goin or loss may arise on initial recognition of agriciltural produce as a result of Harvesting

An entily shall disclose the aggregate gain or loss arising on the initial recognition of biological
awets and agricultural produce and from the change in fair value less costs to sell oil bicilogical
awes

Agricultural Land

Agricultural land is not deemed a biological asset. The principles espoused in PAS 41 for
biological assets and agricultural produce do not apply to agricultural land.

The requirements of PAS 16 which are applicable to property, plant and equipment apply
equally to agricultural land for purposes of measurement.

Biological Assets Attached to Lond

Biological asos cre often physically attached to land, for example, trees in o plantation forest
there may be no separate market for biological assah that are attached to the and out on active
market may exist for the combined assels, that for the biological assets and land as a package

An eritity may use information regarding the combined assets to determine the fair value of the
biological assets.

For example, the fair value of the land may be deducted from the fair value of the combined
assets to anive at the fair value of the trees in the plantation forest.

Government Grant

An unconditional government grant related to a biological asset that has been measured at fair
value less costs to sell shall be recognized as income when the grant becomes receivable.

a government grant related to a biological asset measured at far value less cosh to sell is
conditional, the grant shall be recognized as income only when the conditions attaching to the
grant are met.

If the government grant relates to a biological asset measured at cost less cany occumulated
depreciation and any accumulated impairment losses, PAS 20 on "government grant" is applied.
in determining of the inventory at retall and for purposes of computing the cost rafie. the
following items thould be comidered because the original soles price thequently raised or
lowered particularly of the end of the seling season when replacement costs are changing

1. initial markup orginal markup on the cost of goods

2. Olghat fear The solet price of which the goods are fint altered for se

3. Additional markup increase in sales price above the original sales price

4. Markup cancelation-decrease in sales price that does not decrease the sales price below the
original sales price

5. Net additional markup or net markup-markup minus markup cancelation

6 Markdown-decrease in sales price below the original sales précie

7. Markdown cancelation increase in sales price that does not increase the sales price above
the original sales price.

8. Nel markdown-markdown minus markdown cancelation

9. Maintained markup difference between cast and sales price after adjustment for all the above
terms. Sometimes this is referred to as "markon"

Treatment of Other Items

1. Purchaseramcounis deducted from purchases of cost only.

2. Purchase returns-deducted from purchases of cost and at refall.

3. Purchase allowances-deducted from purchases at cost only.

Freight in addition to purchases at cast only.

5. Departmental transfer in or debit-addition to purchases at cost and at retail

6. Departmeritat transfer out or credit-deduction from purchases at cost and at retail

7. Sales discounts and sales allowances-disvegarded, meaning, not deducted from sales.
Please refer to discussion under gross profil method.

8. Sales retums-deaucted from sales. If the account is "sales returns and allowances the same
should be deducted from sales,
9. Employee decounts added to sales. Employee discounts are special discounts usually not
recorded because they are directly deducted from the sales price Only the net sales price it
recorded. Consequently, the amount of sales is understated. Thus the employee discounts are
added back to sales.

10. Normal shortage, shrinkage, spoilage, breakage -This is deducted from goods available for
sale at retall Any normal shortage is usually absorbed or included in cost of goods sold

11. Abnormal shortage, shrinkage, spoilage, breakage - This is deducted from goods available
for sales at both cost and retail so as not to distort the cost ratio. Any abnormal amount is
reported separately as loss.

The accounts receivable should be presented as curtent assels at PSSogoo representing the
occounts of A and 8. The credit balance in the account of Cis classified as current liability and
not offset against the debit balances in the accounts of A and B

No adjustment is necessary to formally recognize the customers' credit balances because

ultimately these are canceled for sales and cash settlement. But an adjustment may be made
only for worksheet purposes, meaning, not formally joumaitzed and posted to the ledger, as
follows:

Accounts receivable

Customers credit balances

P50.000

P50.000

Initial Measurement of Receivables

PFRS9 paragraph 5.1.1, provides that a financial asset shall be recognizeci initially of fair value
plus transaction costs that are directly attributable to the acquisition,

The fair value of a financial asset is usually the transaction price, meaning, the fair value of the
consideration given.

For Short-term receivables, the fair value is equal to the face value or original invoice amount.
Cash flows relating to short-term receivables are not discounted because the effect of
discounting is usually immaterial

Thus, accounts receivable shall be measured initially at face value.

Accordingly, accounts receivable shall be measured initially at face amount or original invoice
amount.

For long-term receivables that are interest-bearing, the fair value is equal to the face

However, for long-term receivables that are noninterest-bearing, the fair value is qual to the
present value of all future cash flows discounted using the prevailing market tute of interest for
similar receivables

Thus, Initially, long-term interest-bearing notes receivable shall be measured at face valve and
long-term noninterest-bearing noles receivable shall be measured of present value.

Direct Wilheoff Method

The direct writeolf method requires recognition of a bad debt lose only when the accounh
proved to be worthless or incollectible accounts on loss it

Doubtful Accounts Accounts fleceivable

2 the accounts me only doubtful of collection, no entry it necessary

This approach is often used by small busiriesses because & smple to apply. As matter of fact,
the Bureau of Internal Revenue recognizes only the method for Income tox purposes

However, the direct writeoff method violates the matching principle because the bad debt loss is
often recognized in later accounting period than the period in which the salles revenue was
recognized. L

Illustration-Direct Writeoll Method

1 Accoutill of $30,000 ore considered [Link]

No entry is necessary

2. the above accounts are proved to be worthless.

Doubtful Accounts Accounts Receivable.

P 30,000

P30,000

3. the same accounts that are previously written off as worthless are recovered or colected
Accounts Receivable

P 30,000

Doubtful Accounts

P 30,000

Cash

Accounts Receivable

30.000

30.000

if the recovery is subsequent to the year of writeoff and the direct method writeoff a used, the
recovery may simply be recorded as follows:

Cash

Omer Income

P 30,000

P30,000

Methods of Estimating Doubtful Accounts

Doubtful accounts are recognized when the loss is probable and the amount can be estimated
rellably. This approach is parallel to the recognition of a "provision" which a both probable and
measurable" in accordance with PAS 37. There are three methods of estimating doubtful
accounts, namely:

1. Aging the accounts receivable or "balance sheet or statement of linancial postion approach"

2. Percent of accounts receivable or also balance sheet or statement of financial position proach

3. Percent of sales or "income statement approach

Its the uneained interest income has a credit balance of P231.800 to be amortized over the term
of the loan using the effective interest method.
Because of the origination fees received and the direct origination costs, a new effective rate
must be computed. The effective rate is computed through the "trial and error or interpolation
approach.

Cust

Since the initial carrying amount of the loan receivable of P4,768.200 is lower than the principal
amount, it means there is a discount and therefore the effective rate must be higher than the
nominal rate of 12%

The effective rate is the rate that would equate the present value of the future cash flows of the
loan to the initial carrying amount of the loan receivable.

Ther me

Vong the effective rate of 13%, the present value of I for three periods is 0.693. and the present
value of an ordinary annuity of I for three periods is 2.361. Accordingly. the present value of the
cash flows is determined as follows:

For det

PV of principal (5,000,000 x 0.693)

P3: 465,000

PV of interest 15,000,000 x 12% x 2.361

1,416,600

Total present value of cash flows

P4.881.600

The initial carrying amount of P4.768.200 is still lower than P4.881.600. This means that the
effective rate is higher than 13%

Examples of Bearer Plants

abees that produce kols ore bearer plants write the trolls groving on the agricultural
prodhorvested

in an all pot partition a coconut tree is the bearer plant and the fruits
When immature, the coconut fruit can be harvested for dinking, known a "buko" Juice in the
vemacolar

When maturs, the coconut truit can be processed to give all, charcoalom the hard shell and
copra from the dried coconut flesh

b in a vineyard, the grape vines are the bearer plants and the grapes are the agricultural
produce

Not Considered Bearer Plants

a. frees grown to be harvested and sold as log or lumber are not bearer plant

b. Annual crops which do not bear produce for more than one period and are held solely to be
rarvested as agricultural produce such as con and rice ateriat Deaner pikants

Plant with Dual Use

A plant with duct use & reported as biological asset and not as bearer plant

A plant may have a dual use, namely:

a. the planit is cultivaled for bearing agricultural produce

b. The plant itself is being sold elther as a living plant or an agricultural produce

For example, rubber trees may be cultivated to grow rubber milk as agricultural produce and at
the same time, may be sold as living plant or cut down at the end of the productive life to be
sold as lumber or wood.

in this case, the rubtier trees are recognized a biologicat asset because of the duci

However, the rubber trees are recognized as bearer plants when simply cut down and sold for
scrap upon maturity.

Judgment Required

Determining whether a plant is a bearer plant is critical as it drives the subsequent

measurement of the plant.

Judgment is required in determining it the definition of bearer plant is met especially in deciding
whether the sales of plant itself are incidental scrap sales

Purchase thing the period of card and of price

conciation incrьдонтална топка[Link]

damagert goods and employes decount

Basic Formula

In pinciple and procedure wise, the formular for the retail inventory methods very milar to the
gram godt method. The difference is that under ther gross profit method, the inding imentary
tated of cost while under the retall inventory metood ther ending tiry is expressed in terms of
selling price. The basic formato for the rest metus

Cheat or sending pace

Ending stiventory of ling price

Mply by cua rao

Ending inventory of od

The farmui for the cost ratio

LAL

Goods Available for sale al cost

Castratio

Goods Available for sale at selling price

By recson of the computation of the cost ratio, it is necessary that the goods avorable for sore
should be determined not only in terms of selling price but ono terms of cost.

When is an account past due?

The credit terms will determine whether an account is past due. For instance, if the credit ferms
were 2/10, n/30, and the account is 45 days old. it is considered to be 15 days past due.

Therefore, the phrase "past due" refers to the period beyond the maximum credit term in the
example, the credit term or credit period it 30 days

Percent of Accounts Receivable

Ak
A certain rate is multipled by the open accounts of the end of the period inadecto gof the
required almance botonce. The rate used is usually, determined from past experience of the
entity.

This procedure has the advantage of presenting the accounts receivable at estimatect net
realizable valde. This also simple to apply

The application of this approach however, violates the principle of matching bod debt loss
against the sales revenue. Moreover, the foss experience rate may be alficult to abitain and may
not be reliable.

lustration

Assume accounts receivable of P2.000.000 and a credit balance in the allowance account of
P10.000. Doubtful accounts are estimated to be 3% of qiccounts receivabin

The enty is

Doubriul accounts

P 50.000

Allowance for doubtful accounts

P50,000

Required allowance (3% x F2.000.000)

P 60,000

Less Credit balance in allowance

10,000

Deubitur accounts experse

P 50,000

when the accounts receivable balance is multiplied by a certain rate, the resulting amount is the
required balance for the allowance for doubtful accounts. Thus, fo determine the amount of
adjustment, the balance of the allowance before adjustment should be considered.

Percent of Sales
The amount of sales for the year is multiplied by a certain rate to get the doubtful accounts
expense. The rate may be applied on credit sales or total sales.

Theoretically, the rate to be used is computed by dividing the bad debt losses in prior yeun by
the charge sales of prior years. The rate thus obtained is multiplied by the Current year's charge
sales to arrive at the doubtful accounts expense.

Practically, however, there is no substantial difference if in the computation of the rate, the basis
is total sales of the prior periods, In such a case, the rate thus oulained is multiplled by the
current year's total sales to get the doubtful accounts expense his procedure of determining the
rate has the advantage of eliminating the extra work of making a record of cash sales and credil
sales, However, this approach may prove unsatisfactory when there is a considerable
fluctuation in the proportion of cash and credit sales periodically

Aging of Accounts Receivable

The aging of accounts receivable involves an analysis of the accounts where they are classified
Into nof due or past due. Fast due accounts are further classified in of length of the peilod
themegre poit due the most common clasifications

Not dve

blo 30 days prost due

31 to 80 devs post due

d41 to 10 days post due

1120 days poll due

4121 o 180 days post que-3

181 to 365 days past due

h. More than 1 year past due

Bonkrupt or under itigosion

The allowance is then determined by multiplying the total of each classification by the sole or
percent of loss experienced by the entity for each categor

In practice. the classifications vary depending on the experience of the entity.

The major argument for the sne of this method is the more accurate and scientific computation
of the allowance for doubtful accounts and consequently, the accounts receivable are fairly
presented in the statement of financial position at net malaotse calue.

The objection to the aging method is that it violates the matching process Moreover, this method
could become atohibitively time consuming if a large number of accounts are involved

lustration

The following dato are summarized in aging the accounts at the end of the period:

Not due

1-30 days past due

31-60 days post due

41-90 days past due

1-180 days past due

181-365 days post due

More than one year

Balance

(b) Experience Rate

F 500.000

300.000

200.000

50.000

30.000

20,000

P1.200.000

7,000
(axb) Required Allowance

P 5,000

6.000

111

8,000

10%

5.000

30%

9.000

10,000

P50.000

The amount compuled by aging of accounts receivable represents the required allowance for
doubtful accounts at the end of the period

Thus, ilhe allowance by aging ot accounts receivable has a cresfit balance of P10000 before,
adjustment, the doubtful accounts expense is determined as follows:

Over-ald Topnotchar No. ass kopnotcher No.

Required allowance

P 50,000

Less Allowance balance

10,000

Doubtful accounts expense

40.000

Ther entry to record the doubtful accounts expense iss

Doubiful Accounts

P 40.000

Allowance for Doubtful Accounts

P 40.000

Allowance Method-Cost of Goods Sold

wiwenfory January 1, of co

Net Purchases

P5,000,000

Goods Avollable for Sale

P25.000.000

Inventory-December 31.

P19,000,000

Cost of Gooch Solid before snventory writedown

1400.0001

Cain on revenial of ewentory wrifedown

P1L400,000

Cost of Goods affer ovenfory wriledown

P100.000

Required allowance December 31 16,000.000-5.900.000)

500.000

Required allowance January 115.000.000-4.500.0001

400.000
Reversal of Inventory weltedown-decrease in allowance

The decrease in allowance is recorded by debiting "allowance for inventory writedown and
crediting "gain on reversal of inventory writedown.

Purchase Commitments

Purchase commitmerits are obligations of the entity to acquire certain goods sometime in the
future at a fixed price and fixed quantify. Actually, a burchase contract has already been made
for future gelivery of goods fixed in price and in quantity

Where the purchese commitments are significant or unusual, disclosure is required in the
accompanying notes to financial statements. Any losses which are expected to ome from lem
and noncancelable commifments shall be recognized.

If there is a decline in purchase price after a purchase commitment has been made, a loss is
recorded in the period of the price decline.

Note that a purchase commitment must be noncancelable in order that a loss purchase
commitment can be recognized

Thus if of the end of the reporting period, the purchase price folls below the agreed price the
difference is accounted for as a debit to lass on purchase commitments and a credit to an
estimated liability.

Illustration: the loss on purchase commitment is material and actual in the sense that the
purchase price fals below the agreed price at the end of the reporting period, the same shall be
given accounting recognition. For example, assume contract purchase price of P500.000 and
replacement cost of year-end. P450.000. the market decline of P50.000 is recorded as follows:

Loss on purchase commitment

50.000

50,000

Estimalert lobsty for purchase commitment

The loss on purchase commitment is classified as other expense and the estimated lability for
purchase commitment is classified as current liability.

When the actual purchase is made in the subsequent period and the current replacement cost
drops further to P420,000, the entry is:
Purchases

420.000

Loss on purchase commitment

Estimated liability for purchase commitment

30.000

Accounts Payable

50,000

Actually, the recognition of a loss on purchase commitment is an adaptation of the

measurement of the lower of cost or netrealizable value.

me ending inventory computed on to

ingrning inventory

P200,000

Goode Available for Sanu

1.200.000

Cost of Sales

Nel Saten

P12401000

Divide by sales matio

300.000

Ending inverstory

If the gross profit is based on cost then gilfthmetically, cost of soles wout be 100% and therefore
the soles ration or percent of useATE
The sales xatio" is simply computed by adding 100%, to the gross profit rate bosed o cod. Thus
100% pås 40% equas 140%. Observe the following

Nel sares

Amount

Percent

Cost of Sales

P1.260.000

140%

900.000

100%

Gross profit ors cost

#360.000

The cost of ices computed by dividing the net sans by the sales rafic. Thus 11.240.000 avis40%
qua P900,000.

Computation of the Gross Profit Rate

To illustrate the computation of the gross profit rate, assume the following details:

Not Sales

P1,000,000

Cost of Goods Sola

750.000

Gross Profit

P250.000

As exemplified carier. The gross profit is expressed as a percent of sales or percent of cost of
goods sold.
Based on the foregoing detaik, the gross profit rate based on sales is computed by dividing the
amount of gross profit of P250.000 by the net soles of P1.000.000 or 25% The gross profit rate
based on cost is computed by dividing the gross profit of P250.000 by the cost of goods sold of
P750.000 or 33 1/3%

The gross pecilit rule on ioles is the common way of quoting gross margin because gouch cre
skammid on a sales price basis rather than on a cost basis. Besides, the gross profil rate on
tolest naturally lower than that based on cost and this lower rate cheates a favorabile
impression on the part of the customers.

Sometimes, it becomes necessary to convert the gross profit rate from one basis to another.

For instance, if the gross profit rate on cost is 25% the gross profit rate on sales is computed as
follows:

Sales

125%

Cost of Sales

100%

Gross profit on cost

25%

Gross profit on sales (25/125)

20%

Note that cost of sales 100% because it is the basis of the gross profit.

ace, the note declosure may appear as follows:

ccounts receivable

P5,000,000

Allowance for doubtful accounts

(200.000)
150,000

Notes receivable

Accued Viterest on notes receivable

100.000

Advances to offician and employees

250.000

Cadenci receivable

Strackin and other receivables

P6.300.000

Examples of Nontrade Receivables

-1 Advancen to or receivable from shareholden directors, officers or empiges collectible in omp

year, such advances ar receivables should be cissified as current assets. Otherwise, they are
classified as nonicument assets

Advancen to affiliates are usually treated as long-term investments.

Advances to supplier for the acquisition of merchandise are curent assets.

4 Subscriptions recelvatile are current auvets if collectible within one year. Otherwise, they are
shown preferatily as a deduction from subscribed share capital

S Crediton accounts may have debit balances as a result of overpayment of returns and
allowances. They are classified as curgent assets. If the deb Poranices are not material on
offset may be made against the cregion als with credit wefonices and only the net accounts
payable is presented

Special deposits on contract bich normally are classified as other noncurent dasers becouse
they are hely to domain outstanding for a considerable period of Hemet Howevel. Those
collectibles currently should be classified as cument casets.

Accrued income receivables such as dividends receivabile, accrued rent cope, accnied royalty
income and accrued interest on bond investment are
Comreceivable such as claims against common canters for losses or damages. claim for
rebates and tax refunds, claims from insurance companies, are normally classified as cument
assels

Customers' Credit Balances

Customers credit balances are credit balances in accounts receivable ring homorerpayments,
returns and allowances, anctadvance payments from Custumors

These broilorices shall be classified as current liabilities and shall not be offset against the debil
balance mother customers accounts except when the same is not alin which care only the het
renunts inceivable may be presented.

For example, assuge that the account receivable controlling account repodsa salance of
P500,000-xamination of the subsidiary ledger reveals the following detail in the customers
accounts

Subsequent Measurement of Loan Receivable

Smancu TOP paragroph 1.1.2. provices that if the Salmanaging fine cmatis for collect
contractuar cash flows on specilled dunes ant the coнастай coat hows are suicly payments of
principal and interest, the financial awet shall be necurect at amortized cost.

Accordingly, a loan recieve measured af amorfized cost wing the affection imennt method

The "amortleed cost" a the amount of which the loan receivabile is measured initially minas
principal repayment plus or minus the cumulative amortization of any afterence between the
initial amount recogized and the principni maturity omount, minus reduction for impairment or
uncollectibility

ather words if the initial amount recognized is lower than the principul amount. the amortization
of the difference is added to the corrying amount.

the initial amount recognized is higher than the principar amount, the amortization of the
difference is deducted train the carrying amount

Origination Fees

Lending activities usually precede the actual disbursement of funds and generally include efforts
to identify and attract potential borrowers and to originate a loan The fees charged by the bank
against the borrower for the creation of the loan ore known as "origination tees".
Origination fees include compensation for activities such as exgluating the Gorower's financial
condition, evaluating guarantees, collateral and other security. negolaring the terms of loan,
preparing and processing the documents and closing the loan transaction

The origination fees received from borrower ane recognized as unearned interest come and
amortized over the term of the loan,

the olgandlion foes are not chargeable against the borrower, they are known as direct
origination costs

The directorigination costs are deterred and also omorfized over the term of the on Preferably,
the direct ongination costs are affset directly against any uneamed algination lees received

the origination fees received exceed the direct angination costs, the difference is unearned
interest income and the amortization will increase interest income.

the direct ongination costs exceed the origination fees received, the difference is charged to
direct origination costs" and the amortization will decrease interest ricomis

Accordingly, the origination fees received and the direct origination costs are Included in the
measurement of the loans receivable.

Approaches in the Use of Retail Method

The approaches in the application of the retail method of inventory estimation are:

a Conservative or coriventional or lower or cost or market opproach

b. Average cost method

FIFO approach

Recoveries of Accounts Written Off

a collection is made on account previously written off as uncollectible. the Customary procedure
is fist to recharge the customer account with the sampunt collected and possibly with the entire
amount previously charged off if it is now expected that collection will be received in full

The collection is then recorded normally be debiting cash and crediting accounts receivable

The recharging of the customers' account is usually followed because it is an evidence of the
attempt of the customer to reestablish his credit with the company.

What account should be credited when the customer's account is recharged?.

The accepted procedure is to simply reverse the original entry of writeoff regardless of whether
the recovery is during the vear of writeoff or subsequent therefo. The Droloms entry is

Accounts Receivable

Allowance for Doubtful Accountk

The collection is then recorded as follows:

Casti

Accounts Receivable

Illustration-Allowance Method

1. Accounts of P30.000 are considered doubtful of collection.

Doubtful Accounts

P 30,000

Allowance for Doubtful Accounts

300

xx

P 30,000

2. The above accounts are subsequently discovered to be worthless or uncollectible

Allowance for Doubtful Accounts

30,000

Accounts Receivable

30.000

3. The some accounts that are previously written off are unexpectedly recovered of collected

Accounts Receivable
30.000

Allowance for Doubtful Accounts

30,000

Cash

Accounts Receivable

30.000

30,000

Cost of inventories

The cost of invenons shall comp

a. Cost of perch

Other coded in bringing the inventomes to the present location and

condition

Cost of Purchase

The cost of purchase of inventaries comprees the purchase pece, emport duties and
imecoverable taxes, Seight, handling and other costs directly aftributable to the acquisition of
finished goods, materials and services

Trade discounts, reticles and other similar items are deducted in determining the cost of
purchase

The cost of purchase thall not include foreign exchange differences which result from a severe
devaluation or depreciation of a currency against which there is no practical means of hedging
and that affects liabilities which arise directly from the recent acquisition of inventories

Moreover, when inventories are purchased with defemed statement terms, the dfference
between the purchase price for noemos credit terms and the amount gond recognized o Interest
expense over the period of financing

Cost of Conversion
the cost of conversion of inventores includes cost directly related to the units of production such
as arect labor. It also includes a systematic allocation of fixed and vanable production overhead
that is incured in converting moterice into finished goods

Fixed production overhead is the indirect cost of production that remans relatively constant
regardless of the volume of production, Examples are depreciation and maintenance of factory
building and equipment, and the cost of factory management and administration.

Variable production overhead & the indirect cost of production that varies directly with the
volume of production. Examples are indirect labor and indirect materials.

Allocation of Production Overhead

The allocation of Rixed production overhead to the cost of convenion is based on the normal
capacity of the production facilities.

Normal capacity the production expected to be achieved on average over a number of periods
or seasons under normal circumstances taking into account the loss of capacity resulting from
planned maintenance,

The amount of fixed overhead allocated to each unit of production is not increased or
consequence of low production or idle plant. Unallocated overhead is recognized on expense in
the period in which it is incurred.

in o period of abnormally high production the amount of fixed overhead allocated to each unit of
production is decreased so that inventories are not measured above

Direct Method

The inventory is recorded of the lower of cost or net realizable value. Thus, the entry to record
the inventory on December 31, 2024 is:

Inventory-December 31, 2024

P785.000

Income Summary

P785,000

The loss on inventory writedown of P15,000 is not accounted for separately. The entry will have
the effect of increasing cost of goods sold because the net realizable value slower than cost.

Allowance Method
The inventory on December 31. 2024 is recorded at cost as follows:

awentory December 31, 2024

P800.000

P800,000

Income Summary

The loss on inventory writedown is accounted for separately as follows:

Loss on inventory writedown

Allowance for inwenfory writedown

15,000

15.000

Biological Transformation

Biological transformation compiss the processes of growth, degeneromon production and

procreation that cause qualitative or quantitative changes in a biological assel

Boogoar randomalonets from the following types of outcome

1. Assel changes through

Growth-is an increase in quantity or improvement in quailty of an animal or olant

b Degeneration-a decrease in quantity or deterioration in quality of an onihal or plant.

Mocreation a creation of additional living animal or plant

2 Production at agricultural produce such as latex, tea, leat, woal and milk.

Recognition

An entity shall recognize a biological asset or agricultural produce when

d. The entity contics the asset as a result of past events

be probable trial future economic benefis associated with the asset will flow to the entily

The for value or cost of the asset can be measured reliably.

in agricultural activity, control may be evidenced by for example, legat ownership of cattle and
the branding or otherwise marking of the caffle on acquisition or bith

The lufure economic beneliti ane normally assessed by measuring the significant physical
attributes

Measurement

A biological asset shall be meawred on initial recognition and at the end of each. reporting
period of fair value less cost of disposal.

Agricultural procuce shall be measured at fair value less cost of disposal at the point of harvest

Cost of Disposal

Cost of disposal is the incremental cost directly attributable to the disposal of an

In other words, cost of deposal is necessary for a sale to occur but that would not otherwise
arise, such as commission to broker and dealer, levy by regulatory agency and commodity
exchange, and transfer tax and duty.

Under the Basis for Conclusions on PAS 41, cost of disposal excludes transport. finance cost
and income tax.

Fair Value of Biological Asset

There is presumplion that low value can be measured reliably for a biologicole However this
presumption con be rebutted only on initial recognition for biological asset for which makel
deleméned prices are not avallibile or estimates of fat value are determined to be clearly
unreliable, in such a case the biological asset shall be measured at cost less occumulated
depreciation and any accumulated impakment foss

However, once the far value of such a biological asset becomes clearly measurable, the antilly
shalt measure the biological asset of fair value less costs of ADOHIL

Fair Valve of Agricultural Produce

in all cases, an entity shall measure agricultural produce of the point of harvest of fair value less
costs to sell
PAS 41 reflects the view that the fair value of agricultural produce of the point of harvest can
always be measured reliably.

The fair volue measurement of agricultural produce stops at the point of harvest After that date
PAS 2 shall apply. This means that the inventory shall be memured of the lower of cost and net
realizable value.

The harvested product recorded by debifing inventory arid crediting gain from change in far
value of agricultural produce

Definition of Fair Value

For value & definest as the price that would be received to sell an asset in an ordetly
feansaction between market participants at the measurement date.

PFRS 13, paragraph 72, enumerates the fair value hierarchy or best evidence of fai valve as
follows

Level 1 Inputs are the quoted prices in an active market for identical assets

An active market is a market in which transactions for the asset or liability take place with
sufficient regularity and volume to provide pricing information on an ongoing basis

A principal market is the market with the greatest volume and level of activity for the asset or
liability.

2. Level 2 inputs are inputs that are observable either directly or indirectly.

Level 2 inputs include quoted prices for similar assets in an active market and quoted prices for
identical or similar assets in a market that is not active

3. Level 3 inputs are unobservable inputs for the assets.

Unobservable inputs are usually developed by the entity using the best available Information
trom the entity's own data.

Use of Estimate in Inventory Valuation

[Link] it necessary to know the approximate value of inventory when it is not possible to
take a physical count, or even if the physical count is posible the same may prove costly,
difficult or incorwenient at the moment.

There are two widely method accepted procedures for approximating the value of inventory,
namely the gross profit method and the retail inventory method.
the approximation or estimation of inventory is made for varled recsons, the most common
reasons for making an estimate of the cost of the goods on hand are

a. The inventory & destroyed by fire and other catastrophe, or theft of the merchandise has
occurred and the amount of inventory is required for insurance purpos

b. A physical count of the goods on hand is made and it is necessary to prove the corectness or
reasonableness of such count by making an estimate. this i known as the gross profit fost in the
accounting parlance.

c. Interim financial statements are prepared and a physical count of the goods on hand is not
necessary either because il may take time to do the same or because only on estimate thereof a
required to fairly present the financial positioni and performance of the entity.

Gross Profit Method

The gross profil method is often used to estimate the value of an inventory from accounting
records without taking physical count. This method is based on the assumption that the rate of
gross profit remains approximately the same from period to period and therefore the ratio of cost
of goods sold to net sales is relatively constant from period to besiod.

the bow fomus under the gross profit method is as follows:

GOODS AVAILABLE FOR SALE (GAS)

COST OF SALES

ENDING INVENTORY

Goods Available for Sale

The usual items affecting the goods available for sale include the following:

Beginning inventory

Purchases

Freight in

Xx
Total

Purchase returns, allowances and discounts

Goods Available for Sole

Cost of Sales

The gross profit method is so called because the cost et sole à compiled through the following
procedures the use of the gross profit rate. Thus, the cost of sales is computed by using any of

a. Net sales multiplied by cost ratio-This is used when the gross profit rate is based on sales.

b. Net sales divided by sales ratio- This is used when the gross profit rate is based on cost.

Net sales minus the amount of gross profit,

Allowance for Sales Discounts

customen are granted can discounts for prompt payment, then, conceptually stimates of cash
discounts on open accounts of the end of the period based on past experience shall be made.

To llustrate, assume that of the accounts receivable of P1,000,000 of the end if the period, it is
estimated that discounts to be taken will amount to P50.000, the adjustment isc

The l

Soles Discounts

P 50.000

P 50,000

Alowance for Sales Discounts

The above entry shall be reversed at the beginning of the next period in order that discounts
than be charged normally to sales discounts account.

Accounting for Bad Debts

Business entities sell on credit rather than only for cash to increase tatal sales and thereby
increase income. However, an entity that sells on credit assumes the risk that same customers
will not pay their accounts.
When an account becomes uncollectible, the entity has sustained a bad debt loss. this loss is
simply one of the costs of doing business on credil

Two methods are followed in accounting for bad debt loss, namely:

Allowance Method

2. Direct writeoff Method

Allowance Method

The allowance method requires recognition of a bad debt loss if the [Link] doubtful of
collection, the entry to recognize the doubtful accounts is:

Doubtful Accounts

Allowance for Doubtful Accounts

XX

The "allowance for doubtful accounts" is deduction from accounts receivable.

If the doubtful accounts are subsequently found to be worthless or uncollectible.

They are weltten off as follows:

Allowance for Doubtful Accounts

Accounts Receivable

XX

XX

Generally accepted accounting principles require the use of the allowance methog because it
conforms with the matching principle. Moreover, accounts receivable would be properly
measured af net realizable value.

Determination of Net Realizable Value

Inventories are usually written down to net realeable value on on item by ilem or Individual
basis.
is not appropriate to witte down Inventories based on a classification of Inventory for example,
finished goods of all inventories in a particular industry or geographicios regment

Mosemiats and offenles held of use in production are not written down below cout if the finished
products in which they will be incorporated are expected to be sod of or above cod

However, when a diectele in the price of materials indicates that the cost of the Ensbed
products exceeds net redilarable value, the materials are written down to net realzable value

in such circumstances the replacement cost of materials may be the best evidence of their not
realizace value

Accounting for Inventory Writedown

if the cost is lower than net realizable value, there is no accounting problem because the
inventory is stated of cost and the increase in value is not recognized

it the net realizoble valve is lower than cost, the inventory is measured of not realkrable value
this case the proper is the proper treatment of the writedown of the inventary to net roofitable
valve,

there are two methock of accounting for the inventory writedown, namely:

Direct Method or Cost of Goods Sold Method-The inventory is recorded at the lower of cost or
not realizable value. Any ipss on inventory writedown is not accounted separately but "burled" in
the cost of goods sold

2. Allowance Method or Loss Method-The inventory is recorded at cost and any loss an
inventory writedown is accounted separately.

In other words, under this method, a loss account "loss an inventory writedowri s debited and a
valuation account "allowance for inventory writedown is credited.

in subsequent years, this allowance account is adjusted upward or downward depending on the
difference between the cost and net realizable value of the Inventory al year-end.

# the required allowance increases, an additional loss is recognized. If the required allowance
decreases, a gain on reversal of inventory writedown is recorded. Hewever, the gain is limited
only to the extent of the allowance balonce

Preferably, the allowance method is used in order that the effects of writedown and reversal of
writedown can be clearly identified
As a matter of fact, PAS 2, paragraph 36, requires disclosure of the amount of any Inventory
wrifedown and the amount of any reversal of inventory writedown

sume further that the goods available for sale amount to P700.000 Following the grow profa
method the ending inventory is determined in lolovn

Goods available for sale

Cost of sales (see corobury example)

Ending inventory

Clearly there is no ending inventory. Now assume that there is a soles alowances of 100.000, If
such scores allowances is considered and therefore deducted from the sales of P1.000.000. the
computation is revised as follows:

Goods available for sole

#700.000

Cost of sales (net sales of P900.000 x 70%

400.000

Ending inventory

70.000

The above consulation ands an ending inventory simply because of the sales allowances is
coroidered. Such ending inventory is incomect because there is no actual inventory-in sales
attowances, there is no physical transfer of goods from the customer but a mere reduction in the
sales price

QUESTIONS

57. Fixptain the use of estimate in inventory valuation:

SE. What is the basic formula for the gross profit method

59. Explain the "nomal computation of cost of goods sold.

60. Why is the method called "gross profit method"

61 Explain the computation of cost of goods sold under the gross profit method.
62. What are the two kinds of gross profit rate?

63 Explain cost ratio and sales ratio in relation to the gross profit method.

What is the gross profit rate on cost it the gross profit rate is 25% on sales

65. What is the gross profit rate on sales if the gross profit rate is 66 2/3% on cost?

66. Explain the treatment of sales allowance and sales discounts in relation to the gross profit
method

Retail inventory Method

The retail inventory method is the other method of estimating the value of inventory

PAS-2, paragraph 22, provides that this method is often used in the retail industry for measuring
inventory of large number of rapidly changing items with similor margin for which it is
impracticable to use other costing method.

The retail inventory method is generally employed by department stores supermarkets and
other retail concerns where there B a wide variety of goods. This is so bec DAG Bunly track of
unit cost of all limes is difficult

The retail aventory method come to its name because the selling price orretoil price is tagged to
each item

The ferm Total simply means selling price.

Statement Presentation

Since ironiones re ocgiated for production, sose or consumption and потоlу орков Phely's need
for the curent operoling cycles

The inventories inat e pronted on one-the term in the statement of fescan pollion but the details
of the inventories shall be be declosed in the notes to financsi statements For infonica the note
shall disclose the composition of the inventories of a manufacturing company ca finished good,
goods in process, row materials and manufacturing sele

QUESTIONS

1. Delline invenitores

2. Explain the two classes of innentory.

3. What goods are includible in inventory

4. What is the exception to the legal test of determining inventory inclusion

Who the of the goods in tronell

Axon the wing term

b. FOB shipping Pant

c. Freight collec

d. Freight prepaid

7. What do you undenland by the shipping terms FAS, CIF, CF and Exship

8. What is consignment

9. Who is the owrier of goods on consignment

10. Explain the statement presentation of inveritories.

Accounting for Inventories

two systems are clled in accounting for inventories, namely periodic system and perpetual
system

The predodic systems calls for the physical counting of goods on hand of the end of the
uccounting period to determine quantities. The quantities are then multiplied by the
corresponding unit costs to get the inventory value for balance sheel purposes. This approach
gives actual or physical inventories.

The periodic inventory procedure is generally used when the individual inventory items furn over
rapidly and have small peso investment such that it may prove impractical or inconvenient to
record inventory inflow and outflow, such as groceries, hardware and auto parts

On the other hand, the perpetual system requires the maintenance of records called stock cards
that usually offer a running summary of the inventory inflow and outflow. Inventory increases
and decreases are reflected in the stock cards and the resulting balance represents the
inventory. This approach gives book or perpetual inventorias.
The perpetual inventory procedure is commonly used where the inventory items freated
individually represent a relatively large peso investment such as jewelry and cors. This
procedure is designed for control purposes.

Separating Bearer Plant from Agricultural Produce

Before amendment, the bearer plant and the agriculturat produce are considered to be one
single biological caset account presented as either cument or noncurent based on assel's

Aner amendment, the bearer plant and the agricultural produce are now reponed as two
separate csets with different measurement roodel.

Bearer plants caec presented as noncurent assets

Agnoultural producely presented as a cument asser unless it takes more than one year le
thofots

Paragraph SC further states that agricultural produce growing on bearer plant a classified as
biologicol asset.

Measurement-Immature Bearer Plants

Immature becarer plants are similar to an item of property, plant and equipment being
constructed belore the intended use

The IASB decided that bearer plants before maturity are measurer af accumulated cost in the
same manner as self-constructed item of properly, plant and equipment

Accumulated of cost ceassis when the bearer plants are in the location and condition necessary
for the intended use, meaning, the bearer plants already reach maturity

Beorel plontcomprovallying bisat under IAS 23 Borrowing cost. Specific and general bombwig
costs are capitalized in accordance with this standard.

Accumulating cost of an immature bearer plant is a new concept.

Entities should be able to track and capture cost incurred for bearer plants during the
prematurity stage

Measurement-Mature Bearer Plants

There is no specific guidance on when a bearer plant reaches maturity.

For example, a grape vine may take many years to produce the right quantity and quality of frull
for a good wine

Judgment à required and entities need an accounting policy to determine when the bearer
plants reach maturity,

Matute bearer plants are measured using either the cost model or the revaluation model The
policy adopted must be applied consistently.

The carving amount of bearer plants is depreciated on systematic basis over the nelul te

The useful life of bearer plants is the number of years bearing agricultural produce

The depreciation method shall reflect the pattem in which the future economic benefits from the
plant are expected to be consumed by the entity.

An example is the production method but the use of olner appropriate depreciation method such
as straight line is not prohibited.

HPO retall approach

me FB relal approche simior to the overtage cost opprocent in thot conte both net naarkup and
net markdown in aning of the good ovulative fore reful to serve as bass in computing the cost
ratio in fact there a no beginning eventory, the itiventory value would be the some under both
the average cal and NPO method

Shated Sfferently, a "cument cod rulo a determined every year considering the net purchases
during the year and without including the beginning Inventory

The FIFO approach is based on the assumption that markup and markdown apply to goods
purchased during the year and not to beginning inventory

The well the of bearer plank stickad be reviewed if lecitatech Sopкуни

At the end of each reporting period an entity should cerns it there is an indication that the beans
plant fiay be impaired by applying the requirement of IAS 36 impairment of as

impairment indicators requiring impairment test include:

a Drop in the market price of agricultural produce Notunt phenomena such as drought and Rood

Decne in paris causing decreases productivity

d. Labar conmans
Measurement of Agricultural Produce

a. Agacultural produce as it growes

Agricultural produce growing on bearer plant is measured of fair value les co of disposal with
changes recognized in profit or loss os the produce grows.

In other words, agricultural produce is measurect of the end of each reporting period pear to
harvest of for value less cost of daposal

b. Harvested produce

Harvested produce is measured at fair value Miss cost of disposal at the point of harvest

IAS 41 provides that the fair value of agricultural produce of the point of harvest can always be
measured reliably

The fair value less cost of disposal of the point of harvest is deemed cost of inventories on the
date IAS 2 Inventories is applied.

Bearer Animals

Bearer onirhols, like bearer plants, may be held solely for the produce that they bea

However, bearer animals have been explicitly excluded from the IASB amendment and will
continue to be accounted for under IAS 41

The reason is that the measurement model would become more complex if applies to bearer
animal.

In other words, bearer animals continue to be reported as biological assets.

Animal-Related Recreational Activities

Managing recre forat activities, for example, gome parks and zaos, is not agricultural activity

The reason is that there is no management of the transformation of the biological asset but
simply control of the number of animals.

The natural breeding that takes place is not a managed activity and is incident only to the main
activity of providing a recreational facility.
Accordingly, animals related to recreational activities shall be accounted for in accordance with
PAS 16. Property, Plant and Equipment,

Financial Statement Presentation

in the December 31, 2024 statement of financial position, the biological assets shall be
measurect at the fair value of P2.540.000 and classified as noncurrent asset and the 2024
income statemerit would show gain from change in fait value of P1,040,000 80000 All, and
P0,000 on December 311.

Price Change and Physical Change

Separating the change in fair value between the portion attributable to price change and the
portion attributable to physical change is encourage but not required by PAS 41.

The change in fair value of P1,040.000 can be separated into price change and physical change
as follows:

Fair value of 3 years old cow on December 31

Acquisition cost of 3 years old cowW

15,000

Price change

3.000

Fair value of 4 years old cow on December 31

24,000

Fair value of 3 years old cow on December 31

18,000

Physical chang

De of Racelvables

fuquets that impresent a contractual right to receive cash or

or monstaciones recevables ter called ant kode receivables and

nontinde wan

Brade metrobent cater to come alles brom sase of merchandise of vence 2 of buenas the usual
types are accounts receivable and notes

Accounts receivable are open accounts arsing hom the sale of goods and services the ordinary
course of business and those not supported by promissory notes. Other names of accounts
receivable are customers accounts trade debfon and

Protesi cee Those suppurten ny tomat promises to pdy in the form of notes

Moe receivables zemand come arising frogs sources other than the sale of in the ordinary
courve of bus

3 and other inicial institutions, receivables result primarily from loans lo The loans are made to
heterogeneous customers and the repayment 3 cre frequently linger of over several yean

Crasulication

Truce receivables which are expected to be realized in cast within the normal operating cycle or
one year, whichever is longer, are classified or current assets 4

Nonépce receivables which are expected to be realized in cash within one year, the length of
the operating cycle notwithstanding, are classified as current assets collectible beyond one
year, nontrade receivables are classified as noncurrent

Peckalicaliant one in accordance with the PAS 1. Presentation of Financial paragraph 66 which
states:

বাংলা চরে সেstity on rasel os cuttent when the entity expects to realize the easta so
or 20laume it in the entily's normal operating cycle, or when to recibe the catel
within twelve months after the reporting

Plasentation

trode receivables and nontrade receivables which are currently collectible shall be presented on
Thig face of the statement of financiat position as one line llem collett [Link] receivables

However, the details of the tolal trade and other receivables shall be disclosed in the

An excessive allesvance a Recorded on follows:

Allwines foi Doubtful Accouns Double Accounts

when the allowance & excesive, there a condly problem when the discrepancy more than the
debit balance in the doubtful accounts experme For Instance the amount of conection due to
excessive allowance z 130.000 and the doubtful accounts expense is a debil of 120.000,
following the above procedure will resul to a credit balance in the doubtheil accounts expense
account of P10.000 Such balance i obviousty abnormal

Delleved that in such a case, the P10,000 difference shall not be treated as a slur period emas
but inoded in the determination come of the current peeded. Thus, to record the foregoing
situation, the entry ic

Allowance for Doubtful Accounts

P 30,000

Doubtful Accounts

Miscellaneous Income

P 20,000

10.000

Debit Balance in Allowance account

a postel How? What does if indicate

The allowance for doubtful account normally has a credit balance. However in certain iratonces,
it may have a debil balance because it may be the policy of the entity to adjust the allowance of
the end of the period and record accounts written all during the year.

For instance, on January 1, the allowance account before adjustment has a credit balance of
130,000 and dusing the year an account of P50.000 is written off and fecordlect as follows

Allowance for Doubtful Accounts

P 50,000

P 50.000

Accounts Receivable

Thus on December 31. the allowance account has debit balance of P20,000 before adjustment

-
The dietat balance does not indicate that the allowance is inadequate because the accounts
written off during the year and charged to the allowance may have grisen hom current year
sales. Thus, the charge to the allowance account simply predates The recording of doubtful
accourts. At the anti of the period when adjustments are made, the debit balance should be
considered

to continue the example-if on December 31, the required allowance is P40,000-the adjustment
should be:

Doubtful Accounts

Allowance for Doublful Acsounts

P 60.000

P 60.000

Required Allowance

P 40.000

Add. Debil balance in allowance/

20.000

Doubtful accounts expense

60,000

Note that after the adjustment for the doubtful accounts, the allowance account hos credil
balance of P40,000, which is the required allowance.

Loan Receivable

A loan receivable is a financial asset arising from a loan granted by a bank or other Inancial
institution to a borrower or client

hom on

the tem of the loan may be short-term, but in most cases, the repayment periods

Initial Measurement of Loan Receivable

details

At initial recognition, an entity shall measure a loan receivable at fair value plus transactions
costs that are directly attributable to the acquisition of the financial asset.

The fair value of the loan receivable at initial recognition is normally the transaction price,
meaning, the amount of the loan granted.

Sales

fransactions costs that are drectly attribulable to the loan receivable include direct origination
costs.

Direct angination costs should be included in the initial measurement of the loan seceivable
However, indirect origination costs should be treated as outright expense

impairment of Loan

Page 25

PERS paragraph 5.5.1, provides that an entity shall recognize o kas alowance fo expected
credit losses on financial anet mecsured of amodzed cost.

Paragraph 5.3.3 provides that an entity shall measure the loss allowance for o nancial
instrument at an amount equal to the lifetime expected credit losses the credit risk on that
financial instrument has increased significantly since initial recognition

Credit losses are the present value of all cash shortfalls

Expected credit losses are an estimate of credit losies over the life of the financial instrument

PAS 39, paragraph 58, provides that an entity shall assess at every end of reporting lod whether
there is objective evidence that a financial asset or group of enonciar assets is impaired. If such
evidence exists, the entily shall determine and recognize the amount of any impairment loss.

Objective evidence of impairment may result from the following "loss events" occuming after the
initiat recognition of the financial asset

Significant financial difficulty of the issuer or obligor.

2. Breach of contract, such as default or delinquency in interest or principal payment,

inct
3. Debt restructuring-The lender, for economic or legal reasons relating to the borrower's
financial difficulty, grants to the borrower a concession that the lender would not otherwise
consider.

Co col clas

4. Probability that the borrower will enter bankruptcy or other financial reorganization.

5. The disappearance of an active market for the financial asset because of francial because of
financial difficulty

Custom

Observable data indicating that there is a measurable decrease in the estimated lulure cash
flows from a group of financial assets since the initial recognition of Those assets, although the
decrease cannot yet be identified with the individual financial assets in the group.

Datorr

These t the det

For exa balanc

Measurement of Impairment

detalb

PFRS 9, paragraph 5.2.2, provides that if there is evidence that an impairment loss on loan
receivable carried at amortized cost has been incurred, the amount of loss is measured as the
"difference between the carrying amount of loan and the present value of estimated future cash
flows discounted at the original effective rate of the loan."

Scales

The carrying amount of the loan receivable shall be reduced either directly or through the use of
an allowance account. The amount of the loss shall be recognized in profili or loss.

When the "percent of soles" methoct is used in compulling doubtheil accounts, proper matching
of cost against revenue à achieved. The à so because the bad debt kra Srectly related to saler
one reported the year of sole. Thus the method i income statement approach because if lovers
the income statement.
the man argument against this method is that the accounts receivable may not be shown al
estimated redilrable value because the allowance for doubtful accounts may prove excmsive or
inadequate

thus, it becomys necessary that from time to time the accounts be "aged to ascertain the
probabile loss and as a consequence of which the rate applied on soles should be revised
accordingly.

Mustration

The following accounts are gathered from ledigen

Accounts Receivable

P1.000.000

Allowance for Doubtful Accounts

20.000

Soskes

5,050.000

Sales Returris

50.000

If doubtfut accounts are estimated to be 1% of net sales, the doubtful accounts mpense is
P50.000 (1%xP5.000.000) and recorded as follows:

Doubtful Accounts

P 50.000

Allowance for Doubtful Accounts

P 50.000

this method is used, the resulting amount of the computation is already the amount of the
doubtful accounts expense and not the required allowance, in contradistinction with the aging
method and the percent of accounts receivable method. The allowance balance before
adjustment is ignored in determining the...
doubtful accounts expense to be recorded.

However, the allowance for doubtful accounts should have an adjusted balance of P70.000 the
beginning balance of P20.000 plus the adjustment of P50.000.

Correction in Allowance for Doubtful Accounts

As pointed out earlier, the percent of sales method of estimating doubtful accounts has the
disadvantage of the allowance for doubtful accounts balance being inadequate or excessive.
Aging the accounts is then necessary to test the rerasonableness of the allowance.

When the allowance is inadequate or excessive, a question arises as to the proper treatment of
the discrepancy, whether to consider it as an error or an ordinary income statement item.

The correction is to be reported in the income statement either as addition to or subtraction from
doubtful accounts expense. The reason is that the correction & the natural result of a change in
estimate. Changes investimate are freated currently anet prospectively, if necessary.

Accordingly, an inadequate allowance is adjusted as follανως:

Doubtful Accounts

Allowance for Doubtful Accounts

Accounting 1

Chapter S

Page 18

a statement of financial position is prepared on December 31. 2074, me c porios of the notes
recevable is classified on current case

Noler receivable-current portion

Lee Uneamed interest income

F100.000

Comming value or amolized value

15.000

meonecmaid rileret income

P50.000

Мосина у 2024

120.000)

Salance-Decombe 31. 2024

15,000

Ad

Recallable in 2025-cument portion

15,000

Jut

le beyond 2025-noncurrent portion (10.000-5.000)

Tofor

P30.000

the noncurrent porton of the notes receivable & classified as noncurrent assets.

Flötes teceivable-noncurent portion (2026 and 2027

Less: Uneamed interest income

P 200.000

15,000

Carrying value or amorfized amount

P185,000

Mustration 2-Noninterest Bearing Note

On January 1, 2024, on entity sells on equipment with a cost of P250.000 for P400,000. The
buyer pays a down of P100.000 and signs a noninterest bearing note for P30 povable in equni
annual insallinent of P100.000 every December 31.
BO CAOF

The prevailing interest rate for a nole of this type is 105. The present value of an erdinary
annuity of 1 for ttvee periods at 10% is 2.4869.

class

this case thit present value of the note is computed by multiplying the annual installment of
P100.000 by the present value factor of 2,4869 or P248.690

Accordingly, the unearned interest income and gain on sale of equipment are computed as
follows:

Custom

Face value of note

P 300.000

Present value of note 1100.000 x 2.4869) -

248.690

Onearedirileresi income

esox O

51310

hesent value of nale

P 248.690.

Cain received-down payment +

100.000

Soles price

P 348,690

Cost of equipment
250.000

Gain on sale cif equipment

P 98 690

De entries for 2024

to record the sale of equipment

Cash

P100,000

Notes Receivable

300.000

Equipment

P250,000

Unearned interest Income

51,310

Gan on Sale of Equipmerit

2. To record the first installment collection:

98,690

Cash

100.000

6. Adjustment of ending inventory.

As a rule, the ending merchandise inventory is not adjusted. The balance of the merchandise
Inventory account represents the ending inverifory.

in this case, the merchandise inventory account has the debit balance of P65.000
However, if at the end of the accounting period, a physical count indicates a different amount.
gn adjustment is necessary to recognize any inventory shortage or averag

For instance, in the physical count shows inventory on hand of P55.000, the following
adjustment a necemory

Inventory Shortage

Merchandise liwentory (65.000-55,000

P10.000

P 10.000

The inventory shortage i usually closed to cost of goods sold because this is often the result of
normal thrinkage and breakage in inventory. However, abnormal ged materies shortage shall be
separately classified and presented as other expense
Amendment for Bearer Plants

Pior to the IASB omenament bearer pionts are considered biological stets included within the
scope of AS 41 and meatured of fair value less cost of disposts

The IASB decided that bearer plants should now be accounted for in the same way as property,
plant and equipment in AS is because the operation of bedrer plants similar to that of
manulacturing

Bearer plants are used solely to grow agricultural produce over several periods

At the end of their productive life, the bearer plarits are usually scrapped

Once a bearer plant is mature, apart from bearing produce, the biological transformation is no
longer significant in generating future economic benefit:

The only significant future economic benefit it generates comes from the agriculturos produce it
creates

Agricultural Produce Growing on Bearer Plants

The agricultural produce growing on bearer plants remains within the scope of IAS 41

In other words, the agricultural produce as it grows is measured at the end of each reporting
period prior to harvest at fair value less cost of disposal

The agricultural produce growing on bearer plant classified as biological asset.

Once harvested, the agricultural produce is measured at fair value less cast of disposal at the
point of harvest.

The fair value less cost of disposal at the point of harvest is the deemed cost of inventory.

Definition of Bearer Plant

A Dearer plant in ia iving plant thal:

aused in the production or supply of agricultural produce.

bis expected to bear produce for more than one period.

c. Has a remote likelihood of being sold as agricultural produce, except for incidental scrap
sales.

In other words, a bearer plant is a living plant that is used solely to grow agricultural produce
over the productive life.

At the end of productive life, the bearer plant is usually scrapped.

A bearer plant that no longer bears produce is commonly cut down and sold as scrap of the end
of the productive life.

The incidental scrap sales would not prevent the plant from being a bearer plant

Sales Allowances and Sales Discounts

Sales allowances and sales discounts are ignored that is not deducted from so The reason is
that while these items decrease the amount of sales, they do not affect the physical volume of
goods sold. Sales attowances and sales discount do not increater the physical enveritory of
goods, unlike sales retums where there is an actuos adiation to goods on hand.

To deduct sores alowances and sales discounts from soles would result to overstatement of
inventory with a consequent understatement of cost of goods sold and aventatement of penfit

why owerstate inventory when there is no addition to physical inventory created thy Oh
akwances and antes discounth

For instance asume that in the preceding illustration, the sales discounts and sales allowances
are deducted from sales, the computation would be:

Goods Available for Sale

Cost of Sales

P3,150,000

Salins

P3.100,000

Sales returns

P 100.000

Sales allowances

50.000

Sales discounts

150.000

1300.0001

Net Sales

P2.800.000

Multiply by cost ratio

15%

Eriding Inventory

L.2.100.0001

P1050,000

Note that the inventory computed, where sales allowances and sales discounts are considered,
is higher that where the same items are divegarded Kindly reler To previous computation.

Where the account saks retums and allowances with no detalls, the same should bo deducted
from sales

As a corollary example assume the following:

Scies

P1,000,000

Accounting for Freight Charge

Sometimes, goods are sold "FOB destination" bul shipped "freight collect with the understanding
that the buyer will pay for the freight charge and deduct the same when remiffonice la made by
him. On the part of the soffer, the freight charge recorded by debiling freight out and crediting
otowance for freight charge

To illustrate, assume that an entily has a 100,000 accounts receivable at the end of accounting
period. The terms of the account are 2/10 n/30. FOB destination and Weight collect. The
customer paid freight charge of P5.000.

1. To record the sole

Account Receivable

P100.000

Freight out

5.000

Allowance for Freight Charge

P 5,000

Sales

100.000

2. To record the collection within the discount period.

Cath

P93,000

Allowance for Freight Charge

5,000
Sales Discounts

2.000

Accounts Receivable

P100.000

Alowance for Sales Retums

The measurement of accounts receivable shall also recognize the probability that some
customers will retum goods that are unsatisfactory or will make other claims requiring reduction
in the amount due as in the case of shipment shortages and defects

To ilustrate, assume that of the total accounts receivable at the end of the period. P50.000
represents selling price of goods that will be reluined. The entry to recognize

Soken Relums

Alowance for Sales Refums

P 50.000

P 50,000

The above adjustment is usually reversed of the beginning of the nexLaccounting perlot so that
sales returms may be recorded in the usual manner.

Sales Discounts

Enillies usually offer cash discounts to credit customers. A cash discount is a reduction from an
invoice price by reason of prompt payment. A cash discount is known os sotes discounts on the
part of the seller and a purchase discounts on the part of the buyer.

A cash discount may be expressed in such terms as 5/10, n/30. This means that the customer is
entitled to a 5% discount if payment is made in 10 days from the invoice date. It the custorner
fails to pay within 10-day discount period, he must pay the gross camount of the Invoice within
30 days from the invoice date

Doubtful Accounts in the Income Statement

Distibution cost
the granting of credit and collection of accounts are under the charge of the we monogen
doubtful accounts shall be considered distribution cost

Aomsinesitative sapere.

the granting of credit and collection of accounts are under the charge of the officer other than
the sales manager, doubitful accounts shall be considered administrative expense.

In the absence of any contrary staternent, doubtful accounts shall be classified os

aciministrative expense

Notes Receivable

Notes Receivable are claims supported by formal promises to pay usually in the form of notes

Anegotiable promissner rate is an unconditional promise in witting made by one Pasen to

another signed by the maker, engaging to pay on demand or of a fixed Geterminatite zulure line
a sum certain in money to order or to bearer

Simply stated, a promissory note it a written contrackin which one person, known as the maker,
promises to play another person, known as the payée, a definite surn of

The noto may be payable on demand or at ardefinite future date.

Standing alone, the term "notes receivable" represents only claims arising from sale of
merchandise or service in the ordinary course of business.

Thus, notes received from officen, employees, shareholders and affiliates shall be designated
separately.

Dishonored Notes

18+

When a promissory note matures and is not paid, it is said to be dishonored.

Theoretically, dishonored notes shall be removed from the notes receivable account and
transferred to accounts receivable at an amount to include, if any, interest and other charges,
The entry to record dishonored notes is as follows:

Accounts Receivable

Notes Receivable
Interest Income

XX XX

The above approach is defended on the ground that the overdte note has lost part of its status
as a negotiable instrument and really represents only an ordinary claim against the maker.

Initial Measurement of Notes Receivable

Conceptucilly, noltes receivable shall be measured inilicily of present value. The present value
is the sum of all future cash flows discounted using the prevalling market rate of interest for
similar notes. The prevailing market rate of interest is actually the effective interest rate

However, short-term notes receivable are measured at face value, Cash flows relating to short-
tom notes receivable are not discounted because the effect of decounting is usually not material

The initial measurement of long-term notes will depend on whether the notes are ndwest-
bearing or ngrinterest-bearing.

Interest beating long-term notes are measured af face value which is actually the present value
upon issuance

Noninterest-bearing long-term notes are measured at present value which is the aliscounted
value of the future cash flows using the effective vifèrest rate.

Actually, the term "noninterest-bearing" is a misnomer because all notes implicitly contain
interest, is simply a case of the "interest being included in the face value" rather than being
stated as a separate rate.

Subsequent Measurement

Suqsequent to initial recognition, long-term notes receivable shall be measured at amortized

cost using the effective interest method.

The amortized cost measurement is in accordance with PFRS 9, paragraph 5:2.1.

The armadlavor cost is the amount of which the receivable is measured initially meu pincipal
repayment, plurteminin the cum Active amortization of any difference between the initial carrying
amount and the principal maturity amoun minus the reduction for impairment or uncollectibility.

for long-term noninterest-bearing notes receivable, the amortized cost is the present value plus
amortization of the discount, or the face value minus the unamortized uneomedianterest income
Accordingly, only long-term notes receivable will be discussed in conjunction with the present
valve concept under the following situations:

a. Interest bearing note

b. Noninterest bearing note

Elin

Accordingly. If the market price mes by the fime the entity Hickey the portione gan empachave
comstment would be recorded. However the amount of gam De recognized is limited to the loss
on purchase commitment previously recorded.

mus, the preceding example, if the replacement cost of the purchove comment 1800Dle when
the actual purchase is made, the entry to record the

Purchoves

Estimated lobilly for purchase commsenent

SOUDOD

Accounts Payable

55000

500.000

Gan on pencьсие соп

50.000

We gon to purchase comment is classified on other co

hit coll of the purchase comstment is P480.000 when the actuc purchase & mote the enwy
forecord the actual punctioje is

Purchaus

450.000

Estimated liability for purchase commitment

50.000
Accounts Payable

500.000

Goin on purchase commitment

30.000

the purchase a recorded at 480.000 only because the replacement cost is lower than the
purchase commitment of P500,000

The gain on purchase commitment is the increase in market price from P450.000 at year end to
P480.000 on the date of actual purchase

Disclosure

With respect to inventorm, the Snancial statements shall disclose the following:

The accounting policies adopted in mecsuring inventories, including the cost formula meld

The total corrying amount of inventories and the carving amount of classificatiom appropriate to
the entity Common classifications of inventores are merchandise, production supplies, goods in
process and finished goods

c. The carrying amount of inventories carried at fair value less cost to sell

d. The amount of inventories recognized as an expense during the period.

e. The amount of any writedown of inventories recognized as an expense during the period

1. The amount of reversal of weltedown that is recognized as income.

The circumstances or events that led to reversal of a writedown of inventories.

b. The carrying amount of inventories pledged os security for liabilities.

Agricultural, Forest and Mineral Products

PAS 2. porograph 4, provides that inventory of agricultural, forest and mineral products are
measured of net realizable value at certain stages of production.
Accordingly, agricultural crops have been harvested or mineral products have been extracted
are measured at net realizable value when sale is assured under a forward or a dovemment
quarantee, or when a homogenous market exists orid there is a negligible nok of failure to sell

Accounts Receivable

Accounts recewable om open accounts arising from sale of merchandise or services in the
ordinary course of busineit

Again, accounts receivable shall be measured initially of face valye or original voice amoune,

However, subsequently the accounts receivable shall be measured of amortized co the

amortized cost is actually the net realitatsle value, meaning the amount of cash expected to be
collected or the estimated recoverable amount.

The term "amorfized cast has more relevarice in long term receivable.

Thus, the term "het realizable value is preferitily used in relation to accounts receivable

the initial amount necognized for accounts receivable shall be reduced by custment whether
treinory course of business will reduce the amount recoverable from the customes

This is based on the established basic principle that assets shall not be commed at above their
recoverable amount

Overall Topnoton Glass topnotcher No.

Accordingly, in estimating the net realzabile value of trade accounts receivable, te following
deductions are mode

Allowance for freight charge

o. Allowance for sales retums

Allowance for sales discounts

d. Allowance for doubtful accounts

‫عمان‬

SPDF

Terms Related to Freight Charge

In order to give proper accounting recognition to freight charge in selation to accounts
receivable, the following terms should be understood-FOB destination FOR shipping point,
freight collect and freight prepaid.

farm FOB destination means that ownership of the goods purchased is vested in the buver upon
recept thereof. Accordingly, the seller shall be responsible for the ght charge up to the point of
destination.

The term "FOB shipping point means that ownership of the goods purchased is vested in the
buyer upon shipment thereof. Thus, if à incumbent upon the buyer to pray for the transportation
charge from the point of shipment to the point of destination

The term "freight collect means that freight charge on the goods shipped is not vet gaid the
common commer shall collect the same from the buyer. Thus, under this. ine freight charge is
actually paid by the buyer.

The term "freight prepaid means that freight charge on the goods shipped

CHAPTER 6 RECEIVABLE FINANCING

Concept of Receivable Financing

money out of its receivables. Receivabile financing is the financial flexibilty or capability of an
entity to rose

During a general-business decine, an entity may find itself in fight cash position because soles
decrease and customers are not paying their accounts on time. But Randing is not to suffer The
entity's current accounts and noles payable mull continue to be poids cad

The entity then would be in a financial distress os colections of [Link] delayed but cash
payments for gbligations must be montained under these circumstances, if the situation
becomes critical, the entity may be forcedite logs for cash by financing its receivables. The most
common toms of receivable financing

Pledge of accounts receivable

A Assignment of accounts receivable

Discounting of notes receivable

Factoring of accounts receivable

Pledge of Accounts Receivable

when loans are obtained from the bank or any lending institution, the accounts Receivabile may
be pledged as collateral security for the payment of the loan. Normally the borrowing enlily
makes the collections of the pledged accounts but may be required to lum over the collections
to the bank in satisfaction for the foon

No complex problems one involved in this form of financing except the accounting, for the loan.
The loan is recorded by debiting cash and discount on notes payable i decooled and crediting
notes payable. The subsequent payment of the onecorded by debiting notes payable and
crediting cash

Mustration:

With respect to the pledged accounts, no entry would be necessary. It is sufficient that
declosure thereof is made in a note fo financial statement.

On November 1, 2024, an entity borrowed P1,000,000 from Philippine National Bank and asued
a promissory note for the same. The term of the loan is one year and discounted of 12%, the
entity pledged accounts receivable of P2,000,000 to secure

the loan

On November 1, 2024, the entry' to record the loan is:

Discount on Notes Pavabile Notes Payable-bank

P880,000

120.000-

P1,000.000

the loan is discounted, in the banking parlance this means that the interest for the term of the
loan is deducted in advance.

Face value of loan

Interest deducted in advance (1.000.000 x 12%)

Nel proceeds

P1,000,000
120.000) P880.0XX

Freight terms

Freight collect the means that the freight charge on the goode shipped paid the commen camer
shall collect the some from the buyer Tha under thi The freight change & actually paid by the
buyes

Fright prepara-The means that the freight charge on the goods shippett a dready paid by the ser

The tore FOB Destination and FC Shipping Point determine ownership of the goods in transit
and the party who is supposed to pay the freight charge and other egorisos from the point of
shipment to the point of destination

The terms "freight collect" and "height prepaid" determine the party who actually paid the freight
charge but not the party who is supposed to legally pay the freignt change.

Maritime Shipping Terms

FAS or free alongside softer who ships FAS muat bear all expremes and nix ενώνε in delivering
the goods to the dock next to or alongside the vestel which the goods are to be shipped the
bever bean the cost of loading and shipment and thus the pasen to the buyer when the conler
takes possession of the goods.

CIF or Cott, insurance and freight-under is shipping contract, the buyer agrees to pay in a lump
sums the cost of the goods, insurance cost and freight charge. The shipping contact may be
modified as Cf which means that the buyer agrees to pay in a lump sum the cost of the goods
and freight charge only.

In either case, the seller must pay for the cost of loading, thus. We and risk of loss thall poss to
the buyer upon delivery of the goods to the camer

Ex-ship-A soller who delivers the goods ex-ship bears all expenses and risk of loss until the
goods are unloaded of which time title and risk of loss shall pass to the buyer.

Consigned Goods

A consignmeofia method of marketing goods in which the owner collighe consignor tramfen
physical possession of certain goods to an agent collect the

sne who sell them on the owner's behalf.

Gansigned goods shall be included in the consignor's inventory and excluded from ban
corsignee's inventory

Freight and other handling charges on the goods out on consigriment are part of the cost of
[Link]

When consigned goods are sold by the consignee a report is made to the consigno together
with a cash remittance for the amount of sales minus commission and other expenses
chargeable to the consignor.

For instance, a consignee seils consigned goods for P100,000. This amount is remitted to the
consignor less commission of P15,000 and advertising of P2.000.

The consignor simply recorded the cash remittance from the consignee as follows

Cosh

Commission

Advertising

P 83,000

15.000

2.000

P100,000

Hncidentally, consigned goods are recorded by the consignor by means of a memorandum

entry. Thus, it may be necessary for the consignor to maintain subidiary ledger for vondus
consignee.

Weighted Average-Perpetual

When Land in creinction with the perpetual system, the weighted average method popularly
know the moving average method. This is in accordance with the Mandarts that the weighted
average may be calculated on a periodic basis or as each oder received depending upon the
clicumstances of the ty

Under this roethod, a new weighted average unit cost must be computed offer every purchase
Thus the total cost of goods available after every purchase is divided by the total units available
for sale of this time to get a new weighted overage tint coal ch new weighted average une cost
is then multiplied by the units on hand to get the inventory coat.
This method requires the keeping of inventory stock in order to monitor the "moving" unit cost
offer every purchase.

January

Bolonce

8 Sole

Balance

18 furchione

22 Sok

Botanice

31 Purchase

Total

Units

800

5001

200

300

200

LBO

207

200

500

Unil Cost
Total Cost

200

1100.0001

200

P40.000

210

147.000

1,000

207

207.000

207

164.6001

220

41.400

700

216

P151.400

Closerve that a new weighted average unit cost is computed after every purchase. Thus, offer
January 18 purchase, the total cost of P207,000 is divided by 1.000 units to gel a weighted
average unit cost of P207. After the January 31 purchase the total Cost of P151, 400 is divided
by 700 units to get a new weighted average unit cost of P216

The cost of goods sold is determined from the stock card as follows:

January & Sole

22 Sole
P100.000

165,600

Cost of Goodt 50

Cammelfies of den

free ore princizioły nowed with the ре ture and generating is poffe fuctuationer price

QUESTIONS

18 може по of LCNRY oppiled to inwendary

27. Expron the nocounting for inventory welledown

28. Explan the wo methods of accounting for vendory willedown.

29. What one puectiose commitments

30. Wieri la 100 con purchase commitments recognisedi

31. When & again on porchose commitments recogrundt

32. What are the necessary disclosures with respect to inventory

31 Depon the tent of the following

Agecullovent and mineol products of certain stages of production Commocities of broker-troder

Biological Assets

PAS 41-Agriculture

PAS 41 shall beer applied to account for the following when they relate to agricultud activity

a Biological assets

b. Agricultural produce

Government granit related to a biological asset

Note that PAS 41 is applied to agricultural produce at the point of harvest Thererater, PAS on
inventories shod be appled

PAS 41 dowment with the processing of agricultural produce after harvest for вкотрие, thе
росening of grapes into wine is covered by PAS 2.

Intercorporate Share Investment

Arintercorp-ata shore esimerick the purchase of the equity secullest one entity tay dnother antity
In other words, it is the case of one entity westinn in another antify through the sequstion of
share capitol

Most intercorporate investments are acquired sirripily as means of accnang reg income in the
form of dividend and investment appreciation these investments do not give the investor entity
an ability to influence or control the operations of the nvestee entity

However, in cedan circumstances, an entity may purchase enough shares of anather enlily in
order to exert significant influence or control over the financial and operating policies of the
investee entity.

Definitions

Significant influence is the power to participate in the financialand optrallisa col decisions of the
investee bulat control or joint control over poipet.

Control is the how to govem the financial and operating policies of an entity so as to obtain
benefits from its activities.

Associate is an entity, including ahsumincorporated entity such appartientlig over which the
investo has significant influence and that is neuter a subsidiary nor an Interest in a joint ventur

Subsidiary is 3 entityMetoding anaumicopatatudentity such as partnership that controlled by

another entity known as the parent

Significant Influence

The assessment of significant influence is a matter of judgment. However, PAS 28. paragraph
5, provides a practical guidance to assist management in making such assessment.
It the investor holds directly or indirectly through subsidiaries 20% or more of the voting power
of the investere it is presumed that the investor has significant Influence, unless it can be clearly
demonstrated that this is not the casey

3.

Conversely. If the investor holds, directly or indirectly Through subsidiaries less than 20% of the
voting power of the Investee is presumed that the investor does not have significant influence,
unless such influence can be clearly demonstrated?

A substantial or majority ownership by another investor does not necessarily preclude an

investor from having significant influence.

Beyond the mere 20% threshold of ownership, the existence of significant influence by an
investor is usually evidenced in one or more of the following factors

a. Representation in the board of cliractors.

b. Participation in policy making process.

4.

c. Maletial transactions between the investor and the invester

d. Interchange of managerial personnelv

e. Provision of essential technical information.y

The accounting Mue à how to elemente the urrentred proff from www Hamactors

Unfortunately, PAS 28 она пот ответ в спиноделни доклонсe оn thе pоcowite

Up to the writing the sue is stil the subject of a discusion paper for on Interpretation

is believed that adation of the investor's share in the prot. of the wate and the joumal entries are
exactly the same whether upstream or [Link]

The pont & that the urvealized profit must be eliminated in determining the investor's share in
the profit or loss of the associate.

There is no good argument for this approach apart from simplicity and the economi retationship
of the investor and the associate viewed as a "single economic entity

Sale of inventory from investor to Associate

Assume the some details in the preceding illustration, except that it is the inwestor that sells
inventory to the associale. The computations of the investor share th profit of the associate and
the journal entries are exactly the same. The tow of the fransaction, whether upstream or
downstream, does not affect the accounting for the transaction.

20

The point is that the unrealized profit must be eliminated in determining the investor's share in
the profit or lost of me associate.

The investor's share in the profit of the associate is adjusted even if the profit is made by the
investor and the profit of the associate is unaffected by the transaction.

This seems to be illogical but it is the "prescription" of Paragraph 28 of PAS 28. The only
plausible explanation is the economic relationship of the investor and the associate viewed as a
"single economic entity".

Sale of Depreciable Asset

On January 1, 2024, an investor acquired 20% interest in an associate. During the year, the
investee sold an equipment with carrying amount of P4,500.000 to the investor for P7,000,000.
The equipment has a remaining useful lite of five years. The investee reported net income of
P6.000.000 for 2024. Ignoring income tax the Investor's share in the profit of the associate in
2024 is determined as follows:

P6,000,000

Net income for 2024

Unrealized profit on sale of equipment

Realized profit on sale of equipment (2,500,000/5 years)

Adjusted net income

Investor's share (20% x 4.000.000)

Sale price of equipment

Carrying amount

Unrealized profit on sale of equipment

(2.500.000)

P4,000,000

P 800.000

P7,000,000

14.500.000)

Note that the profit on sale of the equipment is unrealized because the equipment is not sold to
an unrelated party.

P2.500.000

The profit on the sale of equipment is realized as the asset is used. The realized profit is
measured by the depreciation of the asset. Thus, as the equipment is depreciated on a straight
line basis over the 5-year period, one-fitth of the profit is also realized each year. After a 5-year
period, the whole of the profil 's realized.

Measurement at Amortized Cost

PFRS 9, paragraph 4.1.2 proveches that a financial onset shall be measured al amortized cost if
both of the following conditions are met

a. The business model is to hold the financial osselin order to collect contactus Cash Bows on
specified agles

6. The contractual cash flows are solely payments of principal and intersanton principal amount
outstanding.

In other words, the business model is to collect contractual cash flows if the contractual cash
flows are solely payments of principal and interest in such a cove the financial asset shall be
measured at amortized cost.

Examples of financial assets of amortized cost are investments in bonds and other debt
instruments.

Financial assets at amortized cast are classified as noncurrent assets.

PFRS 9. paragraph 4.1.4, provides that by residual definition or by default, financial assets that
do not meet the conditions for amortized cost measurement shall be measured at fair value.

What is a Bond?
1

"A bond is a formal unconditional promise made under seal to pay a specified sum of money of
a determinable future date, and to make periodic interest payments at a stated rate until the
principal sumis paid".

In simple language, a band is a contract of debt whereby one party called the issuer borrows
fund from another party catted the investor. Thus, a bond is a debt security because the
bondholder is a creditor and the issuer is a debtor.

A bond is evidenced by a certificate and the contractual agreement between the issuer and
investor is contained in another document known as "bond indenture

A bond is issued in small denomination of P100, P1,000 or P10,000 to enable more investors to
purchase the bond issue.

For instance, a P50,000,000 bond issue may be issued in denomination of P1.000. Thus, there
shall 50.000 bonds with face of P1,000 each,

An investor acquires a bond as a temporary or permanent investment and derives regular

income in the form of interest. The interest is usually paid semiannually or every six months as
follows:

a. January 1 and July 1

b. February 1 and August 1

c. March I and September 1

d. April 1 and October I

e. May I and November

1. June I and December I

Of course, there are certain bonds that pay interest annually or at the end of the bond year.
Amortization of Premium or Discount

The standard requires that investment in bonds shall be measured subsequently of amortized
cost. Thires that investment in bonds of discount on the ar quisition of lang Term investment in
bonds must be amortized.
Defini

Borid premium or discount is amortized over the life of the bonds. On the part of the bondholder,
the life of the bonds is from the date of acquisition to the date of maturity.

Ther

Amortization is done through the interest income account, the proforma entry for the
amortization is:

a. Amortization of bond discount:

Investment in bonos Interest income

b. Amortization of bond premium:

Interest income Investment in bonds

Amortization may be made an interest dates or at the end of the accounting period If
amortization is made on every interest date, it would still be necessary to record amortization at
the end of the period should there be accrued interest. Egr this reason, it is more convenient to
record the amortization at the end of the accounting period. Unless otherwise indicated, in
succeeding illustrations. amortization is made at the end of the accounting period.

Philosophy on Amortization

The reason for amortization of bond premium or discount is to bring the investment balance to
face value on the date of maturity so that when the bonds are redeemed on the date of maturity,
the entry will simply be a debit to cash and a credit to investment in bonds of face value

The bondholder is a creditor and will collect on the date of maturity an amount equal only to the
face value of the bonds no more and no less. Accordingly, bond premium is a loss on the part of
the bondholder because he paid more than what he can collect on the date of maturity. Such
loss is not recognized outright bul allocated over the life of the bonds to be offset against the
interest income to be derived from the bond investment.

On the other hand, bond discount is a gain on the part of the bondholder because he paid less
than what he will collect on the date of maturity. Such gain is not recognized outright but
allocated over the life of the bonds to be added to the interest income derived from the bond
investment.

Such process of allocating the bond premium as deduction from the interest income and the
bond discount as addition to interest income is what is traditionally called amortization.

Ustration 1-On Interest Dote

What is the purchase price of the bonds if they were purchased on January 1, 2025 assuming
the following datall

Face value of the tionds

P3.000.000

Date of issue of borids

January 1, 2025

6%

Nominal rate

ef

June 30 and December 31

Effective rate

Semiannual interest

December 31, 2026

Date of maturity

Solution

1. Find the present value of an ordinary annuity of I for 4 interest periods (2 years). using the
semiannual effective rate of 3% per interest period. The present value factor of an ordinary
annuity of 1 for 4 periods at 3% is 3.7171.

2. Semiannual nominal rate times face value (4% x 3.000.000)

P 120,000
Semiannual effective rate times face value (3% x 3.000.000)

90,000

Difference

P 30,000

3. 3.7171 times P30.000 equals P111.513. This amount is a premium because the effective rate
is lower than the nominal rate.

4. Purchase price = P3,000,000 plus P111,513 or P3,111,513.

Another approach

The market price of bonds is equal to the present value of the principal plus the present value of
future interest payments using the effective rate. The following present value factors are
necessary:

PV of an ordinary annuity of 1 at 3% for four periods

3.7171

PV of I at 3% for four periods

0.8885

Accordingly, the market price of the bonds is computed as follows:

PV of principal (3,000,000 x 0.8885)

P2,665,500

PV of future interest payments (120,000 x 3.7171)

446.052

Total market price

P3,111,542

There is a difference of P29 between P3,111,542 and P3,111,513 due to rounding of present
value factors.
4 All debt investments that do not satisfy the requirement for measurement of omorfized cost
and of fair value through other comprehensive income

These financial assets are measured at fair value through profit or loss by default" in
accordance with PERS 9. paragraph 4.14

Financial Assel Held for Trading

Appendix A of PFRS 9 provides that a financiat asset is held as trading i

atis acquired principally for the purposes of selling or repurchasing it in the near tem

b. On Initial recognition, it is part of a portfolio of identified financial assets that are managed
together and for which there is evidence. al.a recent actual pallem of short-term profit taking

cit is a derivative, except for a derivative that is a financial guarantee contract or a designated
and an effective hedging instrument.

In other words, trading securities are debt and equity securities that are purchased with the
intent of selling them in the "near term or very soon. These securities are generally purchased
and sold in the exchange market to generate short-term gains or profits Trading securities are
classified as current assets.

An example is a stock broker that holds an "inventory of securities for sale to its customers shall
classify them as trading-securities

Another example is a bank that holds securities for active and frequent buying and selling in
order to generate profits of short-term differences in price also shall classify them as frading
securities.

Equity Investment at Fair Value through OCI

At initial recognition, PFRS 9. paragraph 5.7.5. provides that an entity may make ag irrevocable
election to present in other comprehensive income or OCI subsequent changes in fair value of
an Investment in equity Instrument is not held for trading.

This irrevocable approach is designed to impose discipline in accounting for nontrading equity
investment.

The amount recognized in other comprehensive income is not reclassified to [Link] loss under
any circumstances

However, on derecognition, the amount may be transferred to equity or retained. earnings.

If the investment in equity instrument is "held for trading", the election to present gain or loss in
other comprehensive income is not allowed.

If the investment in equity instrument is held for trading. subsequent changes in fair. value are
always included in profit or loss.

Cash Dividend from Preacquisition Retained Earnings

21

There is no longer a distinction between preacquesillion dividends and postacquion dividends,

in applying the cost mallon, gividends receivea from an investor recognized on dividend ncome,
regardless of whether the dividends originated from preacqusition retained eamings or
postacquisition retained eamings.

Illustration-Cost Method

1. On January 1, 2024, XYZ Company purchased 10.000 shares of the 100.000 ordinary shares
of ABC Company at P200 per share. The investment a unquoted and represents a 10% equity
interest.

Investment in Equity Securities

P2.000.000

P2.000.000

Cash

2. ABC Company reported net income of P5.000.000 for 2024.

No entry is required. The investor does not recognize o share in the net income of The investee.

3. XYZ Company received a 20% stock dividend from ABC Company on December 31.2024.

Memo-Received 2.000 ordinary shares from ABC Company as a result of stock dividends on
10,000 original shares held. Shares now held.

12.000.

4. ABC Company reported a net loss of P1,000,000 for 2025.

Again, no entry is required. The investor does not share in the net loss of the investee.
5. ABC Company declared and paid a cash dividend of P2,000,000 to ordinary shareholders on
December 31, 2025.

Cash (10% x 2.000.000)

200.000

Dividend Income

200.000

6. XYZ Company sold 3.000 ordinary shares of ABC Company at P250 per share on December
31, 2025.

Cash

Investment in Equity Securities

750.000

500.000

Gain on Sale of investment

250.000

Sales price (3.000 x P250)

P 750.000

Less: Cost of shares sold (3.000/12,000 x 2.000.000)

500.000

Gain on sale of investment

Excess of Cost Over Carrying Amount

An accounting problem antes the investor povi more or less for an investment than the crying
amount of undertying net aneh
For instance, if the eaming potential of the investee is abinormally high, the current value of the
investee's net cases a frequently higher than ther complig omend

If the inventor pays more than the book value of the net quets acaqd the difference a commonly
known as "excess of cost over book value" This excess may be afhibuted to the following

a. Undervaluation of the investee's assets, such as building, land and Inventory

D. Goodwill

In practice, it is often difficult to determine which specific identifiable ogs undervalued

if the assets of the investee are foiny valued, gocountants frequently attribule the excess of cost
over book value of the underlying net assets to goodwill

If the excess is atributable to undervaluation of depreciable asset, it is amortized over the

remaining life of the depreciable asset

If the excess is attributable to undervaluation of land, it is not amortized because the land is
nondepreciable. The amount & expensed when the land is sold.

If the excess is aftributable to Inventory, the amount is expensed when the inventory is already
sold.

If the excess is attributable to goodwill, it is included in the carrying amount of the Investment
and not amortized

However, the entire investment in associate including the goodwill is tested for impairment at
the end of each reporting period.

Illustration: On January I of the current year, an investor purchased 20% of the outstanding
ordinary shares of an investee for P5.000.000. The net assels of the investee on the date of
acquisition are fairly valued except for a depreciable asset for which the fair value is P.000.000
greater than its carrying omount. Anywemoining excess is attritiutable to goodwill.

The book value of the investee's shareholders' equity was P20,000,000, the investor therefore
paid P1,000,000 in excess of the book of net assets, computed as follows:

Acquisition cost

Less: Book value of interest acquired:

Shareholders' equily of investee

Excess of cost over book value

Mulliply by interest acquired

The excess is attributable to the following:

P5.000.000

20% 4.000.000 P1,000,000

stments ve mont

Undervaluation of depreciable asset of investee with remaining lite of five years (20% x
2.000.000) Goodwill-remairider

400,000

P 600.000 P1.000.000

The entry to amortize ine "excess of cost attributable to the undervaluation of depreciable asset
is as follows:

Investment Income

P80.000

Investmerit in associate (400.000/5 yean

P80.000

when depreciable and intangible assets of the invedee ore undervalu depreciation and
amortization are naturally undentated resulting to overstatement of the investee's net income.
Thus, the investor should decrease investment income.

Again, the "excess of cost atributable to goodwill is not amortized. The goodwillis included in the
carrying amount of the investment in associate.

Excess of Net Fair Value Over Cost

As amenciad. PAS 28. paragraph 32, provides that any excess of the investor's shoe of the net
fair value of the associate's identifiable assets and liabilities over the cost of the investment is
included as income in the determination of the investor's share of The associate's prolif or loss
in the period in which the investment is acquired
9

16

Appropriate adjustments to the investor's share of the associate's profit or loss after acquisition
are also made to account, for example for depreciation of depreciable assets based on their for
value on the acquisition date.

Illustration: On January I of the current year, an investor purchased 40%-elthe ordinary shares
outstanding of an investee for P15,000.000 when the net assets of the Investee amounted to
P30.000.000.

At acquisition date, the carrying amounts of the identifiable assets and liabilities of the investee
wore equal to their fair value, except for the following:

a. Equipment whose fair value was P2.000.000 greater than its carrying amount

b. Inventory whose fair value was P2.500.000 greater than its cost.

The equipment has a remaining life of 4 years and the inventory was all sold during the current
year.

‫ سه‬L

The investee reported net income of P20,000,000 for the current year and paid P5.000.000
cash dividend at year-end.

Computation:

Acquisition cost

Book value of net asset acquired (40% x P30,000,000) Excess of cost over book value

Excess attributable to equipment (40% of P7,000,000)

Excess of net fair value over cost

Excess aftributable to inventory (40% of P2,500,000)

P15.000.000

ve

12,000,000
P 3,000,000

12.800.000)

(1.000.000)

(P 800.000

Impairment-Equity Investments at Fair Value

For financial assets measured at fair value, all gains and loss ore either presented in seoff or
lots or in other comprehensive income depending on whether the election to present goins and
losses on equity investments in other comprehensive income taken or not

Therefore, it is not necessary to assess financial asset measured of fair value through profit or
loss and equity investment measured at fair value through other comprehensive income for
impairment.

Impairment-Debt investments

PERS 9. povegroon 5:51. Deovide that an entity shall be recognize a loss allowance

for expected credit losses

a. Detit investment measured at amortized cost

b. Debt investment measured af for value through other comprehensive incom

Porograph 3.3.3 provides that an endily shall measure the loss allowance for a financial
instrument of an amount equal to the lifetime expected credit losses if the credit risk on that
financial instrument has increased significantly since initially recognition

Credit losses are the present value of all cash shortfalls.

Expected credit losses are an estimate of credit loss over the life of the financial instrument

Measurement of Impairment

When meaturing expected credit losses, an entity should consider:

a. The propabilly-weighted outcome

The estimate should reflect the possibility that a credit loss occurs and the possibility that no
credit loss occun

b. The time value of money

The expected credit losses should be discounted.

c. Reasonable and supportable information that is available without undue cost or effort.

PFRS 9 does not prescribe particular method of measuring expected credit losses.

An entity may use various sources of data both internal or entity-specific and extemal in
measuring expected credit losses.

The amount of impairment loss can be measured as the difference between the carrying
amount and the present value of estimated future cash flows discounted at the original effective
rate

Convertible Bonds

Convertible blonds are those which give the bondheiden the right to exchange the bonds for
share capital of therngormy of any lime prior to matunty

Defin

The exatence of the conversion feature generały precludes cratification of the convertible bonds
as held to maturity investment because that would be inconsstent with paying for the conversion
feature, meaning the right to converf into eculty shares before maturity.

Accordingly, investment in convertible bonds can be classified as avaliable for sale or held for
trading depending on management intent

Serial Bonds

Serial bonch are those which have a series of maturity dates or thoer bands whic cre payable in
installments, Bonds with a single maturity date ore called "term bonds

For instance, a P1,000,000 bond issued on January 1, 2025 may provide that the bond will
mature as follows:

December 31, 2025

P 200,000

December 31. 2026

December 31, 2027

December 31, 2028

December 31, 2029

Terms of Bonds

Term bonds are those bonds that mature on a single date.

Callable and convertible bonds can be classified as term bonds despite of their special features.

Methods of Amortization

Three methods are available for the amortization of bond premium or bond discount. namely:

a. Straight line method - This method provides for an equal amount of premium or discount
amortization each accounting period. It is the method used in previous illustrations.

b. Bonds outstanding method-This method is applicable to serial bonds, whether acquired at a

premium or discount and provides for a decreasing amount of amortization.

c. Effective interest method or simply "interest method" or scientific method. This method
provides for an increasing amount of amortization.

In accordance with PFRS 9, bond investments shall be classified as financial assets measured
at amortized using the effective interest method. This means that any discount or premium must
be amortized using the effective interest method.

Bond Investment - FVOCI

PFRS 9. paragraph 4.1.2A, provides that a financial asset shall be measured at fair value
through other comprehensive income if both of the following conditions are met:

a. The business model is achieved both by collecting contractual cash flows and by selling the
financial asset.

b. The contractual cash flows are solely payments of principal and interest on the principal
outstanding.
Note that the business model includes selling of the financial asset in addition to collecting
contractual cash flows.

In this case, interest income is recognized using the effective interest method as in amortized
cost measurement.

On derecognition, the cumulative gain or loss recognized in other comprehensive income shall
be reclassified to profit or loss.

Changes in Equity

Shupter 10

Page 10

Actustments to the corrying amunt of the threvent in quocute may вие песен for changes in the
westor proportionate interest in the resten Changes es the inventer equity that never neregrined
in the inten profit or los

Such changes incside those aging bom myntuation of pempathy, plent gapment and from
foreign exchange transition differences. The investock shore changes a recognized directly in
equity of the investor

Illustration: The investment es associate is 20% as a consequence of which the nvestor has
significant intuence over the investee. The investere reported the lollowing for the curent year

Net income Dividend pidid

16,000,000

Revaluation surplus

The investor shall prepare the following eritries for the current year

1. Share in net income:

P1,200,000

Investment in Associate

F1.200.000

Investment income (20% x P6.000.0001

2. Share in dividend paid:

400.000

400.000

Cash (20% x P2.000.000) Investment in Associate

3. Share in revaluation surplus:

Investment in Associate

600.000

600.000

Revaluation Surplus-Investee (20%×P3.000.000)

Adjustment of Investee's Operations

1. The most recent available financial statements of the associate are used by the investor in
applying the equity method.

When the reporting dates of the investor and the investee are different, the associate shall
prepare for the use of the investor financial statements as of the same date as the financial
statements of the investor unless it is impractical to do 50.

In any case, the difference between the reporting date of the associate and that of the investor
shall be no more than three months.

2. If an associate uses accounting policies other than those of the investor adjustments shall be
made to conform the associate's accounting policies to those of the investor.

3. Profits and [Link] from upstream and downstream transactions between an investor
and an associate are recognized in the investor's financial statements only to the extent of the
unrelated investor's interests in the associate.

"Upstream" transactions are sales of assets from an associate to the investor, For example, the
associate seils inventory or noncurrent asset to the investor

The unrealized profit from these transactions must be eliminated in determining the investor's
share in the profit or loss of the associate.

Effective interest Method

PFRS 9 requires that bond discount and band premium shall be amortized using the eflective
interest method. The effective interest method is also known as scientific method or simply
"interest method

In connection with the effective interest method of amortizaing premium or discount, d is

necessary to classity rate of interest into two, namely:

a. Nominal or coupon rate or stated rate is the rate of interest appearing on the face of the
bonds. The nominal rate multiplied by the face of the bonds gives the period interest received by
the bondholder.

11

b: Effective or yield rate or market rate is the true or actual rate of interest which boridholder
egens on his investment. The effective-rate multiplier by the carving amount of the bond
investment gives the actual interest income. The carrying amount of the bonds is the initial cost
grattaattly increased by periodic amortization of discount or gradually reduced by periodic
amortization of premium

The effective rate and the nominal rate are the same if the cost of the bond investment is equal
to the face value.

When the bonds are acquired at a premium, the effective rate is lower than the nominal rate.
The reason is that the premium is a loss on the part of the bondholder.

On the other hand, when the bonds are acquired at a discount, the effective rate is higher than
the nominal rate. The reason is that the discount is a gain on the part of the bondholder.

The effective interest method simply requires the comparison between the interest eamed or
interest income and the interest received. The difference between the two represents the
premium or discount amortization.

Interest earned or interest income is computed by multiplying the effective rate by the carrying
amount of the bonti investment.

Interest received is computed by multiplying the nominal rate al rate by the face value of the
bonds.

20

The carrying amount of the bond investment is the initial cost gradually increased by penodic
amortization of discount or gradually reduced by periodic amortization of premium
Sale of Bands

Assume that on February 1. 2026, the bonds were sold at 108 plus accrued interest. The
computations below are necessary.

Sales Price (1,000,000 x 108)

P1.080.000

Add Accrued interest for three months from November 1, 2025 to February 1.2026 (1.000.000 x
12% x 3/121

30.000

Total cash received

P1110,000

Original cost

P1.045,000

Less: Amortization from August 1. 2024 to February 1, 2026 or 18 months x 1.000

18,000

Carrying amount of bonds on February 1, 2026

P1,027,000

Sales price (1,000.000 x 108)

1.080.000

Gain on sale

P 53,000

The pertinent entries on the date of sale, February 1, 2026 are:

a. To update the amortization of the premium up to the date of sale, February 1 2026.
Presumably, the last amortization was December 31, 2025,

Interest Income (1 month x 1,000)

1,000

Investment in Bonds

1,000

b. To record the sale of bonds:

Cash

1,110.000

Investment in Bonds

1,027,000

Interest Income

30.000

Gain on Sale of Bond Investment

53.000

Callable Bonds

Callable bonds are those which may be called in or redeemed by the issuing corporation prior to
their date of maturity. Usually, the call price or redemption price 8 at a premium or more than
the face value of the bonds,

The difference between the redemption price and the book value of the bonds on the date of
redemption is recognized in profit or loss.

Share Spill

A corporation may restucture its capillal by effecting a change in the number of shares without
capilalking retained eamings or changing the amount of its legol capital. This restructuring a
known as share split.

Share split may be split up or split clown

Split up is a fransaction whereby the outstanding shores are called in and replaced by a larger
number, accompanied by a reduction in the par or stated value of fach share. For instance, if a
shareholder owns 10.000 shares and the share is spill up 5-for 1. the shareholder receives
50.000 new shares in exchange for the 10.000 original shares.

Split down is the reverse of the split up. It is a transaction whereby the outstanding shares are
called in and replaced by smaller number, accompanied by an increase the por or stated value.
For instance, if a shareholder owns 10.000 shares and the share is split down 5 for the
shareholder receives 2.000 new shares in exchange for the 10.000 old shores.

Share split does not affect the total cost of investment. But there is a [Link] increase in
the cost per share because the total cost now will apply to a larger or smaller number of shares.

Only a memorandum entry is made to record the receipt of new shares by virtue of share split.
For instance, assume that a shareholder owns 10,000 [Link] P2,000,000.
Subsequently, the shareholder receives notice that share is split-2-font: The receipt of new
shares is recorded as follows:

Received 20.000 new shares as a result of a 2-for-1 split of 10,000 original shares."

The total cost of P2,000,000 will now apply to 20.000 shares or a cost per share of P100. Such
cost would then be the basis for subsequent transactions.

Special Assessments

Special assessments are additional capital contribution of the shareholders. On the part of the
shareholders, special assessments are recorded as additional cost of the investment and on the
part of the entity as share premium or additional paid in capital.

For instance, assume that a shareholder owns 10,000 shares costing P500,000. Subsequently,
the directors pass a resolution to the effect that the shareholders shall contribute P5 for each
share held to the corporation.

On the part of the shareholder, the payment of the assessment is recorded as follows:

Investment in equity securities (10.000 x P5)

Cash

50.000

50.000
Introduction
Investment in equity securities, as the title suggests, means that the acquisition of equity
securities for the purpose of accruing income through dividends and increase omarket value, or
coriholling another entity

Equity secunties represent ownership shares such as ordinary shares and other share capdal.
They may also represent sights and options to acquire ownership shores. The owners of eauty
secunties are legally known as shareholders

A share is the ownership Interest or right of a shareholder in on entity. This right pertains to the
shore in eamings, election of directors, subscription for additional shares and share in net
assets upon Rquidation: The share is evidenced by an instrument called share certificate. 2

Acquisition of Equity Securities

The Application Guidance of PFRS 9 provides that when a financial asset is recognized initially,
an entity shall measure il at fair value plus transaction costs that ore directly attributable to the
acquisition.

The fair value is usually the transaction price, meaning the fair value of the consideration
received.

As a rule ramachon coytt that are directly aftributable to the acquisition of the financial
assel'shall be capitalized as cost of the linancial asset

However, transaction costs directly aftributable to the acquisition of financial asset held for
trading or financial asset at fair value through profit or loss shall be expensed Immediately.

If the equity securities are acquired in an exchange, the acquisition costia determined by
reference to the fair value of the asset given. It may be appropriate to consider the fair value of
securities received if it is more clearly evident in the abserice of the fair value, the cost or
carrying amount of the asset given is the basis for recording.

If two or more equity securities are acquired at a single cost or lump sum, the single cost is
allocated to the securities acquired on the basis of their fair value only one security has a known
market value, an amount is allocated to the security with a known market value equal to its
market value and the remainder of the single cost to the other security with no known market
value.

Investment Categories

Investments in equity securities are accounted for as one of the following categories:
a. Trading securities or financial assets at fair value through profit or loss

b. Financial assets at fair value through other comprehensive income

c. Investment in associate

d. Investment in subsidiary

e. Investment in unquoted equity instrument

Trading equity securities and financial assets at fair value-through other comprehensive income
are already discussed exhaustively in Chapter 8. Investment in associate-is-discussed in
Chapter 10 and investment in subsidiary is taken up in an advanced accounting subject.
Investee With Heavy Losses

Under the equity method. PAS 28, paragraph 38 provides that if an investor's share of Josses of
an associate equals or exceeds the carrying amount of an investment, the investor discontinues
recognizing its share of further losses. The investment is reported of nitor zero value.

The carrying amount of the investment in associate is not just the balance of the account
"investment in associate".

The carrying amount of the investment in associate also includes other long-term interests in
associate, such as long-term receivables, loans and advances.
However, frode receivabiles and any king lemrecervables for which adeguate colloferat enth
such of rесrеdiоn оr excluded from the carrying amount of an investment in casociate

Chapter 10

De

Additioriot losses are provided for or osobisty is recognized to the water the investor hos incured
legal or constructival obligations or made paymeth on behal of the associate

If the associate subsequently reports income, the investor resumes including its share of such
income after its share of the income equals the share of [Link] recognizeck

Illustration On January 1, 2024, an investor acquired 25% of the ordinary shares ‫حسان‬
associate for P5,000,000. On this date, the identifiabteransets and liabalm othe associate were
measured of fair value and there is no goodwill arising from the acquisition

The profits and losses made by the associate over the first 6 years of operation wer
Investor's

2024

Loss

Share

2025

(10.000.000)

1250.000 円

7026

(12,000,000)

12.500.000

2027

2.500.000

625.000

The entries on the books of the investor to recognize the share in the profit or loss of the
associate are:

2028

Profit

250.000

P 250.000

2024 Investment Loss

Investment in Associate

2.500,000
2,500,000

2025 Investment Loss

Investment in Associate

2.250.000

2026 Investment Loss

2.250.000

Investment in Associate

P5,000,000

ese

Acquisition cost

P 250.000

2.760.000

Loss on investment:

2.500.000

P2.250.000.

2024

2025

Carrying Amount -January 1, 2026

The investor's share in the loss of the associate for 2026 is P3,000,000. However, the loss to be
recognized cannot exceed the carrying amount of the investment of P2.250.000. The
investment account is reduced to Nit or zero.

2027 No entry

stments to be ve mont
Share in the loss for 2026

Loss recognized in 2026

$3,000,000

Unrecognized loss in 2026

1.2,250.000)

Share in profit for 2027

P 750,000

Remaining unrecognized loss

500.000)

P 250.000

If the associate subsequently reports profit, the investor resumes recognizing its share of profit
only after its share of profits equals the share of losses not previously recognized.

Investee with Cumulative Preference Share

De

When an associate has outstanding cumulative preference shore, the investor shas compute its
share of earnings ortostes after theducting ther preference dividends. whether or not such
dividend ure declared

14

For instance, ABC Company reported the following capital account on January 1 2024

Ireference share capital. 12% cumulative, P100 par. 50,000 shares issued

P5.000.000

Ordinary share capital, P50 par. 500,000 shares authorized and

200,000 sharos issued

Retained Earnings
On January 1, 2024, XYZ Company acquired 40,000 ordinary shares of ABC Company
representing a 20% Interest for P3.000.000. The net assets of the investee are fainy valued

ABC Company reported net income of P2.000.000 for 2024 and paid cash dividends of
P500,000 to ordinary shareholders and the preference dividends at the preference rate.

The pertinent entries for 2024 он

1. To record the investment:

P3,000,000

P3.000.000

Investment in Associate Cash

280,000

280.000

2. To record the share in net income:

Investment in Associate

P2.000.000

Investment income

600.000

Net Income

Less: Preference dividend (12% x 5,000,000)

P1,400,000

Net income to ordinary shares

P 280,000

ese

Share in net income (20% x P1,400,000)

3. To record the share in cash dividend:

Cash (20% x P500.000) Investment in Associate

100.000

19

Investee with Noncumulative Preference share

When an associate has outstanding noncumulative preference share. the investor shall
compute its share of earnings after deducting the preference dividends only when declared,
Accounting for Stock Dividends

Stock dividends of the same class are recorded only by means of a memorandum entry on the
part of the shareholder. An example of a memorandum entry for the receipt of stock dividendis

Received 2.000 shares representing 20% stock dividends on 10.000 original shares held.
Shares now held. 12,000

Stock dividends do not affect the total cost of the investment but reduce the cost of the
investment per shore. The original cost after the stock dividends will now apply to a greater
number of shares, original shares plus those received as stock dividends

For instance, assume that a shareholder owns 10.000 shares costing P120 each or a loful cost
of P1,200,000. Subsequently, the shareholder receives 20% stock dividend or 2,000 shares.
The effect of this stock dividend may be shown as follows:

Shares

Cost Per Share

120

Total Cost

Criginal shares

10.000

Stock dividends

2.000
100

1.200.000

12,000

1.200.000

The total cost of P1.200.000 apples now to the 12,000 shares giving an adjusted cost per share
of P100, The cost per share is reduced from P120 to P100.

Stock Dividends Different from those held

A shareholder may receive a stock dividend which is different from the original shares

Again, stock dividends of different class are not income. However, the [Link] of the
investment is apportioned between the original shtres and the stock dividends on the basis of
market value of each at the date of receipt.

To illustrate, assume that a shareholder owns 10.000 ordinary shares costing P800.000.
Subsequerifly, the shareholder receives 10% stock dividend in the form of preference share.
The market values of shares are ordinary, P150. and preference, P100.

The original cost of P800,000 is allocated as follows:

Market Value

Fraction

Allocated Cost

Ordinary share (10.000 shares x P150)

1,500,000

15/16

750.000

Preference share (1.000 shares x P100)

100.000
1/16

50.000

1,600,000

800.000

The tractions are developed from the market value of the shares and multiplied by the original
cost of P800.000 to anive at the allocated cost. Thus, 15/16 x P800,000 equals P750.000, and
1/16 x P800,000 equals PS0.000.

The receipt of the preference shares as stock dividend on the ordinary share investment is
recorded as follows:

Investment in preference shares Investment in ordinary shares

On Decenter 31 20 of the bonch PS 200,000. The decrease in fair value is recorded as follows:

Urvealized Loss

Financial Assel-PFVPL

300.000

Since the change in the business model is in December 2025, the reclassification is January 1,
2026

On such date, the entry to record the reclassification of the bonds from financial asset af fair
value to financial asset of amorfized cost is recorched as follows:

Investment in Bonds Financial Asset-FVPL

5,200,000

5.200.000

The investment in bonds may be debited to an account "Financial Asset-Amortized Cost

An effective interest rate must be computed based on the new carrying amount of fair value of
PS 200.000

The new carrying amourit of P5,200,000 is higher than the face amount of P5.000.000 or a
premium of P200.000
Accordingly, the effective interest rate must be lower than the nominal-rate-

Reclassification from Amortized Cost to FVPL

PFRS 9. paragraph 5.6.2. provides that when an entity reclassifies a financial asset at
amortized cost to financial asset at fair value through profit or loss is determined af
reclassification date. The difference between the previous carrying amount and fait value is
recognized in profit or loss.

30

fo Bonds necond procre

Illustration: On January 1, 2024, an entity purchased P5,000,000łace valve bonds for

P4.500.000 in accordance with its business model of maltaging financial assets by collecting
contractual cash flows. The bonds pay interest annually on December 31. The entry for the
acquisition is

Investment in Bonds Cash

P4.500.000

P4,500,000

On December 2024, the objective of the entity's business model for managing the bonds has
changed from collecting contractual cash flows to realizing gains,

On December 31, 2024, assume the carrying amount of the bond investment is P4.700.000,
after recording the effective amortization of discount of P200.000. The reclassification date is
January 1. 2025. On such date, the fair value of the bond Investment is P5.500,000 or an
increase of P800.000 from the carrying amount of

P4,700,000. The entry to record the increase in fair value on January 1. 2025 is:

Investment in Bonds

800.000

Gain on Reclassification of Financial Asset

800.000

The entry to record the reclassification from amortized cost to fair value through profit or loss is
Financial Asset-FVPL Investment in Bonds
of inventory from Associate to Investor

On January 1 23224 anwestor acquned 20%, non c westor lo nece anticon fuence over the set
die scdentifiable assets and latties of the investen are locortled at for valve Guing the year, the
investelreported net income of 100 and don Ako daing the year, the invested sold inventory
costing P200.000 300.00 the investor. The inventary & unsold by the inventor on December
2004 Ignoring income fox, the investor's share in the profit of the casociate for 2000 determined
as follows:

Nel income for 2024

P2.000:000

Unrealized prolit on ending inventory 12/31/2024

1100.0001

Adjusted net income

11.900.000

Investor's share (20% x 1,900.000)

Another Approach

P400.000

Share in net income (20% x 2.000.000) Share in unrealized profit (20%×100.000)

20,0001

Investor's share

P 380.000

Sale Price

P 300.000

Cost of inventory

200.0001
Unreakzed profil on ending inventory

P100,000

The entry to recognize the investor's share in the profit of the associate for 2024

Investment in Associate Investment income

P 100,000

P 100.000

Continuing the illustration, the investee reported net income of P2.500,[Link] 2025. The
inventory sold by the associate to the investor in 2024 is subsequently sold by the investor in
2025. The investor's share in the profit of the associate fog 2025 is determined as follows:

Net income for 2025

P2.500.000

Realized profit in beginning inventory 1/1/2025

P2.600.000

Adjusted net income

100.000

P 520,000

Investor's share (20% x 2,600,000)

The entry to recognize the investor's share in the profit of the associate for 2025 is:

Investment in Associate

P 520.000

Investment income

P 520.000
"Downstream" transactions are sales from the investor to the associate. For example, the
investor sells inventory or noncurrent assets to an associate. The unrealized profit from these
transactions must be eliminated as prescribed by paragraph 28 of PAS 28.

Sale of Bonds Prior to Maturity

When investment in bonds is sold prior to the date of maturity, it is necessary to determine the
book value or carrying value of the bonds to be used as basis in computing gain or loss on the
sale.

In such a case, amortization of the premium or discount, if any, should be recognized up to the
date of sale.

If the sale is between interest dates, the sales price normally includes the accrued interest.
Accordingly, that portion of the sales price pertaining to the accrued interest should be credited
to interest income.

The difference between the sales price, after deducting the accrued interest and the carrying
amount represents the gain or loss on the sale of the bond investment.

Illustration

2024

Aug. I Purchased 12% P1,000,000 face value bonds for P1,075,000 including accrued interest.
Interest is payable semiannually May 1 and November 1. Bonds are daled May 1, 2024 and
mature on May 1, 2028.

Investment in Bonds.

P1.045.000

Interest Income

30,000

Cash

P1,075,000

P1,075,000

Total cash paid

Less: Accrued interest from May 1 to August 1. 2024

(1.000.000 x 12% x 3/12)

30,000

Cost of bond investment

P1,045,000

Note that the cash payment of P1,075,000 includes accrued interest. As stated earlier, the
accrued interest purchased is not part of cost. Thus, the same is deducted from the cash paid.

Nov. I Received the semiannual interest:

Cash

60,000

Interest Income

Purchase Price or Market Price of Bonds

An investor may wish to know in advance the total cash outlay for the bond investment at a
specified effective rate of retum.

The procedures for the computation of the purchase price of bonds are:

1. Using the effective rate, find the present value of an ordinary annuity of I for the number of
interest periods involved.

2. Multiply the nominal rate by the face value of the bonds for one interest period. Also multiply
the effective rate by the face value for one interest period. Get the difference between the two
products.

3. The difference computed in no. 2 is multiplied by the present value factor determined in no. 1.
The answer represents either a discount or premium.

If the effective rate is more than the nominal rate the answer in no. 3 is a discount.

If the effective rate is less than the nominal rate the answer in no. 3 is a premium.

4. The face value of the bonds plus premium or minus discount equals the purchase price of the
bond.
Another example of a property dividend & when an entity declares P100 worth of merchandise
for every one share of stock. If a shareholder owns 500 shagn, the dividend in the form of
merchandise would be 250.000

the entry to record the dividend on the part of sharabokter in

Merchandise inventory

Dividend income

50.000

50,000

Liquidating Dividends

Liquidating dividends represent retum of invested capital, and therefore, are not Income. The
payment may be in the form of cash arnoncosh assets,

the proforma entry to record liquidating divideridis

Cash or Other Appropriate account Investment in equity securities

xx

Normally, liquidating dividends are paid when the corporation is dissolved and Squidated.
However, in the case of wasting asset corporation or mining entity liquidating dividends may be
paid even before dissolution and liquidation.

Accordingly, when dividends are received from a wasting asset corporation, the dividends are
designated as partly income and artty-eturn of capital test podion, representing a liquidating
dividend should be credited to the investment account

For instance, assume that a shareholder receives a P100.000 dividend, designated as follows:
income. P60,000 and liqbidafing. P40.000. The entry to record the dividend is

Cash

Dividend income

Investment in equity securities

100.000
60.000

40.000

When liquidating dividends exceed the cost of investment, the difference is credited to gain on
investment. On the other hand, when liquidation is completed and the investment cost is not
fully recovered, the balance is written off as loss.

Stock Dividends

Stock dividends are in the form of asuing entity's own shares. The IAS term for stock dividend is
"Danus issue". Shares of another entity declared as dividends are not stock dividends but
properly dividends.

Stock dividends may be the sarne as those held or different from those held.

Stock dividends whether of the same class or different are not income. The reason is that there
is no distribution of the assets of the entity. The assets of the entity are the same before and
after the issuance of the stock dividends. The stock dividends create only a change in the
composition of the shareholders' equity, that is, a transfer from retained eamings to share
capital.

The shareholder receives additional shares but still has the same proportionately equity interest
in the entity. The shareholder may have more shares but at reduced market valüa.

An example of a formal dividend declaration is as follows:

"The Board of Directors of their meeting on November 15. 2024, declared an annuat dividend
on ordinary share of PS, payable on January 30. 2025, to shareholders of record of the close of
the business on January 15, 2025

A question arises as whon to recognize the dividends on the part of the shareholden whether on
the date of declaration, November 15. 2024 or date of record, January 15. 2025 or date or
payment, January 30, 2025.

When to Recognize Dividends as income

PAS 18, paragraph 29, provides that "dividends shall be recognized as revenue when the
shareholder's right to receive payment is established".

Accordingly, for accounting purposes, the dividends shall be recognized on the date of
declaration
The reason is that when dividends are declared. the shareholders has already acquired the right
thereto so much so that if the shares are subsequently sold, the sales price normally includes
the accrued dividends. Once a dividend has been declared a legal liability binding on the
corporation is created.

Accordingly, when shares are sold "dividends-on" and the dividends accrued is specifically
included in the sales price, that portion of the sales price pertaining to the accrued dividend
should be credited to dividend income and only the remainder should be used as basis for
determining gain or loss on the sale of share.

For instance, assume that a shareholder owns 1,000 shares costing P100.000. Subsequently,
the shareholder received notice of dividend declaration of PS per share or P5.000.

If prior to record date, the shareholder sells the investment for P150,000 which includes the
dividends of P5.000, the entry to record the sale is:

Cash

150.000

Investment in equity securities

Dividend inconie

5,000

Gain on sale of investment

45.000

Property Dividends

Property dividends or dividends in kind are dividends in the form of property or assets other than
cosh

Property dividends are also considered as income and recorded at the fair value as follows:

Noncash assets

Xx

Dividend income

XX
For instance, assume that X Company distributes its holding of P10,000 shares in Y. Company
as property dividends. The shares of Y Company have a market value of P100 per share.
Assume further that a shareholder receives 500 shares of Y Company as property dividends
from X Company.

The entry to record the receipt of the properly dividends is.

Investmerit in equity securities (500 x P100)

Dividend income

50,000

50.000

Accounted for Separately

A financial asset is recognized initially af fair value plus transaction costs directly ottributable to
the acquisition of the financial anset

Accordingly, stock rights as form of financial assets are measured initially at far value

In other words, a portion of the carrying amount of the original investment in equity securities is
allocated to the stock rights at an amount equal to the fair value of the stock right of the time of
acquisition.

The reason for such an allocation is that stock rights are independent of the original shares from
which they are derived.

When stock rights are issued, the investor is now the owner of two financial assets. namoly the
shares and the related stock rights.

Stock rights are normally classified as current assets if the rights are accounted separately.

Not Accounted for Separately

Stock rights are recognized as embedded derivative but not a "stand-alone derivative. An
embedded derivative is a "component of a hybrid or combined instrument (host contract) with
the effect that some of the cash flows of the combined instrument vary in a way similar to a
stand-alone instrument

PFRS 9. paragraph 4.3.3 further provides that an embedded derivative shall be separated from
the host contract and accounted for separately under certain conditions. Paragraph 4.3.3 further
provides that if the host contract is within the scope of PFRS 9. the classification requirements
of PFRS 9 are applied to the combined host contract in its entirety.

This simply means that if the host contract is a financial asset, the embedded derivative is not
separated.

Moreover, it the host contract is measured at fair value through profit or loss, the embedded
derivative is not accounted for separately.

Accordingly, the stock right as an embedded derivative is not accounted for separately because
the host contract "investment in equity instrument" is a financial cisset.

Approach to be Followed

Admittedly, this subject matter is not a well-settled issue, In fact, PFRS 9. paragraph 4.3.4,
states that "this standard does not address whether an embedded derivative shall be presented
separately on the face of the financial statements".

This being the case, it is believed that the traditional approach of accounting for stock rights
separately shall be followed until the FRSC has issued an interpretation to settle this accounting
issue.

Example of a formal Announcement of Stock Right

The Board of Directon in their meeting on December 15. 2024 opproved to e shock rights to the
shorehesters of record on January 13, 2025, enfitting the rehoklen to ocigure one shore of 100
por for every five shores hard the night to крие March 31, 2025

Date of decoration is the dote on which the issuance of stock rights is approved by the Board of
Directors, in the example, the date of declaration i December 15 7024

Date of record i the date on which the shock and transfer trook of the entity will be lovect or
regntiation and only those shareholders registered as of the record date see entitled to rece
stock ights the example, the date of record is January 15 2025 very important to note that the
date of record is abo the date of sung the shore wartonh

Expration date is the date up to which the stock right shall be exercised. After such date the
stock righh shall be worthless. In the example, the expiry date is March 31 2005

Between the Date of Declaration and Date of Record

During this period the shares are considered to be selling right-on. This means that the share
and the right are inseparable and are treated as one. In other was the share cannot be sold
without also selling the right or vice-veno
No accounting problem is encountered in this case because the stock rights are not yet received
by the shareholder.

Accordingly, in the event of subsequent sale prior to the record date, the difference between the
sales price and the carrying amount of the investment is simply considered as gain or loss on
sale of investment

For instance, assume that a shareholder owns 5.000 shares costing P500.000. Subsequently,
the shareholder receives nofice of stock rights to subscribe for 1,000 shares at the por value of
P100 per share. Prior to the issuance of the share warrants, the shareholder sells the
investments for P750,000

The sale of investment is recorded as follows:

Cash

investment in Equity Securities

750.000

500.000

250,000

Gain on Sale of Investment

Between the Date of Record and Expiration Date

On the date of record, the warrants evidencing the stock rights are issued-to-the shareholders.
On or after this date, the shares are said to be selling ex-right. This means that the share can
now be sold separate from the right or vice-versa

Illustration-Accounted Separately

For instance assume that a shareholder owns 10,000 shares costing P1.800.000.
Subsequently, the shareholder receives share warrants to subscribe for new shares at P100 per
share for every ten shares held. The market value of the share is P150 and the right. P10.

The acquisition of the original investment is recorded as follows:

Investment in Equity Securities

Cash
P1,800,000

P1,800,000

Reclassification from FVOCI to FVPL

PFRS paragraph 5.4.7 provides the following if a financial asset is reclassified from FVOCI
FVPL

the financial smel cocminues to be measured of for vase

The foe value of recontication date becomes the new canying amount

The cumulative gain or los previously recognized in other comprehensive income specsect to
profit or loss at reclassification date.

Discontinuance of Equity Method-Change from Equity

PAS 26, paragraph 22. provides that an investor shall discontinue the use of the mowity method
from the date thot & ceases to have significant influence ove on associate, Consequently, the
investor thall account for the investimenta finan auselt of Fair value through profit or loss, or
financiat asset at fair value through othe Comprehensive income or nonmarketable investment
or cost of investment in unquoted equity in tham

PAS 28. Basis for Conclusion 18, requires an investor that continues to have significant
influence over an associate to apply the equity method even if the gasacinte operating under
severe long term restrictions that significantly impair its ability ‫ بعد‬transfer funds to the investor.

Significant influence must be lost before the equity method ceases to be applicable

Measurement After Loss of Significant influence

PAS 28, paragraph 22, provides that on the date the significant influence is lost, the investor
shall measure any refained investment in associate at fair value.

The difference between the carrying amount of the investment at the date the significant
infivenice is lost and the for value of the retained investment plus any proceeds received from
disposal of any part interest in the associate, shall be Included in profit or loss.

Of course, the difference between the net proceeds from disposal of part of the investment and
the carrying amount of the investment sold is also included in profit or loss.
Paragraph 22 further provides that the fair value of the investment at the date it ceases to be an
associate shall be regarded as its fair value on initial recognition as a financial assel.

Illustration: An entity purchased 30.000 ordinary shares of the 100.000 outstanding shares of
another entity representing 30% interest several years ago. There was no increase or decrease
in interest since then. Accordingly. The investor applied the equity method of accounting for the
investment. On December 31, 2024, the Investment in associate has a carrying amount of
P6.000.000. On the same date. the investor sold 20.000 shares for net proceeds of P5,000.00D
resulting to a loss of significant influence. The quoted market price for such investment is P260
per share on December 31, 2024.

Classification of Bond investments

Bands may be acquired as current or noncument investiment depending on the business model
of managing financial assets Accordingly bond investon are clawlled and accounted for os
follows

Def

Financial asset held for trading i rading securities

2. Financial asset at armoniend

3. Financial asset of fair value through other comprehensive income

Financial asset of fair value through profit or test by revocable deugnation or by far value option

Initial Measurement

In accordance with Pres 9, paragraph 5.1.1 bond investments are recognized Initially at fair
value pius transaction costs that are dreary attributable to the acquifion

The fair value of the bond investment is usually the fransaction price, meaning the fair value of
the consideration given.

Transaction costs include fees and commission paid to agents advisers, brokers and dealers,
levies by regulatory authorities and securities exchanges, and transfer foxes and dotiet

However, transaction costs attributable to the acquisition of "trading" bond investments are
expensed immediately.

Subsequent Measurement

Subsequent to initial recognition, bond investments are measured and accounted for as follows,
1. Trading band investments are measured at fair value through prolil or loss. When bond
investmant is held for Trading", it is not necessary to amortize any premium or discount.

2. Bond investments are classified as financial assets measured at amortized cost using the
effective interest method.

3. Bond investments are measured at fair value through other comprehensive Income.

Acquisition of Bond Investments

Bonds may be acquired on interest date or between interest dates. When bonds aris, acquired
on interest date, there is no accounting problem because the purchase price is initially
recognized as the acquisition cost.

When bonds are acquired between interest dates, meaning the date of acquisition is not any
one of the interest dates, the purchase price normally includes the accrued interest. That portion
of the purchase price representing accrued interest should no be reported as part of the cost of
investment but should be accounted for separately. In effect, in this case, two assets are
acquired famely the bonds cinct The accrued interest.

On the date of acquisition, the accrued interest is charged either to accrued interest receivable
or interest income.

When accrued interest receivable is debited, upon receipt of the first semiannual interest, the
accrued interest receivable account is closed and interest income is Credited for the excess.
When interest income is debited, the receipt of the first Semiannual interest is credited entirely
to interest income

Initial Measurement of Financial Asset

Under PFRS 9 Doragraph 85.1.1, at initial recognition, on entity shall measure o Kinancial asset
of fair value plus, in the case of financial aisel not of fair value through profit or loss, transaction
costs that are directly [Link] the acquisition of the financiar ossel.

The fair value of a financial asset at initial recognition is normally the transaction price, meaning,
the fair value of the consideration received.

17

In other words, a financial asset is recognized Initially af fair value.

As a rule, transaction costs that are directly aftributable to the acquisition of the financial asset
shall be capitalized-as cost of the financiarosser

However, if the financial asset is held for trading or if financial asset is measured at fair value
through profit or loss transaction costs are treated as outright expense. This rule-em cotright
expensing of transaction costs related to financial asset held for trading or financial asset of fair
value through profit or loss is principally prescriptive rather than principle-based. The only
fogical reason is that such transaction costs do not result in increase in future economic benefits
to the entity.

7 Transaction costs include fees and commissions paid to agents, advisers, brokers and dealen,
levies by regulatory agencies and securities exchanges, and fransfer taxes and duties.

Transaction costs do not include debt premiums or discounts, financing costs and internal
administrative or holding costs.

Subsequent Measurement

PFRS 9, paragraph 5.2.1 provides that after initial recognition an entity shall measure a financial
asset at:

1. Fair value through profil or loss (FVPL)

Trading Secu

2. Fair value through other comprehensive income (FVOCI)

3. Amortized cost

Financial assets at Fair Value through Profit or Los

The following financial assets shall be measured at "fair value through profit or loss":

1. Financial assets held for trading or popularly known as "trading securities". These financial
assets are measured at fair value through profit or loss "by requirement", meaning, required by
the standard.

2. All other investment in quoted equity instruments. These financial assets are measured at fair
value through profit or loss "by consequence" in accordance with Application Guidance 85.4.14
of PFRS 9.

3. Financial assets that are irrevocably designated on initial recognition as at fair value through
profit or loss. These financial assets measured at fair value through profit or loss "by irrevocable
designation" or "by option". For example, investments in bonds and other debt instruments can
be irrevocably designated as at fair value through profit or loss even if the financial assets
satisfy the amortized cost measurement. This irrevocable designation is the fair value option is
allowed in-eecordance with Paragraph 4.1.5 of PFRS 9.

Definitions of Investments

If nutshell copt for themetriad

The International Accounting Standards Board defined investments as follows:

"Investments are assels held by an entity for the accretion of wealth through distribution such as
interest, royalties, dividends and rentals, for capilar appreciation A or for offher benefits to the
investing entity such as those obtained th

Telationships

Actually, investments are assets not directly identified with the operating activities of an entity
and occupy only an auxiliary relationship to the central reverive producing activities of the entity.

Investments are held by entities for diverse reasons such as:

a Fot accretion of wealth or regular income through interest, dividends, royalties

and rentak

For capital apppreciation as in the case of investments in land and real estate held fox
appreciation and direct investments in gold, diamonds and other precious commodities

Fot ownership control as in the case of investment in subsidiaries and associates

d. For meeting business requirements as in the case of sinking fund, preference share
Tedemption fund, plant expansion fund and other noncurrent fund.

e. For protection as in the case of interest in life insurance contract in the form of cash surrender
value.

Examples of Investments

Specifically, investments include the following:

1. Trading securities or financial asset at fair value through profit or loss

2. Financial asset at fair value through other comprehensive income 3. Investment in nontrading
equity securities
4 Investment in bonds or financial asset at amortized cost

5. Investment in associates

6. Investment in subsidiary

7 Investment property

8. Investment in fund,

9. Investment in joint venture

Statement Classification

4. Investments are classified either as current or noncurrent assets. Current investments are
investments that are by their very nature readily realizable and are intended to be held for not
more than one year.

For instance, trading securities are normally classified as current assets because these
investments are expected to be realized within twelve months after the end of reporting period.

Noncurront or long-term investments are investments other than current investments. This
residuar cdefinition means that the noncurrent investments are intended to be nnot expected to
be realized within twelve months
Fab Value Approach

The existing Interest in me associate a remecsund of lot value with any change in lair value
included in profit or loss.

D. However, if the existing interest is accounts for at for value through other comprehensive
income any unrealized gain or loss of the date the investee becomes an associate a necknsified
to retained earnings

The for value of the existing interest plus the cost of the additional interest acquired constitutes
the total cost of the investment for initial application of the erauity methoct

d the total cost of the investment for the initial application of the equity method minus the
carrying amount of the net assets acquired at the date significant influence is obtained equals
excess of cost over carrying amount or excess net

fair value
lustration-Cost Method to Equity Method

On January 1, 2024, an investor acquired a 10% interest in an investee for P2,000,000 The
investment is accounted for under the cost method because the investment is unquoted.

On January 1. 2026, the investor acquired a further 20% interest in the investee for P4.000.000.
On such date, the carrying amount of the net assets of the investee is P18.000.000. Any excess
of cost over carrying amount is attributable to on undervalued equipment with remaining useful
lite of 5 years

On January 1, 2026, the 10% existing investment has a fair value of P2.500.000.

The investee reported the following nel income and dividends:

Cash Dividends

PYRS paragraph 4.1.2A mandates that interest income for bond investiment measured of far
value through other comprehensive income must be ceicСИ osing effective interest method and
included in profit or loss

Accordingly this would require amortization of any discount or premsum on the bond investment

Face Amount

P5.000.000

Acquisition Cost

4,760.000

Discount

240,000

Joumal entry to record the amortization of discount

2025

Dec. 31 Financial Asset-FVOCI

interest income (12% x 4,760,000)

P 71.200
P 71,200

NOTE: The table for amortization of discount or premium will be the same applied by bond
investment measured of amortized cost.

Date

Interest Received

Interest Income

Discount Amortization

Carrying Amount

January 1, 2025

December 31, 2025

P500,000.00

P571,200.00

P71,200.00

P4,760,000.00

December 31, 2026

500.000.00

579,744.00

79,744.00

4,831,200.00

December 31, 2027

500.000.00

589.056.00
89.056.00

4,910,944.00

On December 31, 2025, the bond investment is measured at fair value through other
comprehensive income.

The bonds are quoted at 102 on December 31, 2025.

Markel Value-December 31, 2025 (5.000,000 x 102)

P5.100.000

Carrying Amount - December 31. 2025 (4.760.000+71.200)

4,831,200

Unrealized Gain-OCI

P268.800

2025

Dec 31

Financial Asset-FVOCI

P 268.800

Unrealized Gain-OCI

Impairment Loss

If there a on indication that an investment in associate may be impared. PAS 28.

375.000

paragraph 40, in conjunction with PAS 36 on "impairment of assets" requires that an impairment
loss shall be recognized "whenever the carrying amount of the Foxetliment in associate exceeds
its recoverable amount-

The recoverable amount is measured as the highier between far valve less cost to sel
and value in ure

Far value less cost to sell is the amount obtainable from the sale of the assetin an arm's length
transaction between the knowledgeable willing parties less dupa cost.

Value in use is the present value of the estimated future cash flows expected to cre from the
continuing use of an asset and from its ultimate disposal.

The value in use of an investment in associate is the investor's share in either of the following:

a. Present value of estimated future cash flows expected to be generated by the investee,
including cash flows from operations of the investee and the proceeds) on the ultimate disposal
of the investment.

b. Present value of the estimated future cash flows expected to arise from dividends to be
received from the investment and from its ultimate disposal.

Under appropriate assumptions, both methods give the same result.

PAS 28, paragraph 42, states that since goodwill is not separately recognized from the
investment amount, the impairment loss recognized is applied to the investment as a whole

The recoverable amount of an investment in associate is assessed for each individual

associate, unless an individual associate does not generate cash inflows from continuing use
that are largely independent of those from other assets of the reporting entity.

Noncurrent investments may be acquired in accordance with a [Link] looking to the

accumulation of tunds for such purposes as plant expansioner Squiciation of long-term debt.

Noncument investments may represent shareholdings acquired for the [Link] ceplicting
another or creating good customer or supplier relationship

Investment in tand and buildings acquired for capital appreciation are intended to be field for a
member of years to generale income and capifal gain. Thase tevestment propter anositied as
noncurrent investments even though they may be marketable

Financial Instruments

PAS 32 defines a financial instrument as any contract that gives rise to a financial 5 asset of
one entity and a financial llability of aff equity Instrument of another entity

Thus, the term "financial instrument" encompasses a financial asset, a financial sability and an
equity instrument. From the definition, the characteristics of a financial instrument are:
a. There must be a contract.

b. There are at least two parties to the contract.

The contract shall give rise to a financial asset of one party and financial liability or equity
instrument of another entity.

Common Examples of Financial Instruments

Applying the definition of financial instrument, the following would quality as financial instrument:

1. Cash in the form of notes and coins-This is a financial asset of the holder or bearer and a
financial liability of the issuing government.

2. Cash in the form of checks - This is a financial asset of the payee and a financial liability of
the drawer or issuer.

3. Cash in Bank - This is a financial asset of the depositor and a financial liability of the
depository bank.

4. Trade accounts - This is a financial asset of the seller as accounts receivable and a financial
liability of the customer or buyer as accounts payable.

5. Notes and loans - This is a financial asset of the lender or creditor as notes receivable or
loans receivable and a financial liability of the borrower or debtor as noles payable or loans
payable.

6. Debt securities - This is a financial asset of the investor and a financial liability of the issuer.

7. Equity securities - This is a financial asset of the investor and an equity of the issuer.

Note that most financial instruments involve one party having a contractual right to receive cash
or another financial asset and another party having a contractual abligation to deliver cash or
another financial asset.

Investment in Unquoted Equity Instruments

Under the Application Guidance 6.4.14 PFRS 9. all investments in equity instruments and
contracts on those instruments must be mesured of for valve
However, Investment in unquoted equity instruments are measurect of cost it the fair value
cannot be measured seliably

Sale of Equity Securifies

PFRS poragroph 3.2.12, provides that on derecognition of a financialassati entirety, the

difference between the consideration received and the carrying amount of the financial asset
hebe recognized in profit or loss.

When equity securities are of the same class acquired on different dates at different costs a
problem will oflse as to the determination of cost of securities sold when only a portion of the
securities is subsequently sold.

In such a case the entity shall determine the cost of the securities sold using either the FIFO or
average cost approach.

Cash Dividends

On the part of the shareholder, cash dividends are considered as income and recorded as
follows:

a. When the dividends are earned but not received

Dividends Receivable

Dividend Income

b. When the dividench are eamed and subsequently received:

Costi

Dividends Receivable

Xx

The cash dividends do not affect the investment account. The main problem in accounting for
cash dividends on stock investments is fiming. The questions when are dividends considered
earned? In this connection, three dates are important in accounting for cash dividends, namely:

a. Date of declaration- This is the date on which the payment of dividends is approved by the
Board of Directors.
b. Date of record - This is the date on which the stock and fransfer book of the corporation is
closed for registration. Only those shareholders registered as of this date are entitled to receive
dividends.

c. Date of payment - This is the date on which the dividends declared shall be paid.

Between the date of declaration and the record date, the shores are selling "dividends-on", This
means that when shares are sold after the date of declaration but prior to record date, they carry
with them the right to receive dividends.

Between the date of record and the date of payment, the shares are selling "ex dividend, which
means that the shares can be sold, and still the original shareholder has the right to receive the
dividends on payment date.

On December 31, 2024, the trading securities have a far valuer of P6.000.000 The increase in
value is recorded as follows:

Trading Secunties

Unrealized Gerints

The unrecolzet gairs is classified in the income statement as other income.

On December 31, 2024, the statement of financial position will show the trading securities at fair
value of P6.000.000 with a disclosure of its cost of P5.000.000

On December 31, 2025, the trading securities have a fair value of P4,500,000. The decrease in
fair value is recorded as follows:

Unrealized Loss-15 Trading Securities

1,500,000

1.500.000

The unrealized loss is shown in the income statement as other expense.

In the December 31, 2025 statement of financial position, the trading securities will be caried at
P4,500,000 with disclosure of the cost of P5,000,000.

On December 31, 2026, the trading securities are sold for P5.200.000. In this case, the sale is
simply recorded as follows:

Cosh
Trading Securities

5,200.000

4.500.000

Gain on Sale of Trading Securities

PFRS 9, paragraph 3.2.12. provides that on derecognition of a financial asset, the difference
between the carrying amount and the consideration received, inclüding any new asset obtained
less any new liability assumed, shall be recognized in profit or loss.

In other words, on disposal of a financial asset, the difference between consideration received
and the carrying amount is recognized as gain or loss an disposal to be reported in the income
statement

Market price of Serial Bonds

Face value

P6,000,000

Annual installment every December 31

Date of issue

January 1.2025

Nominal-interest rate payable annually every December 31

14%

Effective interest rate

present value of 1 of 14% for plus the present value of future interest payments using the
effective rate. The Again, the market price of the bonds is equal to the present value of the
principiat

One period

08772

Iwo periods
6.7695

0.6750

Three periods

bonds The simple approach is to compute the present value of the cash flows from the

Principal due on December 31, 2025

#2.000.000

Interest received on December 31, 2025 (6,000,000 × 12%) Total cash flows-December 31,
2025

720.000

Principal due on December 31, 2026

P2,720.000

Interest received on December 31, 2026 14,000,000 x 12%)

480.000

P2.000.000

Total cash flows-December 31, 2026

F2.480,000

Principal due on December 31, 2027

P2.000.000

Interest received on December 31, 2027 (2.000.000 x 12%)

240,000

P2.240.000

Total cash flows - December 31, 2027

The purchase price or market price of the serial bands is computed by multiplying the total cash
flows every December 31 by the relevant present value factor.

December 31. 2025 (2,720.000 x 0.8772)

P2,385,984

December 31, 2026 (2.480.000 x 0.7695)

1.908.360

December 31, 2027 (2.240,000 x 0.6750)

1,512,000

Total market price

P5.806,344

Computation of Effective Rate

On January 1, 2025, an entity purchased bonds with face value of P5.000.000 at a Cost of
P4,650.00. The nominal rate is 10% payable annually every December 31. The bonds mature
on January 1, 2030 or in 5 years.

There is no algebraic or mathematical formula in computing the effective rate on the bonds. The
effective rate is determined by means of "trial and error" or the so called "interpolation process".

In this case, a mathematical table of present value is necessary. Better still, the teacher should
teach the students how to compute the present value factor using an ordinary calculator.

The theory is to find an effective rate that would equate the acquisition cost and the present
value of the future cash flows from the bonds.

Since the acquisition cost is of a discount, the effective rate must be higher than the nominal
rate of 10%

Illustration-Equity Method

1. On January 1, 2024, XY Company purchased 20.000 shores of the 100.000 oulstanding

ordinary shares of ABC Compony of 1200 per shore. The im represents a 20% exquily interest
and the investor has a significant intuence. the investee the acquisition cost is equil to the book
value of the interest, acquired
Investment in Associate

Cash

P4.000.000

2. ABC Company reported net income of P5.000.000 for 2024 XYZ Company recognizes a
share of the net income of the invester equal to 20% of P5.000.000 or P1,000,000.

Investment in Associate

1,000,000-

Investment income

3. Received a 25% stock dividend from ABC Company on December 31, 2024

Memo-Received 5,000 ordinary shares os 25% stock dividends on 20.000 original shares held.
Shares now heit 25.000.

Note that the 20% equity interest is not affected by the stock dividend. The equity interest is the
same before and after the stock dividend.

4. ABC Company reported a net loss of P1,000,000 for 2025. XYZ Company recognizes a share
in the net loss of the investee equal to 20% of P1,000,000 or P200.000.

Investment Loss

200.000

Investment in Associate

200.000

5. ABC Company declared and paid a cash dividend of P2.500.000 on its ordinary shares on
December 31, 2025, XYZ Company recognizes a share in the cash dividend paid by the
investee equal to 20% of P2.500.000 or P500,000.

Cash

Investment in Associate

500.000
500.000

Nole that under the equity method, cash dividend is not an income but a return of investment.

dments obe

3
Illustration 2-On interest Date

What is the purchase price of the bonds if they were purchased on January 1, 2025 assuming
the following data

Face value of the bonds

P3,000,000

Date of issue of bonds

January 1, 2025

Nominal rate

De

December 31

Effective rate

Interest payable annually

December 31.2027

Date of matunty

Solution

1. The present value of an ordinary annuity of 1 for 3 interest periods using the annual effective
rate of 8% is 2.5771.

2. Annual nominal rate times face value (6% x 3,000,000)

P 180.000

Annual effective rate times face value (8% x 3.000.000)

240.000

Difference

P 60.000

3. 2.5771 times P60,000 equals P154,626. This amount is a discount because the effective rate
is higher than the nominal rate.

4. Purchase price = P3.000.000 minus P154.626 or P2.845.374.

Another approach

Again, the following present value factors are necessary:

PV of an ordinary annuity of I at 8% for three periods

2.5771

PV of 1 at 8% for three periods

0.7938

The market price of the bonds is computed as follows:

PV of principal (3,000,000 x 0.7938)

P2.381,400

PV of future interest payments (180.000 x 2.5771)

463,878

Total market price

P2,845,278

There is a difference of P96 between P2,845,278 and 2,845,374 due to rounding of present
value factors.

On December 31, 2024, the net decrease in the market value is recorded as follows:

Unrealized LOS-TS
Trading Securities

300.000

Otiserve that the unrealized gain and unrealized loss are offset against the other and only the
net amount is recorded. This is permitted by the standard.

On December 31 2024, the statement of financial position will show the trading securities of fair
voase of 14,700.000. However, the notes to financial statements shall disclose the individual
securities with their corresponding carrying amount and market value.

On January 15, 2025, the ABC preference share is sold for P80,000. The entry to record the
sale is:

Cosh

Loss on Sale of Trading Securities

80.000

Trading Securities

70.000

150,000

Again, the difference between the sales price and the carrying amount of the trading securities
shall be recognized as gain or loss to be shown in the income statement. The carrying amount
of ABC preference share is equal to its market value of P150.000 on December 31, 2024.

On December 31. 2025, the remaining trading securities have the following carrying amount and
market value:

XYZ

RST

MNO

Carrying Amount

950,000
2,500,000

4.550.000

Market

1,500,000

400.000

2,400,000

4,900,000

Gain (Loss)

50,000

[100,000)

350.000

The entry to record the net increase in market value is:

Trading Securities

Unrealized Gain - TS

350.000

350.000

The December 31, 2025 statement of financial position will show the trading securities at the
market value of P4,900,000.

Equity Investment at Fair Value through OCI

At initial recognition, PFRS 9, paragraph 5.7.5. provides that an entity may make an Irrevocable
election to represent in other comprehensive income subsequent changes in fair value of an
investment in equity instrument that is not held for trading.
In other words, if the investment in equity securities is "held for trading", the election to present
gains and losses in other comprehensive income is not allowed.

If the investment in equity instrument is held for trading, subsequent changes in fair value are
always included in profit or loss.

Mustration: On January 1. 2024, on entity purchased P5.000.000 tace value bonds for
4,600.000. The entity's business model of managing financial asset is collecting contactual cash
flows and the selling the asset. The bonds pay Interest annuity evmy December 31

Froncial As VOCI

4.600.000

4.600.000

On December 31, 2024, the business model for managing financial asset has changed from
collecting contractual cash flows and selling the asset to collecting contractual cash flows only.
The amortized cost of the bonds on December 31, 2024 it P800.000 after recording discount
amortization of P200.000. The fair value on December 31, 2025 is P5.300.000. On January 1,
2026, the reclassification date. the fair value of the bonds did not change.

1. To recognize the unrealized gain on December 31.2025:

Financial Asset-FVOCI

500.000

500.000

Unrealized Gain OCI (5.300.000-4,800,000

2. To record the reclassification on January 1. 2026:

Investment in Bonds

Financial Asset-FVOCI

5,300,000

5.300.000

3. To eliminate the amount of other comprehensive income on January 1, 2026

Unrealized Gain-OCI Investment in Bonds

Reclassification from FVPL to FVOCI

PFRS 9. paragraph 5.6.6. provides the following if a financial asset is reclassified from FVPL to
FVOCI:

a. The financial asset continues to be measured at fair value.

b. The fair value at reclassification date becomes the new carrying amount.

c. An effective interest rate must be determined based on the new carrying amount or fair value
at reclassification date.

Illustration: On January 1, 2024, an entity purchased P3.000.000 face value bonds for
P3.300.000. The entity's business model of managing financial asset is to realize fair value
changes. The bonds pay interest annually every December 31.

Financial Assel-FVPL Cash

33

On December 31, 2024, the entity's business model for managing financial asset has changed
from realizing fair value changes to collecting contractual cash flows and selling the asset in the
open market.

The fair value of the bonds is P3.600.000 on December 31, 2024.

On January 1, 2025, the reclassification date, the fair value did not change.

1. To recognize the unrealized gain on December 31, 2024:

Financial Asset-FVPL

Accrued Interest on Date of Acquisition

An entity acquired 12% bonds with tace value of P2.000.000 for P2.200.000 which includes
accrued interest of P20.000. The brands are held for "trading". The exity to record the
acquisition is

Defin

Trading Securities
P2,180,000

Accrued interest Receivable

20,000

Cash

P2.200.000

When the first semiannual interest of P120,000 is received, the entry is:

Cain

Accrued Interest Receivable

120,000

20.000

Interest income

100.000

There is another approach of accounting for the accrued interest purchased. The accrued
interest purchased or paid is charged to "interest income" instead of accrued interest receivable.
Using the same example, the entry to record the acquisition of the bond investment is.

Trading Securities

P2,180,000

Interest Income

20.000

Cash

P2.200.000

The subsequent collection of interest is simply credited to interest income. Thus. when the
semiannual interest of P120.000 is received, the entry is:

Cash
Interest income

120.000

120.000

The above approach is more convenient and will be followed for this illustration in these
materials.

Illustration-Trading Securities

The following transactions occur on the dates indicated:

April

Purchased P1,000,000 12% bonds at 96 plus accrued interest. Interest is payable January 1
and July 1. The bonds are held as trading investment.

Trading Securities100, 0965.

Inferest Income Clow,000 x 124.x 3/17)

P 960,000

Cash

30.000

P 990.000

Note that the accrued interest is for three months from January to April 1 The computation of the
accrued interest is: P1.000.000 x 12% x 3/12=

P30.000

July 1 Received semiannual interest.

Cash

Interest Income

Classification of Financial Assets

Under PFRS 9, paragraph 4.1.1, financial assets are classified into three, namely

1. Financial assets of fair value through profit or loss include both equity securities and debt
securities

2. Financial assets at fair value through other comprehensive income-include both equity
securities and detit securities.

3. Financial assets at amortized cost-include only debt securities.

the classification depends on the business model for managing assets which may be

a. To hold investments in order to realize fair value changes.

12

b. To hold investments in order to collect contractual cash flows

Under the Application Guidance of PFRS 9, paragraph 84.1.1. the entity's business model is
determined by key management personnel,

What is an Equity Security?

The term "equity security" encompasses any instrument representing ownership of shares and
right, warrants or options to acquire or dispose of ownership shares at a Vaad or determinable
price.

In simple language, equity securities represent an ownership interest in an entity. Ownership

shares include ordinary share, preference share and other share capital. The owners of equity
securities are legally known as shareholders.

A share is the ownership interest or right el a shareholder in an entity. The share is Evidenced
by an instrument colleckshare certificate)

This right pertains to the share in earnings, election of directors, subscription for additional
shares and share in net assets upon tiqoidation.

Equity securities do not include redeemable preference share, treasury shares and convertible
debt.

What is a Debt Security?

14
A debt security is any security that represents a creditor relationship with an entity. A debt
security usually has a maturity date and a maturity value.

Examples of debt securities include corporate bonds, BSP treasury bills, govemment securities,
commercial papers and preference share with mandatory redemption date or is redeemable at
the option of the holder.

Receipt of Stock Rights

The stock rights received are initially measured at fair value and recorded as follows:

Stock Rights Investment in Equity Securities

100.000

Note that the shareholder received 10.000 stack rights because the shareholder owned 10.000
shares.

The fair value of the stock rights is 10.000 rights times P10 or P100.000.

Note aso that the original investment account is credited when the rights are received because
the stock rights are "derived" from the original investment,

If the stack rights do not have a market value, the theoretical or parity value of the stock rights is
used in measuring the fair value of the stock rights.

Theoretical or Parity Value of Stock Right

The theoretical or parity value is the assumed value of the right that is derived from the market
value of the share.

The formulas for the computation of the theoretical or parity value of the stock right are:

a. When the shore is selling right on

Market value of share right-on minus subscription price

Value of one right

Number of rights to purchase one share plus 1

b. When share is seiling exvight

Markell value of share ex right minus subscription price Number of rights to purchase ane share
Value of one right

For instance, assume that a shareholder owns 10,000 shares costing P2,500,000.
Subsequently, the shareholder receives stock rights to subscribe for new shares at P150 per
share for every five shares held. The market value of the share is P210 per share. The right has
no known market value.

in the absence of the market value of the stock right, the theoretical or parity value is
determined to approximate the fair value of the stock right at the time of acquisition.

if the market value of the share of P210 is right-on, the theoretical value of stock right is
computed as follows:

210-150

Value of one right

5+1

60

P10 per right

Sole of Stock Rights

The located cod of the stock nights is on bas to detemining gonocio of thock nghe. The ex

When ther shock rights ove sosd at o go

Coth

Stock Rights

Gain on Sale of Stock Rights

D. When the stock nights are sold at a kiss

Cash

Los on Sale of Stock rights

Stock Rights

Expiration of Stock Righis

When stack nights are not exercised and have expired, they become worthless. Accordingly, the
allocated cost of the stack rights is treated as a loss. The entry to Hecord the loss is as follows

Lossori STOCk Rights

Stock ngrih

This approach is delended on the philosophy that the original shares have lost some of their
value because the new shares are offered for sale af a price which is below the current market
price thereby creating dilution in the value of such shares Moreover, such loss is the evidence of
the failure of the shareholder to preserve the original equity interest in the company.

Illustration: Assume that a shareholder acquires 10,000 shares for P1,500,000. Subsequently,
the shareholder receives stock rights to subscribe for new shares ait P100 per share for every
five shares held. The market value of the share ex-right is P140, and the market value of the
tight is P10.

Based on the market value, the cost of the stock right is P100,000 computed by multiplying
10/150 by P1,500,000.

Assume further that the stock rights are all exercised by the shareholder. The pertinent entries
are:

a. To record the acquisition of the original share investment:

Investment in Equity Securifies

500.000

Cash

1.500.000

b. To record the receipt of the stock rights:

Stock Rights

Investment in Equity Securities

c. To record the exercise of the stock rights:

Investment in Equity Securities

Cash (*2.000 shares x P100)

Stock rights

*10,000 rights/5 shares equals 2.000 new shares acquired

Measurement of Debt Investments

1. Held for trading af fair value through profit or loss

2. Held for collection of contractual cash flows of amortized cost

3. Held for collection of contractual cash flows at fair value through profit or lons by irevocable
designation or fair value option

4. Held for collection of contractual cash flows and for sale of the financial asset-af fair value
through other comprehensive income.

5. Held for collection of contractual cast love and for sale of the financial asset f fair value
through profit or loss by irrevocable designation or fair value option

What is Fair Value?

Appendix A of P'FRS 9 in conjunction with PRIS 13 provides a new definition of fair value

Fair value of an asset is price that would be received to sell of asset in an orderly 23 fransaction
between market participants at the measurement date.

The best evidence of fair value is descending hierarchy is the quated price of identical asset in
an active market, The quoted price of similar asset in an active market and the quoted price of
identical and similar asset in an inactive market.

An active market is a market in which transactions take place with sufficient regularity and
volume to provide pricing information on an ongoing basis.

Simply stated, fair value is defined as the price agreed upon by a willing buyer-and.g willing
seller in an arm's length transaction.
The buyer and seller who are the market participants must be independent. knowledgeable and
willing meaning not forced or not compelled to enter into the transaction/

Quoted Price

Most often, the fair value of securities is the quoted price in the securities market tou example,
the Philippine Stock Exchange. Thus, the fair value is synonymous with market value of the
securities in the stock market.

If the quoted price pertains to a share or equity security, it means pesos per share. For instance,
if the investment is 10,000 shares of an entity costing P800,000 is quoted at 90. the market
value thereof is P900,000, computed by multiplying 10.000 shares by P90 per share.

If the quoted price pertains to a band or debt security, it means percent of the face value of the
bond. For instance, if the investment in P2,000,000 face value bond of another entity, costing
P1,700.000 is quoted at 90, the market value thereof is P1.800.000, computed by multiplying
the face of P2.000.000 by 90%.

Reclassification from FVPL to Amortized Cost

PFRS 9, paragraph 5.6.3. provides that when an entity reclassifies a financial asset of fair value
to financial casel of amortized cost

a. The fair value at the reclassification date becomes the new carrying amount of the financial
asset at amortized cost.

b. The difference between the new carrying amount of the financial asset at amortized cost and
the face value of the financial asset shall be amortized through profit or loss over the remaining
life of the financial asset using the effective interest method

c. An effective interest rate must be determined based on the new carrying amount or fair value
at reclassification date.

Illustration: On January 1, 2024, an entity purchased a portfolio of bonds in accordance with its
business model of mantiging financial assets by selling the bonds in short term or in order to
realize fair value changes. The acquisition cost is P6.000.000 and the face value of bonds is
P5,000,000. The entry to record the purchase is:

Financial Asset-FVPL-

Cash

P6.000.000
P6,000,000

FVPL means the financial asset is measured at fair value through profit or loss.

During 2024, no securities were sold and on December 31, 2024, the fair value of the bonds is
P5.500.000. The decrease in fair value is recorded as follows:

Unrealized Loss

Financial Asset-FVPL

800.000

500.000

The unrealized loss is component of profit or loss and therefore reported in the 2024 income
statement.

In December 2025, the entity acquired another entity that manages commercial bonds and has
a business model that holds the bonds in order to collect contractual cash flows

The acquisition of another entity that manages bonds in order to collect contractual cash flows
effectively changes the business model of the entity in acquiring portfolio of bonds.

As a consequence. The portfolio of bonds acquired by the entity is no longer for sale. and the
portfolio is now managed Together with the acquired entity's commercial bonds to collect
contractual cash flows.

Shares Received in lieu of Cash Dividends

When cash dividends are declared and received, it is without doubt that they are ancome. A
problem will atke when shares are receivedin eru of cash dividends declared

If a generally accepted that shares received in lieu of cash dividends are [Link] fair value of
the shares received. The reason is that such shares are in effect properly dividends

in the absence of fair value of shares received, the income is equal to the cash diedenes that
woust have been received.

For instance, cassume that a shareholder owris 10.000 shares costing P1,000,000
Subsequently, the shareholder receives 1,000 shares in lieu of casb dividends +10 pershare the
morket valve per shore is 150. The receipt of the 1000 shores, recorded as follows:

Investment in equity securities Dividend income (1,000x150)

150.000

150.000

If there is no market value, the entry is,

Investmest in equity securities Dividend income (10.000 x 10)

100.000

100.000

۱۲

Cash Received in Lieu of Stock Dividends

When stock dividends are declared and received, unquestionably, they are not income. A
problem will arise when cash is received in lieu of stock dividends

For instance assume that a shareholder owns 10,000 shares costing P1,100,000 Subsequently,
the shareholder receives P150,000 cash in lieu of 1,000 shares origirially declared as 10% stock
dividends.

In this case, the "as if" approach is followed. This means that the stock dividends are assumed
to be received and subsequently sold at the cash received. Therefore, a gain ar lass may be
recognized.

14

Thus, the original cost of P1,100,000 applies now to 11.000 shares which is the sum ol the
original 10.000 shares and the 1.000 shares assumed to be received as stock-dividends. The
cost per share would then be P100. The 1,000 shares representing stock dividends are
assumed to be sold for the cash received. The entry to seco the cash receipt is:

Cash

Investment in equity securities (1.000 shares x P100)

150.000

Gain on investment
50.000

It is to be mentioned that under the ruling of the Bureau of Intermal Revenue, oll cash received,
whether originally designated as cash dividend or stock dividend, is income on the part of the
shareholder.

Thus, under the "BIR" approach, the cash received of P150,000 is simply debited to cash and
credited to dividend income.

However, the "as it" approach is theoretically sound and should be followed for accounting
purposes.

illustration On January 1. 2024, an entity purchased marketable eqully securities for

P1.000.000. The entity paid commission and taxes of P100.000,

The equity secuilties do not quality os financial asset held for trading, the entity made in
revocable election to present urrealized gain and loss in other comprehensive income.

The entry to record the acquisition a

Financial Asset-FVOCI Cash

P1,100,000

P1.100.000

FVOCI means the financial assel is measured at fair value through othe comprehensive income

Under PFRS9, paragraph 5.1.1, a financial asset measureckicit fair value through other.
comprehensive income shall be recognized initially at fair value plus transaction costs that are
directly attributable to the acquisition. Thus, the Commission and taxes -are part of the initial
cost of the investment.

On December 31, 2024, the securities have a market value of P1,300,000. The increase in
market value is:

Financial Asset-FVOCI Unrealized Gain-OCI

200.000

The unrealized gain in presented as component of other comprehensive income in the 2024
statement of comprehensive income.
The Finaricial Asset - FVOCI on December 31, 2024 are carried at the market value of
P1,300,000, with disclosure of the cost of P1.100.000.

The Financial Asset-FVOCI is normally classified as noncurrent asset.

On December 31, 2025, the securities have a market value of P1.600.000. The Increase in
market value is recorded as follows:

Financial Asset - FVOCI Unrealized Gain-OCI

At this point, the Financial Asset - FVOCI is carried at the market value of P1.600,000 and the
total unrealized gain is P500,000 (200,000+300.000).

However, only P300,000 will be shown in the 2025 statement of comprehensive income.

The total amount of P500,000 will appear in the statement of changes in equity.

On July 1, 2026, the securities are sold for P2,000,000. The entry to record the sale is:

Cash

Financial Asset FVOCI

1,600,000

Retained Earnings

400.000

Gain or loss in disposal of equity investment measured at fair value through other
comprehensive income is recognized in retained earnings in accordance with PFRS 9.
paragraph 5.7.1b.

Unrealzed Gain-OCI Retained Earnings

Application Guidance of PFRS 9, paragraph 85.7.1. provides that amount recognized in other
comprehensive income for financial asset measured at fair value through other comprehensive
income is not subsequently reclassified to profit or loss.

However, the cumulative gain or loss may be transferred within equity or retained eamings

3. To reclassify the 10% interest:

Investment in Associate
Financial Asset-FVOCI

4. To record the share in 2021 net income:

Investment in Associate

2.400.000

Investment income (40% x 6.000,000)

2,400,000

5. To record the share in 2022 cash dividend:

1,600,000

Cash (40% x 4,000,000) Investment in Associate

1,600,000

6. The excess of cost over carrying amount attributable to goodwill is not amortized.

Cost of 30% new interest

8,500.000

Fair value of 10% existing interest

P 4,000,000

P12.500.000

Total Cost of Investment

Carrying amount of net assets acquired (40% x 25.000.000)

Goodwill

Other Comprehensive Income of Associate

2.600.000
PAS 28, paragraph 22, provides that if an investor loses significant influence the investor shall
account for all amounts recognized in other comprehensive income by the associate on the
same basis as would be required if the associate had directly disposed of the related assets.

23 23

In other words, if the gain or loss previously recognized in other comprehensive income by the
associate would be reclassified to profit or loss upon disposal of the related assets, the investor
shall reclassify such gain or loss to profit or loss when the investor loses significant influence
over the associate 1

For example, if an associate has available for sale financial asset and the investor loses
significant influence over the associgte, the investor shall reclassity to profit or loss any gain or
loss previously recognized in other comprehensive income.

Investment in Bonds at Amortized Cost

When bonds are acquired and classified as financial assets at amortized cost, the bond
investments are classified as noncurrent investments.

The accounting procedures concerning acquisition of bonds, collection of interest periodically

and accrual of interest at the end of the period are the same as those used for trading and
available for sale securities.

The difference is that instead of debiting "trading securities", the debit should be "investment in
bonds" or "financial asset at amortized cost".

Reclassification

PYRS 9. paragraph 4.4 provides that an entity shall reclassity financial asses only when it
changes its business model for managing the financial assets

Where reclassificaftige occurs paragraph 5.6.1 provides that an entity shall apply the
reclassification prospectively from the reclassification date.

The entity shall not restate any previously recognized gains, losses and interest.

As defined in Appendix A of PFRS 9, the "reclassification date" is the first day of the reporting
period following the change in business model that results in an entity reclassifying financial
asset.

This means that if the change in business model is in 2024, the reclassification date January 1,
2025, the first day of the next reporting period.
However, the entity must disclose the change in business model in the 2020 financial
stotements because the change in the entity's business model it [Link] demonstrable
event

The Application Guidance 84.4.1 of PFRS 9 makes it clear that changes in-on entity's business
modelin managing its financial assets are expected to be infrequent.

The Application Guidance 84.4.3 expressly states that the following would not result to a change
in business model:

a. Change in intention related to a particular financial asset.

The classification of financial asset as at, fair value or amortized cost is no longer govemed by
management intent but by the entity's business model in managing financial assets.

b. A temporary disappearance of a particular market for a financial asset.

c. A transfer of financial asset between parts of the entity with different business models.

Exemptions from Reclassification

a. Equity investment held for trading or measured at FVPL cannot be reclassified by reason of
the consequential requirement of PFRS 9.

Actually, all equity investments cannot be reclassified.

b. Equity investment measured at EVOCI by irrevocable election cannot be reclassified simply

because the election is irrevocable.

c. Only debt investment can be reclassified because the change in business model applies
appropriately to debt investment.

However, debt investment measured at FVPL by irrevocable election cannot be reclassified

simply because the election is irrevocable.

Redemption of Share

Shores particularly preferencs shores, may be coled is for usdemption and cancreation by the
onlily tauing them

On the part of the shareholder, the redemption of shares is recorded in the same mariner as
sale of shares. The redemption price is treated at the sales price.
For instance, if a shareholder acquires 10.000 preference shares for P100 per share the entry
is:

Investment in preference shores

Cash

If subsequently, the preference shares are redeemed by the issuing entity of Pi 10 per share,
the entry to record the redemption is

Cosh (10.000 shares x P110)

Investment in preference shares

Gain on investment

100.000

Stock Right

When a corporation issues additional or new shares of stock, shareholders of record are given
the legal right to subscribe for the same before the new shares are offered for sale to the public)
Such legal right is called stock right. In law, stock right is known as preemptive right or right of
preemption.. The IAS term for stock right is right issue.

A stock right is inherent in every share. A shareholder receives one right for every share owned,
"Thus, if a shareholder owns 10,000 shares, the shareholder will receive 10,000 stock rights

Stock rights are valuable to shareholders because the price at which the new shores are sold is
generally below the prevailing market price. For instance, the market. value of the share may be
P150 but a shareholder Ihroügh the exercise of stock rights may be required to subscribe only
at the par value of P100.

The purpose of the stock right is to give the shareholders the change to preserve their equity
interest in the corporation.

The ownership of stock rights is evidenced by instruments or certificates called share warrant

Accounting for Stock Rights

PFRS 9 does not address this accounting issue categorically. But unquestionably, a stock right
is a form of a financial asset.
In this regard, this is a divergence of opinion among academicians and theoreticians. There are
two schools of thought on the matter, namely:

1. Stock rights are accounted for separately.

2. Stock rights are not accounted for separately.

Debt Investment of Amortized Cost

PS paragraph 4.1.2. provides that a financial civet sthall be meat of amortized cod if both of the
following conditions are met

a. The business model a to hold the financial asset in order to collect contractual cash flows on
specified dates.

b the contractual cash flows are solely payments of principal and interest on the princibat and
interest on the principal amount outstanding

In other worth the business model is to collect contractual cash flows if the contractual cash
flows are solely payments of principal and interest. In such a case. the financice assets sharbe
measured at amorfized cost.

Debt investment of Fair Valve through OCI

PFRS 9, paragraph 4.1.2A, provides that financial asset shall be measured at fair value through
other comprehensive income if both of the following conditions are met:

o the business model is achieved both by colecting contractual cash flows and by selling the
financial asset.

b. The contractual cash flows are solely payments of principal and interest on the principal
outstanding.

Note that the business model includes selling the financial asset in addition to collecting
contractual cash flows.

In this case, interest income is recognized using the effective interest method as in amortized
cost measurement

On derecognition, the cumulative gain and loss recognized in other comprehensive income shall
be reclassified to profit or loss.

Summary of Measurement Rules

Measurement of Equity Investments

1. Held for trading at fair value through profit or loss

2. Not held for trading-as a rule, at fair value through profit or loss

21

3. Not held for trading as a rule, at fair value through other comprehensive income by
irrevocable election

4. All other investment in quoted equity instruments at fair value through profit or loss

5. Investment inunquoted equity instruments of cost

6. Investments of 20% to 50%-equity method of accounting

7. Investments of more that 50%-consolidated method

Reclassification from Amortized Cost to FVOCI

PERS pommigraci provides the following if a inancs set is teckslied trom amedlaed cost to
IVOCE

The financiardoselis measured at fair value of reclassification date.

The alfference between the amortized cost carrying amount and the fair value af neclassification
datte is recognized in other comprehensive income

c. The original effective interest rate is not adjusted

lustration: On January 1. 2024, an entity purchased P6,000.000 face value bonds for
PS.500.000, The entity's business model of managing financial asset is collecting contractual
cash flows composed of principal and interest. The bonds pay interest annually every December
31.

Investment in Bondy

Canh

5:500,000
On December 31 2024 the entity's business model for managing financial asset nas change
from collecting contractual cash flows to collecting [Link] flows and seeing me asel in
the open markel.

The amortized cost of the tionds on December 31, 2024 is P5,800,000 after recording discount
amortization of P300.000

On January 1, 2025, the reclassification date, the fair value of the bonds

6.200.000

1. To record the reclassification on January 1, 2025:

Financial Asset-FVOCI Investment in Bonds

5,800,000

5,800,000

2. To recognize the fair value change:

Financial Asset-FVOCI

400.000

Unrealized Gain-OCI (6.200.000-5.800.000)

400.000

Reclassification from FVOCI to Amortized Cost

PFRS 9, paragraph 5.6.5. provides the following if a financial asset is reclassified from FVOCI to
amortized cost

a. The fair valve at reclassification date becomes the new amortized cost carrying amount.

b. The cumulative gain or loss previously recognized in other comprehensive income is

eliminated and adjusted against the fair value at reclassification date.

As a result, the investment is reverted back to amortized cost measurement.

c. The original effective rate is not adjusted.

Definition of Financial Asset

A financial asset is any astel that is

a. Cash

b. A contractual right to receive cash and another financial asset from another

entity. c. A contractual right to exchange financial instrument with another entity under
conditions that are potentially favorable.

An equity instrument of another entity

Examples of Financial Assets

Cash or currency is a financial asset because it represents the medium of exchange and is
therefore the basis on which all transactions are measured and recognized in financial
statements.

A deposit of cash with a bank or similar financial institution is a financial asset because it
represents the contractual right of the depositor to obtain cash from the bank or to draw a check
against the balance in favor of a creditor in payment of a financial liability

But a gold bullion deposited in bank is riot a financiat asset because although it is very precious
the gold is a commodity.

Examples of financial assets representing a contractual right to receive cash in the future are

a. Trade accounts receivable

b. Notes receivable

c. Loans receivable

d. Bonds receivable

In case of exchanges of financial instruments with another entity, conditions are potentially
favorable when such exchanges will result to gain or additional cash inflow to the entity.
Conversely, conditions are unfavorable when such exchanges will result to Toss or additional
cash outflow to the entity.

Ari example of a favorable condition is an option held by the holder to purchase shares of
another entity at less than market price.
Investments in shares or other equity instruments issued by other entities, for example. trading
and available for sale equity securities, can be classified as financial assets.

Not Considered Financial Assets

Physical assets, such as inventory, property, plant and equipment, and intangible assels, such
as patents and frademarks are not financial assets.

16

Control of such physical and intangible assets creates an opportunity to generate an intlow of
cash or another financial asset but it does not give rise to a present right to receive cash or
another financial asset.

Assets, such as prepaid expenses, for which the future economic benefit is the receipt of goods
or services, father than the right to receive cash or another financial asset are not also financial
assels.

Leased assets are not also financial assets because control of such assets does not give rise to
a present right to receive cash or another financial asset

Gains and Loss Financial Asset of Fair Value

Lincker PFRS 9, pronograph 5.7.1. gain and loss on financial asset measured of for vour shall
be presverded in profit or lost, except

a. When the financial asset is part of a hedging relationship.

When the financial asset is an investment in nontrading equity instrument and the entity has
irrevocably elected to present unrealized gain and loss in other comprehensive income.

c. When the financial asset is a debt investment that is measured at fair value through other
comprehensive income.

In other words, unrealized gain and loss on financial asset held for trading and other financial
asset measured at fair value are reported in the income statement.

Unrealized gain and loss arise from investments that are reported at fair valve
In determining fair value, no deduction is made for transaction costs that may be incured on
disposal of the financial asset.

If the fair vakie is higher than carrying amount, the difference is an unrealized gain.

If the fair value is lower than carrying amount, the difference is an unrealized loss.

Gain and loss that result from actually selling the investments are known as realized gain and
realized loss.

24

Gains and loss - Financial Asset at Amortized Cost

Unrealized gains and losses on financial assets at amortized cost are not recognized simply
because such investments are not reported at fair value.

22

PRFS 9. paragraph 5.7.2. provides gain and loss on financial asset measured al amortized cost
and is not part of a hedging relationship shall be recognized in profit or loss when the financial
assets are derecognized, sold, impaired or reclassified, and through the amortization process.

Illustration-Trading Securities (TS)

On January 1, 2024, an entity purchased marketable equity securities to be beld for,

P5.000.000. The equity securities qualify as financial asset held for trading. The entity also paid
P50,000 as commission to the broker. The entry to record the acquisition is:

Trading Securities

Commission Expense

Cash

P5,000,000

50.000

P5,050,000

The acquisition may be debiled to "Financial Asset - FVPL".

FVPL means that the financial asset is measúred at fair value through profit or loss.
Observe that the commission paid to the broker is not capitalized as cost of the investment but
treated as outright expense.

Equity Method Not Applicable

PAS 28. paragraph 17, provides that an investment in associate shall not be accounted for
using the equity method if the investor is a parent that is exempt from preparing consolidated
financial statements or all of the following apply

[Link] investor is a wholly-owned subsidiary, or a partially owned subsidiary of another entity

and its other ownais do not object to the investorñol applying the

2. the investor's debt and equity instrument are not traded in the public market meaning stock
exchange or "over the Counter market.

3. The investor did not file or it is not in the process of filing its financial statements with the
secunties and Exchange Commission for the purpose of issuing any class of instruments in a
public market

4. The ultimale or any intermediate parent of the investor produces consolidated financial
statements available for public use that comply with Philippine financial Reporting Standards

In these circumstances, the investment is accounted for as financial asset at fair value through
profit or loss or as financial asset at fair value through other comprehensive income or as
nonmarketable investment af cost or investment in unquofed equity instrument.

PAS 28. paragraph 20, provides that if the investment in associate is classified as held for sale,
it is accounted for in accordance with PPRS's which specifically mandates that any noncurrent
asset classified as "hetd for sale" shall be measured of the lower of carrying amount and fair
value less cost to sell/disposal.

25

Investment of Less Than 20%

Again, it the investor holds, directly or indirectly, through subsidiaries less than 20% of the
voting power of the investee, it is presumed that the invester does not have significant influence,
unless such influence can be clearly demonstrated.

Accounting for Investment of Less than 20%

a. Fair Value Method - This is applicable to financial asset measured at fair value through profit
or loss and financial asset measured at fair value through other comprehensive income.
b. Cost Method This is usually applied with respect to investment in unquoted equity instrument
or nonmarketable equity security.

]30

Under the fair value and cost method, the investor does not share in the profit or loss of the
investee because of the legal relationship between the investor and the investee. The investor
and the investee are independent of the other. Accordingly. dividends received by the investor
from the investee are accounted for as dividend income
Potential Voting Rights

PAS 28 paragraph / prowans that chong Hot ather arentity fios g

However, when potential rights est, thestore-00 port of th

Loss of Significant Influence

Participate in thetiniccior and operating policy d

The loss of significant influence con accur with or without change in the absolute or relative
ownership interest.

For example, the loss of significant influence could occur when on associate becomes subject to
control of a government, court, administrator or reguligt

The loss of significant influence could also occur as a result of a contractual agreement

Equity Method

The equity method is based on the economic relatoning between the vestice art the anvesteel
the investor and the investee, orowed on anale economic

The equity method is applicable when the investor has a significant influence over the investee

Under the equity method. the investment is initially secorded of cost-butil subsequently
increased by the net jncome of the investise and decreased by the rel loss and dividend
payments of the investee.

Note that the investment must be in ordinary shares. If the investment is in preference shares,
the equity method is not appropriate regardless of the percentage because the preference share
is a nonvaling equity. The investment in preference shares may be accounted for as fair value
through profit or lass or at fais value through other comprehensive income.

Technically, the investor nos significant influence but not control over the invester the investee
is said to be an associate or associated company. The investment in associate accounted for
using the equity method shall be classified as noncurrent anset

Accordingly, under the equity method, the investment in ordinary shares should be appropriately
described as Investment in associate.

the investor has control over the investee, the investor is known as the parent and the investee
is known as the subsidiary.

In this case, the investment in ordinary shares is described as investment in subsidiary

2. To record the sale of the bonds on June 30, 2027:

2027

P5,750,000

June 30 Cash

339.056

Unrealized Gain-OCI

P5.294.528

Financial Asset-FVOCI

544,528

Gain on Scale of Financial Asset

250,000

Interest Income

P5,500,000

Sales Price (5,000,000×110)

339.056
Unrealized Gain-OCI

P5.839.056

Total

5,294,528

Investment balance per book - June 30, 2027

P 544,528

Gain on Sale of Financial Asset

Another Computation

Sales Price

P5,500,000

Carrying Amount per table - June 30, 2027

4,955,472

Gain on Sale of Financial Asset

P 544,528

Sales Price

P5,500,000

Interest accrued from January 1 to June 30. 2027

250,000

Total

(5.000.000 x 10% x 6/12) Cash Received

P5,750,000
Note that for debt investment measured at fair value through other comprehensive income, the
cumulative gain or loss is reclassified to profit or loss on disposal of the investment.

Fair Value Option

PFRS 9, paragraph 4.1.5, provides that an entity at initial recognition may irrevocably designate
a financial asset a measured at fair value through profit or loss even if the financial asset
satisfies the amortized cost or FVOCI measurement.

In other words, investment in bonds can be designated without revocation as measured at fair
value through profit or loss even if the bonds are held for collection as a business model.

Under the fair value option, all changes in fair value are recognized in profit or loss. Accordingly,
any transaction cost incurred is an outright expense.

Moreover, the interest income is based on the nominal rate rather than the effective interest rate

the cost of P2.500.000 is then alikicated as tolloves

Cost of anginal invesiment

P2.500.000

Theoretical value of stock night (10.000 x P101

12.400.000

Remaining cost of ongrial investment

Note that the market value of the share is P210 right-on, meaning, this includes the value of the
right of P10, therefore, the value of the share excluding the right is P200

If the market value of the share is exright, the theoretical value of the stock right is computed as
follows:

210-150

Value of one right

60

5
812 per right

The cost of P2.500.000 is then allocated as follows:

Cost of original investment

P2.500.000

Theoretical value of stock right (10.000 x P12)

120.000

Remaining cost of original investment

12,380,000

Exercise of Stock Rights

When the rights are exercised, the cost of the new investment includes the following:

a, Subscription price

b. Cost of the stock rights exercised

The entry to record the acquisition of the new investment through the exercise of stock rights is:

Investment in Equity Secunties

Cash (for the subscription price)

Stock Rights (for cost of rights exercised)

XX

XX

XX

To continue the illustration, since that there are 10,000 stock rights and the investor can acquire
one new share for every 5 rights, the investor would acquire 2.000 new shares at P100 per
share of P200.000.
The journal entry to record the acquisition of the new investment through the exercise of stock
rights is:

Investment in Equity Securities

P300,000

Cash

P200.000

Stock Rights

When a shareholder is entilled only to a fraction of a share, the shareholder may purchase
additional rights in order to acquire one full share. In this case, the cost of The new investment
includes the following:

a. Subscription price

b. Cast of rights onginally owned

Cost of stocknights purchased

the stock rights are not exercised buf sold for P150.000, the entry to record the sole

Cash

Stock Rights

150.000

50.000

Gain on Sale of Stock Rights

On the other hand, if the stock nights are not exercised bul expired, the entry to record the
expiration is

1015 on Stock Rights Stock Rights

100.000

100.000
Illustration-Not Accounted for Separately

A shareholder acquired (10.000 hores costing P1.500.000. Subsequently, the shareholder

received 10.000 stock rights to subscribe new shares of P100 per share for every five rights
held

The market value of the share is P140, and the market value of the right is P10. The stock rights
are all exercised by the shareholder.

Journal Entries

a. To record the acquisition of the original investment:

Investment in Equity Securities Cash

P1,500,000

P1.500.000

b. To record the receipt of the stock rights:

Memo entry-Received 10,000 stock rights to subscribe for new shares at P100 per share for
every five shares held, or a total of 2.000 new shares.

c. To record the exercise of the stock rights:

Investment in Equity Securities Cash (2,000 shares x 100)

200.000

If the stock rights are not exercised but sold, the sale is simply recorded by debiting cash and
crediting the original investment account. No gain or loss is recognized from the sale.

Thus, if the 10.000 rights are sold for P150,000, the entry is:

Cash

Investment in Equity Securities

P 150,000

P 150.000
if the stock rights are not exercised but expired, only a memorandum is necessary to record the
expiration.

Any subsequent transactions affecting the shares shall be accounted for using either FIFO or
average method.
Pistrofion Ordensry

veste canet 10% de testthen in agityscunty unquoted and the cond methode

following

Hef income

Cash Dividend Mone

2024

4.500/100

2025

Obviously, the cash dividend of P4.500.000 originated from postacnusion eamings of

Pc000.000 and preacquisition retained earnings of P500.000

Novertheins, the cash dividend poed by the investee in 2025 is recorded on XYZ follows

Cosh (10% x P500.000)

450.000

Dividend income

P450.000

Change from Cost or Fair Value to Equity Method

the investee may not be classified as an associate until a later date. certain date t

For example, an investor held a 10% interest in an investee on January 1. 2024. The investor
acquired additional 10% interest in the same investee on January 1. 2025 enabling the investor
to exercise signilicant influence over the investee
In 2020, the investmerit is accounted for under the cost method or fair value method However,
in 2025, the investment is to be accounted for under the equity method because the investee is
now an associate.

If subsequent acquisitions increase the ownership interest to 20% or more, a change must be
made to the equity method.

This scenario or phenomenon is known as "investment in associate achieved in stages

Investment in Associate Achieved in Stages

The investment in associate achieved in stages is not covered by PAS 28. The principle for
business combinations achieved in stages should be applied.

PFRS 3. paragraph 42, provides that in a business combination achieved in stages. the acquirer
shall remeasure the previously held equity interest at fair value and recognize the resutting gain
or loss in profit or loss.

29

By influence, the investor shall remeasure the previously held interest in an investee using the
equity method. The remeasured equity amount is considered the fair value of the investment in
associate.

By inference, this "fair value approach" should be followed when an associate is acquired in
stages,

The difference between the remeasured equity amount and the carrying amount of the
investment shall be recognized in profit or loss.

Actually, the difference between the remeasured equity amount and the carrying amount of the
investment is the sarne as the difference between the income previously reported and the
income thal would have been reported under the equity method.

Accounting is a service activity primarily Enancial in nature about economic entities useful in
making economic decisions. that is intended to be

2. Accounting is an art of recording money clarifying significant manner and in terms of which
are in part at least of a financial character thereof. and and sumin arising transaction and events
interpreting in a the results
3. Accounting is the process of identifying. mea sueño. and communicating economic
information to permit informed judgment and decision by users of the information.

4. The following important points made in the definitions of accounting are one, accounting is
about quantitative information, two, the information is likely to be financial in nature. and three,
the information should be useful in decision making

5. Identifying This accounting process is the recognition or nonrecognition of business activities

as "accountable" events.

6. Economic activities of an entity are referred to as which may be classified as external and
internal. transaction or events

7. External transactions or exchange transactions are those economic events involving one
entity and other entity.

8. Internal transactions.

are economic events involving the entity only.

9. An event is accountable and equity. quantifiable when it has an effect on assets, liabilities

10. Measuring This accounting process is the assigning of peso amounts to the accountable
economic transactions and events.

11. Several measurement bases are used in accounting which include, but not limited to,

historical cost

current cost

fair value

realizable value

present valve

and sometimes

inflation adjusted costs

12. Communicating is the process of transforming economic data into useful accounting
information, such as financial statements and other accounting reports.
13.

Communicating is the process of preparing and distributing accounting reports to potential users
of accounting information.

14 Recording

or journalizing is the process of systematically maintaining a record of all economic business

transactions after they have been identified and measured.

15. Classifying is the sorting or grouping of similar and interrelated economic transactions into
their respective classes.

16. Summarizing is the preparation of financial statements which include the statement of
financial position, income statement, statement of comprehensive income, statement of
changes in equity and statement of cash flows.

17.

Interpreting statement ratios.

the processed information involves the computation of financial

18. Identifying and measuring are pointless if the information contained in the accounting
records cannot be communicated in some form to potential users. Actually, it is for this reason
that accounting has been called the " language of business

Accounting is an in formation system that measures business activities, processes information

into reports and communicates the reports to decision makers.

20. The basic objective of accounting is to provide quantitative financiat

21. Accountancy of law and medicine. Here in the Philippines, in order to qualify to practice the
accountancy profession, a person must Finish a degree in Bachelor of Science in Accountsmey
and pass a very difficult government examination given by the Duard of Accontanty has
developed as a profession attaining a status equivalent to that

22. Republic Act No. 9298 is the law regulating the practice of accountancy in the Philippines.
This law is known as the Philippins Accountancy Act of 200.

23. The Board of Accountancy is the body authorized by law to promulgate rules and
regulations affecting the practice of profession in the Philippines.
24. The Board of Accountancy. CPA examination. is responsible for preparing and grading the
Philippine

25. Single practitioners and partnerships for the practice of public accountancy shall be
registered certified public accountants in the Philippines.

26. Certified public accountants, firms and partnerships of certified public accountants, including
partners and staff members thereof, are required to register with the Board of Accountancy and
Professional Regulation Commission for the practice of public accountancy.

27. Certified Public Accountants generally practice their profession in three main areas, namely,
public accounting private accounting. and government accounting

28. The field of public accounting or public accountancy is composed of individual practitioners,
small accounting firms and large multinational organizations that render independent and expert
financial services to the public.

29. Public accountants usually offer three kinds of services, namely auditing and management
advisory services taxation

has traditionally been the primary service offered by most public 30. Auditing accounting
practitioners.

31. or specifically external auditing. is the examination of Auditing financial statements by

independent certified public accounts for the purposes of expressing an opinion as to the
fairness with which the financial statements are prepared.

32. Taxation service includes the preparation of annual income tax returns and determination of
tax consequences of certain proposed business endeavors.

33. Management advisory services have become increasingly important in recent years,
although audit and tax services are undoubtedly the mainstay of public accountants.

34. Specifically, management advisory services include advice of installation of computer

system installation and modification of accounting system quality control budgeting forward
planning and forecasting design and modification of retirement plano and even advice on
company_mergers and take overs

35. Private accounting Many Certified Public Accountants are employed in business entities in
various capacity as accounting staff, chief accountant, internal auditor and controller.

36. Government accounting "encompasses the process of analyzing, classifying. summarizing

and communicating all transactions involving the receipts and disposition of government fund
and property and interpreting the results thereof".
Continuing professional development / refers to the inculcation and acquisition of advanced
knowledge, skill, proficiency, and ethical and moral values after the initial registration of the
Certified Public Accountant for assimilation into professional practice and lifelong learning.

38. raises and enhances the technical skill and Continuing professional development
competence of the Certified Public Accountant.

39. The CPD credit units refer to the CPD credit hours required for the renewal of CPA licenses
and accreditation of a CPA to practice the accountancy profession every three years.

40. Under the new BOA Resolution, all Certified Public Accountants regardless of area or sector
of practice shall be required to comply with 120 CPD credit units in a compliance period of three
years.

41. The Continuing Professional Development is required for the renewal of CPA License and
aærediation of to practice the accountancy profession. CPA

42. A CPA shall be permanently exempted from CPD requirements upon reaching the age of 65
years

43. In a broad sense, accounting embraces auditing Auditing is one of the areas of accounting.
specialization,

44. In a limited sense, hand, auditing is analytical accounting is essentially. constructive in

nature. On the other

45. Bookkeeping is procedural and largely concerned with development and maintenance of
accounting records. It is the how of accounting.

46. Accounting is conceptual and is concerned with the why reason or justification for any action
adopted.

47. Accountana, Peters to the profession of accounting practice while secounting used in
reference only to a particular field of accountancy. is

48. Financial accounting is primarily concerned with the recording of business transactions and
the eventual preparation of financial statements.

49. Financial reporting financial reporting. endeavors to promote principles that are useful in
other
50. Other financial reporting comprises information provided outside the financial statements
that assists in the interpretation of a complete set of financial statements or improves user's
ability to make efficient economic decisions.

51. Managerial accounting. internal users only. is the accumulation and preparation of financial
reports for

52. Generally accepted accounting principles. are conventional, meaning, they become
generally accepted by agreement rather than by formal derivation from a set of postulates and
basic concepts.

53. Generally accepted accounting principles represent the rules, procedures, practice and
standards followed in the preparation and presentation of financial statements.

54. The process of establishing GAAP is a social process which incorporates political actions of
various interest user groups as well as professional judgment logic and research

55. The overall purpose of accounting standards is to identify proper accounting practices for
the preparation and presentation of financial statements.

The Financial Reporting starelords Council is the accounting standard setting body created by
the Professional Regulation Commission upon the recommendation of the Board of
Accountancy in carrying out its powers and functions provided under R.A. Act No. 9298.

57. The FRSC is composed of 15 members with a Chairman who had been or is presently a
senior accounting practitioner and 14 reprezentatives.

58. The Philippine Interpretation Committee was formed by the FRSC in August 2006 and has
replaced the Interpretations Committee or IC formed by the Accounting Standards Council in
May 2000.

59. The counterpart of the PIC in the United Kingdom is the International Finonciat which has
already replaced the Standing Reporting Interpretations Committee /Interpretations Committee
or SIC.

60. The International Accounting standards Committee is an independent private sector body,
with the objective of achieving uniformity in the accouriting principles which are used by
business and other organizations for financial reporting around the world.

61. Objectives of IASC

a. To formulate and publish in the public interest accounting standards to be observed in the
presentation of financial statements and to promote their worldwide acceptance and
observance.
b. To work generally for the improvement omel harmonitatief regulations, accounting standards
and procedures relating to the presentation of financial statements.

62. The International Accounting Standards Board publishes its standards in a series of
pronouncements called "International Financial Reporting Standards" or IFRS.

65. The move towards IFRS is essential to achieve the goal of one globally accepted financial
reporting standards. uni form and

66. The International Financial Reporting Stanclards is a global phenomenon intended to bring
about greater transparency and a higher degree of comparability in financial reporting, both of
which will benefit the investors and are essential to achieve the goal of one uniform and globally
accepted financial reporting standards.

67. The Philippine Financial Reporting Standards collectively include all of the following:

a. Philippine Financial Reporting Standards which correspond to International Financial

Reporting standards

b. Philippine Accounting Standards which correspond to International Accounting Standards

IFRIC

c. Philippine Interpretations which correspond to Interpretations of the and the Standing

Interpretations Committee and Interpretations developed by the Philippine Interpretations
Committee

68. The conceptual fromeworks is a summary of the terms and concepts that underlie the
preparation and presentation of financial statements for external users.

69. The conceptual frameworle is an attempt to provide an overall theoretical foundation for
accounting which will guide standard-setters, preparers and users of financial information in the
preparation and presentation of statements.

70. conceptual framework It is the underlying theory for the development of accounting
standards and revision of previously issued accounting standards.

71. In essence, the conceptual framework of accounting:

a. Assists the FRSC in developing accounting stanclards/that will represent Philippine GAAP.

b. Assists preparers of financial statements in applying accounting standards and in dealing with
issues not yet covered by GAAP.
C. Assists the FRSC in its review and adoption. Reporting Standards. of the International
Financial

d. Assists users of financial statements in interpreting the information/contained in the financial

statements.

e. Assists auditors in Farming on opinien conform with Philippine GAAP, as to whether financial
statements

f. Provides information to those interested in the work of the FRSC in the formitation of Pres

72. Is the conceptual framework a Philippine Financial Reporting Standard? No.

73. The primary users creditors. include existing and potential investors, lenders and other

74. Existing and potential investors in and return provided by their investmerrfs. are concerned
with the risk inherent

75. Existing onel potential lenders and other creditors information which enables them to
determine whether their loans and interest are interested in thereon will be paid when due.

76. The other users include the employees, customers, governments and their agencies, and
the public.

77. Employees

are interested in information about the stability and profitability of the entity.

78. Employees They are interested in information which enables them to assess the ability of
the entity to provide information, retirement benefits and employment opportunities.

79. Customers have an interest in information about the continuance of an entity especially
when they have a long-term involvement with or are dependent on the entity.

80. Government and their agencies resources and therefore the activities of the entity. are
interested in the allocation of

Government and their agencies.

81. These users required information to regulate the activities of the entity, determine taxation
policies and as a basis for national income and similar statistics.
82. public by providing information Financial statements may assist the about the trends and
recent development in the prosperity of the entity and the range of its activities.

83.

The conceptual framework deals with the following:

α. Objectives of financial statements

b. Qualitative characteristics. in financial statements. that determine the usefulness of the

information

C. Definition, recognition and measurement of the elements from which financial statements are
constructed.

d. Concepts of capital and copital maintenance

84.

Financial reporting is the provision of financial information about an entity to external users that
is useful to them in making economic decisions and for assessing the effectiveness of the
entity's management.

Financial reports include not only financial statements but also other information such as
financial highlights, summary of important financial figures. analysis of financial statements and
significant ratios.

86. The overall objective of financial reporting is to provide information about the reporting entity
that is useful to existing and potential investor, lenders. and other creditors in making decisions
about providing resources to the entity.

objectives of financial reporting: 87. Specifically, the Conceptual Framework for Financial
Reporting states the following

a. To provide information useful in making decisions about providing resources to the entity

b. To provide information useful in pessing the prospects of future net cash flows to the entity

c. To provide information about entity resources claims and chang to in resources and claims.

88. Financial position is information about the entity's economic resources and claims against
the reporting entity.

89. Liquidity is the availability of cash in the near future to cover currently maturing obligations.
90. solvency is the availability of cash over a long term to meet financial commitments when
they fall due.

91. The financial performance of an entity comprises its revenue, expenses and net income or
loss for a period of time.

92. Accnal accounting depicts the effects of transactions and other events and circumstances
on an entity's economic resources and claims in the periods in which those effects occur even if
the resulting cash receipts and cash payments occur in a different period.

are the basic notions or fundamental premises on 93. Accounting asumptions" which the
accounting process is based.

94. The going concern assumption means that in the absence of evidence to the contrary, the
accounting entity is viewed as continuing in operation indefinitely.

95. In financial accounting, the accounting entity. organization, which may be a proprietorship,
partnership or corporation. is the specific business

96. The time period assumption. requires that "the indefinite life of an entity is subdivided into
time periods or accounting periods which are usually of equal length for the purpose of
preparing financial reports on financial position, performance and cash flows".

97. The monetary unit assumption has two aspects, namely quantifiability Stability of the peso
and

98. Qualitative characteristics are the qualities or attributes that make financial accounting
information useful to the users.

99. The fundamental qualitative characteristics relate to content or substance financial

information. of

100. The fundamental qualitative characteristics are:

α. Relevance

b. Faithful Representation

The most efficient and effective process of applying the fundamental characteristics would
usually be:

that has the potential to be useful. First, islentify an economic phenomenon Second, identify the
type of information about the phenomenon that would
be most relevant and can be faithfully represented.

Third, cdetermine whether the information is available

102.

Pelevance is the capacity of information to influence a decision.

103. Financial information is capable of making a difference in a decision if it has a predictive

valve and confirmatory vabe

104. Financial information has predictive value processes employed by users to predict future if
it can be used as an input to outcome.

If it provides feedback about 105. Financial information has confirmatory value previous
evaluations.

106.

Materiality

is a practical rule in accounting which dictates that strict adherence to GAAP is not required
when the items are not significant enough to affect the evaluation, decision and faimess of the
financial statements. This concept is also known as the doctrine of convenience

107. An item is material if knowledge of it would affect or influence the decision of the informed
users of the financial statements".

108. In the exercise of judgment in determining materiality, the relative of an item are
considered. size and nature

109. Faithful representation. means that financial reports represent economic phenomena or
transactions in words and numbers.

110. To be a perfectly faithful representation, a depiction should have three characteristics,

namely:

a. Complete nes

b. Neutrality

C. Free from emar

111. Completeness requires that relevant information shall be presented in a way that facilitates
understanding and avoids erroneous implication.

112. Completeness is the result of adequate disclosure standard or the principle of full
disclosure.

113. The standard of adequate disclosure means that all significant and relevant information
leading to the preparation of financial statements shall be clearly

reported.

114. Actually, to be complete, the financial statements shall be accompanied by notes to

financial statements

provide narrative description or disaggregation of 115. Notes to financial statements, the items
presented in the financial statements and information about items that do not qualify for
recognition.

116. A neutral depiction. depiction is "without bias" in the preparation or presentation of financial
information.

117. Neutrality is synonymous with the all-encompassing "principle of fairness".

Free from error

sed

118. means there are no errors or omissions in the description of the phenomenon or
transaction, and the process used to produce the reported information has been selected and
applied with no errors in the process.

Timeliness means that the financial information must be available or communicated early
enough when a decision is to be made.

139. Timeliness enhances the truism that without knowledge of the past, the bosis for prediction
will wwally be lacking and without interest in the fitum knowledge of the post sanile

esired

140. Cost is a pervasive constraint on the information that can be provided by financial
reporting.

141. The Cost constraint is a consideration of the cost incurred in generating financial
information against the benefit to be obtained from having the information.
142. The elements of financial statements refer to the qualitative information shown in the
statement of financial position and income statement

143. The elements of financial statements are the building blocks, from which the financial
statements are constructed.

144. The elements directly related to the measurement of financial position are Assets, liabilities
and equity.

145. The elements directly related to the measurement of financial performance are income and
expenses.

146. Recognition is a term which means the reporting of an asset, liability. income or expense
on the face of the financial statements of an entity.

147. Assets are defined as "resources controlled by the entity as a result of past are expected
transactions or events and from which future economic benefits. to flow to the entity".

148. An asset is recognized when it is probable thet future economic benefito will flow to the
entity and the asset has a cost or value that can be measured reliably

149. The term probable means that the chance of the future economic benefits arising is more
likely rather than less likely.

150. The future economic benefit embodied in an asset is the potential to contribute directly or
indirectly to the flow of cash and cash equivalents to the entity.

151. This principle requires Inherent in asset recognition is the cost principle that the assets
should be recorded initially at original acquisition cost

152. In a cash transaction, cost is equivalent to the cash payment

153. In a noncash or an exchange transaction, the cost is equal to the fair valve of the asset
given or fair value of the amet evident, whichever is clearly received

154. In the absence of fair value, the cost is equal to the book value of the asset given.

155. Liabilities are " present obligations of the entity arising from past transactions or events the
settle ment of which is expected to result in an outflow from the entity of resources embodying
economic benefits".
156. A liability is recognized when it is probable that an outflow of resources embodying
economic benefits will be required for the settlement of a present obligation and the amount of
the obligation can be measured reliably.

157. An essential characteristic of a liability is that the entity has a present obligation which may
be legal or constructive

Obligations may be legally enforceable contract or statutory requirement. as a consequence of a

binding

159. Equity is the residual interest deducting all of its liabilities in the of the entity after assets

160. Income is " increase in economic benefit during the accounting perjod in the form of inflow
or increase in asset or decrease in liability. that results in incison in equity, other than
contribution from equity participants".

161. The definition of income encompasses both revenue and gains

162. Revenue arises in the course of the ordinary regular activities of an entity and is referred
by a variety of different names including sales, fees, interest, dividends, royalties and rent.

163. Gains represent other items that meet the definition of income and do not arise in the
course of the ordinary regular activities of an entity.

164. Income Recognition Principle recognized when earned". The basic principle is that "income
shall be

165. PAS 18, paragraph 14, provides the following conditions for the recognition of revenue
from sale of goods:

of 1. The entity has transferred to the buyer the significant risks and rewards ownership of the
goods.

2. The entity retains nelther continuing managerial involvement nor effective contel Lover the
goods sold.

3. The amount of revenue con be measured reliably

associated with the transactions will 4. It is probable that economis benefits. flow to the entity.

5. The costs incurred or to be incurred in respect of the transaction can be measured reliably

166. Installment Methock - Revenue is recognized at the point of collection. The amount of
revenue is determined by multiplying the gross profit rate by the amount of collections.
167. -Revenue is recognized Gout Recovery Method or Sunk Cost Hethod also at the point of
collection. However, unlike the installment method, all collections are first applied to the cost of
merchandise sold.

168. Cost Recovens Hethod or Sunle Cost Method. This method is usually followed when the
collection of the installment sales contract is very uncertain or highly speculative.

-Revenue is recognized when received regardless of 169. Cash method when earned.

170. Percentage of completion method. When the outcome of a construction contract can be
estimated reliably, contract revenue and contract costs associated with the construction contract
shall be recognized as revenue and expenses, respectively, be reference to the stage of
completion of the contract activity.

- Revenue is recognized at the point of production. 171. Production method

172. Production method 1. This method is applicable to agricultural, forest and mineral products.

173.

The production method is allowed when a sale is assured under a forward contract or a
government guarantee, or when a homogeneous market exists and there is a negligible risk of
failure to sell.

Interest revenus shall be recognized on a time proportion basis that takes into account the
effective yield on the asset.

175. Royalties shall be recognized on an accrual basis in accordance with the substance of the
relevant agreement,

176. Dividends shall be recognized as revenue when the shareholder's right to receive payment
is established, meaning, when these are declared.

177. Installation fees are recognized as revenue over the period of installation by reference to
the stage of completion.

178. Subscription revenue subscription period. should be recognized on a straight-line basis

over the

179. Aclmission fees are recognized as revenue when the event takes place.

180. Tuition fees are recognized as revenue over the period in which tuition is provided.
181. Expense is" decrease in economic beret during the accounting period in the form of an
outflow or decrease in asset of increase in liability results in cleer case in equity other than
distribution to equity participants". that

182. The definition of expenses encompasses losses as well as those that arise in the course of
the ordinary regular activities of the entity. expenses

that arise in the course of ordinary activities of the entity 183. Expenses include, for example,
cost of sales, wages and depreciation.

184. Losses represent other items that meet the definition of expenses and do not arise in the
course of the ordinary regular activities of the entity.

185. The basic expense recognition principle means that "expenses are recognized when
incurred.

186. The expense recognition principle is the application of the matching principle

187. The matching principle requires that "those costs and expenses incurred in earning a shall
be reported in the same period".

188. The matching principle has three applications, namely, Cause and effect association
systematic and rational allocation and immediate recognition

189. Under this principle, the expense is Cause and Effect Association recognized when the
revenue is already recognized. The reason is the presumed direct association of the expense
with specific items of income. This is actually the strict matching concept "

190. Cause and Effect Association This process, commonly referred to as the matching of costs
with revenue, involves the simultaneous or combined recognition of revenue and expenses that
result directly and jointly from the same transactions or other events.

191. Systematic and Rational Allocation expensed by simply allocating them over the periods
benefited. Under this principle, some costs are

192. Immediate Recognition Under this principle, the cost incurred is expensed outright because
of uncertainty of future economic benefits or difficulty of reliably associating certain costs with
future revenues.

Measurement is the process of determining the monetary amounts at which the elements of the
financial statements are to be recognized and carried in the balance sheet or statement of
financial position and income statement.
194. Historical cost is the amount of cash or cash equivalent paid or the fair value of the
consideration given to acquire an asset at the time of acquisition. This is also known as " past
purchas exchange pice".

195. Historical cost is the measurement basis most commonly adopted by entities in preparing
their financial statements.

196. Current cost is the amount of cash or cash equivalent that would have to be paid if the
same or equivalent asset was acquired currently. This is also known as "current purchase
exchange prise".

197. Realizobh value is the amount of cash or cash equivalent that could currently be obtained
by selling the asset in an orderly disposal. This is also known as " current sale exchange price

198. Present value is the discounted value of the future net cash inflows that the Item is
expected to generate in the normal course of business. This is also known as "future exchange
price

199. The financial performance of an entity is determined using two approaches. namely capital
maintenance and transaction appmach

200. The" capital maintenance approach means that net income occurs only after the capital
used from the beginning of the period is maintained.

201.

Financial capital is the absolute monetorry value of the net assets contributed

by shareholders and the value of the increase in net assets resulting from earnings retained by
the entity.

202. Financial capital is based on historical cost It is the concept that is adopted by most
entities.

203. Physical capital is the quantitative measure of the physical productive capacity to produce
goods and services.

204. Constructive obligations arise from normal business practice, custom and a desire to
maintain good business relations or act in an equitable manner.

205. The following factors are considered in deciding to move totally to international accounting
standards:
a. Support of international accounting standarsks by Philippine organizations, such as the
Philippine SEC, Board of Accountancy and PICPA.

b. Increasing internalization of business. which has heightened interest in a common language

for financial reporting.

C. Improvement of international accounting standards or removal of free choices of accounting

treatments.

d. Increasing recognition of international accounting standards by the World Bank. Asian

Development Bank and World Trade Organization.

206. Existing and potential investors need general purpose financial reports in order to enable
them in making

decisions whether to buy sell or hold investments

207. Existing and potential lenders and other creditors need general purpose financial reports in
order to enable them in making decisions whether to provide or settle loans and other forms of
credit

208. General purpose financial reports provide information about the financial
position of a reporting entity.

1. Financial statements are the means by which the information accumulated anel processed in
financial accounting is periodically communicated to the users. Stated differently. these are the
end product / or main output of the financial accounting process. These are the structured
financial presentation of the financial position and financial performance of an entity.

2. A complete set of financial statements comprises the following components:

1. Statement of Financial Position or formerly Balance Sheet

2. Income statement

3. Statement of Comprehenaiks pooms

4. Statement of Changes in Equity

5 Statement of Cash Flows.

6. Notes, comprising a summary of significant acuaunting policies and other aplanetary notes
3. The objective of financial statements is to provide information about the financial portion
financial performance and cash flows is useful to a wide range of users of an entity that in
making eczeemic decisions

4. Financial statements shall be presented at least cinnually.

5. A statement of financial position is a formal statement showing the three elements comprising
financial position namely assets, Irabilities and equity

6. The essential characteristics of an asset are:

a. The asset is controlled by the entity

b. The asset is the result of a past trong a past troncoction or event

C. the asset provide future conomic benefits

d. The cost of the asset can be measured reliably.

7. Assets are classified into two, namely curent assets and noncument assets

8. Paragraph 66 of revised PAS I provides that an entity shall classify an asset as current when:

cash or cash equivalent unless the asset is restricted from being exchanged or used to settle a
liability for at least twelve months after the a. The assel is

reporting period. purpose of trading b. The entity holds the assets primarily for the

after the reporting c. The entity expects to realize the asset within twelve months. period.

it within d. The entity expects to realize the casset or intends to sell or consume the entity's
normal operating cycle.

9. PAS 1. paragraph 54, provides that as a minimum, the line items in the current assets section
are:

Cash and cash equivalents α.

Financial assets at fair value such as trading securities and other b. investments in quoted
equity instruments.

C. Trade and other receivalotes

d. Inventories
e. Prepaid expenses

10. The caption "noncurrent assets" is a residual definition. PAS 1, paragraph 66, simply states
that "an entity shall classify all other assets not classifieel as current as noncurrent".

11. Noncurrent assets include the following:

a. Property, plant and equipment

b. Long-term investment

C. Intangible assets

d. Deferred tax assets

e. Other Noncument assets

Property, plant and equipment. are tangible assets which are held by an entity for use in
production or supply of goods and services, for rental to others, or for administrative purposes,
and are expected to be used during more than one period.

13. Investments are assets held by an entity for the accretion of wealth through capital
contribution, such as interest, royalties, dividends and rentals, for capital appreciation or for
other benefits to the investing entity such as those obtained through trading relationships.

14. An intangible asset is simply defined as an identifiable nonmonetary asset without physical
substance.

15. Offier noncurrent assets are those that do not fit into the definition of the previously
mentioned noncurrent assets.

16. The essential characteristics of a liability are

The liability is the present obligation of particular entity.

b. The liability anses from post tromsoction or event

C. The settlement of the liability reprizes on out flow of resources embodying economic!

17. Liabilities are also classified as current and noncurrent.

18. Paragraph 69 of revised PAS 1 provides that an entity shall classify a liability as current
when:
a. The entity expects to settle the liability within the entity's normal operating cyck.

b. The entity holds the liability primarily for the purpose of trading

c. The liability is due to be settled within twelve months reporting period. after the

d. The entity does not have on unconditional right to defer rettlement. liability for at least twelve
months after the reporting period. of the

19. The face of the statement of financial position shall include the following line items for

current liabilities:

a. Trade and other Payables.

b. Current provisions

c. Short-term borrowing

d. Current portion of long-term debt

e. Current tax liability.

20. The term "noncurrent liabilities" is a residual definition. PAS 1, paragraph 66, provides that
all liabilities not classified as noncurrent". current are classified as

21. Examples of noncurrent liabilities are:

a. Noncurrent portion of long-term clebt

b. Finance lease liability /

C. Deferred for liability.

d. Long-term obligations to company officers.

e. Long-term deferred revenue

22. Shareholders' Equity or stockholders' equity is the residual interest of owners in the

net assets of a corporation

excess of assets over liabilities

measured by the

23. Notes to financial statements provide

narrative description or disaggregation of items presented in the financial statements and

information about items that

do not qualify for recognition

24. Notes contain information in acidition. to the presented in the statement of financial position,
income statement, statement of comprehensive income. statement of changes in equity and
statement of cash flows.

Generally, the elements constituting shareholders' equity with their equivalent IAS term are:

Philippine Term

IAS Term

Capital Stock

Share Capital

Subscribed Capital Stock

Subacibed share capital

Preferred stock

Preference Share Capital

Common Stock

Ordinary Share Capital

Additional Paul in capital

Share Premium

Petained Earnings (esAcit)

Accumulated Profits (looses)

Retained Earning: oppropriatel

Appropriation Resene

tuvalkation Surplus

Revaluation Resene

Treasury Stock

Treasury shore

This form sets forth the three major sections in a 26. Report form downward sequence of
assets, liabilities and equity.

27. Account form The presentation shows that the assets are shown on the left side and the
liabilities and equity on the right side of the statement of financial position.

28. An income statement is a formal statement showing the financial performance of an entity
for a given period of time.

29. Information about financial performance is useful in predicting future per formance and
ability to generate future cash flows

30. Comprehensive income is the change in equity during a period resulting from transactions
and other events, other than changes resulting from transactions with owners in their capacity
as owners.

31. The term is the total of income less expenses, excluding the profit or loss components of
other comprehensive income.

32. The term other comprehensive income comprises items of income and expenses including
reclassification adjustments that are not recognized in profit or loss as required or permitted by
Philippine Financial Reporting Standards.

33. The components of "other comprehensive income" include the following:

1. Unrealized gain or loss on equity investment.

2. measured at fair value through other comprehensive income. Unrealized gain or loss on debit
investment

3. measured at fair value through other comprehensive income.. Gain or loss from translation of
the financial stoctement of a foreign operation
4. Revaluation surplus during the year

5. Unrealized gain or loss from derivative contracts designated as cash flow hedge

6. "Re measurements", including actuarial gain or loss on defined bene fit plan..

7. Change in four value attributable to credit risk. liability designated at fair value through profit
or loss. of the financial

34. Two statements presentation of Comprehensive income:

a. An income statement showing the component of profit of loss.

b. A statement of comprehensive income beginning with as shown in the statement plus or

minus Other comprehensive income profit or loss the components of

35. This is the combined statement single statement of comprehensive in come showing the
components of profit or loss and components of other comprehensive income in a single
statement.

Sources of Income

a. Sales et merchandise to customers.

b. Kindering of services

C. of entity resources.

d. Dyposal of resources other than products

37. Components of Expense

a. Cost of sales

b. Disbebution costs selling expenses

Administrative expenses.

fier expenses

c. Income tax expense

38. The cost of sales of a merchandising concern is computed as follows (you may assume your
own amounts but see to it that it must be an acceptable assumption):

Beginning Loventory

Purchase

1,500,000.00

Freight in

$1,000,000.00

Total

Purchase returns and Allowancea

1,550,000.00

Purchase Discounts

2,250,000.00

Goocks Avartable for sale

200,000.00)

Ending Inventory.

Cout of Sale

2,050,000.00

39. Distribution costs.

constitute costs which are directly related to selling.

advertising and delivery of goods to customers. These ordinarily include salesmen's

commissions. traveling and marlating expenses. advertising and publicity expenser, freight out
depreciation of delivery equipment and ston equipment and other expenses related directly with
the selling function.

constitute cost of administering the business. These 40. Administrative expenses. ordinarily
include all operating expenses. goods sold, such as doubtful accounts not related to selling and
cost of of fir salories and expenses of general executives and of the generel accounting and
credit department office supplies used. certain taxes contributions depreciation of office building
office equipment and amortication of intergibles. professional fees and

41. Other expenses are those expeross which are not directly related to the selling and actininis
trat These expenses include charges to income such as loss on sale of trading investments loss
on sale of property, plant and equipment loss on sale of noncurent investment. and cavalty los
flood, earthquale, fire.

42. PAS 1, paragraph 82, provides that as a minimum, the income statement and statement of
comprehensive income shall include the following line items:

a. Revenue

b. Gain and loss from the derecognition of financial asset measured at amortized cost.

C. Finance Cost

d. Share in income or loss of associates and jant ventin accounted for using the equity method.

e. Income tax Expense.

f. A single amount comprising the total of the post-tax profit or loss of recognized on the
discontinued operations and poot far gain or loss measurement to fair value less cost to sell or
on disposal of the assets or disposal group constituting the discontinued operations.

g. Profit or loss for the period

h. total other comprehensive income

Comprehensive income for the period 1. loss and other comprehensive income.

Functional Presentation, function as part of cost of sales, distribution eosts, administrative

activities and other activities. It is also known as the cost of sales method This form classifies
expenses according to their

44. Natural Presentation. This presentation is referred to as the Under this form, expenses are
aggregated nature of expense method according to their nature and not allocated among the
various functions within the entity.

45. PAS I does not prescribe which form of Income Statement should be presented. True or
False?

Twe
46. a statement of comprehensive In addition to the income statement income is also prepared
in order to show the total comprehensive income.

47. The statement of comprehensive income starts with the profit or low shown in the income
statement as that plus or minus the component of other comprehensive income. are not
currently presented in the income statement but are recognized directly in equity as required or
permitted by accounting standards.

48. The Statement of Retained Earnings shows the changes affecting directly the retained
earnings of an entity and relates the income statement to the statement of financial position.

49. The important data affecting the retained earnings that should be clearly disclosed in the
statement of retained earnings are:

a. Profit or loss for the period

b. Prior period errors

C. Dividends declared and paid to sharsholders

d. Effect of charge in accounting poticy

e. Appropriation of retained earning,

50. The statement of changes in equity is a basic statement that shows the movements in the
elements or components of the shareholders' equity.

51. The statement of cash flows is a basic component of the financial statements which of an
entity. In summarizes the operating, investing caged financing activities simple language, the
statement of cash flows provides information about the cash receipts and cash payments. of an
entity during a period.

52. An entity shall present a statement of changes in equity showing the following:

1. Comprehensive income for the period

2. For each component of equity.

the effects of changes in accounting policies and correction of errors.

3. For each component of equity, a reconciliation between the camying amount at the beginning
and end of the period separately disclosing changes from:
α. Profit or loss

b. Each item of other comprehensive incothe

c. Transactions with owners in their capaci is owners showing seperately. contributions by and
distributions to av

Chapter 3

02

1. As contemplated in accounting, cash includes money and any other negotiable instrument
that is payable in money and acceptable by the bank for deposit and immediats credit.

2. Cash includes becks money orders bank drafts and because these are acceptable by the
bank for deposit or immediate encashment.

3.

Accordingly, to be reported as "cash", an item must be unrestricted in use. This means that the
cash must be readily available in the payment of current obligations and not be subject to any
restrictions contractual or otherwise.

4. Cash on hand. This includes undeposited cash collections and other cash items awaiting
deposit such as customers checke cashier's or manager's checks bank drafto traveters check
and money orders

5. Cash in bank This includes demand deposit or checking account and saving deposit which
are unrestricted as to withdrawal.

6.

Cash fund petty Patni denash fufynd payroll fund. divide set aside for current purpose such as

and

as short-term and highly liquid 7. PAS 7 defines cash equivalents investment that are readily
convertible into cash and so near their maturity that they present insignificant risk of changes in
value because of changes in interest rates.

8. The standard further states that "only highly liquid investments that are acquired three
months before maturity can qualify as cash equivalents.

9. Examples of cash equivalents are:

Three month BSP treasury bill

three-gear BSP treasury bill purchased three months before clate of maturity.

Three month time deposit

Three-month money market instrument

10. Cash is valued at

face valve Cash in foreign currency is value at the cument exchange rate

11. The caption "cash and cash equivalents" should be shown as the first item among the
current assets. However, the details comprising it should be disclosed in the notes to financial
statements.

12. If the term of money market instrument is three months or less such investments are
classified as cash equivalent and therefore included in the caption cash and cash equivalents.

13. If the term of money market instrument is more than three months but within one year, such
investments are classified as short-term financial asseb or temporainy investments current
assets and presented separately as

14. If the term of money market instrument is more than one year, such investments are
classified as noncurrent or long-term investments

15. Cash in foreign currency should be translated to Philippine pesos the current exchange rate

Deposits in foreign countries which are not subject to any foreign exchange restriction are
included in cash

17. Deposits in foreign bank which are subject to foreign exchange restriction, if material should
be classified separately among honcurrent assch and the restriction clearly indicated.

18. Examples of cash fund set aside for ioncurrent purpose: sinting fond preference shoe
redemption fund insurance funct equip

contingerit fund funed for acquirthiop or construction at property, plant o

19. When the cash in bank gecount has a credit balance, it is said to be an overdraft The credit
balance in the cash in bank account results from the issuance of checkes in excess of the
deposits
20. A bank overdraft is classified as a not be offbet current liability and should against other
bank accounts with debit balances.

21. When an entity maintains two or more accounts in one bank and one account results in an
overdraft, such overdraft can be offset against the other bank account with a debit balance in
order to show cash, net of bank over traft

or bank overdraft, net of other bank account

22. An overdraft can also be offset against other bank account if the amount is not material

23. A compensating balonce generally takes the form of minimum checking or demand deposit
account balance that must be maintained in connection with a borrowing arrangement with a
bank.

24. If the deposit is not legally restricted as to withdrawal by the borrower because of an
informal compensating balance agreement, the compensating balance is part of cash

25. If the deposit is legally restricted because of a formal compensating balance agreement, the
compensating balance is classified separately as cash held as compensating balonce the
related loan is short-term. under current assets. of

26. If the related loan is long-term, the compensating balance is classified as noncurent
investment

27. Checks are said to be undelivered of unreleased when they have been merely drawn and
recorded but not given to the payees. Accordingly. an adjusting entry is required to restore the
cash balonce set up the liability Cash as follows: and to

Accounts Payable or Appropriate account

28. The term postclated checks delivered means that the checks are drawn, recorded and
already given to the payees but they bear a date subsequent to the end of reporting period. The
original entry recording these checks should be reversed as follows: Cash

Accounts Payable of appropriate account

29. When the checks are not encashed by the payees within a relatively long period of time,
they are said to be stale

30. If the amount of stale etheck is immaterial, the accounting entry is as follows:

Cash
Miscellaneous Income

31. If the amount of stale check is material, the accounting entry is as follows: material.

Cash

Accounts Payable

32. Some entities open their books even beyond the end of the accounting period for the
purpose of showing a better picture of the financial highlights and-profit activities of the
business. Such practice is referred to as window dressing.

33. Window dressing is usually accomplished as follows:

[Link] as of the last day of the accounting period colleckons made subsequent to the
close of the period.

[Link] as of the last day of the accounting period payment of accounts mode subsequent
to the close of the period.

34.

Lapping consists of misappropriating a collection from one customer and concealing this
defalcation by applying a subsequent collection made from another customer.

35. Lapping involves the postponements of the entries for the collection of receivables,

36.

Kiting This practice is possible when an entity maintains current accounts in different banks.

37.

Kiting bank. occurs when a check is drawn against a first bank and depositing the same check
in a second bank to cover the shortage in the latter

38. When the cash count shows cash which is less than the balance per book.

there is a cash shortage The entry to record the same is as follows:

Cash Short or Over.

Cash
39. The cash short on over gecount is only a temporary or suspense account. When financial
statements are prepared the same should be adjustee

40. If the cashier or cash custodian is held responsible for the cash shortage, the

adjustment should be: Due from cashier

Cash short of over

41. If reasonable efforts fail to disclose the cause of the shortage, the adjustment is:

Loss from cash shortage Cash short of over

42. If the amount of cash shortage is not material it can be debited to miscellaneous expense

43. Where the cash count show cash which is more than the balance per book, there is a cash
overage The entry to record the same is as follows:

Cash

Cash Short or over

44. The cash overage is treated as miscellaneous income no claim on the same.

Demand Deposit deposit where deposits are covered by deposit slips and where funds are
withdrawable on demand by drawing checks against the bank. is the current account or
checking account or commercial

2. Saving Deposit The depositor is given a passbook upon the initial deposit. The passbook is
required when making deposits and withdrawals.

3. Time Deposit is similar to saving deposit in the sense that it is interest bearing. It evidenced,
however, by a formal agreement embodied in an instrument called certificate of deport.

4. The entry on the books of the bank when they have received deposits from Company A:

Cash

Company A

5. The entry in the books of the bank when a payee presented a check drawn by

Company B:
Company B

Cash

6. A bank reconciliation is a statement which brings into agreement the cash balance per book
and cash balance per bank.

7. A bank statement is a monthly report of the bank to the depositor showing the cash balance
per bank at the beginning, the deposits acknowledged, the checks paid, other charges and
credits and the daily cash balance per bank during the month.

8. Credit memos refer to items not representing deposits credited by the bank to the account of
the depositor but not yet recorded by the depositor as cash receipts. Typical examples are:

a. Notes receivable follected by bank in favor of the depo stor and credited to the account of dey

b. Proceeds of bank leor credited to the account of the deponitor

c. Hatured time cheposits transferred by the bank to the current account of the depositor

9. Debit memos refer to items not representing checks paid by the bank which are charged or
debited by the bank to the account of the depositor but not yet recorded by the depositor as
cash disbursement. Typical examples are:

a. No Sufficient Fund

checks

b. Technically refortive checks

C. Bank Senice Charges

d. Reduction of foan

10. Deposib in Tronat are collections already recorded by the depositor as cash receipts but not
yet reflected on the bank statement. These include

a. Collections already forwarded to the banks for clepost in the bank statement. but too late to
appear

the
b. Undepos'teel collections or those still in the honds of deportor. In effect, these are cash on
hand awaiting delivery to the bank for deposit.

11. Outstanding checks are checks already recorded by the depositor as cash disbursement but
not yet reflected on the bank statement.

12. A certified chicks is one where the bank has stamped on its face the word "accepted"
indicating sufficiency of fund.

13. Certifieel checks are deducted from the total outstanding checks (if included therein)
because they are no longer outstanding for bank reconciliation purposes.

Adjusted balance mettiest

bank balance are brought to a correct cash balance that must appear on the

Under this method, the book balance and the

balance sheet.

15. Book to bank method. Under this method, the book balance is reconciled with the bank
balance or the book balance is adjusted to equal the bank balance.

16. Bank to book method Under this method, the bank balance is reconciled with the book
balance or the bank balance is adjusted to equal the book balance.

17. Computation of book balance

Balance por book beginning of month

Add Book debits during the nooith

Total

Lero Book credits during the month

Balonce per book end of month

18. Computation of Bank balance

Balance per bank beginning of month

Add: Bank credits cluring the monit

Jotel

Less Bank clebits during the month

Balance per bank end of month,

19. Computation of Deposits in Transit

Deposits in Transit beginning of month.

Add: Cash receipts deposited during the month

Total

Leas: Deposits acknowledged by bank wring the month

Depornito in Transits end of month

20. Computation of Outstanding Checks

Outstanding Checks beginning of mooth

Add: Che drawn by depositor during the month

Total

Less Chealy paid by bonk during the month

Outstanding checks end of monty

21. Two-Date Bank Reconciliation The bank reconciliation is so-called "two-date" because it
literally involves two dates.

22. Book debits bank account. refer to cash receipts or all items debited to the cash in

23. Book credits cash in bank account. refer to cash disbursements or all items credited to the

24. Bank credits refer to all items credited to the account of the depositor which include deposits
acknowledged by bank and credit memos.

25. Bank debits refer to all items debited to the account of the depositor which include checks
paid by bank and debit memos.
26. A proof of cash is an expanded reconciliation that it includes proof of receipts and
disbursements.