Chapter PREPARATION OF FINANCIAL STATEMENTS Expected Learning Outcomes After studying this chapter, you should be able to: 4. Know the principles and guidelines in financial statement preparation. e with the 2. Prepare the following statements in accordance Philippine Financial Reporting Standards: - Statement of Financial Position = Statement of Profit or Loss and Comprehensive Income ~ Statement of Changes in Owners’ Equity - Cash Flow Statement - Notes to Financial Statements QOgS Searoed th canscannet,— a CHAPTER 24 PREPARATION OF FINANCIAL STATEMENTS INTRODUCTION In the world of business, accounting plays an important role to aid jn mak critical decisions. ‘The more complex the decision, the more detateg né information must be. Individuals and companies need different kinds of information to make their business decisions, The financial statements present the accounting, information in formal reports th tell interested groups, such as manager creditors, prospective in investors a s doing. Those repons are prepa governmental agencies, how the busines from information obtained from the various business transactions that the business recorded, It should be remembered that the responsibility to prepare the financial statements rests primarily with the entity’s management. The Financial Reporting Standards Council in its PAS 1 on Presentation of Financial Statements prescribes the basis for presentation of general purpose financial statements to ensure comparability both with the entity's financial statements of previous periods and with the financial statement of other entities, ‘This standard sets out overall requirements and provision for the presentation of financial statements, guidelines for their structure and minimum requirements for their content. FINANCIAL STATEMEN' ancial Statements Purpose of Financial statements are a structured representation of the financial position and financial performance of an entity. The objective of financial statements is 10 financial performance and cash rs in making economic gement’s provide information about the financial position, flows of an entity that is useful to a wide range of u sions. Financial statements also show the results of the mana de stewardship of the resources entrusted to it ‘Seanad wth ComS:anerPreparation of Financial Statements 708 To meet this objective, financial statements provide information about an entity's: (a) assets; (b) liabilities; (c) equity; (d) income and expenses, including gains and losses; (©) contributions by and distributions to owners in their capacity as ow and (f) cash flows. mers; assists users of This information, along with other information in the notes, : d, in particular, financial statements in predicting the entity's future cash flows an their timing and certainty. Complete Set of Financial Statements A complete set of financial statements comprises: (a) a statement of financial position as at the end of the period; (b) a statement of profit or loss and comprehensive income for the period; (c) a statement of changes in equity for the period; (d) a statement of cash flows for the period; (e) notes, comprising a summary of significant accounting policies and other explanatory information; and (f) a statement of financial position as at the beginning of the earliest comparative period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements. An entity may use titles for the statements other than those used in this Standard. WHO ARE REQUIRED TO SUBMIT AUDITED FINANCIAL STATEMENTS? © Unless exempt, corporations, partnerships or individuals with gross quarterly sales, earnings, receipts or output of more than P150,000 are required to submit audited financial statements to the Bureau of Internal Revenue (BIR) to accompany their annual income tax returns, ‘Seana wth CamS:aner706 Chapter 24 * While a domestic stock company with paid up capital of PS0,009 o, must submit audited financial statements annually to the Securities ‘Ore. Exchange Commission (SEC). ang SOURCES OF AUDITED FINANCIAL STATEMENTS IN 7 PHILIPPINES Me Audited Financial Statements in the Philippines may be obtained * Directly from the company office or website, or * By downloading from the Philippine Stock Exchange (PSE) for liseg companies + By having an {View account with the Securities and Exchan Commission (SEC) on-line facility 10 download the annual repoee submitted by corporations to them, General Features of Financial Statements Fair Presentation and Compliance with PFRSs Financial statements shall present fairly the financial position, financial performance and cash flows of an entity. Fair presentation requires the faithful representation of the effects of transactions, other events and condition accordance with the definitions and recognition criteria for assets, liabilit income and expenses set out in the Framework. The application of PFRSs, with additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation. ‘An entity whose financial statements comply with PFRSs shall make an explicit and unreserved statement of such compliance in the notes. An entity shall not describe financial statements as complying with PFRSs unless they comply with all the requirements of PFRSs. ‘An entity cannot rectify inappropriate accounting policies either by disclosure of the accounting policies used or by notes or explanatory material, In the extremely rare circumstances in which management concludes. that compliance with a requirement to a PFRS would be so misleading that it would conflict with the objective of financial statements set out in the Framework, the entity shall depart from that requirement in the manner set out in paragraph 20 if the relevant regulatory framework requires, or otherwise does not prohibit, such a departure ‘Seana wth CamS:amer | adPreparation of Financial Statement 707 ng Concern ake an assessment of hall prepare financial ather intends to ive but to do 60 When preparing financial statements, management shall 1 an entity's ability (0 Continue ava gong concern An ently 6 statements ON A going concen basis unless management © fiquidate the entity oF fo cease trading, or has no realistic alternat When Management 1s aware, in making its assessment, oF material uncertainues related (0 events oF conditions that may cast significant doubt upon the entity's ability (© continue as a going concem, the entity shall disclose those uncertainties. When an entity does not prepare financial statements 0” a going concern basis, i shall disclose that fact, together with the basis on which i prepared the financial statements and the season why the entity 1 not regarded as a going concem Accrual Basis of Accounting ‘An entity shall prepare its financial statements, except for cash flow inform: using the accrual basis of accounting Materiality and Aggregation An entity shall present separately each material class of similar tems An ents shall present separately items of a dissimilar nature or function unless they are immaterial Offsetting ‘An entity shall not offset assets and liabilities or income and expenses, unless required oF permitted by a PERS Frequency of Reporting ‘An entity shall present a complete set of financial statements (including comparative information) at least annually. When an entity changes the end of its reporting period and presents financial statements for a period longer or shorter than one year, an entity shall disclose, in addition to the period covered by the financial statements (a) the reason for using a longer or shorter period, and (b) the fact that amounts presented in the financial statements are not entirely comparable ‘Seana wth CamS:anerComparative Information Except when PFRSs permit or require otherwise, an entity: shaly comparative information in respect of the previous period for al] reported in the current period's financial statements. An entity shaq) mn Comparative information for narrative and descriptive information when relevant to an understanding of the current period's financial statements, i When an entity changes the presentation or classification of items in its, statements, the entity shall reclassify comparative amounts unless reclassifi is impracticable. When the entity reclassifies comparative amounts, the shall disclose: ety (a) the nature of the reclassification; (b) the amount of each item or class of items that is reclassified; and (c) the reason for the reclassification. When it is impracticable to reclassify comparative amounts, an entity shay disclose: (a) the reason for not reclassifying the amounts; and (b) the nature of the adjustments that would have been made if the amouns had been reclassified Consistency of Presentation An entity shall retain the presentation and classification of items in the financial statements from one period to the next unless: (a) it is apparent, following a significant change in the nature of the enti’ operations or a review of its financial statements, that another presentation or classification would be more appropriate having regard the criteria for the selection and application of accounting policies in PAS 8; or (b) a PERS requires a change in presentation. ‘Seanad wth CamS:anerPreparation of Financial Starements__709. Structure and content Identification of the Financial Statements An entity shall clearly identify the financial statements and distinguish them from other information in the same published document. In An entity shall clearly identify each fina statement and the notes. fi an addition, an entity shall display the following information prominently, repeat it when necessary for the information presented to be understandable: tification, and any {a) the name of the reporting entity or other means of iden! : ding reporting change in that information from the end of the prece period; (b) whether the financial statements are of an individual ent entities; (c) the date of the end of the reporting period or the period covered by the set of financial statements or notes; tity or a group of (d) the presentation currency, as defined in PAS 21; and (e) the level of rounding used in presenting amounts in the financial statements. STATEMENT OF FINANCIAL POSITION Information to be presented in the Statement of Financial Position ‘As a minimum, the statement of financial position shall include line items that present the following amounts: (a) property, plant and equipment; (b) investment property; (c) intangible assets; (4) financial assets (excluding amounts shown under (¢), (h) and (i)); (e) investments accounted for using the equity method; (f) biological assets; (g) inventories; (h) trade and Other receivables; Pane Na it Rae el ‘Seana wih CamS:anerTWO Chapter 4 (1) cash and cash equivalents; sified as held for sale and ass G) the total of assets cl lS includeg disposal groups classified as held for sale in accordance with Non-current Assets Held for Sule and Discontinued Operations: i PrRG' (K) trade and other payables, (1)_ provisions: (m) financial liabilities (excluding amounts shown under (k) and (1); Mt WX, (n) liabilities and assets for s defined in PAS 32 Income Tar (0) deferred tay liabilities and deferred tax assets, as defined in PAS |. (p) liabilities included in disposal groups classified as held for sae accordance with PERS 5; in (q) non-controlling interests, presented within equity; and (F) issued capital and reserves attributable to owners of the parent, An entity shall present additional line items, headings, and subtotals inthe statement of financial position when such presentation is relevant tg as understanding of the entity's financial position, When an current i ity presents current and non-current assets, and current and non. bilities, as separate classifications in its statement of financial position, Deferred tax assets (Liabilities) are classified as noncurrent assets and liabilities Current / Non-current Distinction An entity shall present current and non-current assets, and current and non- current liabilities, as separate classifications in its statement of financial position in accordance with paragraphs 66-76 except when a presentation based on liquidity provides information that is reliable and more relevant, When that exception applies, an entity shall present all assets and liabilities in order of liquidity ‘Seanad wth ComS:anerJose the amount s for each asset J or settled: Whichever method of presentation is adopted, an entity shall dise expected to be recovered or settled after more than twelve month: and liability line item that combines amounts expected to he recovered (a) no more than twelve months after the reporting, period: (b) more than twelve months alter the reporting period. Current Assets ‘An entity shall classify an asset as current when Its (a) Expected to be realized, or intended to be sold or consumed, in normal operating cycle, (b) Held primarily for the purpose of trading: (c) Expected to be realized the asset within twelve months period: or (d) Cash or a cash equivalents unless re: used to settle a fiability for at least twelve months period. ter the reporting, stricted from being exchanged or after the reporting All other assets are classified as non-current Current Liabilities ‘An entity shall classify a liability as current when it is (a) Expected to be settled the in the normal operating cyel (b) Hold primarily for the purpose of trading: (c) Due to be settled within twelve month: after the reporting period; or (d) There is no unconditional right to defer s tlement of the liability for at least twelve months after the reporting period All other liabilities are classified as non-current. ‘Seana wthCamS:anerChapter 24 Information to be Presented either in the Statement of a ae aa. in the Notes 1 Position An entity shall disclose, either in the statement of financial position gp notes, further subelassifications of the line items presented, classified ing appropriate to the entity's operations. An entity shall disclose the following, either in the statement of finay or the statement of changes in equity, or in the notes: (a) for each class of share capital; (i) the number of shares authorized; the manne, il Posto, (11) the number of shares issued and fully paid, and issued but neg ly ful paid: (ili) par value per share, or that the shares have no par value: (iv) a re won of the number of shares outstandi beginnin, (¥) the rig! including repayment of capital; ind at the end of the period; MB at the preferences and restrictions attaching to that class restrictions on the distribution of dividends and ie (si) shares in the entity held by the entity or by its subsidiaries oy associates; and (vii) shares receive shares, including terms and amounts; and (b) a description of the nature and purpose of each reserve within equity, STATEMENT OF PROFIT OR LOSS AND COMPREHENSIVE INCOME OR STATEMENT OF COMPREHENSIVE INCOME. for issue under options and contracts for the sale of An entity shall present all items of income and expense recognized in a period: (a) ina single statement of profit or loss and comprehensive income; or (b) in two statements: a statement displaying components of profit or loss (separate income statement) and a second statement beginning with profit or loss and displaying components of other comprehensive income (statement of comprehensive income). ‘Scand wth CamS:aner LPreparation of Financtal Stasements_7\3 Information to be Presented in the Statement of Profit or Loss and Comprehensive Income As a minimum, the statement of comprehensive income shall include the line items that present the following amounts for the period: (a) revenue; (b) finance costs; (c) share of the profit or loss of associates and joint ve using the equity method: (d) tax expense; (¢) a single amount comprising the total of: (i) the post-tax profit or loss of discounted operations and (ii) the post-tax gain or loss recognized on the meastrement less costs to sell or on the disposal of the assets or disposal constituting the discontinued operation; (f) profit or loss; (g) each component’ of other comprehensive income classified by nat (excluding amounts in (h)); (h) share of the other comprehensive income of associates ai accounted for using the equity method; and (i) total comprehensive income. ntures accounted for to fair value group(s) ture ind joint ventures 'The components of other comprehensive income include: (a) changes in revaluation surplus (see PAS 16, Property, Plant and Equipment and PAS 38, Intangible Assets); (®) actuarial gains and losses on defined benefit plans recognized in accordance with paragraph 934 of PAS 19 Employee Benefits; (0) gains and losses arising from translating the financial statements of a foreign ‘operation (see PAS 21 The Effects of Changes in. Foreign Exchange Rates); (a) gains and losses on remeasuring available-for-sale financial assets (see PAS 39 Financial Instruments: Recognition and Measurement); (@) the effective portion of gains and losses on hedging instruments in a cash flow hedge (see PAS 39). ‘Seanad wth CamSsanerAn entity shall disclose the following items in the statement of comprehen, income as allocations of profit or loss for the period . (a) profit or loss for the period attributable to (i) non-controlling interests; and (ii) owners of the parent (b) total comprehensive income for the period attributable to: (i) non-controlling interests, and (ii) owners of the parent An entity may present in a separate income statement (see paragraph 81) the jig items in paragraph §2(a)-(1) and the disclosures in paragraph 83(a). An entity shall present additional line items, headings and subtotals in the statement of comprehensive income and the separate income: statement (it presented), when such presentation is relevant to an understanding of the enti financial performance An entity shall not present any items of income or expense as extraordinary items, in the statement of comprehensive income or the separate income statement (if presented), or in the notes. Profit or Loss for the Period An entity shall recognize all items of income and expense in a period in profit or loss unless a PFRS requires or permits otherwise. Other Comprehensive Income for the Period An entity shall disclose the amount of income tax relating to each component of other comprehensive income, including reclassification adjustments, either in the statement of comprehensive income or in the notes. ‘An entity may present components of other comprehensive income either: (a) net of related tax effects; or (b) before related tax effects with one amount shown for the aggregtt amount of income tax relating to those components. ‘Seanad wth CamS:anerPreparation of Financial Statements _7\8 An entity shall disclose reclassification adjustments relating to components of other comprehensive income. Information to be Presented in the Statement of Profit or Loss snd Comprehensive Income or in the Notes When items of income or expense are material, an entity shall. disclose their nature and amount separately, Circumstances that would give rise to the separate disclosure of items of income and expense include: (a) write-downs of inventories to net realizable value or of property, plant and equipment to recoverable amount, as well as reversals of such write- downs; ae (b) restructurings of the activities of an entity and reversals of any provisions for the costs of restructuring; (c) disposals of items of property, plant and equipment; (d) disposals of investments; (e) discontinued operations; (f)_ litigation settlements; and (g) other reversals of provisions. ‘An entity shall present an analysis of expenses recognized in profit or loss using a classification based on either their nature or their function within the entity, whichever provides information that is reliable and more relevant. STATEMENT OF CHANGES IN EQUITY An entity shall present a statement of changes in equity showing in the statement: (a) total comprehensive income for the period, showing separately the total amounts attributable to owners of the parent and: to non-conuolling interests; (b) for each component of equity, the effects of retrospective application or retrospective restatement recognized in accordance with PAS 8; and (c) [deleted] ‘Seana wth CamS:aner(4) for each component of equity. a reconciliation between the cary, amount at the beginning and the end of the period, separately diggj9."8 changes resulting from: ing (i) profit or loss; (ii) each item of other comprehensive income; and (iii) transactions with owners in their ci pacity aS OWNEFS, shoyi separately contributions by and distributions to owners and chany in ownership interests in subsidiaries that do not result in a fos control. sil An entity shall present, cither in the statement of changes in equity or in the notes, the amount of dividends recognized as distributions to owners during 14, period, and the related amount per share. STATEMENT OF CASH FLOWS Cash flow information provides users of financial statements with a basis 4 assess the ability of the entity to generate cash and cash equivalents and the needs of the entity to utilize those cash flows. PAS 7 sets out requirements for the presentation and disclosure of cash flow information. NOTES TO FINANCIAL STATEMENTS Structure The notes shall: (a) present information about the basis of preparation of the financial statements and the specific accounting policies used in accordance with paragraphs 117-124; (b) disclose the information required by PFRSs that is not. presented elsewhere in the financial statements; and (c) provide information that is not presented elsewhere in the financial statements, but is relevant to an understanding of any of them. ‘An entity shall, as far as practicable, present notes in a systematic manner. An entity shall cross-reference each item in the statements of financial position and of comprehensive income, in the separate income statement (if presented), and is the statements of changes in equity and of cash flows to any related information in the notes. ad ‘Seanad wthCamS:anetPram final Sinenens 2 Disclosure of Accounting Policies ‘An entity shall disclose in the summary of significant accounting policies: (a) the measurement basis (or bases) used in preparing the financial statements; and (b) the other accounting policies used that are relevant to an underst of the financial statements. tanding ‘An entity shall disclose, in the summary of significant accounting policies OF s (See paragraph other notes, the judgments, apart from those involving estimation: paar 125), that management has made in the process of applying the oe recounting policies and that have the most significant effect on the amounts recognized in the financial statements. Sources of Estimation Uncertainty ptions it makes about the tainty at the end of the the carrying amounts of the notes shall ‘An entity shall disclose information about the assum| future, and other major sources of estimation unce! reporting period, that have a significant adjust ment to assets financial year. In respect of those assets and liabilities, include details of: (a) their nature, and (b) their carrying amount as at the end of the reporting period. Capital ‘An entity shall disclose information that enables users of its financial statements to evaluate the entity's objectives, policies and processes for managing capital. Other Disclosures An entity shall disclose in the notes: a) amount of dividends proposed or declared before the financial statements were authorized for issue but not recognized as a distribution to owners. during the period, and the related amount per share; and b) the amount of any cumulative preference dividends not recognized. ‘Seanad wih CamS:anerAn entity shall disclose the following, if not disclosed elsewhere in inf published with the financial statements: Mtioy (a) the domicile and legal form of the entity, its country oF incorporati the address of its registered office (or principal place of busing 2M different from the registered office); 5, if (b) a description of the nature of the entity's operations and its Pring; activities; and “ipa (c) the name of the parent and the ultimate parent of the group, ILLUSTRATIVE FINANCIAL STATEMENTS PAS | sets out the components of financial statements and Minimy requirements for disclosure inthe statements of financial pg” comprehensive income and shanges in ait Ht albo describes Further iene may be presented either in the relevant financial statement or in the notes The guidance provides simple examples of ways in which the requirements of PAS | for the presentation of the statements of financial position, Comprehensive income and changes in equity might be met. An entity should change the order of Presentation, the titles of the statements and the descriptions used for line iene when necessary to suit its particular circumstances. The examples are not intended to illustrate all aspects of PFRSs, nor do they constitute a complete set of financial statements, which would also include statement of cash flows, a summary of significant accounting policies and other explanatory information. The illustrative statement of financial position shows one way in which an enity may present a statement of financial position distinguishing between current and non-current items. Other formats may be equally appropriate, provided the distinction is clear. The illustrations use the term ‘comprehensive income! to label the total of all components of comprehensive income, including profit or loss, The illustration use the term ‘other comprehensive income’ to label income and expenses that are included in comprehensive income but excluded from profit or loss. IAS 1 does not require an entity to use those terms in its financial statements. ‘Two statements of comprehensive income are-provided, to illustrate the alternate presentations of income and expenses in a single statement or in two statements. The single statement of comprehensive income illustrates the classification of income and expenses within profit or loss by function. The separate statement (in this example, 'the income statement’) illustrates the classification of income and expenses within profit by nature. ‘Seanad wth CamS:aner79 oan Leaparetion of Frances ATLAS GROUP OF COMPANIES Consolidated Income Statement For the Year Faded December 31, 2020 tin millions of pesos) | Oiner revenue | Cost of goods sold | Distnbution expenses Marveting and adminstraton expenses Research and development costs Other trading income Omer trading expenses 4 | | Trading operating profit, { \ \ 3) | Gtr opening come — ' Omner operating expenses \ Operating profit Financial income | Financial expense i | Profit before taxes, associates and joint ventures 1 Vanes income from associates and jont ventures " Profit for the year cof which atfibutable 40 non-controling interests | of wtuch attributable to shareholders of the parent (Net profit) | ‘As percentages of sales a I "Tracing operating profit | Proft or tie year attnbutsble 9 shareholders of the pare mw ‘Seana wth CamS:aner720 Chapter 24 ATLAS GROUP OF COMPANIES Consolidated Statement of Comprehensive Income For the Year Ended December 31, 2020 (in millions of pesos) [ Notes] 2020 T3575) | Profit for the year recognized in the income statement OX pe anes [ ar} Currency retranslations, net of taxes = X1 (on) Fair value changes and recycling on debt instruments, net of taxes x ea Fair value changes and recycling on cash flow hedges, net of taxes (x09 re Share of other comprehensive income of associates and joint ventures x] x [ton)] Items that are or may be reclassified subsequently to the {Lea income statement (ox (0 Remeasurement of defined benefit plans, net of taxes xT (ox) om Fair value changes on equity instruments, net of taxes xT (00) x] Share of other comprehensive income of associates and joint ventures xX] ox | Items that will never be reclassified to the income statement xx | x] Other comprehensive income for the year X 1 (xxx)} (xn Total comprehensive income for the year OX | 0K attributable to non-controlling interests Xxx | ox attributable to shareholders of the parent xx] mx ‘Seanad wth CamS:aner___ Preparation of Financial Statement m ATLAS ROUP OF COMPANIES Consolidated Statement of Financial Position As at December 31, 2020 in millions of pesos) LM BIS : Oh 1000 wt | ox | 1K 0 JO woe | 00 | ox | xk | sss els forsale - ot = | Total current assets __ wa xf ne | ce F Goodwill x |e |_wee [intangible assets x| ex | _0e [investments in associates and jont ventures Xoo Financial assets x |_ re = | Employee benefits assets x} 1000 Current income tax assets rox | _ 00 [Deferred tax assets x] mo} woe Total non-current assets 20x |_ 0 Total assets 20x | __ root Liabilities and equity | Current liabilities Financial debt x] ox] mx Trade and other payables x] xx |x ‘Accruals and deferred income yoo | ox Provisions x] ox | wx Derivative fables x| ox] xx Current income tax liabilities roo | 0 Liabilities directly associated with assets held for sale x |x | x Total current liabilities rox | x} ‘Seana wth CamS:aner722 Chapter 24 ‘Non-current liabilities a= Financial debt _ —| «rp Employee benefits liabilities xox Provisions x] ox Pd [ Deferred tax liabilities x] x Other payables x | 9 Pe Total non-current liabilities [ee PE Total liabilities {xxx | ay Equity ee Share capital Xo | Treasury shares (xx | inn) Translation reserve (00) Gog} Other reserves (2000) (og Retained earnings Xx | ao Total equity attributable to shareholders of the parent 200 | og Non-controlling interests XxX | Yay Total equity x | ax {Total liabilities and equity Xxx |x ‘Seanad wth CamS:anerrLAS GROUP OF COM ( IP, 5 Consolidated Cash Flow Ststeceal For the Year Ended Dec {un millions of pesos) ember 31, 2020 Preparation of Finar | impairment | “Nt sul on disposal panes | ‘ther non-cash ilems of income expense Cash flow before one ea anges in operating assels andlabililes petaingases and iabiies —— rom operations St Pé sand dividend received [ Taxes paid _ Dividends and mterest from associates and joint ventures: cash flow [investing activities [ Capital expenditure Enpenditure on intangible assets [Acquistion of businesses Disposal of businesses [investment (ne of vestments) 2 ‘esociates and joint ventures t infiws(outflows) from treasury investments | Other investing activities } investing cash flow | Financing activities | Dividend paid to shareholders of the parent Dividends paid to non-controfing nlrests ‘Acquisition (net of disposal ‘of non-controling interests 5 f Purchase (net of sale) of treasury shares | infows from bonds and other non-curent financial debt Sutlows ron bonds and olhernon-curent financial debt infowsoutlows) from curent nancial eB Financing cash flow Currency retransiations [Increase(decrease) in cash and cash equivalents Tash and cash equivalent at beginning of year Cash and cash equivalent at end of year ‘Mostly related 0 the share buyback ‘program launched in 2018. ‘Seanad wth CamS:anerTERT a 0807 Jer O22 "be JoqweTeG ese KIT] ~ =} ‘iUaWSRoUauIO = Teal ‘Giawao WPA UONDEsUeN TeIOL 5 00 Sieys Ur woTIMpaR = 5 SSBF jUooruoU UF SaBUEU we = Sued vonesuaduico Kins Text 5 Sereys ANseoH a (ea) | ay = HL (ea oa = 300 = 5 5 wat tan) | pe] 0 mm (ext wo Ghoz ‘be Fequiesag ye se Aynby OH S]USWSAOW TBUIO Sioumo Woe SUONDESUEN TE}0L Tear 5 mH WH Tex sare ys ANSE JO aWEno Way 7 SpuBpIAIG cca ic = — 3eak auf 10} awioDu) SATSUayaITUIOD 1810] Way eK Weak oi 16) BWOOUT as cad i = = Ta Pex | (on) ea) fo 6102} Arenuep ye se AInby Sor |sbujuies | sonosoy ‘sores | ede Suyjonuos pouoy | s0y19 Juonejsuery| Aunseas, | oxeys son | aigeinquny Aunba reioy (sosad Jo st 0207 ‘1¢ 49qui939q popug ava, Qmnby uy sasueyD Jo yuowarEg poyeprosuoy SAINVdINOD AO dNOUD SVILY Fe todoy FTL ‘Seanad wth CamS:anerFinancial Statements, 7125 Preparatio ‘The Accompanying Notes to Financial Statements cover the following areas: 1. Corporate Information, 2. Basis of Preparation, Statement of Compliance, Chane in Accounting Policies and Disclosures and Summary of Significant Accounting Policies. ions. nificant Accounting Judgments, Estimates and Assump! 4. Disclosure of Significant Matters and Details Related 10 Individual Accounts presented in the Financial Statements. oooee Ilustrative Audit Case 24-1: Multi-Step Income Statement The condensed trial balance of Patrick Corporation for the year ended December 31, 20X7 follows: 2,097,500 90,000 ! 1,650,000 | ‘Seanad wth Comsat} 726 Chapter 4 Z Other financial data for the year ended December 31, 20X7. — Income tax Estimated tax payments P: Accrued ‘ato Total charged to income tax expense (does 1009 not properly reflect current of deferred income tax expense or intraperiod income tax allocation for income statement Purposes Py The applicable tax rate on all types of 0,009 taxable income for the current and future years is 30%. Temporary difference Excess of book basis over tax basis in depreciable assets (arising from equipment donated as a capital contnbution on December 31, 20X7 and expected to be depreciated over five year beginning in 20X8. There were no temporary differences prior to 20X7 90,000 Nondeductible expenditure Officers’ life insurance expense 70,000 Earthquake damage This damage is considered unusual and infrequent. 70,000 Capital Structure Ordinary shares, par value P5 per share, traded on a national exchange: Number of shares Outstanding at 1/1/X7 200,000 Issued on 3/3/X7 as a 10% share dividend 20,000 Sold for P25 per share on 6/30/X7 30,000 Oulstanding at 12/31/X7 "250,000 Required: Prepare a formal Statement of Profit or Loss and Comprehensive Income for Patrick for the year ended December 31, 20X7. A ‘Seanad wth CamS:anerPreparation of Financial Statements nI Solution: Mustrative Audit Case 24-1 stavom PATRICK CORPORATION Statement of Profit of Loss and Comprehensive Income For Yeo Endec December 31, 20X7 Net sales: a ot cles PE 250 000 Gross profit g spon Selling and admuistratve expenses 1.212.500) Operating income eon 500 Other expenses: Interest expense 177500 Loss en aispesiton of pla: assets (275.000) Sain on sale of long-tenn investments 130.000 Loss from earthquake 975,009) 692,500) Income before income tax =lese 000 ‘000 Income tax Current 199,500 Deierrec 27,900 [11 (226,500) Net income Eamings per share pis? (2j Explanation of Amounts. i Deferred income tax tox 20X7 Excess of 200% basis ove! {2x basts depreciable assels (Expected to reve! aqqually over next 5 years) 90,000 Deferred income tax Hab ty 123107 (P90. 000 x 30%) 27,000 Less Beginning balance. 4121310X7 0 Net change in deferred tx babllly tor 20X7 Par.n00 (2) Earmngs yr share on niet Hrewne for 20X7 ® we fecome 368,500 Weighted average number of shares 235.000 Earnings per share (P68. 500: 239 000) . PLS ‘Seana wth CamS:aner728 Chapter 24 Illustrative Audit Case 24-2: Statement of Financial Position The December 31, 20X0 audited account balances of the Jaycee Company are shown below: Ordinary shares, P10 par 300,000 Cash 23,000 Buildings 1.440.000, Bonds payable (due 20x9) 770,000 ‘Allowance for doubtful accounts 8,000 ‘Additional paid-in n preference shares 115,000 Additional paid-in ordinary shares 240,000 Accumulated depreciation equipment 351,000 ‘Accumulated depreciation: buildings 530,000 Accounts receivable 215,000 ‘Accounts payable 224,000 Unrealized increase in value of securities @ FVOCI 11,000 Trademarks (net) 37,000 Salaries payal 20,000 Retained earnings 462,000 Preference shares, P100 par 210,000 Patents (net) 98,000 Securities @ FVOCI (short-term) 61,000 Land 300,000 Equipment 724,000 | Inventory 372,000 | Discount on bonds payable 54,000 Current taxes payable 89,000 Required: Prepare the December 31, 20X0 Statement of Financial Position of the Jaycee Company. ‘Seana wth CamS:anerSolution: Mustrative Audit Case 24-2 Preparation of Financial Statements__729 JAYCEE COMPANY Statement of Financial Position December 31, 20X7 Assets Current assets: Cash Seouties @ FVOGI (shor tenn Po ‘Accounts receivable 5M Less: Allowance for doubiful accounts 8,000) 207,000 Tnventory oO Total current assets nn Property, plant and equipment: Lond 300,000 Buildings 51440000 Less: Accumulated depreciation 530,000) 370,000 Equipment 724,000 Less: Accumulated depreciation (351,000)| 373,000 Total property, plant and equipment 4,583,000 intangible assets Patents (net) P $808 Trademarks (nel) Total intangible assets 735,000 Total assets 22,387,000 | Liabilities Current liabilities: ‘Accounts payable 224,000 Current taxes payable 9.000 Salaries payable 200 |e Total current rabies X Long-term labiities: Bonds payable (due 20X4) P 770,000 Less: Discount on bonds payable (54,000) = Total longterm liabilities Total fabilives P_1,049,000 | Equity Contributed capital Preference shares, P100 par P ID Ordinary shares, P10 par X ‘Additional paid-in capital on preferences shares 115,000 ‘Additional paid-in capital on ordinary shares, ann | Total contributed capital on Relained earings x ‘Accumulated other comprehensive income 14,000 Unrealized increase in value of securities @ FVOCI Total shareholders equity 1,338,000 Total liabilities and shareholders’ equity E_2.287,000 ‘Seana wth CamS:anerWorksheet for lement of Cash Flows, information is available for the Josie Company: ____ Account Balances (in P0005 om December 31, 20X1 December 1-75) | Debits | ——— Cash P1,800 Pa ‘Accounts receivable _ 4,600 4733 Notes receivable (short-term) | 0 1.0007 Inventories | 12,000 9700 Prepaid items I 1.700 1389 and { 11,000 17.1001 Buildings and equipment 78,000 T0000 Goodwil 4,400 4000 Treasury shares (ordinary shares, at cost, P25 per share) 2,500 41000 Totals 116,000 0] 24,000 P3180 6,000 8210 2,600 3.500 1,400 4,200 0 140! 0 70) 0 850 9,000 6500 3,000 2500) [Ordinary shares, P10 par 18,000 23,500 "Premium on ordinary shares 28,800 40,850, Retained eamings 23,200 25,25) |__ Totals P116,000 11,100 ‘Seanad wth CamS:anerPreparation of Financial Statements _734 Additional information for the year: () (b) Beginning retained earings, unadjusted 23,200 Less: Prior period adjustment - correction of ~ understatement of depreciation (net of income taxes) 1.309) Adjusted beginning retained earnings P2130 Add: Net income {2008 P33,900 Less: Cash dividends (4,000) Share dividends (150 shares at P31 per share) (4 650) (8,650) Ending retained eamings £25,250 Last year depreciation expense was inadvertently understated in the amount of P1,800. The correction was made this year to ‘Accumulated Depreciation and to Retained Eamings as a prior period adjustment. The company also received a related income tax refund of P500. Sixty treasury shares (ordinary) were reissued at P30 per share. 10 were issued for P7,750 on May 1, and pay interest semiannually. The 1 bond premium. Interest expense Bonds payable with a face amount of P7,001 20X2. The bonds mature on May 1, 20X7, straight-line methods is used to amortize th totaled P460 for 20X2. Fifty preference shares (originally issued at P60 per share) were converted into 400 ordinary shares. Land costing P2,900 was sold for P3,800. Three hundred ordinary shares were sold for P32 per share. Equipment costing 32,000 was purchased during the year. Land was acquired at a cost of P9,000 during the year. Depreciation expense was 6,000. Impairment of goodwill was P400. The company loaned money to one of its executives and received a P1,000 short-term note receivable on December 31, 20X2. The note matures 90 days from the date of issuance. ‘Seanad wih CamS:aner732__ Chapter 24 Required: 1. Prepare a worksheet to support a statement of cash flows for 20X2, 2. Prepare the 20X2 statement of cash flows for Josie Company, Sho a . i w reconciliation of the nest income to the net eash provided by oper activities in a separate schedule accompanying the statement. tating Solution: Mustrative Audit Case 24-3 Requirement (1) JOSIE COMPANY Worksheet for Statement of Cash Flows For Year Ended December 31, 20X2 Balances Change |_Worksheet Enties ‘Account Titles #2/340X1 | 121340K2 | Debit | Credit | Debit_| Crear Debits Cash 7,600 | 2,200 | 400 (w) 400 Noncash Accounts: “Accounts receivable 4600 | 4720 | 120 (120 Noles receivable (short-term) = [1.000 | 7,000 (e)_4,000 Inventories 72,000 [9.700 2,300 EET Prepaid items. 1,700 | 1,380 320 (gy) 0 Land 11,000 [17,100 | 6,100 §) 9,000 | (p) 2900) Buildings and equipment 78,000 | 110,000 | 32,000 () 32,000 Goodwill 4.400 | 4,000 400 @ @ Treasury shares 2,500 | 1,000 | 7,500 (my .500 Tolals 116,00 | 151.100 1 Credits _| | ‘Accumulated depreciation 24000 |_31,800 |_7,800 a0, L_ [— (e4yi.g00" ‘Accounts payable 6,000 (h) 2210) Salaries payable 2,600 | I ©, Miscellaneous current payables | 1.400 | 1,200 200) 20] Interest payable : wo; of | 18, 12% bonds payable = | (o) 10) Premium on bonds payable [650 | 650 | yy 100 [ (ny 1. Converible preference shares, P50 par | 9,000 | 6,500 | 2,500 |(0-2)2.500 |___— | Premium on preference shares | 3,000 2,500 | 500 |(o-2) 500 ‘Seana wth CamS:anerPreparation of Financial Statements _733 ordinary shares, P10 par 18,000 | 23,500 | 5,500 (0-1) 1,000 (q)_ 3,000 lu) 1.500 Premium on ordinary shares 28,800 | 40,650 | 12,050 (m) _300 (0-1)2,000 (q)_6.600 lu) 3.150 Retained earings * 23,200 [75,250 | 2,050 (-4) 1,800 a) 12,000 i) 4,000 |(-2) 500 (u)_4,650 Totals 116,000 | 151.100 56,270 | 56.270 JOSIE COMPANY Worksheet for Statement of Cash Flows For Year Ended December 31, 20X2 Worksheet Entries Debit Credit Tie cash Flow rom Operating Actes Netincome @ 72,000 ‘Add. Depreciation expense {b) 6,000 Impairment of gooswil @) 400. Decrease in nv o 2,300 Decrease n “(a 320. Increase in accounis o5yabl6 (hp 2210 Increase in saianes payable (i) 900 increase in interest payable (kd) 140 Income tax refund " 2) 500) Tess: Increase in accounts receivable @ 120 Decrease in miscellaneous curent payables Co 200 Gain on sae of land ) 900 ‘Amortization of bonds premium (vy) 100 Cash Flows from Investing Activities Payment for loan on nole recewvable —_— © 7000 Proceeds from sale of and © 3,800 Payment for purchase of equpment O 32,000 Payment for purchase of land (s)_ 9,000 Cash Flows from Financing Activities Proceeds from sale of treasury shares = _ my 1800 [Proceeds from issuance of 12% bonds payable 0) 7.750 Proceeds from issuance of ordinary shares @) 9,600 | Payment of dividends w 5000 investing and Financing Activites Nol Afecing Cash \ssuance of ordinary shares lo convert preference shares? (0-1) 3,000 _| Conversion of preference shares to ordinary shares I{o-2) Net Increase in Cash _ ~ ane Totals — ‘e) ‘Seana wth CamS:aner734_ Chapter 24 Requirement (2) JOSIE COMPANY — ‘Statement of Cash Flows For Year Ended December 31, 20X2 Net Cash Flow from Operating Activities Net cash provided by operating activities (Schedule 1) P Bay Cash Flows from Investing Activities P 3,800 Proceeds from sale of land (1,000) Payment for loan on note receivable (9,000) Payment for purchase of land (32,000) Net cash used for investing activites (ay Cash Flows from Financing Activities Proceeds from sale of treasury shares P1800 Proceeds from issuance of 12% bonds payable 7,750 Proceeds from issuance of ordinary shares 9,600 Payment of dividends (4,000) Net cash provided by financing activities [15150] 5,150) Net Increase in Cash Pa 1 Cash, January 1, 202 20 Cash, December 37, 20X2 P_ 2a] Schedule 1: Net Cash Flow from Operating Activities Net income P 12,000 Add: Depreciation expense 6,000 Impairment of goodwill 400 Decrease in inventories 2,300 Decrease in prepaid items 320 Increase in accounts payable 2.210 Increase in salaries payable 900 Increase in interest payable 140 Income tax refund 500 Less: Increase in account receivable (120) Decrease in miscellaneous current payables (200) Amortization of bond premium (100) Gain on sale of land (900) Net cash provided by operating activities 23.450 Schedule 2: Investing and Financing Activities Not Affecting Cash Financing Activities Conversion of preferences shares to ordinary shares P (3,000) Issuance of ordinary shares to convert preferences shares 3,000 ‘Seana wth CamS:anerPreparation of Financial Statements 738 Illustrative Audit Case 24-4: Changes in Shareholders’ Equity On January 1, 20X7, the Francisco Company listed the following shareholders" equity section of its statement of financial Position: Contributed capital P 92,800 Preference shares, P100 par 37,400 Ordinary shares, PS par 21,500 Additional paid-in capital on preferences shares 58.700 Total contributed capital P210,400 Retained earnings 185,700 Total shareholders’ equity 396.100 During 20X7 the following transactions and events occurred and were properly recorded: The company issued 1.700 ordinary shares at P13 per share. The company issued 340 preference shares at P130 per share. ‘The company earned net income of P38,950. The company paid a P7 per share dividend on the preference shares and a PI per share dividend on the ordinary shares outstanding at the end of 20X7. Bee Required: Prepare a statement of changes in shareholders’ equity of the Francisco Company for 20X7. (Include retained earnings). Solution: WMustrative Audit Case 24-4 FRANCISCO COMPANY Statement of Changes in Shareholders’ Equity For Year Ended December 31, 20X7 ‘Additional | Additional Paid-in | Paid-in Preference | Ordinary | Capital on | Capital on Shares | Shares | Preference | Ordinary | Retained P100par_| P5par_|_Shares_| Shares_| Eamings | Tota! (Balances, 1/1/20X7, 92,800 | P37.400 | P21.500 | P58,700 | P185,700 | P395.100 [Ordinary shares issued 8,500, 13,600 22.100 [Preference shares issued 34,000 10,000 420 INet income B90 38.950 sh dividend on preference” | (8.876) | (8.876) (Cash dividend paid on ordina (8,876) |__(8.876) (Balances, 12/1X7 Pi26,600 | P45,900 | Pat700 | 72.300 | 206.594 | P483,254 + Prelerence cvdend P72 (928 + MO shares) = P8676: ~ Orénary cider 1x (7.480 1,700 shares) «P3160 APPENDIX A PRESENTS SAMPLE AUDITED FINANCIAL STATEMENTS OF SELECTED COMPANIES IN THE PHILIPPINES. ‘Seanad wth CamS:aner736 Chapter 24 REVIEW PROBLEMS Problem 1 You have been assigned to examine the financial staternents of Internati, Company for the year ended Devember 31, 20X7. You discover a. following situations: 7 6. Depreciation of P3,200 for 20X7 on delivery vehicles 25 sap recorded. ‘ The physical inventory count on December 31, 20%6, improgess excluded merchandise costing P19,000 that had been temprrar stored in a public warehouse. International uses a periodic invener, system. ° The physical inventory count on December 31, 2X7. impey included merchandise with a cost of P8,500 that had been revordes zs 5 sale on December 27, 20X7, and held for the customer to pick up ex January 4, 20X8 A collection of P5,600 on account from a customer received op December 31, 20X7, was not recorded until January 2, 208. In 20X7, the company sold for P3,700 fully depreciated equipmen: t originally cost P22,000. The company credited the proceeds from the sale to the Equipment account. During November 20X7, a competitor company filed infringement suit against Imternational claiming damages of P22 The company's legal counsel has indicated that an unfavorable v is probable and a reasonable estimate of the cours award competitor is P125,000. The company has not reflected or disclosed this situation in the financial statements. International has a portfolio of trading securities. No entry has b= made to adjust the market. Information on cost and market value is = follows: Cost Market December 31, 20%6 95,000 95,000 December 31, 2047 64,000 82,000 ‘Seana wth CamS:aner—$$$$—_—_________Prperation of Fimane 8. At December 31, 20X7, an analysis of payroll information shows accrued salaries of P12,200, The Accrued Salanes . Payable atcount had a balance of P 16,000 at December 31, 20X7 which was unchanged from its balance at December 31. 20X6 A large piece of equipment was purchased on January 3. 20X7, for 32,000 and was charged to Repairs Expense. The equipment 15 estimated to have a service life of 8 years and no residual valve International normally uses the straight-line depreciation method for this type of equipment. . A P1S,000 insurance premium paid on July 1, 20X6, for a policy that expires on June 30, 20X9, was charged to insurance expense ILA trademark was acquired at the beginning of 20X6 for PS0,000. No amortization has been recorded since its acquisition. The trademark is deemed to have indefinite life. Required: ‘Assume the trial balance has been prepared but the books have not been closed for 20X7. Assuming all amounts are material, prepare journal entries showing the adjustments that are required. Ignore income tax considerations, Problem 2 Part During the course of your examination of the 20X8 financial statements of Tally Company, the following data were discovered. Give any correcting and adjusting entries called for by the information given. Disregard any effects on income tax. Write your answers on the space provided. 17. Office equipment. purchased January 2, 20X7, at a cost 2 interest deducted in advance on notes payable amounts | Adjusting Journal Entries, | 42-31-20X8 of P22,000, having estmated salvage value of P2,000 and an estimated life of five years, now is reesimated to have a total life of 10 years ‘rom January 2, 20X7, the estimated salvage value remains unchanged. The straight-line method of deprecation is used to P5,000. The Interest Expense account nas a debit of balance of P7,500. The company failed to record interest deducted in advance at the end of 20X6, P3,000, and at the end of 20X7, P3,100. All onginal entries were made to the interest Expense account ‘Seanad wth CamS:aner738 _ Chapter 24 3. Merchandise in tans, December 31 shipping point, of P15,000 was inventory as of December 31, 2 the 4 Merchandise costing P6000 inventory as of December 31, 207, in the purchases account ur purchased for P36 Prepaid expen 6 Store supplies inver ‘on hand were: 20X6. on hand at the 9. Merchandise costing P600, received on December 31, | 20X8, had been included in the physical inventory taken | on that date; how the invoice was received on January 4 70. In March 20XB, the company share dividend on 100 shares of Brooks, inc., ordinary | | shares acquired in 20X6 at P150. The shares received as | share dividend were sold for cash in April, 20X8, at P170 each and a revenue account credited for the full proceeds Ti. The account “Advertising and Promotions" include amount of P90,000 which represented the cost of print sales catalogues for a special promotional campaign in December 20x | \42. A check for P6,000 representing the repayment of an | employee advance was received on November 30, 20X8, | |___but was not recorded until December 2, 20X8. | 73 On December 1, 20X8, the company purchased for | 205,000 @ new machine for its main factory The | | machine is being depreciated on the straight-line method |___over an estimated useful fe of 10 years. When the new an ‘Seanad wth CamS:anerPreparation of Financial Statements _T39 machine was insialed, the company pad forthe oow items which were not included in the cost of the mochine but were charged to "Repairs and Maintenance"; Delivery expense P 1,500 Installation cost 12,000 Rearrangement of related equipment _6,500 720.000 14. On May 3, 20X8, Tally exchanged 500 treasury shares (P50.00 par value ordinary shares) for a parcel of land to be used as a site for a new factory. The treasury shares had cost P70.00 per share when il was acquired and on May 3, 20X8, it had a fair market value of P80.00 per share. Tally received 2,000.00 when an existing building ‘on the land was sold for scrap. The land was capitalized ‘at P40,000.00, and Tally recorded a gain of P5,000.00 on the sale of its beasury shares. You found the following journal entries in the books: Land 40,000 Treasury shares 35,000 Gain on sale of treasury shares 5,000 Cash P 2,000 Miscellaneous or Scrap income _P_2,000 15. Tally uses the allowance account for uncollectible trade accounts receivable, The allowance is based upon 3% of past due accounts (over 120 days) and 1% of current accounts as of the close vf each month. Due to changing ‘economic conditions and climate, the amount of past due accounts has increased significantly, and management has decided to increase the percentage based on past due accounts to 5%. The following balances are available: As of November 30, 20X8 ‘Debit_| Credit ‘Accounts Receivable 390,000 = Past due accounts {included in Accounts Receivable) 42,000 ‘Allowance for uncollectible accounts| - | 28,000 Asof December 34, 20X6 Debit Credit Accounts Receivable ‘430,000 Pas due accounts {included in Accounts Receivable)|___ 30,000. = ‘Allowance for uncolletibie accounts] 9,000 AI ‘Seana wth CamS:anerPart If Below, in Column A, are the names of the debits and credits for sey adjustments an auditor found it necessary to make t0 the trial balay submitted to him by a company on December 31, 20X7. The company it instructed to record these adjustments on its books, but failed 10 do 39.4 column B indicate the entries necessary to adjust the trial balance submit to the auditor on December 31. 20X8 because of the company's failure to make the adjustments on its books. Amounts have been omitted. If you think no adjustment is necessary, write "none" in the space provided, Column A - Adjustment Column B - Adjustment 12-31-20X7 12.31-20X8 a) Purchases a) Accounts payable Item omitted; merchandise included in inventory. b) Retained eamings b) Wages Company failed to set up accrued wages at December 31, 20X6. c) Retained eamings ¢) ‘Allowance for depreciation | Provision for 20X6 depreciation [a Depreciation d) Allowance for depreciation Provision for 20X7 depreciation ) Machinery e) Repairs | Expenditure erroneously charged to repairs. f) _ Item (e) above requires an additional f) adjustment in 20X8. g) Taxes 9) Accrued taxes | 1 | | i | | | |___To provide for taxes, 12-31-2017. | Ea I Br ‘Seanad wth CamS:anerPreparation of Financial Statements Problem 3 74 Selected preadjustment account balances and adjusting information of Sunshine Cosmetics Inc. for the year ended December 31, 20X7, are as follows: Retained Eamings, January 1, 20X7 Sales Salaries and Commissions Advertising Expense Legal Services Insurance and Licenses Travel Expense-Sales Representatives Depreciation Expense-Sales/Delivery Equipment Depreciation Expense-Office Equipment Interest Revenue Utilities Telephone and Postage Supplies Inventory Miscellaneous Selling Expenses Dividends Dividend Revenue Interest Expense ‘Allowance for Doubtful Accounts (Cr. balance) Officers’ Salanes Sales Sales Retums and Allowances Sales Discounts Gain on Sale of Assets Inventory, January 1, 20X7 Inventory, December 31, 20X7 Purchases Freight-in ‘Accounts Receivable, December 31, 20X7 Gain from Discontinued Operations (before income taxes) Loss on Sale of Equipment (before income taxes) Ordinary shares outstanding 881,240 70,000 32,180 4,450 17,000 7,120 42,200 9,600 1,400 42,800 2,950 4,360 4,400 66,000 44,300 9,040 740 73,200 990,400 22,400 4,760 37,000 179,400 44,400 346,000 44,050 522,00C 80,000 45,200 78,000 ‘Seanad wth CamS:aner 2742 Chapter 4 Adjusting Information a) Cost of inventory in the possession of consignees as of December P67 20g 31, 20X7, was not included in the ending inventory balan b) Alter preparing an analysis of aged accounts receivable, a y decision was made to increase the allowance for doubtful i accounts to a percentage of the ending accounts receivable balance ¢) Purchase retums and allowances were unrecorded. Thay are 6% computed as a percentage of purchases (not including freight-in) d) Sales commissions for the last day of the year had not been accrued. Total sales for the day P7209 Average sales commissions as a percent of sales %% ©) No accrual had been made fora freight bil weceived on January 3, P4699 20X8, for goods received on December 29, 20X7 f) An advertising campaign was initiated November 1, 20X7. This P 3,636 amount was recorded as "prepaid advertising" and should be amortized over a six-month period. No amortization was recorded 9) Freight charges paid on sold merchandise and not passed on to 8,400 the buyer were netted against sales. Freight charges on sales during 20X7 . h) Interest earned but not accrued P 4,380 i) Depreciation expense on a new forklift purchased March 1, 20X7, had not been recognized. (Assume all equipment will have no salvage value and the straight-line method is used. Depreciation is calculated to the nearest month.) Purchase price P45,600 Estimated life in years 10 j) A “real” account is debited upon the receipt of supplies. Supplies P 3,200 ‘on hand at year-end k) Income taxes rate (on all tems) 32% Required: 1. Prepare adjusting entries. 2. Prepare a corrected multiple-step statement of profit or loss and comprehensive income and a retained earnings statement for the year ended December 31, 20X7. Assume all amounts are material. dd a lL tel ‘Seana wthCamS:anetPreparation of Financial Statements 743 Problem Determinations Preparation of Audit Adjustments and Net Income Daffodil, Inc., a new client, prepared the tral balance set forth below, as of December 31, 20X8, the close of its second year of operations You were engaged to examine the records and the examination resulted in the necessity of apply ing the entries required in the additional data : ~DAFFOD Tral Balance _ December 31, 20X8 a : ‘ | Land —_ Buildings — [ Accumulated depreciation. buildings Piachiney 148,000 | ‘Accumulated depreciation, machinery 15,000 Sinking fund assets 25,000 ‘Unamonized bond discount 25,000 Treasury shares, ordinary 35,000 ‘Accounts payable 88,000 Bond interest accrued 3,750 First-mortgage. 6% sinking fund bonds 226,500 | Ordinary share capttal 500,000 Premium on ordinary shares 50,000 Share donation 60,000 Retained earings, Dec. 31. 20X7 74,150 Sales 875,000 Purchases 283,500 Payroll 169,000 | Factory operating expenses 121,500 ‘Administrative expenses 35,000 Bond interest 15,000 Totals 1,900,000 | 1,900,000 ‘Scan wthComS:aner744 Chapter Additional data: 1. The P500,000 of ordinary shares had been issued at a 10% premium the vendors of the land and buildings on January 2, 20X7, the date organization. Shares of a par value of P60,000 was donated by y. vendors and was recorded by a debit of P60,000 to Treasury Shares sng" credit to Share Donation. It was donated because the proceeds from jg subsequent sale were to be considered as an allowance on the purchase price of land and buildings in proportion to their values as first recordeg, The treasury shares were sold in 20X8 for P25,000, which amount wag credited to the Treasury Shares account, 2. On December 31, 20X8, a machine costing P5,000 when the business started was removed. The removed machine had been depreciated at 19% during the first year. The only entry made was crediting the Machinery account with its sales price of P2,000. 3. Depreciation is to be provided on the straight-line basis, as follows: buildings, 2% of cost; and machinery, 10% of cost. Ignore salvage value, 4. Inventories at December 31, 20X8, were P175,000. 5. The provision for doubtful accounts is to be adjusted to’ 1% of the accounts receivable balance as of December 31, 20X8. 6. Three years’ insurance is carried on buildings and machinery; and a premium of P9,000 had been paid on January 2, 20X7. 7. The first-mortgage, 6% sinking fund bonds of a par value of P250,000 mature in 10 years from January 1, 20X7 with interest payable on April | and October I. They were sold on January 1, 20X7 at 90; the discount is to be amortized over the life of the bonds on a straight-line basis. 8. Sinking fund is built up on the straight-line basis, with a provision that installments after the first shall be decreased by the amount of the annual 6%, interest, which interest is to be added to the fund. The records disclose that the proper installment to the sinking fund was paid by the company on December 31, 20X8, but that the amount was! charged in error to the First-Mortgage, 6% Sinking Bonds account. 9. The sinking fund trustee reports that he added P1,500 interest to the fund ‘on December 31, 20X8. This has not been recorded by the company. Required: Prepare the audit adjustments and an eight-column worksheet, setting forth the net income or loss for the year ended December 31, 20X8. (Ignore income taxes). | ‘Seana wth CamS:aner