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Noncurrent Assets and Liabilities Analysis

This document discusses noncurrent assets held for sale and biological assets. It provides examples of classifying and accounting for these assets, including calculating impairment losses and fair values. Assignment questions are also included for practice.

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40 views3 pages

Noncurrent Assets and Liabilities Analysis

This document discusses noncurrent assets held for sale and biological assets. It provides examples of classifying and accounting for these assets, including calculating impairment losses and fair values. Assignment questions are also included for practice.

Uploaded by

fanchasticomms
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Module 5 classified a land as held for

sale.
Discussion 5.1 Noncurrent asset
held for sale At that date the carrying amount was
P2,900,000 and the balance of
Hello, future CPAs, revaluation surplus was P200,000..
On June 30, 2017, the fair value was
Why do you think that noncurrent assets
estimated at P3,300,000 and the cost of
held for sale should be classified as disposal at P200,000.
another asset category?
On December 31, 2017, the fair value
Why not include it in inventory or why was estimated at P3,250,000 and the
not include it in an investment property? cost of disposal at P250,000.

Assignment 5.1 Noncurrent assets How much is the impairment loss for
held for sale 2017? 300,000
4. Aruba Company accounts for
1. On January 1, 2017, an entity acquired noncurrent assets using the revaluation
a machinery at a cost of 5,000,000 with model. On June 30, 2017, the entity
an estimated residual value of 500,000 classified a land as held for
and estimated useful life 5 years. sale.
On June 30, 2018, the entity decided to At that date the carrying amount was
reclassify it as held for sale. The Fair P2,900,000 and the balance of
value less cost of disposal on that date revaluation surplus was P200,000
was 2,800,000.
On December 31, 2018, the fair value On June 30, 2017, the fair value was
less cost of disposal was estimated at P3,300,000 and the cost of
3,800,000. disposal at P200,000.
How much is the Noncurrent asset held
for sale at June 30, 2018? 3,650,000 On December 31, 2017, the fair value
was estimated at P3,250,000 and the
cost of disposal at
2. On January 1, 2017, an entity acquired P250,000.
a machinery at a cost of 5,000,000 with
an estimated residual value of 500,000 How much is the revaluation surplus on
and estimated useful life 5 years. December 31,
On June 30, 2018, the entity decided to 2017? 600,000
reclassify it as held for sale. The Fair
value less cost of disposal on that date Assignment 5.3 Biological assets
was 2,800,000.
On December 31, 2018, the fair value 1. Marian and Dingdong Partnership have
less cost of disposal was pomelo plantation and piggery. The
3,800,000. related data are:
How much is the impairment loss on June The cost of the Land of the pomelo
30, 2018? 850,000 plantation and piggery is P2,500,000.
The pomelo trees cost P300,000.
3. Aruba Company accounts for
noncurrent assets using the revaluation The pomelo fruits ready for harvest are
model. On June 30, 2017, the entity valued at P100,000.

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Total fair value less cost of disposal of Why do you think that a probable liability
mother pigs is P200,000. is recognized already as a liability while
the probable contingent asset is not
Total value of piglets is P500,000. recognized as an asset?
How much is the total biological assets? Question no. 2:
800,000
What are the strengths and weaknesses
2. Related data: of this canvas course and the professor
Agricultural produce on bearer and why?
plants 600,000
Animals on recreational
activities 2,000,000 Assignment 6.2
Bearer animals
Bearer plants
1,000,000
1,500,000
Provision and
Freestanding estimated liability
trees 5,000,000
Harvested Agricultural 1. On November 3, 2020, Minorka Bus Company
produce 2,000,000 had an accident. On January 12, 2021, the entity
Land under received a notice of lawsuit for 7,000,000 damages
trees 900,000 for personal injuries suffered by the
Roads in passengers.
forest 500,000 The entity's legal counsel believed it is probable
How much is the biological assets? that Minorka will pay the complainant between
6,600,000 2,000,000 and 5,000,000. The possible outcomes
are equally likely.
3. Related data: How much is the provision on December 31, 2020?
Agricultural produce on bearer 3,500,000
plants 600,000
Animals on recreational 2. During 2020, Sushmita Company was
activities 2,000,000 sued by a competitor.
Bearer animals 1,000,000
The lawyer believe there is a chance of
Bearer plants 1,500,000
75% that the court will not dismiss the
Freestanding
case and the entity will incur outflow of
trees 5,000,000
benefits. If the court rule in favor of the
Harvested Agricultural
complainant, the lawyer believe that 75%
produce 2,000,000
chance of paying P3,000,000
Land under
damages and a 25% chance of paying
trees 900,000
P1,500,000. Other amounts of damages
Roads in
are unlikely.
forest 500,000
How much is the property, plant and There is no indication that the claimant
equipment? 4,900,000 will settle out of
court.

MODULE 6
A risk adjustment of 9% is considered to
appropriately reflect uncertainties in the
Discussion 6.1 Contingency cash flow
Hello, future CPAs, estimates.

Question no.1: The court is expected to rule in late


December 2021.
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The discount rate is 12% and the PVF of
1 is 0.89
How much is the provision on December
31, 2020 (round-off answer to the
nearest peso value)? 1,909,884
3. In 2020, Dublin Company began selling new line
of products that carry a two year warranty against
defects.
Based upon past experience with other products,
the entity estimated warranty costs as a percentage
of peso sales.
First year of warranty 2%
Second year of warranty 5%
2020
2021
Sales 5,000,000
7,000,000
Actual warranty cost 100,000
300,000
How much is the estimated warranty
liability at December 31,
2020? 250,000
4. In 2020, Dublin Company began selling new line
of products that carry a two year warranty against
defects.
Based upon past experience with other products,
the entity estimated warranty costs as a percentage
of peso sales.
First year of warranty 2%
Second year of warranty 5%
2020
2021
Sales 5,000,000
7,000,000
Actual warranty cost 100,000
300,000
How much is the estimated warranty
liability at December 31,
2021? 440,000

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Common questions

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The valuation of biological assets presents unique challenges due to the dynamic nature of biological growth and market influences on fair value estimation. It offers opportunities for capturing the economic potential of an asset, such as the pomelo plantation and piggery valued at 800,000. Fair value accounting allows for representational faithfulness, reflecting real-time changes and adjustments according to IAS 41 for agriculture, thus providing more relevant financial information .

Probable contingent assets are not recognized because their outcome and realizability are uncertain and rely on events not within the control of the entity. Conversely, probable liabilities are recognized as they reflect mandatory eventual outflows based on past events, providing clearer criteria for measurement and reporting. Recognizing contingent assets prematurely could result in overstated financial performance, whereas recognizing liabilities emphasizes caution and reflects the prudence concept in accounting .

The provision for potential legal liabilities in the case of Minorka Bus Company is calculated by estimating the probable outflows based on equally likely outcomes in a given range. The midpoint of the range (2,000,000 to 5,000,000) is used, resulting in a provision of 3,500,000. This approach reflects uncertainty while adhering to accounting principles of reasonable estimation .

The classification of assets like 'roads in forest' distinct from biological assets and property, plant, and equipment involves accounting complexities due to overlapping definitions and use cases. Roads may support biological assets by facilitating operations but do not inherently produce agricultural output. Thus, they are often classified under infrastructure—part of property, plant, and equipment—reflecting their fixed nature and supportive role, as opposed to dynamic biological assets reflective of growth and harvest cycles .

Noncurrent assets held for sale are classified in a separate category to reflect their unique status in the financial statement and the intention of the entity to sell them in the near term rather than continuing to use them in the business. Including them in inventory or investment property could misrepresent the nature of these assets and distort financial ratios such as the asset turnover ratio. This classification also aids in compliance with accounting standards that require separate presentation and measurement criteria for such assets .

Changes in the revaluation surplus for assets held for sale can occur due to fluctuations in the asset's fair value, adjustments in the costs of disposal, and market conditions affecting asset capitalization. For example, in the case presented where the fair value and costs change, the difference affects the carrying amount and can result in a change of surplus from revaluation, reflected as 600,000 on December 31, 2017, due to such adjustments .

Estimating warranty liabilities based on historical experience allows entities like Dublin Company to anticipate future liabilities accurately. By applying percentages of sales—2% for the first year and 5% for the second year—entities assess and recognize liabilities in financial statements proactively, affecting current liabilities and ultimately influencing financial health indicators, cash flow projections, and credit risk assessment .

The revaluation model allows for assets to be carried at fair value rather than historical cost, thus reflecting current market conditions. For example, in the case of Aruba Company's land, revaluation surplus and impairment are recorded to reflect changes in asset valuation, offering more realistic and up-to-date financial information. This can lead to higher asset values on the balance sheet compared to the lower, fixed values under historical cost, affecting profitability and return ratios .

The impairment loss is calculated as the difference between the carrying amount of the asset and its fair value less the cost of disposal at the date of classification as held for sale. In the case of the machinery acquired for 5,000,000 with a carrying amount reduced for depreciation by 850,000, the impairment loss on June 30, 2018, is recognized as 850,000, which corresponds to the decrease in value reflective of its market fair value .

A risk adjustment, such as the 9% used in Sushmita Company's case, is necessary to account for uncertainties in legal outcomes, reflecting variations in potential financial impacts. It affects financial statements by adjusting the estimated provision, creating a more conservative liability recognition. This ensures that financial obligations are neither understated nor overstated, thus preserving the integrity of financial reporting under uncertainty .

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