Page 1 of 10 | AP 01

SINGLE ENTRY SYSTEM

DARRELL JOE O. ASUNCION, CPA, MBA

SINGLE ENTRY SYTEM

DARRELL JOE O. ASUNCION, CPA MBA
CONCEPTS
OUTLINE:
1. Single Entry System
2. T-accounts approach

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3. Guidelines in using T-account approach
4. T-accounts of accounts receivable/notes receivables/advances from customers.
5. T-accounts of allowance for bad debts

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6. T-accounts of accounts payable/notes payable/advances to supplier.
7. T-accounts of merchandise inventory
8. T-accounts of property, plant and equipment

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9. T-accounts of accumulated depreciation
10. T-accounts of rent receivable/unearned rent income
11. T-accounts of prepaid rent/rent payable
12. T-accounts of capital
13. T-accounts of retained earnings
14. T-accounts of net assets

Single Entry System

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A system of record keeping in which transactions are not analyzed and recorded in the double entry framework.
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T-ACCOUNTS APPROACH
In order to compute for the cash payments or collections for certain account, it is suggested that the T-account approach
will be used on the following:
1) Accounts receivable/notes receivables/advances from customers;
2) Allowance for doubtful accounts;
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3) Accounts payable/notes payable/advances to supplier;

4) Merchandise inventory;
5) Property, plant and equipment;
6) Accumulated depreciation;
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7) Rent receivable/Unearned rent income;

8) Prepaid rent/Rent payable;
9) Capital;
10) Retained earnings;
11) Net assets.
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PROBLEM NO. 1
Assume the following independent cases:
1. Computation of Sales
The following data were reported by Franz Company during the current year:

Accounts receivable - January 1 ₱ 200,000

Accounts receivable - December 31 180,000
Notes receivable - January 1 240,000
Notes receivable - December 31 170,000

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DARRELL JOE O. ASUNCION, CPA, MBA

SINGLE ENTRY SYSTEM

Advances from customers - January 1 55,000

Advances from customers - December 31 40,000
Sales returns and allowance 4,000
Sales discounts 2,000
Uncollectible accounts written off during the current year 3,000
Recoveries of accounts previously written off -
Cash sales 50,000
Collection of accounts and notes receivable including
advances from customers 600,000

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I. Assume the above data, compute for the Net Sales.
II. Assume instead that the sales returns and allowance included ₱1,000 which was refunded to the customer,
compute for the Net Sales.

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Computation of Bad Debts
2. The following data were reported by Azul Company during the current year:

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Allowance for doubtful accounts-January 1 ₱ 50,000
Allowance for doubtful accounts-December 31 80,000
Uncollectible accounts written off during the current year 16,000
Recoveries of accounts previously written off 4,000

b. ₱30,000
c. ₱42,000
d. ₱46,000
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How much is the total bad debts expense during the current year?
a. ₱18,000
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Computation of Purchases
3. The following data were reported by Sipag Company during the current year:

Accounts payable - January 1 ₱ 200,000

Accounts payable - December 31 250,000
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Notes payable - January 1 400,000

Notes payable - December 31 210,000
Advances to suppliers - January 1 50,000
Advances to suppliers - December 31 68,000
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Purchase returns and allowance 6,000

Purchase discounts 3,000
Payment of accounts and notes payable including advances to suppliers 800,000
Cash purchases 100,000

I. Assume the above data, compute for the Net Purchases.

II. Assume instead that the purchase returns and allowance included ₱1,000 which was refunded by the supplier,
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compute for the Net Purchases.

Computation of Cost of Sales

4. The following data were reported by Haste Company during the current year:

Accounts payable - January 1 400,000

Accounts payable - December 31 500,000
Merchandise inventory - January 1 800,000

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DARRELL JOE O. ASUNCION, CPA, MBA

SINGLE ENTRY SYSTEM

Merchandise inventory – Dec. 31 420,000

Purchase returns and allowance 12,000
Purchase discounts 6,000
Payment to trade creditors 1,600,000
Cash purchases 20,000

How much is the total cost of sales?

a. ₱1,718,000 c. ₱2,080,000
b. ₱2,100,000 d. ₱2,098,000

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Computation of Income Other Than Sales
5. The following data were reported by Chaste Company during the current year:

Rent receivable-January 1 400,000

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Rent receivable-December 31 500,000
Unearned rent income - January 1 180,000
Unearned rent income - December 31 60,000

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Collection of rent 1,320,000

How much is the total rent income?

a. ₱1,300,000 c. ₱1,600,000
b. ₱1,540,000 d. ₱1,940,000

Computation of Expenses in General

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6. The following data were reported by Chessy Company during the current year:
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Prepaid Rent - January 1 400,000
Prepaid Rent - December 31 500,000
Rent payable - January 1 160,000
Rent payable - December 31 130,000
Payment of rent 1,700,000
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How much is the total rent expense?

a. ₱1,570,000 c. ₱1,700,000
b. ₱1,640,000 d. ₱1,830,000
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PROBLEM NO. 2
1. On January 1 of the current year, the capital balance of Jessa Co was ₱3,400,000 and on December 31, the capital
was ₱4,800,000. During the year, Jessa withdrew merchandise costing ₱200,000 and with sales value of ₱360,000,
and paid a ₱2,000,000 note payable of the business with interest of 12% for six months with a check drawn on a
personal checking account. What was the net income or loss for the year?
a. 520,000 income c. 360,000 income
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b. 520,000 loss d. 360,000 loss

2. Beverlyn Company provides the following information for the current year:
January 1 December 31
Total Assets 10,000,000 15,000,000
Total liabilities 4,000,000 7,000,000
Share capital 3,000,000
Share Premium 1,000,000
Retained earnings ? ?

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 Page 4 of 10 | AP 01

DARRELL JOE O. ASUNCION, CPA, MBA

SINGLE ENTRY SYSTEM

During the current year, the company issued share capital of ₱2,000,000 at a premium of ₱400,000. Dividends of
₱1,600,000 were paid on December 31, 2009.
What was the net income or loss for the year ended December 31 of the current year?
a. 1,200,000 income c. 3,600,000 income
b. 1,200,000 loss d. 3,600,000 loss

3. The following changes in account balances of Analiza Company during the current year are presented below:
Increase
Assets 3,560,000
Liabilities 1,080,000

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Share capital 2,400,000
Share premium 240,000

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Assuming there were no changes in retained earnings other than for a dividend payment of ₱520,000, what is the net
income for the current year?
a. 2,480,000 c. 360,000
b. 1,960,000 d. 920,000

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4. Changes in the accounts of Cherry Lyn Company for the current year are as follows:
Increase
(Decrease)
Cash
Accounts receivable
Inventory
Investments
Equipment
3,000,000
7,000,000
7,800,000
(2,000,000)
6,000,000
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Accounts Payable (1,600,000)
Bonds payable 4,000,000

During the year, Cherry Lyn sold 200,000 shares with ₱20 par value for ₱30 per share and received cash in full. Dividend
of ₱9,000,000 was paid in cash during the year. Cherry Lyn borrowed ₱8,000,000 from the bank and made interest payment
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of ₱1,200,000. Cherry Lyn had no other loan payable. Interest of ₱800,000 was payable at December 31, Interest payable
at January 1 was ₱200,000. Equipment of ₱4,000,000 was donated by a shareholder during the year. What was the net
income for the current year?
a. 18,400,000 c. 9,800,000
b. 9,600,000 d. 8,600,000
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5. Changes in the accounts of Neon Co. for 2021 are as follows:

Increase
(Decrease)
Cash 500,000
Accounts receivable (4,600,000)
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Allowance for bad debts (460,000)

Merchandise inventory 4,800,000
Investment in associate 3,000,000
Property, plant and equipment 2,400,000
Accumulated depreciation 800,000
Notes payable 2,600,000
Bonds payable (2,800,000)
Discount on bonds payable (600,000)
Ordinary share capital 3,900,000
Share premium 200,000

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DARRELL JOE O. ASUNCION, CPA, MBA

SINGLE ENTRY SYSTEM

Revaluation surplus 2,600,000

Treasury shares 320,000

Additional information:
• On December 31, 2021, Neon Co. declared Cash dividends amounting to ₱500,000 and 20% share dividends to be
issued next year amounting to ₱800,000. Also during the year, the company appropriated retained earnings for the
retirement of bonds amounting to ₱100,000.
• During the year, Neon obtained a bank loan of ₱2,000,000 and paid off loan amortization of ₱1,600,000 and interest of
₱100,000. Interest of ₱180,000 is accrued on December 31, 2021. There was no interest payable at the end of 2020.
In 2021, Neon Company acquired treasury shares from its existing shareholders.

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How much is the net loss during the year?
a. 1,000,000 c. 1,600,000

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b. 1,100,000 d. 2,000,000

6. Chavez started a retail merchandise business on January 1 of the current year. During the fiscal year ended December
31, the business paid trade creditors ₱1,000,000 in cash and suffered a net loss of ₱175,000. Among the ledger

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account preclosing balances on December 31 of the current year were the following:

Accounts receivable 300,000

Accounts payable 375,000
Capital (total investment in cash)
Expenses (paid in cash)
Merchandise (unadjusted debit balances)
There were no withdrawals. All sales and purchases
and credited for sales.
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1,000,000
50,000
350,000
were on credit. The merchandise account is debited for purchases
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1. Total sales for the year amounted to?
a. 1,375,000 c. 1,325,000
b. 1,025,000 d. 350,000
2. What was the cash balances at the end of the current year?
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a. 675,000 ` c. 725,000
b. 1,000,000 d. 1,725,000
3. What was the merchandise inventory on December 31 of the current year?
a. 350,000 c. 375,000
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b. 225,000 d. 0

PROBLEM NO. 3
Your audit of Pura Company disclosed that your client kept very limited records. Purchases of merchandise were paid for
by check, but most other items were out of cash receipts. The company’s collections were deposited weekly. No record
was kept of cash in the bank, nor was a record kept of sales. Accounts receivable were recorded only by keeping a copy
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of the ticket, and this copy was given to the customer when he paid his account.

On January 2, 2022 started business and issued ordinary shares, 108,000 shares with ₱100 par, for the following
considerations:

Cash ₱ 900,000
Building (useful life, 15 years) 8,100,000
Land 2,700,000
₱11,700,000

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 Page 6 of 10 | AP 01

DARRELL JOE O. ASUNCION, CPA, MBA

SINGLE ENTRY SYSTEM

An analysis of the bank statements showed total deposits, including the original cash investment of ₱6,300,000. The
balance in the bank statement on December 31, 2022, was ₱450,000, but there were checks amounting to ₱90,000 dated
December but not paid by the bank until January 2023. Cash on hand on December 31, 2022 was ₱225,000 including
customers’ deposit of ₱135,000

During the year, Pura Company borrowed ₱900,000 from the bank and repaid ₱225,000 and ₱45,000 interest.

Disbursements paid in cash during the year were as follows:

Utilities ₱180,000

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Salaries 180,000
Supplies 360,000
Dividends 270,000
₱990,000

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An inventory of merchandise taken on December 31, 2022 showed ₱1,359,000 of merchandise.

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Tickets for accounts receivable totaled ₱1,620,000 but ₱90,000 of that amount may prove uncollectible.

Unpaid suppliers invoices for merchandise amounted to ₱630,000.

Equipment with a cash of ₱720,000 was purchased in early January on a one-year installment basis. During the year,
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checks for the down payment and all maturing installments totaled ₱801,000. The equipment has a useful life of 5 years.

Based on the above and the result of your audit, determine the following :(Disregard income taxes)
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1. Payments for merchandise purchases in 2022
a. ₱4,869,000 c. ₱3,654,000
b. ₱3,879,000 d. ₱3,969,000

2. Collections from sales in 2022

a. ₱6,480,000 c. ₱5,580,000
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b. ₱7,380,000 d. ₱4,500,000

3. Net income for the year ended December 31, 2022

a. ₱2,430,000 c. ₱2,655,000
₱1,440,000 ₱2,340,000
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b. d.

4. Stockholders’ equity as of December 31, 2022

a. ₱13,860,000 c. ₱14,085,000
b. ₱12,870,000 d. ₱13,770,000

5. Total assets as of December 31, 2022

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a. ₱14,175,000 c. ₱14,374,800
b. ₱14,085,000 d. ₱14,310,000

PROBLEM NO. 4
You were assigned to audit the books of KIBUNGAN CO for the period ended December 31, 2017. The bookkeeper of the
client provided you the following summarized data taken directly from its records:

Cash Sales ₱7,500,000

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DARRELL JOE O. ASUNCION, CPA, MBA

SINGLE ENTRY SYSTEM

Total cash collected from charge customers 2,550,000

Cash purchases of merchandise 5,100,000
Credit purchases of merchandise 1,200,000
Expense paid in cash 2,250,000
Accounts receivable, January 1 750,000
Accounts receivable, December 31 1,200,000
Bad debt expense 100,000

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Recovery of bad debts 25,000
Allowance for doubtful accounts, January 1 125,000
Allowance for doubtful accounts, December 31

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175,000
Accounts payable, January 1 450,000
Accounts payable, December 31 600,000

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Merchandise inventory, January 1 1,500,000
Merchandise inventory, December 31 1,800,000
Accrued expenses, December 31 60,000
Prepaid expenses, December 31
Furniture and equipment, at cost
Interest received
Accrued interest income, January 1
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3,000,000
120,000
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30,000
Purchase returns 120,000
Purchase discounts 210,000

Additional Information:
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The furniture and equipment which had an estimated useful life of 10 years were acquired on July 1, 2014 and were
estimated to have a 10% salvage value based on cost. The company uses the double declining balance method in
computing the depreciation.

Required:
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1. What is the correct net sales for the year?

a. 10,575,000 c. 10,475,000
b. 10,550,000 d. 9,675,000
2. What is the correct cost of sales for the year?
a. 6,000,000 c. 5,790,000
b. 5,670,000 d. 345,600
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3. How much is the correct depreciation expense for the year?

a. 384,000 c. 311,040
b. 307,200 d. 345,600
4. What is the net income for the year?
a. 2,244,400 c. 2,304,400
b. 2,404,400 d. 2,214,400

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 Page 8 of 10 | AP 01

DARRELL JOE O. ASUNCION, CPA, MBA

SINGLE ENTRY SYSTEM

PROBLEM NO. 5
Roxas Co. is engaged in a small export business. The company maintains limited records. Most of the company’s
transactions are summarized in a cash journal; non-cash transactions are recorded by making memo entries. The following
are abstracted from the company’s records:
Accounts receivable, increase ₱1,480,000
Notes receivable, decrease 800,000
Accounts payable, decrease 600,000
Notes payable-trade, increase 800,000
Notes payable – bank, increase 1,200,000
Sales return (₱200,000 was refunded) 320,000

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Sales discounts 80,000
Purchase returns (₱120,000 was refunded) 320,000
Purchase discounts 140,000
Accounts written-off 240,000

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Recovery of accounts written-off 72,000
Cash sales 1,200,000
Cash purchases 1,000,000

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Cash received from account customers 6,000,000
Cash payment to trade creditors 4,800,000

Requirements:
1. What are the correct gross sales on account?
a. 4,752,000
b. 6,432,000

2. What are the total gross sales?

c. 7,048,000
d. 7,248,000
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a. 8,448,000 c. 7,632,000
b. 8,248,000 d. 5,952,000
3. What are the total net sales?
a. 5,552,000 c. 7,848,000
b. 7,232,000 d. 8,048,000
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4. What are correct gross purchases on account?

a. 5,460,000 c. 4,260,000
b. 5,340,000 d. 4,140,000
5. What are the gross purchases?
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a. 5,140,000 c. 5,752,000
b. 5,260,000 d. 6,340,000
6. What are the net purchases?
a. 5,880,000 c. 5,000,000
b. 5,292,000 d. 4,900,000
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PROBLEM NO. 6
The following data are obtained from a single entry set of books kept by the proprietor of SHED CIRIACO Store for 2021.

December 31 January 1
Cash 900,000 600,000
Notes receivable 600,000 200,000
Accounts receivable 1,000,000 800,000
Merchandise inventory 500,000 800,000
Equipment 550,000 600,000

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DARRELL JOE O. ASUNCION, CPA, MBA

SINGLE ENTRY SYSTEM

Notes payable 250,000 350,000

Accounts payable 500,000 600,000
Accrued interest payable 20,000 40,000
Unearned rent income 20,000 60,000

The cashbook shows the following information:

Balance, January 1 600,000

Receipts:
Accounts receivable 1,500,000

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Notes receivable 500,000
Cash sales 400,000
Purchase returns received from suppliers 20,000
Rent income 80,000

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Sale of equipment costing
₱100,000 and with book value of
₱50,000 60,000

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Investment 300,000 2,860,000
Total 3,460,000
Payments:
Sale returns refunded to customers 10,000
Accounts payable 750,000
Notes payable
Cash purchases
Interest expense
Expenses
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650,000
300,000
50,000
400,000
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Equipment 200,000
Withdrawals 200,000 2,560,000
Balance, December 31 900,000

Supplementary information:
a. Sales discounts granted to customers 50,000
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b. Sales returns made by customers (including the ₱10,000 refund to the customer) 150,000
c. Accounts receivable written off as uncollectible 30,000
d. Purchase discounts on accounts payable paid 40,000
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QUESTIONS:

Based on the above and the result of your audit, determine the following as of December 31, 2021:
1. Total gross sales
2. Total gross purchases
3. Cost of sales
4. Interest expense
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5. Rent income

COMMITMENT TO THE SUCCESS OF PASSING THE CPA BOARD EXAMINATION.

I commit myself today to do the best I can in passing the CPA board examination. I will do whatever I can to:
Read all the necessary textbooks, reviewers and other handouts.
Study and solve all problem-solving and theory questions from ___ to ___everyday starting today for all the board
exam subjects.

Although the road may get bumpy and will require lots of sacrifice, I will do what it takes and persevere.

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DARRELL JOE O. ASUNCION, CPA, MBA

SINGLE ENTRY SYSTEM

Signature:_______________Date:____________
(Affix your signature as a sign of your whole-hearted, not half-hearted, commitment.)

“Whatever you do, work at it with all your heart, as though you were working for the Lord.”—Colossians 3:23, Today’s
English Version

WHEN OUR ATTITUDES OUTDISTANCE OUR ABILITIES, EVEN THE IMPOSSIBLE BECOMES POSSIBLE.” JOHN
MAXWELL

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YOUR ATTITUDE DETERMINES YOUR ALTITUDE.

“DISCIPLINE IS DOING THE THINGS YOU DON’T WANT TO DO IN ORDER FOR YOU TO DO WHAT YOU WANT TO
DO” JOHN MAXWELL

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--- END OF HANDOUTS ---

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PA
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CORRECTION OF ERRORS
DARRELL JOE O. ASUNCION, CPA, MBA

CORRECTION OF ERRORS
DARRELL JOE O. ASUNCION, CPA MBA
CORRECTION OF ERRORS

ERRORS

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According to Philippine Standards on Auditing No. 240, “error refers to an unintentional misstatement in financial statements
including the omission of an amount or a disclosure, including:
1. A mistake in gathering or processing data from which financial statements are prepared;

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2. An incorrect accounting estimate arising from oversight or misinterpretation of facts;
3. A mistake in the application of accounting principles relating to measurement, recognition, classification, presentation
or disclosure.”

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FRAUD
Fraud refers to the intentional act by one or more individuals among management, those charged with governance,
employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage.

Prior Period Errors

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Prior period errors are omissions from, and misstatements in, the entity’s financial statements for one or more prior periods
arising from a failure to use or misuse of reliable information that:
(a) was available when financial statements for those periods were authorized for issue; and
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(b) could reasonably be expected to have been obtained and taken into account in the preparation and presentation of
those financial statements.
Such errors include the effects of mathematical mistakes, mistakes in applying accounting policies, oversights or
misinterpretations of facts, and fraud.

Accounting Treatment of Prior Period Error

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According to PAS 8 par 42, “an entity shall correct material prior period errors retrospectively in the first set of financial
statements authorized for issue after their discovery by:
(a) restating the comparative amounts for the prior period(s) presented in which the error occurred; or
(b) if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and
equity for the earliest prior period presented.
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Limitations on retrospective restatement

A prior period error shall be corrected by retrospective restatement except to the extent that it is impracticable to
determine either the period-specific effects or the cumulative effect of the error.

When it is impracticable to determine the period-specific effects of an error on comparative information for one or more prior
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periods presented, the entity shall restate the opening balances of assets, liabilities and equity for the earliest period for
which retrospective restatement is practicable (which may be the current period).

When it is impracticable to determine the cumulative effect at the beginning of the current period of an error on all prior
periods, the entity shall restate the comparative information to correct the error prospectively from the earliest date
practicable.

TYPES OF ERRORS

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DARRELL JOE O. ASUNCION, CPA MBA

CORRECTION OF ERRORS

1. Balance sheet or statement of financial position errors

2. Income statement errors
3. Combined statement of financial position and income statement errors
a. Counterbalancing errors
b. Non-counterbalancing errors

PROBLEM NO. 1 Income Statement and SFP Errors

You discovered the following errors in connection with your examination of the financial statements of the Jessica
Corporation:

1) Purchases of merchandise of ₱25,000 in 2016 was erroneously debited to office supplies expense.

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2) Preference share capital of ₱28,000 in 2016 was erroneously credited to ordinary share capital.

The following data were extracted from the financial statements of Jessica Corporation:

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2016 2017
Net income 200,000 160,000

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Working capital 180,000 260,000
RE, end of the year 200,000 360,000

Questions:
Based on the above data, determine the following:
1. Net Income in 2016
a. 200,000
b. 203,000
c. 225,000
d. 228,000
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2. Working capital, end of 2016
a. 152,000 c. 208,000
b. 180,000 d. 225,000

3. Retained earnings, end of 2016

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a. 200,000 c. 225,000
b. 203,000 d. 228,000

4. Net Income in 2017

a. 107,000 c. 160,000
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b. 135,000 d. 185,000

5. Working capital, end of 2017

a. 232,000 c. 260,000
b. 2228,000 d. 285,000
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6. Retained earnings, end of 2017

a. 275,000 c. 360,000
b. 310,000 d. 413,000

7. Prepare adjusting entries assuming errors were discovered in (a) 2016, (b) 2017, and (c) 2018.

Combined Statement of Financial Position and Income Statement Errors

Errors affecting both the statement of financial position and income statement can be classified as:

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DARRELL JOE O. ASUNCION, CPA MBA

CORRECTION OF ERRORS

1. Counterbalancing errors and

2. Non-counterbalancing errors

Counterbalancing Errors
Counterbalancing errors are errors that will offset or be corrected over two accounting periods. Examples include the
following:
Omissions of the following:
1. Deferred expense (or Prepayments under the expense method.)
2. Deferred income (Precollection under the revenue method.)
3. Accrued Expenses

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4 Accrued Revenues

Overstatement Or Understatement of the following:

5. Sales not recorded in the first year and subsequently recorded the

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following year (or vice versa).
6. Purchases not recorded in the first year and subsequently recorded the
following year (or vice versa).

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7. Error affecting ending inventory.

PROBLEM NO. 2 Counterbalancing Errors

You discovered the following errors in connection with your examination of the financial statements of the Jane Corporation:
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1) Accrued interest expense of ₱18,000 was not recorded at the end of 2016.
2) Accrued rent receivable of ₱25,000 was not recorded at the end of 2016.
3) The company paid one-year insurance premium of ₱24,000 effective March 1, 2016. The entire amount was debited to
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expense account and no adjustment was made at the end of 2016.
4) The company leased a portion of its building for ₱36,000. The term of the lease is one year ending April 1, 2017.
Collection of rent was credited to rent revenue account. At the end of 2016, no entry was made to take up the unearned
portion of the amount collected.

The following data were extracted from the financial statements of Jane Corporation:
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2016 2017
Net income 200,000 160,000
Working capital 180,000 260,000
RE, end of the year 200,000 360,000
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Questions:
Based on the above data, determine the following:
1. Net Income in 2016
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2. Working capital, end of 2016

3. Retained earnings, end of 2016

4. Net Income in 2017

5. Working capital, end of 2017

6. Retained earnings, end of 2017

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DARRELL JOE O. ASUNCION, CPA MBA

CORRECTION OF ERRORS

7. Prepare adjusting entries assuming errors were discovered in (a) 2016, (b) 2017, and (c) 2018.

PROBLEM NO. 3 Counterbalancing Errors

You discovered the following errors in connection with your examination of the financial statements of the Girlie Corporation:

1) Purchase of merchandise on account on December 24, 2016 amounting to ₱50,000 was not recorded until it was paid
in January 2017. The merchandise was properly included in the ending inventory in 2016.
2) Sale of merchandise on account on December 30, 2016 amounting to ₱60,000 was not recorded until it was collected
in January 2017. The merchandise was properly excluded in the ending inventory in 2016.
3) On December 31, 2016, the ending inventory was understated by ₱30,000.

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The following data were extracted from the financial statements of Girlie Corporation:

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2016 2017
Net income 200,000 160,000
Working capital 180,000 260,000

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RE, end of the year 200,000 360,000

Questions:
Based on the above data, determine the following:
1. Net Income in 2016

2. Working capital, end of 2016

3. Retained earnings, end of 2016

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4. Net Income in 2017

5. Working capital, end of 2017

6. Retained earnings, end of 2017

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7. Prepare adjusting entries assuming errors were discovered in (a) 2016, (b) 2017, and (c) 2018.

NON-COUNTERBALANCING ERRORS
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Non-counter balancing errors do not offset in the next accounting period. Therefore, companies must make correcting
entries, even if they have closed the books.

Examples:
1. Prepayments under the asset method
2. Precollection under the liability method
3. Error in recording depreciation
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4. Improper capitalization of expense

5. Improper expensing of capital expenditures
6. Error in recording of proceeds of sale of an asset (e.g. PPE) as other income

PROBLEM NO. 4 (NONCOUNTERBALANCING ERRORS)

You discovered the following errors in connection with your examination of the financial statements of the Joy Corporation:

1) The Company paid one- year insurance premium of ₱36,000 effective March 1, 2017. The entire amount was debited
to asset account and no adjustment was made at the end of 2017.

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DARRELL JOE O. ASUNCION, CPA MBA

CORRECTION OF ERRORS

2) The company leased a portion of its building for ₱30,000. The term of the lease is one year ending April 30, 2018.
Collection of rent was credited to unearned rent revenue account. At the end of 2017, no entry was made to take up the
earned portion of the amount collected.
3) Depreciation expense in 2017 was overstated by ₱12,000.
4) Improvements on building amounting to ₱200,000 had been charged to expense on January 1, 2017. Improvements
have a life of 4 years.
5) On January 1, 2017, an equipment costing ₱60,000 was sold for ₱20,000. At the date of sale, the equipment had an
accumulated depreciation of ₱48,000. The cash received was recorded as other income in 2017.
6) Repairs expense on the building amounting to ₱20,000 had been charged to the building account on January 1, 2017.
Depreciation expense has been recorded in 2017 to 2018 based on the 4 year remaining useful life of the building.

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The following data were extracted from the financial statements of Joy Corporation:
2017 2018

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Net income 200,000 160,000
Working capital 180,000 260,000
RE, end of the year 200,000 360,000

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Questions:
Based on the above data, determine the following:
1. Net income in 2017
a. ₱194,000 c. ₱216,500
b. ₱206,000 d. ₱325,000

2. Working capital, end of 2017

a. ₱170,000
b. ₱192,000
c. ₱196,500
d. ₱202,500
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PA
3. Retained earnings, end of 2017
a. ₱194,000 c. ₱216,500
b. ₱206,000 d. ₱325,000

4. Net income in 2018

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a. ₱119,000 c. ₱159,000
b. ₱154,000 d. ₱161,500

5. Working capital, end of 2018

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a. ₱254,000 c. ₱276,000
b. ₱260,000 d. ₱267,500

6. Retained earnings, end of 2018

a. ₱350,000 c. ₱366,000
b. ₱360,000 d. ₱444,000
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7. Prepare adjusting entries assuming errors were discovered in (a) 2017, (b) 2018, and (c) 2019.

PROBLEM NO. 5 (COMPREHENSIVE)

As part of your engagement to audit the financial statements of Bray Company for the year ended December 31, 2022,
you found the following data relating to the company’s Accumulated Profit account before any adjustments:
Date Particulars Debit Credit Balance
01.01. 2020 Beginning Balance 800,000
09.30. 2020 Gain on sale of treasury shares 60,000 860,000

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DARRELL JOE O. ASUNCION, CPA MBA

CORRECTION OF ERRORS

12.31. 2020 Net loss for the year 100,000 760,000

01.31 2021 Dividends paid 120,000 640,000
04.30 2021 Paid in Capital in excess of par 70,000 710,000
08.31 2021 Gain on sale of debt investment at fair value through OCI 80,000 790,000
12.31 2021 Net income for the year 510,000 1,300,000
01.31 2022 Dividends paid 140,000 1,160,000
12.31 2022 Net loss for the year 180,000 980,000

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Your examination disclosed the following:

a. The following omissions were made at the end of each year:

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2019 2020 2021 2022
Accrued expense 1,500 6,000

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Deferred expense 4,000 6,000
Deferred income 1,200 5,000 8,000

b. Major repairs done at the beginning of 2020 on the company’s equipment for P40,000 were recognized as outright
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expenses. The company depreciates equipment at 10% per annum.

c. The company paid on July 1, 2020 an operating expense covering a period of three years beginning July 1, 2020
in the amount of P30,000, which were all charged as outright [Link] adjusting journal entry was ever made
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pertinent to this transaction.

d. Dividends were declared in 2020 and 2021 amounting to P120,000 and P140,000, respectively, but were not
recognized until they were paid the following year.

Compute for the following:

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1. Net Profit (or loss) for the years ended December 31, 2020 and 2021
2. Accumulated profit as of December 31, 2020 and 2022

PROBLEM NO. 6 (COMPREHENSIVE)

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ABC Co reported net income as follows:

2020 1,500,000
2021 2,200,000
2022 2,800,000

An audit of the records disclosed the following:

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a. Accounts receivable instead of notes receivable

was debited in 2021 ₱20,000
b. Purchases account was debited in 2021 instead of
office supplies 15,000
c. The physical inventory on December 31, 2021
was overstated 10,000
d. The physical inventory on December 31, 2022
was understated 8,000
e. Advances to supplier were recorded as purchases
but the merchandise was received in the following year:

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DARRELL JOE O. ASUNCION, CPA MBA

CORRECTION OF ERRORS

2021 20,000
2022 40,000
f. Advances from customers recorded as sales but the goods
were delivered in the following year:
2020 20,000
2021 70,000
g. Insurance premium for three years paid in 2021 was
charged entirely to expense in 2021 15,000
h. Salaries accrued not recorded:
2021 30,000

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2022 60,000
i. Rental for two years received in 2020 was entirely
credited to income 10,000
j. Unrecorded accrued interest receivable:

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2020 10,000
2022 25,000
k. Improvements on building had been charged to expense

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on January 1, 2020. Improvements have a life
of 5 years. 100,000
l. On January 1, 2021, an equipment costing P40,000 was
sold for P20,000. At the date of sale, the equipment had an
accumulated depreciation of P15,000. The cash received
was recorded as other income in 2021.
m. Depreciation for 2020 overstated

Required:
R 30,000
PA
Prepare worksheet showing corrected net income for each year.

PROBLEM NO. 7 (COMPREHENSIVE)

BBCI Co’s net income for 2016, 2017 and 2018 were ₱200,000, ₱290,000 and ₱370,000; respectively. The following items
were not handled properly.
a. Rent payable on December 31 have been consistently omitted from the records of that date and have been recorded
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as expenses when paid in the following year. The rent accruals recorded in this manner were:

December 31, 2015 5,000

December 31, 2016 11,000
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December 31, 2017 15,000

December 31, 2018 9,400

b. Interest of ₱13,000 was received from a borrower on December 23, 2018. It was recorded as income at that time
even though the interest pertains to 2019.
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c. Invoices for office supplies purchased have been charged to expense accounts when received. Inventories of
supplies on hand at the end of each year have been ignored and no entry has been made for them.

December 31, 2015 7,000

December 31, 2016 13,000
December 31, 2017 7,400
December 31, 2018 14,200

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DARRELL JOE O. ASUNCION, CPA MBA

CORRECTION OF ERRORS

d. You also discovered that on January 1, 2016, the company completed a major repair on the company’s machinery
and equipment incurring a total cost of ₱440,000, which it had charged to repairs expense. The said equipment
has been used in operations for 5 years as of January 1, 2016. The equipment which had an original cost of
₱1,000,000 had a carrying value of 500,000 as of December 31, 2018.

1. The correct depreciation expense on machinery and equipment in 2018 is:

a. 62,500 c. 102,500
b. 100,000 d. 140,000
2. The corrected net income for 2016 is:
a. 160,000 c. 480,000

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b. 468,000 d. 600,000
3. The corrected net income for 2017 is:
a. 227,400 c. 253,400
b. 240,400 d. 278,600

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4. The corrected net income for 2018 is:
a. 369,400 c. 331,200
b. 341,800 d. 329,400

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5. The effect of the above errors to the 2018 beginning retained earnings is:
a. 352,400 understatement c. 232,400 understatement
b. 272,400 understatement d. 7,600 overstatement
6. The effect of the above errors to 2018 working capital is:
a. 8,200 understatement c. 17,800 understatement
b. 8,200 overstatement

a. 40,000 overstatement
b. 51,000 overstatement
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d. 17,800 overstatement
7. The effect of the 2016 errors to 2018 net income is:
c. 280,000 understatement
d. 320,000 overstatement
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8. The effect of the 2017 errors to 2018 net income is:
a. 22,400 understatement c. 15,000 understatement
b. 7,600 understatement d. 7,400 overstatement

PROBLEM NO. 8 (COMPREHENSIVE)

You were engaged by SELF-SACRIFICE Company to audit its financial statements for the first time. In examining the
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books, you found out that certain adjustments had been overlooked at the end of 2021 and 2022. You also discovered that
other items had been improperly recorded. These omissions and other failures for each year are summarized below:

12/31/2022 12/31/2021
₱40,000 ₱50,000
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Interest receivable
Rent payable 240,000 260,000
Prepaid insurance 300,000 342,000
Advances to suppliers 250,000 270,000
(Payment to suppliers had been recorded as
purchases but should have been recognized as
advances to suppliers because goods were not
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received until the following year)

Machinery 420,000 500,000
(Capital expenditures had been recorded as repairs
but should have been charged to Machinery; the
depreciation rate is 10% per year, but depreciation in
the year of expenditure is to be recognized at 5%)

QUESTIONS:

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DARRELL JOE O. ASUNCION, CPA MBA

CORRECTION OF ERRORS

Based on the above and the result of your audit, answer the following:

1. What is the total effect of the errors on the 2021 net income?

2. What is the total effect of the errors on the 2022 net income?

3. What is the total effect of the errors on the company’s working capital at December 31,2022?

4. What is the total effect of the errors on the balance of the company’s retained earnings at December 31, 2022?

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PROBLEM NO. 9 (COMPREHENSIVE)
The Daniel Corporation is in the process of negotiating loan for expansion purposes. The books and records have never
been audited and the bank has requested that an audit be performed. Daniel has prepared the following comparative
financial statements for the years ended December 31, 2016 and 2015:

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STATEMENT OF FINANCIAL POSITION
As of December 31, 2016 and 2015

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ASSETS
Current assets: 2016 2015
Cash ₱ 163,000 ₱ 82,000
Accounts receivable 392,000 296,000
Allowance for doubtful accounts
Trading securities, at cost
Merchandise inventory
Total current assets
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78,000
207,000
₱ 803,000
(18,000)
78,000
202,000
₱ 640,000
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Noncurrent Assets:
Property, plant and equipment ₱ 167,000 ₱ 169,500
Accumulated depreciation (121,600) (106,400)
Total PPE (net) ₱ 45,400 ₱ 63,100
Total Assets ₱ 848,400 ₱ 703,100
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LIABILITIES AND SHAREHOLDERS’ EQUITY

Accounts payable ₱121,400 ₱196,100
Shareholders’ equity:
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Ordinary shares, ₱10 par value, authorized 50,000

shares, issued and outstanding 20,000 shares 260,000 260,000
Retained earnings 467,000 247,000
Total shareholders’ equity ₱727,000 ₱507,000
Total liabilities and shareholders’ equity ₱848,400 ₱703,100
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INCOME STATEMENT
For the years ended December 31, 2016 and 2015
2016 2015
Sales ₱1,000,000 ₱900,000
Cost of sales 430,000 395,000
Gross profit 570,000 505,000
Operating expenses 210,000 205,000

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DARRELL JOE O. ASUNCION, CPA MBA

CORRECTION OF ERRORS

Administrative expenses 140,000 105,000

Net income ₱ 220,000 ₱ 195,000

During the course of the audit, the following additional facts were determined:
A. On December 31, 2016, Daniel provided uncollectible accounts based on 2% of its annual sales. Daniel changed its
method of determining its allowance for uncollectible by 10% based on accounts receivable.
B. An analysis of trading securities revealed that this investment portfolio consisted entirely of securities that were acquired
in 2015. The total market valuation for these investments as of the end of each year was as follows:
December 31, 2015 ₱81,000
December 31, 2016 62,000

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C. The merchandise inventory at December 31, 2015 was overstated by ₱4,000, and the merchandise inventory at
December 31, 2016 was overstated by ₱6,100.
D. On January 1, 2015, equipment costing ₱12,000 (estimated useful life of ten years and residual value of ₱1,000) was

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incorrectly charged to operating expenses. Daniel records depreciation on straight-line method.
E. At the beginning of 2016, fully depreciated equipment (with no residual value) that originally cost ₱17,500 was sold at
scrap for ₱2,500. Although Daniel credited the proceeds of ₱2,500 to property and equipment, no depreciation has

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been provided on this equipment.
F. An analysis of 2015 operating expenses revealed that Daniel charged to expense a three-year insurance premium of
₱2,700 on January 2, 2015.

Questions:
Based on the above data, compute for the following:
1. The adjusted net income in 2015.
a. ₱203,700
b. ₱206,700
c. ₱200,700
d. ₱199,700
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PA
2. The adjusted net income in 2016.
a. ₱212,400 c. ₱196,400
b. ₱197,200 d. ₱194,700
3. The adjusted current asset in 2015.
a. ₱636,000 c. ₱639,900
b. ₱643,000 d. ₱640,800
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4. The adjusted total asset in 2016.

a. ₱836,400 c. ₱855,000
b. ₱837,300 d. ₱852,500
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5. The adjusted shareholders’ equity in 2016.

a. ₱715,900 c. ₱749,900
b. ₱753,900 d. ₱748,900

“Whatever you can do, or dream you can do, begin it. Boldness has genius, power, and magic in it. Begin it now.”
- Goethe
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“One of the most important keys to Success is having the discipline to do what you know you should do, even when you
dont feel like doing it.” - Unknown
--- END OF HANDOUTS ---

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SHAREHOLDERS’ EQUITY
DARRELL JOE O. ASUNCION, CPA, MBA

SHAREHOLDERS’ EQUITY
DARRELL JOE O. ASUNCION, CPA MBA
SHAREHOLDERS’ EQUITY
Shareholders’ equity is the residual interest of owners in the net assets of a corporation measured by the excess of assets
over liabilities. Generally, the elements constituting Shareholders’ equity are:
OLD TERMS IFRS TERMS

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a. Capital stock Share capital
b. Preferred stock Preference share
c. Common stock Ordinary share

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d. Subscribed capital stock Subscribed Share capital
e. Additional paid in capital Share Premium
f. Retained earnings Accumulated profits

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g. Revaluation surplus Revaluation reserve
h. Treasury stock Treasury shares
Components of shareholders’ equity:
Share capital issued XX
Subscribed share capital XX
Less: Subscriptions receivable
Share premium:
Share premium excess over par
Share premium - Treasury shares
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XX
XX
XX
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Share premium conversion option - convertible bonds payable XX
Donated capital XX
Share premium warrants outstanding XX
Share premium options outstanding XX XX
Total paid in capital XX
Retained earnings - unappropriated XX
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Retained earnings - appropriated XX XX

Other comprehensive income (cumulative balance)
Revaluation surplus XX
Unrealized gain or (loss) on FVTOCI XX
Remeasurement gain or (loss) under PAS 19 XX
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Translation gain or (loss) XX

Effective portion of cash flow hedge XX
Change in fair value due to credit risk of designated FL@TPL XX XX
Total XX
Less: Treasury shares XX
Total shareholders’ equity XX
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Contributed Capital (also known as Paid-In capital)

Represents the amount invested or contributed by owners. This is composed of share capital and share premium.
Legal Capital
It is the portion of paid in capital which cannot be returned to stockholders in any form (cash, property or stock dividends)
during the lifetime of the corporation.
1. With par value Share capital issued XX

Subscribed share capital XX

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DARRELL JOE O. ASUNCION

SHAREHOLDERS’ EQUITY

2. No par value Share capital issued XX

Subscribed share capital XX

Paid in capital in excess of stated value XX

PROBLEM NO. 1 Legal Capital, Contributed Capital, Shareholders’ Equity

The shareholders’ equity section of Kristal Mae Company revealed the following information on December 31, 2015:

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Estimated Premiums payable 200,000
Share premium on preference shares 300,000
Authorized preference shares at ₱50 par value 1,600,000

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Gain on sale of treasury shares 120,000
Unrealized increase in value of FVTOCI securities 20,000
Ordinary share warrants outstanding 70,000
Unissued ordinary shares 1,300,000

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Unissued preference shares 300,000
Cash dividends payable – preferences 160,000
Donated capital 80,000
Reserve for bond sinking fund 640,000
Reserve for depreciation
Revaluation surplus
Subscription receivable – preference
Subscription receivable – ordinary shares
Ordinary shares options outstanding
R 200,000
260,000
30,000
40,000
50,000
PA
Accumulated profits – unappropriated 1,000,000
Bonds payable 2,000,000
Subscribed Ordinary shares 400,000
Long term investments in equity securities 800,000
Share Premium on ordinary shares 600,000
Premium on bonds payable 200,000
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Share Premium conversion option-bonds payable 80,000

Authorized ordinary shares at ₱10 stated value 2,400,000
Subscribed Preference shares 120,000
Treasury shares-ordinary shares (10,000 shares) 150,000
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Questions:
Based on the above data, compute for the following:
1. Ordinary share issued
2. Preference shares issued
3. Share premium
4. Contributed capital
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5. Total legal capital

6. Total shareholders’ equity

PROBLEM NO. 2 Issuance of Shares for Cash Consideration, Share Issue Cost
Assume the following issuances of ₱40 par value shares of stock:
1. Issuance of 2,000 shares at par for cash.
2. Issuance of 5,000 shares at ₱60 per share for cash. Stock issue costs that were paid by the corporation amounted to
₱70,000.
3. Issuance of 4,000 shares at ₱30 per share for cash.

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DARRELL JOE O. ASUNCION

SHAREHOLDERS’ EQUITY

Required: Record the transactions listed above in journal entry form.

PROBLEM NO. 3 Issuance of Shares for Noncash Consideration
Assume the following issuances of ₱40 par value shares of stock:
1. Issued 2,500 shares of stock for machinery. The machinery has a fair value of ₱180,000 while the stock is selling at
₱65 per share.
2. Issued 1,000 shares of stock for patent (an intangible asset). The stock is selling at ₱65 per share.
3. Issued 400 shares of stock in full payment of organization services rendered from the legal counsel. The fair value of
such services is ₱40,000.

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Required: Record the transactions listed above in journal entry form.

PROBLEM NO. 4 Issuance of Shares for Outstanding Liability

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The company issued 2,000, ₱40 par ordinary shares for an outstanding bank loan of ₱150,000. On this date, shares are
quoted at ₱70 per share.

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Required: Record the transactions listed above in journal entry form.
PROBLEM NO. 5 Issuance of Two Classes of Shares - Shares are Issued Separately
The company issued the following shares of stock:
1. Issued 2,500, ₱200 par value preference share, for ₱216 per share for cash.
2. Issued 500, ₱100 par value ordinary share, for ₱120 per share for cash.
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Required: Record the transactions listed above in journal entry form.

PROBLEM NO. 6 Lump Sum Issuance of Two Classes of Shares - Incremental Method - Proportional Method
PA
The company issued for ₱900,000 cash, 2,500 shares of ₱200 par value Preference share and 500 shares of ₱100 par
ordinary share. The preference and ordinary shares have fair values of ₱216 and ₱120 per share, respectively on the date
of sale.

Required: Record the transactions listed above in journal entry form.

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PROBLEM NO. 7 Lump Sum Issuance of Two Classes of Shares - Incremental Method
The company issued for ₱900,000 cash, 2,500 shares of ₱200 par value Preference share and 500 shares of ₱100 par
ordinary share. The preference share has a fair value of ₱216 on the date of sale. No fair value available for the ordinary
share.
Required: Record the transactions listed above in journal entry form.
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PROBLEM NO. 8 Subscriptions

Assume the following transactions for Blessie Corporation during the current year:
1) Ngeteg subscribed for 4,000, ₱50 par ordinary shares of BlessieCorporation at ₱60 per share.
2) Ngeteg paid 60% of the subscriptions price.
3) Ngeteg paid the remaining balance.
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Required: Record the transactions listed above in journal entry form.

PROBLEM NO. 9 Delinquent Subscriptions, Downpayment Is Forfeited
Assume the following transactions for Rosanna Corporation during the current year:
1) Osang subscribed for 5,000, ₱40 par ordinary shares of Rosanna Corporation at ₱60 per share.
2) Osang paid 60% of the subscriptions price.
3) Subsequently, Osang was declared delinquent subscriber. In accordance with the subscriptions contract Osang’s
downpayment was forfeited.

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DARRELL JOE O. ASUNCION

SHAREHOLDERS’ EQUITY

Required: Record the transactions listed above in journal entry form.

PROBLEM NO. 10 Delinquent Subscriptions, Down-payment Is Not Forfeited with Highest Bidder
Assume the same data in Problem No. 9, except that the delinquent stocks are subsequently offered for public auction
incurring a cost of ₱10,000. The offer price is ₱130,000.

During the auction, there are three bidders who are willing to pay the offer price corresponding to shares of stocks, as
follows:
# of shares
willing to be

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Bidders received
Ria 4,000 shares
Josiah 4,500 shares
Luke 3,500 shares

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Required: Record the transactions listed above in journal entry form.

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PROBLEM NO. 11 Delinquent Subscriptions, Down-payment is Not Forfeited without Highest Bidder
Use the same Problem NO. 10 above, except that there are no bidders and the corporation purchased its own delinquent
shares.

Required: Record the transactions listed above in journal entry form.

PROBLEM NO. 12 Treasury shares and Donated Capital R
The Keep Walking Co. had 100,000 shares of ordinary share capital on December 31, 2014. Its statement of financial
position on that date showed the following shareholders’ equity balances:
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Ordinary share capital, ₱20 par ₱2,000,000
Share Premium 600,000
Retained earnings 1,200,000

The following treasury share transactions took place in 2015:

1) Purchased 15,000 ordinary shares at ₱24 per share.
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2) Sold 5,000 of the treasury shares at ₱26 per share.

3) Sold 4,000 of the treasury shares at ₱20 per share.
4) Retired the remaining treasury shares.
5) Stockholder donated 5,000 shares when the market price is ₱25 per share. Subsequently, the company sold 2,000
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shares at ₱28 per share.

Required: Record the transactions listed above in journal entry form.

PROBLEM NO. 13 Retirement of Share Capital

The Shareholders’ equity section of Flordie Co. on December 31 is as follows:
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Preference share ₱100 par, 30,000 shares issued and outstanding 3,000,000
Share Premium on Preference shares 300,000
Ordinary share ₱50 par, 50,000 shares issued and outstanding 2,500,000
Share Premium on Ordinary shares 100,000
Accumulated Profits 15,000,000

Required: Prepare the journal entry assuming 3,000 shares of the preference are redeemed at:
a. 140 b. 95

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PROBLEM NO. 14 Conversion of Preference Shares

The Shareholders’ equity section of Divine Grace Co. on December 31 is as follows:

Preference share ₱100 par, 30,000 shares issued and outstanding 3,000,000
Share Premium on Preference shares 300,000
Ordinary share ₱50 par, 50,000 shares issued and outstanding 2,500,000
Share Premium on Ordinary shares 100,000
Accumulated Profits 15,000,000

Required:

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Prepare the journal entry assuming that 4,000 shares of preference are converted under each assumption listed:
1) Preference share are convertible into ordinary on a share-for-share basis.
2) Each preference share is convertible into 5 shares of ordinary.

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RECAPITALIZATION
It occurs when there is a change in the capital structure of the company. The old shares are cancelled and new shares are
issued.

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Examples:
1. Change from par to no-par
2. Change from no-par to par
3. Reduction of par value or stated value
4. Split up or split down

Split up
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Is a transaction whereby the original shares are called in for cancellation and replaced by a larger number accompanied by
a reduction in the par value or stated value.
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Memo: Issued number of shares as a result of a 4 for 1 share split, reducing the par value to Pxx.

Before After
Share capital issued XX X 4/1 XX
Subscribed share capital XX X 4/1 XX
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Total XX X 4/1 XX
Less treasury shares XX X 4/1 XX
Donated shares XX X 4/1 XX
Outstanding shares XX X 4/1 XX
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Before After
Par value per share XX X¼ XX

Split down
It is a transaction whereby the original shares are cancelled and replaced by a smaller number accompanied by an increase
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in the par value or stated value.

Memo: Issued number of shares as a result of a 1 for 4 share split, increasing the par value to Pxx.

Before After
Share capital issued XX X¼ XX
Subscribed share capital XX X¼ XX
Total XX X¼ XX
Less treasury shares XX X¼ XX

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SHAREHOLDERS’ EQUITY

Donated shares XX X¼ XX
Outstanding shares XX X¼ XX

Before After
Par value per share XX X 4/1 XX

Effect
Split up Split down
No. of shares Increase Decrease

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Par value per share Decrease Increase
Total SHE Same Same

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PROBLEM NO. 15 Recapitalization, Change From Par to No-Par, Reduction of Par Value and Share Split
The Shareholders’ equity section of Levana Co. on December 31 is as follows:

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Ordinary share ₱50 par, 50,000 shares issued and outstanding 2,500,000
Share Premium on Ordinary shares 100,000
Accumulated Profits 15,000,000

with the following stated value:

a. ₱40 b. 140
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Required: Assume the following independent cases; provide the journal entry that is made on the corporation books:
1) All the 50,000 ordinary shares are called in for cancellation. Instead, the company issued 50,000 no-par ordinary shares
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2) A recapitalization is effected whereby the par value of the ordinary shares is reduced to ₱40 per share.
3) The company effected a 5 for 1 stock split on the ordinary shares.

PROBLEM NO. 16 Share warrants - Different Cases

The Patacsil Co. issued 2,000 shares of ₱50 par preference shares with detachable warrants. The package sells for ₱200.
The warrants enable the holder to purchase 1,000 ordinary shares of ₱20 par at ₱40 per share.
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Case No. 1: If Immediately after the issuance of the share, the warrants are selling at ₱20 per share and the market value
of the preference without the warrants is ₱80.

Subsequently, 80% of the warrants is exercised.

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Case No. 2: Assume instead that only the market value of the preference without the warrants amounting to ₱80 is available.

Case No. 3: Assume instead that the warrants and the preference have no known market values but the ordinary share is
trading at ₱50 per share.
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Required: Record the transactions listed above in journal entry form.

PROBLEM NO. 17 Cash Dividends

On December 1 of the current year, Brayden Corp. declared ₱5 per share dividends on the outstanding ordinary shares to
the shareholders of record on December 15 payable on December 31. Brayden has 40,000 issued ordinary shares with par
value of ₱100. These shares were issued on January 1 of the current year. On February 1 of the current year, the company
acquired 2,000 ordinary shares at cost of ₱110 per share which were held in treasury.

Required: Prepare all the necessary entries at the:

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DARRELL JOE O. ASUNCION

SHAREHOLDERS’ EQUITY

1) Date of Declaration
2) Date of Record
3) Date of Payment

PROBLEM NO. 18Cash dividends for Preference Shares-Semi-annual Payment

On January 1, of the current year, Chinito issued 10,000, 10% preference shares to the public. The preference share has a
par value of ₱100. On April 1 of the same year, Chinito reacquired 1,000 of this share. On July 1, the Chinito paid its semi-
annual dividends. On October 1 of the same year, Chinito reissued 600 of its treasury preference shares. On December 31
of the current year, Chinito again declared the semi-annual dividends of the preference shares.

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Required: Prepare all the necessary entries on the date of declaration of dividends.

PROBLEM NO. 19 Current Assets as Property Dividends

On November 1, 2015, Tolding Company declared inventory as property dividend payable on February 15, 2016. The

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carrying amount of the inventory is ₱500,000. Data relating to the fair values of the inventory are as follows:

Fair values (assume these are

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Date not materially different with the
net realizable values)
November 1, 2015 ₱450,000
December 31, 2015 ₱600,000
February 15, 2016 ₱540,000
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Required: Record the transactions listed above in journal entry form.

PROBLEM NO. 20 Property, plant and Equipment as Property Dividends

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On November 1, 2015, Rhenz Company declared equipment as property dividend payable on February 15, 2016. The
carrying amount of the equipment is ₱500,000. Data relating to the fair values of the equipment are as follows:
Fair value (assume that the
Date costs to distribute are immaterial)
November 1, 2015 ₱450,000
December 31, 2015 ₱600,000
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February 15, 2016 ₱540,000

Required: Record the transactions listed above in journal entry form.

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PROBLEM NO. 21 Cash and Noncash Alternative

On January 1, 2015, Drenz Company had ten outstanding ordinary shares. On December 31, 2015, Drenz declared
dividends on the ordinary shares. The corporation decided to give the ordinary shareholders a choice between receiving a
cash dividend of ₱8,000 per share or a property dividend in the form of a non cash asset. Each noncash asset has a fair
value of ₱9,000. The corporation estimated that 60% of the ordinary shareholders will take the option of the cash dividend
and 40% will elect for the noncash asset. Journalize the transaction on December 31, 2015.
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Required: Prepare all the necessary entries on the:

1) Date of declaration of dividends.
2) Date of payment assuming the shareholders opted to avail of the
a. Cash dividends
b. Noncash dividends

PROBLEM NO. 22 Share Dividends: Small, Large and Treasury Shares

The Shareholders’ equity section of Myna Ley Co on December 31 is as follows:

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DARRELL JOE O. ASUNCION

SHAREHOLDERS’ EQUITY

Ordinary share ₱50 par, 53,000 shares issued 2,650,000

Share Premium on Ordinary shares 53,000
Treasury shares (3,000 shares) 120,000
Accumulated Profits 10,000,000

Required: Assume the following independent cases, provide the journal entry that is made on the corporation books:
1) The company declared 10% share dividends on the ordinary share when the market value per share is ₱80.
2) The company declared 20% share dividends on the ordinary share when the market value per share is ₱80.
3) The company declared and paid ₱2 per share liquidating dividends.
4) Assume instead that the 3,000 treasury shares were declared and issued as share dividends.

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PROBLEM NO. 23 Comprehensive Problem
Crein Company reported the following amounts in the shareholders’ equity section of its December 31, 2021, statement of

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financial position:
Ordinary shares
1,500,000
Preference shares, 40,000 shares issued during the company’s

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incorporation at ₱50 per share. Each preference share is convertible to four ordinary shares.
2,000,000
Retained earnings 540,000
Total shareholders’ equity 4,440,000

Audit notes and transactions:

a.
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You found out that Crein Company was incorporated in early 2021 when it was authorized by SEC to
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issue 500,000 ordinary shares (₱10 par) and 100,000 convertible preference shares (₱20 par). Each preference
share is convertible to four ordinary shares.
b. The balance of the ordinary shares reflects the amount credited during incorporation when the company
issued 100,000 shares in exchange for a land with a fair value of ₱1.5M.
c. The balance of the preference shares reflects the amount credited during incorporation when the
company issued 40,000 shares at ₱50 per share.
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d. Net income for 2022 was ₱540,000.

e. On February 14, 2022, 10,000 preference shares were converted to ordinary shares.

f. On March 1, 2022, 20,000 ordinary shares and 25,000 preference shares were issued in exchange of a
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building with a fair market value of ₱1,200,000. The fair value of the ordinary shares was considerably stable at
₱32 per share while the fair value of the preference shares was volatile and highly speculative and that it ranges
from a low of ₱21 per share to high of ₱55 per share within a trading week.

g. On July 1, 2022, the company issued 5,000, ₱1,000 12% bonds payable with detachable warrants. One
warrant is attached to each ₱1,000 bond. The bonds which pay semi-annual interest every June 30 and
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December 31 were issued at total lump sum of ₱5,300,000. On the date of issuance, the bonds were quoted at
105 without the warrants while each warrant can be sold in the market at ₱12. Five warrants surrendered
together with ₱20 exercise price entitle the holder to acquire one ordinary share. Warrants can be exercised 2
years from the date of the issuance.

h. On August 1, 2022, the company reacquired 9,000 ordinary shares (from the 2021 issue) at ₱22 per
share and reverted them to treasury since it intends to reissue the same.

i. On October 11, 2022, the company reissued 1,000 treasury shares at ₱25 per share.

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SHAREHOLDERS’ EQUITY

j. On December 1, 2022, the company retired 4,000 treasury shares and reverted them to unissued basis.

k. On December 15, 2022, 70% of the warrants issued with the bonds were exercised.

l. The company registered an adjusted net income in 2022 at ₱830,000.

Based on the information above, compute for the adjusted balances of following as of December 31, 2022:

1. Ordinary shares

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2. Preference shares
3. Share Premium
4. Total Contributed capital

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5. Retained earnings – unappropriated account
6. Total shareholders’ equity

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PROBLEM NO. 24
LOESCH Corp. has two classes of share capital outstanding: 12%, ₱100 par value preference share and ₱50 par value
share. Balances on January 1, 2009 were:

Preference Share Capital-5,000 shares ₱500,000

Ordinary Share Capital-50,000 shares
Share Premium- PS
Share Premium- OS
Accumulated Profits
2,500,000
200,000
2,000,000
4,000,000
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The following data summarize the transactions for 2009:
a. Issue of 20,000 shares of ordinary at ₱50 per share on January 20.
b. Purchase of 5,000 of the company’s own ordinary shares from stockholders at ₱60 per share on February 20.
c. A 2 for 1 share split on the ordinary on April 1.
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d. 20% stock dividend to ordinary shares was declared on April 30 and distributed on May 20. The prevailing
fair value of share on this date was ₱60 per share.
e. Reissuance of 3,000 reacquired shares at ₱40 per share on May 3.
f. Donation of 15,000 shares of ordinary by shareholders on June 5.
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g. Reissuance of 10,000 donated stocks at ₱40 per share on July.

h. Declaration of ₱12 cash dividends to preference shares and ₱3 per share dividends to ordinary on November
30 stockholders as of December 20 payable on January 30 of the next year.
i. The company appropriated 20% of the adjusted unappropriated accumulated profits (after other
appropriations) for plant expansion.
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The net income for the year after adjustments was ₱1,200,000 and accumulated balance of the unrealized loss from
remeasurement of the company’s fair value through comprehensive income securities was at ₱200,000.

Required:

1. What is the adjusted balance of the ordinary share account on December 31,2009?
a. 4,150,000 b. 3,850,000 c. 7,700,000 d. 8,300,000

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SHAREHOLDERS’ EQUITY

2. What is the total additional Paid in Capital as of December 31,2009?

a. 2,630,000 b. 2,660,000 c. 2,690,000 d. 2,600,000

3. What is the balance of the accumulated profits, unappropriated account at the end of 2009?
a. 1,998,000 b. 2.334,500 c. 2,534,400 d. d. 3,054,400

4. How much is the total accumulated profits, appropriation?

a. 973,600 b. 773,600 c. 633, 600 d. 210,000

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5. What is the total stockholders equity as of December 31,2009?
a. 10,458,000 b. 10,898,000 c. 10,868,000 d. 11, 318,000

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PROBLEM NO. 25 Comprehensive Problem
Joy Ashliy Company reported the following amounts in the shareholders’ equity section of its December 31, 2014, statement

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of financial position:
10% Preference share, 100 par (10,000 shares
authorized, 4,000 shares issued ₱ 400,000
Ordinary share, ₱5 par (100,000 shares
authorized 40,000 shares issued 200,000
Share Premium
Retained earnings
Total
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900,000
₱ 1,750,000
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During 2015, the following transactions transpired concerning shareholders’ equity:
1) Paid the annual ₱10 per share dividend on preference share and a ₱2 per share dividend on ordinary share. These
dividends had been declared on December 31, 2014.
2) Purchased 3,400 shares of its own outstanding ordinary share for ₱40 per share.
3) Reissued 1,400 treasury shares for land valued at ₱60,000.
4) Issued 500 shares of preference at ₱105 per share.
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5) Declared a 10% share dividend on the outstanding ordinary share when the stock is selling for ₱45 per share.
6) Issued the share dividend.
7) Net income for the year is ₱2,500,000.
8) Declared the annual 2015 ₱10 per share dividend on preference share and the ₱2 per share dividend on the ordinary
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share. These dividends are payable in 2016.

Questions:
Based from the above data, answer the following:
1. How much is the balance of the Preference share on December 31, 2015statement of financial position?
a. ₱452,000 c. ₱420,000
b. ₱450,000 d. ₱400,000
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2. How much is the balance of the Ordinary share on December 31, 2015statement of financial position?
a. ₱371,000 c. ₱219,000
b. ₱219,600 d. ₱200,000
3. How much is the balance of the Retained earnings unappropriated on December 31, 2015statement of financial
position?
a. ₱3,127,400 c. ₱3,020,400
b. ₱3,100,400 d. ₱2,900,400
4. How much is the balance of the Treasury share on December 31, 2015statement of financial position?

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SHAREHOLDERS’ EQUITY

a. ₱136,000 c. ₱76,000
b. ₱80,000 d. Zero
5. How much is the total stockholders’ equity as of December 31, 2015?
a. ₱4,346,900 c. ₱4,097,900
a. ₱4,148,900 d. ₱3,926,900

PROBLEM NO. 26
The Running Man Corporation has requested you to audit its financial statements for the year 2016. During your audit,
Running Man presented to you its balance sheet as of December 31, 2015 containing the following capital section:
Preference Share ₱10 par; 60,000 shares authorized and

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issued, of which 6,000 are treasury shares costing
₱90,000 and shown as an asset ₱ 600,000
Ordinary Share, par value ₱4; 600,000 shares authorized,

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of which 450,000 are issued and outstanding 1,800,000
Share Premium (₱5 per share on Preference Share
issued in 2000) 300,000

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Allowance for doubtful accounts receivable 12,000
Reserve for depreciation 840,000
Reserve for fire insurance 198,000
Retained earnings 2,250,000
Total stockholders’ equity ₱6,000,000
Additional information:
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1) Of the Preference Share, 3,000 shares were sold for ₱18 per share on August 30, 2016. Running Man credited the
proceeds to the Preference Share account. The treasury shares as of December 31, 2015 were acquired in one
purchase in 2015.
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2) The Preference Share carries an annual dividend of ₱1 per share. The dividend is cumulative. As of December 31,
2015, unpaid cumulative dividends amounted to ₱5 per share. The entire accumulation was liquidated in June 2016,
by issuing to the Preference Shareholders 54,000 shares of Ordinary Share,
3) A cash dividend of ₱1 per share was declared on December 1, 2016 to Preference Shareholders of record December
15, 2016. The dividend is payable on January 15, 2017.
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4) At December 31, 2016, the Allowance for Doubtful Accounts Receivable and Reserve for Depreciation had balances of
₱25,000 and ₱1,050,000, respectively.
5) On March 1, 2016, the Reserve for Fire Insurance was increased by ₱60,000; Retained Earnings was debited.
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6) On December 31, 2006, the Reserve for Fire Insurance was decreased by ₱30,000, which represents the carrying value
of a machine destroyed by fire. Estimated fire clean-up cost of ₱6,000 does not appear on the records.
7) The December 31, 2015 Retained Earnings consists of the following:
Donated land from a stockholder
(Market value on date of donation) ₱ 450,000
Gains from treasury stock transactions 51,000
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Earnings retained in business 1,749,000

₱2,250,000

8) Net income for the year ended December 31, 2016 was ₱1,297,500 per company’s records.
Based on the above and the result of your audit, determine the adjusted balances of the following as of December 31, 2016:
(Disregard tax implications)

1. Total Share Premium

a. ₱414,000 c. ₱810,000

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b. ₱804,000 d. ₱864,000
2. Retained earnings - Appropriated
a. ₱258,000 c. ₱228,000
b. ₱303,000 d. ₱ 0
3. Retained earnings - Unappropriated
a. ₱2,677,500 c. ₱2,578,500
b. ₱2,626,500 d. ₱2,623,500
4. Treasury stock
a. ₱45,000 c. ₱36,000
b. ₱90,000 d. ₱ 0
5. Total stockholders’ equity

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a. ₱3,700,500 c. ₱6,316,500
b. ₱5,812,500 d. ₱6,319,500

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PROBLEM NO. 27
Select the best answer for each of the following:
1. In an examination of shareholder’s equity, an auditor is most concerned that

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a. Capital stock transactions are properly authorized.
b. Share splits are capitalized at par or stated value on the dividend declaration date.
c. Dividends during the year under audit were approved by the shareholders.
d. Changes in the accounts are verified by a bank serving as a registrar and stock transfer agent.

least amount of audit time?

a. Owner’s equity b. Assets
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2. In audit of a medium-sized manufacturing concern, which one of the following areas can be expected to require the

c. Revenue d. Liabilities
3. When a corporate client maintains its own stock records, the auditor primarily will rely upon
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a. Confirmation with the company secretary of shares outstanding at year-end.
b. Review of the corporate minutes for data as to shares outstanding.
c. Confirmation of the number of shares outstanding at year-end with the appropriate state official.
d. Inspection of the stock book at year-end and accounting for all certificate numbers.
4. When a client company does not maintain its own stock records, the auditor should obtain written confirmation from the
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transfer agent and registrar concerning

a. Restrictions on the payment of dividends.
b. The number of shares issued and outstanding.
c. Guarantees of preference share liquidation value.
d. The number of shares subject to agreement to repurchase
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5. The auditor is concerned with establishing that dividends are paid to client corporation shareholders owning stock as of
the
a. Issue date c. Record date
b. Declaration date d. Payment date
6. An audit program for the accumulated profits account should include a step that requires verification of the
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a. Fair value used to charge accumulated profits to account for a two-for-one-stock split.
b. Approval of the adjustment to the beginning balance as a result of a write-down of an account receivable.
c. Authorization for both cash and stock dividends.
d. Gain or loss resulting from disposition of treasury shares.
7. During an audit of an entity’s shareholders’ equity accounts, the auditor determines whether there are restrictions on
accumulated profits resulting from loans, agreements, or law. This audit procedure most likely is intended to verify
management’s assertion of
a. Existence c. Valuation
b. Completeness d. Presentation and disclosure

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8. If the audit client has a material amount of treasury shares on hand at year-end, the auditor should
a. Count the certificates at the same time other securities are counted.
b. Count the certificates only if the company had treasury stock transactions during the year.
c. No count the certificates if treasury stock is a deduction from shareholders’ equity.
d. Count the certificates only if the company classifies treasury stock with other assets.
9. In performing tests concerning the granting of stock options, an auditor should
a. Confirm the transaction with the Securities and Exchange Commission.
b. Verify the existence of option holders in the entity’s payroll records or stock ledgers.
c. Determine that sufficient treasury stock is available to cover any new stock issued.
d. Trace the authorization for the transaction to a vote of the board of directors.

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10. The auditor would not expect the client to debit accumulated profits for which of the following transactions?
a. A 4-for 1 stock split.
b. "Loss" resulting from disposition of treasury shares.

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c. A 1-for 10 share dividend.
d. Correction of error affecting prior year's earnings.

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11. An audit program of the retained earnings account should include a step that requires verification of
A. Market value use to charge retained earnings to account for a 2-for-1 stock split.
B. Approval of the adjustment to the beginning balance as a result of a write down of an account
receivable.
C. Authorization for both cash and stock dividends

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D. Gain or loss resulting from disposition of treasury shares
12. Where no independent stock transfer agents are employed and the corporation issues its own stocks, And maintain
stock records, cancelled stock certificates should
A. Be defaced to prevent issuance and attached to their corresponding stubs
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B. Not be defaced but segregated from other stock certificates and retained in a cancelled certificates file
C. Be destroyed to prevent fraudulent reissuance
D. Be defaced and sent to the secretary of finance
“Keep Moving Forward”
― Walt Disney Company
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“Do it again.
Play it again. Sing it again. Read it again. Write it again. Sketch it again. Rehearse it again. Run it again. Try it again.
Because again is practice, and practice is improvement, and improvement only leads to perfection.”
― Richelle E. Goodrich, Smile Anyway: Quotes, Verse, & Grumblings for Every Day of the Year
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“Success is not obtained overnight. It comes in installments; you get a little bit today, a little bit tomorrow until the whole
package is given out. The day you procrastinate, you lose that day's success.”
― IsraelmoreAyivor
--- END OF HANDOUTS ---
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SHARE-BASED PAYMENT OF ACCOUNTING

DARRELL JOE O. ASUNCION, CPA, MBA

SHARE-BASED PAYMENT
DARRELL JOE O. ASUNCION, CPA MBA
SHARE-BASED PAYMENT
Share-based payment is a transaction in which the entity:
a. receives goods or services as consideration for equity instruments of the entity (including shares or share options),

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or
b. acquires goods or services by incurring liabilities to the supplier of those goods or services for amounts that are
based on the price of the entity’s shares or other equity instruments of the entity.

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TYPES OF SHARE-BASED PAYMENT TRANSACTIONS
1. Equity settled - the entity issues equity instruments in consideration for services received, e.g., stock options.
2. Cash settled - the entity incurs a liability for services received and liability is based on the entity’s equity instruments,

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e.g., stock appreciation rights.
3. Share-based payment with cash alternatives.
a. Originally equity-settled and cash settled was subsequently added, or
b. Granted simultaneously

Share option R
Share option or stock option is a contract that gives the holder the right, but not the obligation, to subscribe to the entity’s
shares at a fixed or determinable price for a specified period of time.
PA
Are granted to officers and key employees to enable them to acquire shares of stock of the entity during a specified period
upon fulfillment of certain conditions at a specified price.
-part of compensation package, additional compensation.

Types Journal entries:

Date of grant End of each reporting Exercised date
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period
1. Equity settled Memo: (e.g.) Granted options to 5 Debit Compensation Debits Share options outstanding
executives to purchase 4,000 shares exp. and credit Share and Cash Credits OS account and
of ₱50 par value OS. options outstanding. share premium.
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2. Cash settled Memo: (e.g.) Granted each of the four Debit Compensation Debit SARS payable and credit
executives to receive cash payment exp. and credit SARS Cash
equal to 900 shares, conditional upon payable
the completion of three years of
service.
3. Share-based Memo: (e.g.) Granted each of the four Debit Compensation Cash alternative:
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payment with executives the right to choose either expense and credits Debits: SARs payable (no. of
cash 1,000 ordinary shares or to receive Share options cash alt shares x fair value) and
alternatives. cash payment equal to 900 shares, outstanding and SARS Share options outstanding and
conditional upon the completion of payable. Credits Cash (no. of cash alt
three years of service. shares x fair value) and Share
premium
Equity alternative:
Debits: SARs payable (no. of
cash alt shares x fair value) and

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SHARE-BASED PAYMENT

Share options outstanding and

Credits Share capital (no. of
equity alt x par value) and Share
premium

VESTING CONDITIONS
TYPES OF CONDITIONS
Service Performance
-requirement to complete a specified period of service 1. Market condition
-employees are required to complete a specified period of 2. Non-market condition

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service
-Shall not be taken into account when estimating the fair
value of the share options at measurement date.

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-shall be taken into consideration when estimating the
number of share options that will eventually vest.
-the fair value of the options will be determined at the date -the fair value of the options will be determined at the date
they were granted. they were granted.

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-the determined fair value will be charged to income -the determined fair value will be charged to income
statement equally over the vesting period. statement equally over the vesting period.
-adjustments made at each accounting date to reflect the -adjustments made at each accounting date to reflect the
best estimate of the number of options that will eventually best estimate of the number of options that will eventually
will vest.

-Non-exercise of options after vesting date

-no subsequent adjustment to equity.
R will vest.
-shareholders’ equity will be increased by an amount equal -shareholders’ equity will be increased by an amount equal
to the income statement charge. to the income statement charge.
-Non-exercise of options after vesting date
-no subsequent adjustment to equity.
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-transfer from one component of equity to another. -transfer from one component of equity to another.

PERFORMANCE CONDITION
Non-market condition Market condition
-based on growth in profit or earnings -share price must increase by a certain % or a certain share price level must be
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per share reached.

-shall not be taken into account -shall be taken into account when estimating the fair value of the share options
when estimating the fair value of the at measurement date.
share options at measurement date.
-the estimated length of the vesting -the estimated length of the vesting period is determined at grant date and is not
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period is determined at grant date. subsequently revised.

(may be revised, if necessary) The entity shall recognise the goods or services received from a counterparty
who satisfies all other vesting conditions (eg services received from an
employee who remains in service for the specified period of service), irrespective
of whether that market condition is satisfied.
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Service Vesting period shall depend on the length of period specified in the agreement.
condition
Performance
condition
a. Nonmarket Length of vesting period varies- the entity shall estimate the length of the vesting period based on
condition the most likely outcome of the performance condition and shall revise the estimate if necessary.
Number of equity instruments varies (with service condition)- the vesting period shall be the
service period. Number of equity instruments granted shall be based on the most likely outcome of
the performance condition and shall be revised if necessary.

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SHARE-BASED PAYMENT

Exercise price varies (with service condition)- the vesting period shall be the service period.
Exercise price shall be based on the most likely outcome of the performance condition and shall be
revised if necessary.
b. Market outcome of the market condition did not change the length of the vesting period -Paragraph
condition 21 requires the entity to recognize the services received from a counterparty who satisfies all other
vesting conditions (e.g. services received from an employee who remains in service for the specified
service period), irrespective of whether that market condition is satisfied. It makes no difference
whether the share price target is achieved. The possibility that the share price target might not be
achieved has already been taken into account when estimating the fair value of the share options at
grant date.

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Length of vesting period varies-Paragraph 15 requires the entity to presume that the services to be
rendered by the employees as consideration for the equity instruments granted will be received in the
future, over the expected vesting period at grant date, based on the most likely outcome of the

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performance condition. If the performance condition is a market condition, the estimate of the length
of the expected vesting period must be consistent with the assumption used in estimating the fair
value of the share options granted, and is not subsequently revised.

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RECOGNITION
In accordance with paragraph 7 of PFRS 2, “an entity shall recognise the goods or services received or acquired in a share-
based payment transaction when it obtains the goods or as the services are received.” For
1. Equity-settled share-based payment transaction - recognise a corresponding increase in equity if the goods or services
were received
R
2. Cash-settled share-based payment transaction - recognize a liability if the goods or services were acquired

When the goods or services received or acquired in a share-based payment transaction do not qualify for recognition as
assets, they shall be recognised as expenses.
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Equity-settled share-based payment transaction
Measurement
1. With employees and others providing similar services - the entity shall measure the fair value of the services
received by reference to the fair value of the equity instruments granted, because typically it is not possible to estimate
reliably the fair value of the services received. The fair value of those equity instruments shall be measured at grant
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date.
2. Other than employees - there shall be a rebuttable presumption that the fair value of the goods or services received
can be estimated reliably. That fair value shall be measured at the date the entity obtains the goods or the counterparty
renders service. In rare cases, if the entity rebuts this presumption because it cannot estimate reliably the fair value of
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the goods or services received, the entity shall measure the goods or services received, and the corresponding increase
in equity, indirectly, by reference to the fair value of the equity instruments granted, measured at the date the entity
obtains the goods or the counterparty renders service.

Intrinsic Value Method

PFRS 2, paragraph 24, provides if the fair value of the share options cannot be measured reliably, the entity shall measure
the share options at their intrinsic value initially and subsequently at each reporting and at the date of final settlement, with
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any change in intrinsic value recognized in profit or loss.

Intrinsic value = Market Price – Option Price

BASIC FORMULA:
Year 1 Year 2 Year 3
Number of employees XX XX XX
Less: Employees who left XX XX XX

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SHARE-BASED PAYMENT

Employees expected to leave XX XX XX

Total employees entitled for the benefit XX XX XX
Multiply by: Share options per employee
(if there is a condition, and the condition
is met, used the share options) XX XX XX
Total share options XX XX XX
Multiply by: Fair value or intrinsic value* XX XX XX
Total value of the compensation XX XX XX
Multiply by: Ratio (e.g. 3 years vesting period) 1/3 2/3 3/3
Cumulative Salaries expense XX XX XX

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Less: Cumulative compensation
in previous years - XX XX
Salaries expense during the year XX XX XX

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*Fair value on the measurement date (which is usually the date of grant), if fair value cannot be estimated reliably, use the
intrinsic value.

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PROBLEM NO. 1 (SERVICE CONDITION)
On January 1, 2021, an entity grants 100 share options to each of its 500 employees. Each grant is conditional upon the
employee working for the entity over the next three years.

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The entity estimates that the fair value of each share option is ₱30. On the basis of a weighted average probability, the
entity estimates that 20 per cent of employees will leave during the three-year period and therefore forfeit their rights to the
share options.

Scenario 1 If everything turns out exactly as expected, compute for the following:
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1. How much is the salaries expense for 2021

2. How much is the salaries expense for 2022

3. How much is the salaries expense for 2023

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Scenario 2
During 2021, 20 employees leave. The entity revises its estimate of total employee departures over the three-year period
from 20 per cent (100 employees) to 10 per cent (50 employees).
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During 2022, a further 22 employees leave. The entity revises its estimate of total employee departures over the three-year
period from 15 per cent to 12 per cent (60 employees).

During 2023, a further 15 employees leave.

Questions:
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1. How much is the salaries expense for 2021

2. How much is the salaries expense for 2022

3. How much is the salaries expense for 2023

PROBLEM NO. 2 Grant with a performance condition, in which the length of the vesting period varies

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DARREL JOE O. ASUNCION, CPA MBA

SHARE-BASED PAYMENT

On January 1, 2021, SAX Co granted 300 share options to each of its 300 employees for the purchase of ₱50 par ordinary
share at ₱60 per share. The employees are required to be in the employ of the company at least until the option vested.
The share options will vest as follows:
End of 2021, if earnings in 2021 increased by 18%.
End of 2022, if average annual earnings during 2021 and 2022 increased by 13%.
End of 2023, if the entity’s earnings increase by more than an average of 10 per cent per year over the
three-year period.

The share options have a fair value of ₱30 per share at the start of 2021. No dividends are expected to be paid over the
three-year period.

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By the end of 2021, the entity’s earnings have increased by 14 per cent, and 30 employees have left and 20 employees will
leave in 2022 and 2023. The entity expects that earnings will continue to increase at a similar rate in 2022.

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By the end 2022, the entity’s earnings have increased by only 10 per cent and therefore the shares do not vest at the end
of 2022. 28 employees have left during the year. The entity expects that a further 25 employees will leave during 2023, and
that the entity’s earnings will increase by at least 6 per cent, thereby achieving the average of 10 per cent per year.

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By the end of 2023, 23 employees have left and the entity’s earnings had increased by 8 per cent, resulting in an average
increase of 10.67 per cent per year.

Required:
Compute for the following:

1. Compensation expense for 2021

a. 2,250,000 c. 750,000
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PA
b. 1,125,000 d. 0

2. Compensation expense for 2022

a. 0 c. 552,000
b. 1,302,000 d. 177,000
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3. Compensation expense for 2023

a. 1,971,000 c. 0
b. 750,000 d. 669,000
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PROBLEM NO. 3 Performance Condition, Nonmarket condition, # of equity instruments varies

Grant with a performance condition, in which the number of equity instruments varies
Background
On January 1, 2021, Entity A grants share options to each of its 300 employees working in the sales department. The share
options will vest at the end of 2023, provided that the employees remain in the entity’s employ, and provided that the volume
of sales of a particular product increases by at least an average of 5 per cent per year. If the volume of sales of the product
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increases by an average of between 5 per cent and 10 per cent per year, each employee will receive 100 share options. If
the volume of sales increases by an average of between 10 per cent and 15 per cent each year, each employee will receive
200 share options. If the volume of sales increases by an average of 15 per cent or more, each employee will receive 300
share options.
On grant date, Entity A estimates that the share options have a fair value of CU20 per option. Entity A also estimates that
the volume of sales of the product will increase by an average of between 10 per cent and 15 per cent per year, and therefore
expects that, for each employee who remains in service until the end of 2023, 200 share options will vest. The entity also
estimates, on the basis of a weighted average probability, that 20 per cent of employees will leave before the end of 2023.

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SHARE-BASED PAYMENT

By the end of 2021, 21 employees have left and the entity still expects that a total of 60 employees will leave by the end of
2023. Product sales have increased by 12 per cent and the entity expects this rate of increase to continue over the next 2
years.
By the end of 2022, a further 15 employees have left. The entity now expects only 9 more employees will leave during
2023. Product sales have increased by 18 per cent in 2022. The entity now expects that sales will average 15 per cent
or more over the three-year period.

By the end of 2023, a further 6 employees have left. The entity’s sales have increased by 18 percent in 2023.

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Compute for the following:
1. Compensation expense for 2021
a. 320,000 c. 60,000

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b. 960,000 d. 480,000

2. Compensation expense for 2022

a. 700,000 c. 1,020,000

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b. 60,000 d. 680,000

3. Compensation expense for 2023

a. 528,000 c. 1,032,000
b. 1,548,000 d. 12,000
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PROBLEM NO. 4 Grant with a performance condition, in which the exercise price varies
PA
At the beginning of 2021, an entity grants to a senior executive 20,000 share options, conditional upon the executive’s
remaining in the entity’s employ until the end of 2023. The exercise price is ₱40. However, the exercise price drops to ₱30
if the entity’s earnings increase by at least an average of 10 per cent per year over the three-year period.

On grant date, the entity estimates that the fair value of the share options, with an exercise price of ₱30, is ₱15 per option.
If the exercise price is ₱40, the entity estimates that the share options have a fair value of ₱12 per option.
C

During 2021, the entity’s earnings increased by 14 per cent, and the entity expects that earnings will continue to increase
at this rate over the next two years. The entity therefore expects that the earnings target will be achieved, and hence the
share options will have an exercise price of ₱30.
EO

During 2022, the entity’s earnings increased by 11 per cent, and the entity continues to expect that the earnings target will
be achieved.

During 2023, the entity’s earnings increased by only 3 per cent, and therefore the earnings target was not achieved. The
executive completes three years’ service, and therefore satisfies the service condition. Because the earnings target was not
achieved, the 20,000 vested share options have an exercise price of ₱40.
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Questions:
1. How much is the salaries expense for 2021
a. ₱100,000 c. ₱480,000
b. ₱160,000 d. Nil

2. How much is the salaries expense for 2022

a. Nil c. ₱100,000
b. ₱320,000 d. ₱80,000

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SHARE-BASED PAYMENT

3. How much is the salaries expense for 2023

a. ₱360,000 c. Nil
b. ₱40,000 d. ₱320,000

PROBLEM NO. 5 Grant with a market condition

On January 1, 2021, Japan Co grants to a senior executive 4,000 share options, conditional upon the executive remaining
in the entity’s employ until the end of 2023. However, the share options cannot be exercised unless the share price has
increased from ₱50 at the beginning of 2021 to above ₱65 at the end of year 2023. If the share price is above ₱65 at the
end of 2023, the share options can be exercised at any time during the next seven years, ie by the end of year 10.

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The entity applies a binomial option pricing model, which takes into account the possibility that the share price will exceed
₱65 at the end of 2023 (and hence the share options become exercisable) and the possibility that the share price will not
exceed ₱65 at the end of year 3 (and hence the options will be forfeited). It estimates the fair value of the share options with

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this market condition to be ₱21 per option.

Questions:

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1. How much is the salaries expense for 2021
a. ₱84,000 c. ₱56,000
b. ₱28,000 d. Nil

2. How much is the salaries expense for 2022

a. ₱84,000
b. ₱28,000

3. How much is the salaries expense for 2023

c. ₱56,000
d. Nil
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PA
a. ₱84,000 c. ₱56,000
b. ₱28,000 d. Nil

PROBLEM NO. 6 Grant with a market condition, in which the length of the vesting period varies
On January 1, 2021, an entity grants 9,000 share options with a ten-year life to each of ten senior executives. The share
options will vest and become exercisable immediately if and when the entity’s share price increases from ₱50 to ₱70,
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provided that the executive remains in service until the share price target is achieved.

The entity applies a binomial option pricing model, which takes into account the possibility that the share price target will be
achieved during the ten-year life of the options, and the possibility that the target will not be achieved.
EO

The entity estimates that the fair value of the share options at grant date is ₱24 per option. From the option pricing model,
the entity determines that the mode of the distribution of possible vesting dates is five years. In other words, of all the
possible outcomes, the most likely outcome of the market condition is that the share price target will be achieved at the end
of 2025.

Therefore, the entity estimates that the expected vesting period is five years. The entity also estimates that two executives
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will have left by the end of 2025, and therefore expects that 72,000 share options (9,000 share options × 8 executives) will
vest at the end of 2025.

Throughout years 2021-2024, the entity continues to estimate that a total of two executives will leave by the end of 2025.
However, in total three executives leave, one in each of 2023, 2024, 2025. The share price target is achieved at the end of
2026. Another executive leaves during 2026, before the share price target is achieved.

Questions:
1. How much is the salaries expense for 2021

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SHARE-BASED PAYMENT

a. Nil c. ₱129,600
b. ₱345,600 d. ₱1,512,000

2. How much is the salaries expense for 2022

a. ₱345,600 c. ₱691,200
b. ₱129,600 d. ₱150,000

3. How much is the salaries expense for 2023

a. ₱345,600 c. ₱691,200
b. ₱129,600 d. ₱150,000

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4. How much is the salaries expense for 2024
a. ₱345,600 c. ₱1,382,400
b. ₱691,200 d. ₱1,512,000

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5. How much is the salaries expense for 2025
a. ₱129,600 c. ₱400,000

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b. ₱345,600 c. ₱691,200

Modifications, Cancellations and Settlements

Modifications to the terms and conditions on which equity instruments were granted, including cancellations and settlements
may either be:
A. Beneficial to the employees, for example
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1. Increase in fair value of the equity instruments granted (e.g. by reducing the exercise price.
2. Increase in the number of equity instruments granted
PA
3. By reducing the vesting period or by modifying or eliminating a performance condition (other than a market
condition)

B. Not beneficial to the employees, for example

1. Decrease in fair value of the equity instruments granted (e.g. by increasing the exercise price.
2. Decrease in the number of equity instruments granted
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3. By increasing the vesting period or by modifying or adding a performance condition (other than a market condition)

PROBLEM NO. 7 Grant of share options that are subsequently repriced

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On January 1, 2021, Garcia Co. grants 100 share options to each of its 400 employees. Each grant is conditional upon the
employee remaining in service over the next three years. The entity estimates that the fair value of each option is ₱18. On
the basis of a weighted average probability, the entity estimates that 100 employees will leave during the three-year period
and therefore forfeit their rights to the share options.

During 2021, 40 employees left and that by the end of year 2021, the entity’s share price has dropped, and the entity reprices
its share options, and that the repriced share options vest at the end of 2023. The entity estimates that a further 70
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employees will leave during 2022 and 2023.

During 2022, a further 35 employees leave, and the entity estimates that a further 30 employees will leave during 2023.

During 2023, a total of 28 employees leave. The share options vested at the end of 2023.

The entity estimates that, at the date of repricing, the fair value of each of the original share options granted (ie before taking
into account the repricing) is ₱9 and that the fair value of each repriced share option is ₱12.

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SHARE-BASED PAYMENT

Questions:
1. How much is the salaries expense for 2021
a. Nil c. ₱224,250
b. ₱174,000 d. ₱354,000

2. How much is the salaries expense for 2022

a. ₱180,000 c. ₱398,250
b. ₱224,250 d. ₱623,700

3. How much is the salaries expense for 2023

a. ₱225,450 c. ₱398,250

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b. ₱623,700 d. ₱534,600

PROBLEM NO. 8 Decrease in fair value of the equity instruments granted (e.g. by increasing the exercise price:

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On January 1, 2021, Wallkill Co granted 1,000 share options at an exercise price of ₱60 to each of its 50 key management
personnel. They had to stay with the entity for 3 years.

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At grant date, the fair value of the share options was estimated at ₱30 and the entity estimated that the options would vest
with 40 managers. This estimate didn’t change in 2021. On January 1, 2022, the share price increase so that the entity
modified the scheme by increasing the exercise price to ₱70.

Questions:
1. How much is the salaries expense for 2021
a. Nil
b. ₱400,000
c. ₱800,000
d. ₱1,200,000
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PA
2. How much is the salaries expense for 2022
a. Nil c. ₱800,000
b. ₱400,000 d. ₱1,200,000

3. How much is the salaries expense for 2023

a. Nil c. ₱400,000
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b. ₱200,000 d. ₱1,200,000

PROBLEM NO. 9
On January 1, 2021, Mark Sanderson Co granted 1,000 share options at an exercise price of ₱50 to each of its 40 key
EO

management personnel. They had to stay with the entity for 3 years. At grant date, the fair value of the share options was
estimated at ₱20 and the entity estimated that the options would vest with 30 managers. This estimate didn’t change in
2021.

On January 1, 2022, the entity modified the scheme by increasing the number of share options to 1,500 share options. The
fair value of the incremental share options on that date is ₱22. The additional share options vest at the end of 2023.
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Required: Determine the salaries expense from 2021 to 2023 arising from share-based payment.

PROBLEM NO. 10 By reducing the vesting period or by modifying or eliminating a performance condition (other
than a market condition)
On January 1, 2021, the entity grants 1,000 share options to each member of its sales team, conditional upon the employee
remaining in the entity's employ for three years, and the team selling more than 50,000 units of a particular product over
the three-year period. The fair value of the share options is ₱15 per option at the date of grant.

CASE NO. 1

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SHARE-BASED PAYMENT

During 2022, the entity decreases the sales target to 40,000 units. By the end of 2023, the entity has sold 45,000 units.
Twelve members of the sales team have remained in service for the three-year period.

CASE NO. 2
During 2022, the entity increases the sales target to 100,000 units. By the end of 2023, the entity has sold only 55,000 units.
Twelve members of the sales team have remained in service for the three-year period.

Determine the salaries expense for the three-year period.

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Cancellations and settlements
An entity may settle or cancel an equity instrument during the vesting period. Basically treat this as the vesting period being
shortened.

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PROBLEM NO. 11

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On January 1, 2021, Kenneth Cook Co has granted 3,000 share options at an exercise price of ₱20 to each of its 40 key
management personnel. The management must stay for 3 years. The fair value of the options was estimated at ₱35 and
the entity estimated that the options would vest with 30 managers. This estimate stayed the same in 2021.

At the end 2022, the entity decided to abolish the existing scheme when the market price of the entity's shares was ₱60.

Required:
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How should the entity recognize the cancellation assuming the following different cases?
CASE NO. 1: In 2022, the fair value of the options was ₱30, and that ₱27 was paid to the 32 managers in employment at
PA
that date.

CASE NO. 2: In 2022, the fair value of the options was ₱27, and that ₱30 was paid to the 32 managers in employment at
that date.

CASE NO. 3: In 2022, the fair value of the options was ₱50, and that ₱55 was paid to the 32 managers in employment at
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that date.

PROBLEM NO. 12 Intrinsic Value

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On January 1, 2021, Awake Co grants 1,000 share options to 40 employees. The share options will vest at the end of 2023,
provided the employees remain in service until then. The share options have a life of 5 years. The exercise price is ₱45 and
the entity's share price is also ₱45 at the date of grant.

At the date of grant, the entity concludes that it cannot estimate reliably the fair value of the share options granted.

At the end of 2021, three employees have ceased employment and the entity estimates that a further four employees will
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leave during 2022 and 2023.

Two employees leave during 2022, and the entity revises its estimate of the number of share options that it expects will vest
to 80 per cent or 32,000 share options.

Three employees leave during 2023. Hence, 32,000 share options vested at the end of 2023.

The entity's share price and the number of share options exercised during year 2021 to 2025 are set out below. Share
options that were exercised during a particular year were all exercised at the end of that year.

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SHARE-BASED PAYMENT

Number of share
Share price options exercised at
Year at year-end year-end
2021 ₱ 55 0
2022 60 0
2023 65 0
2024 68 18,000
2025 80 14,000

Questions:

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Based on the above and the result of the audit, determine the following:
1. How much is the salaries expense in 2021
a. ₱110,000 c. ₱480,000

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b. ₱640,000 d. ₱330,000

2. How much is the salaries expense for 2022

a. ₱110,000 c. ₱210,000

ev
b. ₱320,000 d. ₱640,000

3. How much is the salaries expense for 2023

a. ₱110,000 c. ₱320,000
b. ₱330,000 d. ₱640,000

4. How much is the salaries expense for 2024

a. Nil
b. ₱28,000
c. ₱96,000
d. ₱64,000
R
PA
5. How much is the salaries expense for 2025
a. ₱104,000 c. ₱330,000
b. ₱168,000 d. ₱185,600

PROBLEM NO. 13 Cash alternative

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On January 1, 2021, Drenz Co grants 100 cash share appreciation rights (SARs) to each of its 600 employees, on condition
that the employees remain in its employ for the next three years.

During 2021, 36 employees leave. The entity estimates that a further 60 will leave during 2022 and 2023.
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During 2022, 42 employees leave and the entity estimates that a further 27 will leave during 2023.

During 2023, 21 employees leave. At the end of 2023, 150 employees exercise their SARs, another 230 employees exercise
their SARs at the end of 2024 and the remaining employees exercise their SARs at the end of 2025.

The entity estimates the fair value of the SARs at the end of each year in which
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a liability exists as shown below. At the end of 2023, all SARs held by the
remaining employees vest. The intrinsic values of the SARs at the date of
exercise (which equal the cash paid out) at the end of years 2023, 2024 and 2025 are also shown below.

Year Fair value Intrinsic value

2021 15
2022 18
2023 21 15
2024 24 20

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DARREL JOE O. ASUNCION, CPA MBA

SHARE-BASED PAYMENT

2025 25

Based on the above and the result of the audit, determine the following:
1. Compensation expense in 2021
a. 252,000 c. 342,000
b. 756,000 d. 225,000

2. Compensation expense in 2022

a. 594,000 c. 891,000
b. 342,000 d. 737,100

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3. Compensation expense in 2023
a. 143,100 c. 368,100

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b. 225,000 d. 737,100

4. Compensation expense in 2024

a. 446,700 c. 290,400

ev
b. 460,000 d. 13,300

5. Compensation expense in 2025

a. 302,500 c. 290,400
b. 460,000 d. 12,100

SHARE AND CASH ALTERNATIVE

CASH ALTERNATIVE SUBSEQUENTLY ADDED
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PA
Modifications to the terms and conditions on which equity instruments were granted, including cancellations and
settlements
Par 27 of PFRS 2 provides the entity shall recognise, as a minimum, the services received measured at the grant date fair
value of the equity instruments granted, unless those equity instruments do not vest because of failure to satisfy a vesting
condition (other than a market condition) that was specified at grant date. This applies irrespective of any modifications to
the terms and conditions on which the equity instruments were granted, or a cancellation or settlement of that grant of equity
C

instruments. In addition, the entity shall recognise the effects of modifications that increase the total fair value of the share-
based payment arrangement or are otherwise beneficial to the employee.

Furthermore, the addition of the cash alternative at the end of (say year 2) creates an obligation to settle in cash. In
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accordance with the requirements for cash-settled share-based payment transactions, the entity recognises the liability to
settle in cash at the modification date, based on the fair value of the shares at the modification date and the extent to
which the specified services have been received. Furthermore, the entity remeasures the fair value of the liability at each
reporting date and at the date of settlement, with any changes in fair value recognised in profit or loss for the period.

PROBLEM NO. 14 (Share Options – With Cash Alternative)

Background
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At the beginning of 2021, the entity grants 30,000 shares with a fair value of CU33 per share to a senior executive,
conditional upon the completion of three years’ service. By the end of 2022, the share price has dropped to ₱25 per
share. At that date, the entity adds a cash alternative to the grant, whereby the executive can choose whether to receive
30,000 shares or cash equal to the value of 30,000 shares on vesting date. The share price is ₱23 on vesting date.

QUESTIONS:
Based on the above and the result of the audit, determine the following:
1. Compensation expense in 2021
a. 330,000 c. 500,000

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DARREL JOE O. ASUNCION, CPA MBA

SHARE-BASED PAYMENT

b. 660,000 d. 0

2. Compensation expense in 2022

a. 330,000 c. 250,000
b. 270,000 d. 0

3. The balance of the liability component of the instrument as of December 31, 2022?
a. 230,000 c. 250,000
b. 500,000 d. 0

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4. Compensation expense in 2023
a. 330,000 c. 230,000
b. 270,000 d. 0

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5. The balance of the liability component of the instrument as of December 31, 2023?
a. 230,000 c. 300,000
b. 690,000 d. 0

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6. The balance of the equity component of the instrument as of December 31, 2023?
a. 80,000 c. 240,000
b. 160,000 d.0

GRANTED SIMULTANEOUSLY
FV of the share alternative
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PA
(# of share alt. x FV of share alt. XX
less FV of liability on grant date
(# of cash alt. x share prices on grant date) XX
Equity component XX
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Equity component XX
divided by vesting period XX
Additional Comp exp to be recognized per year XX
Journal entry:
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Compensation expense XX
Share options outstanding XX

Journal entries:
Compensation expense XX
SARs payable XX
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Total compensation expense:

Compensation expense for the year XX
Add additional compensation expense XX
Total compensation expense XX

Final Accounting:
Cash alternative:
SARs payable (no. of cash alt shares x fair value)XX
Share options outstanding XX

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DARREL JOE O. ASUNCION, CPA MBA

SHARE-BASED PAYMENT

Cash (no. of cash alt shares x fair value) XX

Share premium XX

Equity alternative:
SARs payable (no. of cash alt shares x fair value) XX
Share options outstanding XX
Share capital (no. of equity alt x par value) XX
Share premium XX

PROBLEM NO. 15

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On January 1, 2020, ZEUS Co granted to an employee the right to choose either shares or cash payment. The choices are
as follows:
• Share alternative-equal to 25,000 shares with par value of ₱30.
• Cash alternative-cash payment equal to the market value of 20,000 shares.

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The grant is conditional upon the completion of three years of service. On grant date, on January 1, 2020, the share price
is ₱51. The share prices for the three-year vesting period are ₱54 on December 31, 2020, ₱66 on December 31, 2021 and

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₱65 on December 31, 2022. After taking into account the effect of vesting restrictions, ZEUS Company has estimated that
the fair value of the share alternative is ₱76.

QUESTIONS:
1. What is the total fair value of the equity component on January 1, 2020 as a result of the share and cash
alternatives?
a. 180,000
b. 120,000
c.
d.
R 60,000
40,000
PA
2. What is the compensation expense for the year 2020?
a. 360,000 c. 300,000
b. 420,000 d. 540,000

3. What is the compensation expense for the year 2021?

a. 520,000 c. 880,000
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b. 580,000 d. 940,000

4. What is the compensation expense for the year 2022?

a. 420,000 c. 600,000
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b. 480,000 d. 500,000

5. If the employee has chosen the cash alternative, the cash payment on December 31, 2022 is equal to
a. 1,300,000 c. 1,080,000
b. 1,020,000 d. 1,320,000

6. If the employee has chosen the share alternative, the share premium or additional paid in capital shall be
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recognized at
a. 730,000 c. 880,000
b. 550,000 d. 700,000

PROBLEM NO. 16 Changes of classification from cash-settled to equity-settled

On 1 January 2021 an entity grants 100 share appreciation rights (SARs) that will be settled in cash to each of 100
employees on the condition that employees will remain employed for the next four years.

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DARREL JOE O. ASUNCION, CPA MBA

SHARE-BASED PAYMENT

On 31 December 2021 the entity estimates that the fair value of each SAR is ₱10 and consequently, the total fair value of
the cash-settled award is ₱100,000. On 31 December 2022 the estimated fair value of each SAR is ₱12.

On 31 December 2022 the entity cancels the SARs and, in their place, grants 100 share options to each employee on the
condition that each employee remains in its employ for the next two years. Therefore the original vesting period is not
changed. On this date the fair value of each share option is ₱13.20.

All of the employees are expected to and ultimately do provide the required service.

For simplicity, this example assumes that none of the employees’ compensation qualifies for capitalization as part of the

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cost of an asset.

Questions:

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1. How much is the salaries expense in 2021
a. ₱25,000 c. ₱100,000
b. ₱66,000 d. ₱41,000

ev
2. How much is the salaries expense in 2022
a. ₱66,000 c. ₱41,000
b. ₱25,000 d. ₱33,000

3. How much is the salaries expense in 2023

a. ₱66,000
b. ₱25,000
c. ₱41,000
d. ₱33,000
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PA
4. How much is the salaries expense in 2024
a. ₱99,000 c. ₱33,000
b. ₱132,000 d. ₱41,000

PROBLEM NO. 17
The adjusted shareholders’ equity of Josiah Corporation at January 1, 2021, appeared below:
C

Ordinary shares, ₱50 par, 400,000 shares

authorized, 160,000 shares issued
and outstanding 8,000,000
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Share Premium 2,500,000

Retained earnings 3,000,000

During 2021, the following transactions occurred:

January 1 Granted to a senior executive 10,000 share options conditional upon the executive remaining in the entity’s
employ until December 31, 2023. However, the share options cannot be exercised unless the share price has increased
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from ₱50 on January 1 to above ₱65 on December 31, 2023. If the share price is above ₱65 on December 31, 2023, the
share options can be exercised at any time during the next 5 years.
The entity applied a binomial option pricing model and estimated that the fair value of the share options with this market
condition on grant date is ₱24 per option. No journal entry was made by the company during the year.

February 14 Declared a 10% share dividend when the market value of the ordinary shares was ₱60 per share. Only
memorandum entry was made by the company.

March 15 Issued the share dividend declared on February 14. The company made the following entry:
Retained earnings (160,000 x 10% x ₱50) 800,000

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DARREL JOE O. ASUNCION, CPA MBA

SHARE-BASED PAYMENT

Ordinary shares 800,000

March 31 3,000 shares were reacquired at ₱60 per share. The company debited ordinary shares and credited Cash
equal to the amount paid.

June 01 Issued 2,000 treasury shares at ₱65 per share. The company debited cash and credited ordinary shares
equal to the amount received.

December 01 Issued 500 treasury shares at ₱54 per share. The company debited cash and credited ordinary shares
equal to the amount received.

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December 05 Declared a cash dividend of ₱2 per share. No journal entry was made by the company.
25 Paid the cash dividend declared on December 5. The company debited other operating expense and
credited cash equal to the amount paid.

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31 The unadjusted net income is ₱2,149,000.

1. What is the compensation expense in 2021 from share options?

ev
a. 240,000 c. 48,000
b. 80,000 d. 0
2. What is the balance of the Ordinary shares at December 31, 2021?
a. 8,000,000 c. 8,960,000
b. 8,800,000 d. 8,775,000
3.

4.
b. 2,747,000
c. 2,670,000
d. 2,590,000
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What is the total share premium at December 31, 2021?
a. 2,667,000

What is the balance of the Treasury shares at December 31, 2021?

PA
a. 180,000 c. 150,000
b. 120,000 d. 30,000
5. What is the balance of the Retained earnings-unappropriated at December 31, 2021?
a. 4,156,000 c. 4,079,000
b. 4,159,000 d. 4,319,000
C

PROBLEM NO. 18
In the course of your first-time audit of Drhiana Company financial statements, you audit staff summarized the following
audit findings:

a. The records of the client showed the unadjusted net income in of ₱6,500,000 and ₱7,000,000 2022 in 2023,
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respectively.
b. Dividend declarations at the end of 2022 and 2023 amounting to ₱100,000 and ₱150,000, respectively were not
recorded until it was paid in the following year.
c. ₱1,000,000 worth of merchandise was purchased in 2022 and included in the ending inventory. However, the
purchase was recorded only in 2023.
d. A merchandise shipment valued at ₱1,500,000 was properly recorded as purchase at year-end. Since the
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merchandise was still at the port area, it was inadvertently omitted from the inventory balance at December 31,
2022.
e. Insurance premium covering the period from April 1, 2022 to April 1, 2023, amounting to ₱240,000 was paid and
recorded as expense on April 1, 2022. The company did not make any adjustment at the end of the year.
f. A fully depreciated asset was sold on December 31, 2023 but the sale was not recorded until 2024. The cost of the
machinery is ₱400,000 and the proceeds amounted to ₱100,000.
g. On January 1, 2022, Drhiana granted share options to each of its 500 employees working in the sales department.
The share options vest at the end of a three-year period provided that the employees remain in the company’s

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DARREL JOE O. ASUNCION, CPA MBA

SHARE-BASED PAYMENT

employ and provided the volume of sales will increase by more than 10% per year. The fair value of each share
option on grant date is ₱30.
If the sales increase by more than 10%, each employee will receive 200 share options. If the sales increase by
more than 15%, each employee will receive 300 share options.

In 2022, the sales increased by more than 10% but not more than 15% and no employees have left the company.
In 2023, sales increased by more than 15% and 50 employees have left. No journal entries have been made by
the company since the granting of stock options.
h. The company started operations on January 1, 2021 and the adjusted net income for that year amounted to
₱800,000 and no dividends were declared on that date. At the beginning of 2021, the company issued 100,000

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ordinary shares. Additional issuance of 20,000 ordinary shares was made on April 1, 2023.

Based on the above data, determine the following:

ie
1. The corrected net income for 2022 should be
a. 8,060,000 b. 5,940,000 c. 7,060,000 d. 6,060,000
2. The corrected net income for 2023 should be

ev
a. 4,840,000 b. 4,740,000 c. 2,840,000 d. 4,960,000
3. The corrected retained earnings on December 31, 2023 should be
a. 10,900,000 b. 10,650,000 c. 11,650,000 d. 11,900,000
4. The effect of the errors in the working capital on December 31, 2023 is
150,000 100,000 50,000
a. None b. over
R c.
5. What is the amount of basic earnings per share in 2023?
a. 24.70 b. 42.09 c.
under

41.22
d.

d.
over

43.13
PA
--- END OF HANDOUTS ---
C
EO
R

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AUDIT OF CASH
D. ASUNCION, CPA, MBA, F. MONTEROLA, CPA, R. PARAGAS, CPA

AUDIT OF CASH
DARRELL JOE O. ASUNCION, CPA, MBA
FERNANDO M. MONTEROLA JR., CPA
RALLEY S. PARAGAS, CPA

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PROBLEM 1
Tidehunter Co.’s “cash account” balance per general ledger as of December 31, 2022 includes:

1 Cash in bank-BDO, which includes a compensating balance of ₱50,000 for

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short-term borrowing arrangement. The compensating balance is not legally ₱ 1,050,000
restricted as to withdrawal.
2 Cash in bank-BDO (100,000)

ev
3 Cash in bank-RCBC, which includes a compensating balance of ₱50,000 for
long-term borrowing arrangement. The compensating balance is legally
restricted as to withdrawal. 450,000
4 Cash in bank-PNB (60,000)
Cash in bank-BPI, which includes a compensating balance of ₱40,000 for short-
5

6
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term borrowing arrangement. The compensating balance is legally restricted as
to withdrawal.
Cash in bank-Eastwest, which includes a compensating balance of ₱40,000 for
short- term borrowing arrangement.
150,000

250,000
PA
7 Petty cash fund, which includes an unreplenished voucher for ₱4,000 10,000
8 Payroll fund 100,000
9 Cash in bank-HSBC Hong Kong branch HKD 3,000
10 Money market instrument-due date 2/28/2023 40,000
11 Money market instrument-due date 6/1/2023 45,000
12 Time deposit-PCIB, it can be preterminated 60,000
C

13 Time deposit-PNB-90 days 170,000

14 Time deposit-BPI-120 days, acquired 12/31/2022, due date 4/30/2023 180,000
15 Cash in bank-Citibank Switzerland branch CHF 1,000
16 90-day treasury bill 50,000
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17 180-day treasury bill, acquired 9/30/2022, due date 3/31/2023 30,000

18 180-day treasury bill, acquired 12/1/2022, due date 1/31/2023 60,000
19 Manager’s checks 90,000
20 Traveler’s checks 100,000
21 Bank drafts 20,000
22 Postal money orders 25,000
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23 Demand deposit 100,000

24 Coins and currencies on hand 2,500
25 PLDT shares, market value as of 12/31/2022 350,000
26 Travel advances to key officers (reimbursement will be via salary deduction) 50,000
27 Cash in bank-ING Netherlands branch, restricted as to withdrawal due to legal
disputes EUR 1,500
28 Postage stamps 2,000
29 Payroll fund 100,000
30 Travel fund 20,000

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D. ASUNCION, CPA, MBA, F. MONTEROLA, CPA, R. PARAGAS, CPA

AUDIT OF CASH

31 Interest fund 40,000

32 Tax fund 30,000
33 Sinking fund 420,000
34 Preferred redemption fund 100,000
35 Contingent fund 200,000
36 Insurance fund 500,000
37 Fund for acquisition of Property, plant & Equipment 1,000,000
38 IOU officers 18,000
39 Customer’s post-dated checks 92,000
40 Customer’s checks returned by bank marked NSF 80,000

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41 Redeemable preferred shares-acquired 3 months before maturity 40,000
42 Visa Card-credit limit 20,000
43 Dividend fund 15,000

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44 Credit memo from a supplier for a purchase return 14,000
45 Pension fund 700,000

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Relevant foreign exchange rates as of 12/31/2022 are as follows:
USD/PHP = 55.25
EUR/PHP = 60.00
HKD/PHP = 7.00
CHF/PHP = 58.00

Required: R
Compute the cash and cash equivalents that should be shown on the face of the statement of financial position as of
12/31/2022.
PA
PROBLEM 2
The cash receipts and the cash payments of Templar Co. for April 2023 is as follows:

Cash Receipts (CR) Cash Payment (CP)

Date Cash Debit Check No Cash Credit
C

April 2 P208,700 4113 P44,550

8 20,350 4114 7,350
10 27,950 4115 96,500
16 109,350 4116 33,200
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22 92,700 4117 73,600

29 53,000 4118 50,000
30 16,850 4119 31,600
Total P528,900 4120 83,750
4121 5,000
4122 120,650
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Total 546,200

The cash account of Templar Co. shows the following information at April 30, 2023:

CASH

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D. ASUNCION, CPA, MBA, F. MONTEROLA, CPA, R. PARAGAS, CPA

AUDIT OF CASH

Date Item Ref Debit Credit Balance

April 1 Balance 95,550
April 30 CR 6 528,900 624,450
April 30 CP 11 546,200 73,250

Templar Co received the following bank statement on April 30, 2023:

BANK STATEMENT FOR APRIL 2023

Beginning Balance P95,550
Deposits and other credits

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April 1 P16,300 EFT
April 4 208,700
April 9 20,350

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April 12 27,950
April 17 109,350
April 22 68,400 BC

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April 23 92,700 543,750
Checks and other debits
April 7 P44,550
April 13 69,500
April 14
April 15
April 18
April 21
45,150 US
7,350
33,200
10,950 EFT
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PA
April 26 73,600
April 30 50,000
April 30 1,000 SC (335,300)
Ending Balance P304,000
Footnotes: EFT – electronic funds transfer / US – unauthorized signature / BC – bank collection / SC – service charge
C

Additional data for the bank reconciliation include the following:

a. The EFT deposit was a receipt of monthly rent. The EFT debit was a monthly insurance payment.
b. The unauthorized signature check was received from Techies Co.
c. The P68,400 bank collection of a note receivable on April 22 included P9,250 interest revenue.
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d. The correct amount of check number 4115, a payment on account, is P69,500. (Templar’s accountant mistakenly
recorded the check for P96,500.)

1. What is the amount of deposits in transit on April 30?

a. 53,000 c. 45,150
b. 69,850 d. 115,000
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2. What is the amount of outstanding checks on April 30?

a. 241,000 c. 286,150
b. 337,500 d. 310,500
3. What is the amount of bank receipts in April?
a. 543,750 c. 459,050
b. 527,450 d. 528,900
4. What is the amount of bank disbursements in April?
a. 290,150 c. 289,150
b. 335,300 d. 316,150

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D. ASUNCION, CPA, MBA, F. MONTEROLA, CPA, R. PARAGAS, CPA

AUDIT OF CASH

5. What is the correct cash balance as of April 30?

a. 132,850 c. 122,150
b. 87,700 d. 223,150

PROBLEM 3
The following data were assembled by the accountant of Sven Co:

a. Balances taken from the company’s general ledger:

Cash balance, November 30, 2022 P637,860
Cash balance, December 31, 2022 576,420

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Receipts, December 1-31, 2022 306,220
b. Outstanding checks, November 30, 2022
(P26,140 was paid by bank in December) 64,140

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c. Checks written and recorded in December; not included in the checks returned with the
December bank statement 36,080
d. Deposit in transit, November 30, 2022 15,260
e. Deposit in transit, December 31, 2022 16,140

ev
f. A bank credit memo was issued in December to correct an erroneous charge made in
November 1,500
g. Note collected by bank in December (company was not informed of the collection) 2,060
h. A check for P2,020 (payable to a supplier) was recorded in the Check Register in
December as P3,000
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i. A check for P2,240 was charged by the bank as P2,420 in December (corrected the
following month)
j. Sven Company issued a stop payment order to the bank in December. This pertains to a
980
180
PA
check written in December which was not received by the payee. A new check was written
and recorded in the Check Register in December. The old check was written off by a
journal entry, also in December 780
k. k. Bank service charge, November 30, 2022 60
k. l. Bank service charge, December 31, 2022 75
k. m. Erroneous bank charges (corrected by the bank in the following month)
C

November 150
December 120
k. n. Erroneous bank credits (corrected by the bank in the following month)
November 115
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December 70
o. NSF checks returned by the bank
November 2,210
December 1,560
p. December NSF check (other than those December NSF checks returned above) 3,500
redeposited in December, although no entries were made to take up the return and redeposit
R

QUESTIONS:

1. The total outstanding checks on December 31, 2022, should be:

a. P38,000 b. P74,080 c. P36,080 d. P62,220

2 What is the bank statement balance on November 30, 2022?

a. P684,400 b. P587,420 c. P685,180 d. P682,935

3. What is the bank statement balance on December 31, 2022?

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D. ASUNCION, CPA, MBA, F. MONTEROLA, CPA, R. PARAGAS, CPA

AUDIT OF CASH

a. P636,440 b. P637,220 c. P637,580 d. P635,535

4. The total bank receipts for the month of December should be:
a. P309,680 b. P304,000 c. P308,900 d. P311,840

5. The total bank disbursements for the month of December is:

a. P356,080 b. P356,860 c. P357,640 d. P359,240

6. The adjusting journal entries per book include a:

a. Debit to Accounts Receivable of P2,210

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b. Debit to Bank Service Charge of P60
c. Credit to Notes Receivable of P2,060
d. Credit to Accounts Payable of P780

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PROBLEM 4

In relation to your audit of the cash balances of your client, Storm Corp. for the period ended December 31, 2023, the

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client’s accountant provided the following information from its bank transfer schedule. Further investigation revealed that
checks are dated and issued on December 30, 2023.

Disbursement Date Receipt Date

Check No. Amount Bank Account Per Books Per Bank Per Books Per Bank

101
202
303
20,000
12,500
14,500
From
FEB TC
PCIB
PNB
To
PNB
MBTC
CBC
R Dec 30
Jan 3
Dec 31
Jan 4
Jan 2
Jan 3
Dec 30
Dec 30
Jan 2
Jan 3
Dec 31
Jan 2
PA
404 17,000 MBTC BPI Jan 2 Jan 2 Jan 2 Dec 31

1. Which of the following checks might indicate kiting?

a. 101 and 303
b. 202 and 404
c. 101 and 404
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d. 202 and 303

2. How much is the overall cash balance overstated per books at December 31, 2023?
a. 32,500
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b. 12,500
c. 27,000
d. 14,500

3. Which specific bank accounts are overstated per your audit?

a. PCIB and MBTC
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b. CBC and BPI

c. MBTC and BPI
d. CBC and MBTC

PROBLEM 5

You were assigned to audit the financial statement of Spirit Corp. on January 15, 2019, for the year ended December
31, 2018. The general ledger shows cash account balance of P726,600 as at December 31, 2018.

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D. ASUNCION, CPA, MBA, F. MONTEROLA, CPA, R. PARAGAS, CPA

AUDIT OF CASH

The bank reconciliation prepared by the client’s cashier included the following items:

Cash per records, December 31, 2018 P726,600

Cash per bank statement, December 31, 2018 792,285
Note receivable collection by the bank in December, recorded in the books
in January 3 20,000
Bank service charge for December, recorded in books in January 3 5,000
Outstanding checks, including P11,900 disbursement check certified by 87,875
the bank
Check of Jude Corp., charged by the bank in error on December 28, 2018;

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corrected by the bank on January 2, 2019 2,250
Deposit in transit, including P5,200 customer collection check marked NSF 15,700

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From January 2, 2019, to January 15, 2019, the date of your cash count, total cash receipts appearing in the cash
records amounted to P180,500. During the same period, deposits clearing the bank amounted to P143,895. The
following cash and cash items were on hand at the close of business on January 15, 2019:

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Currency P4,275
Customers’ checks 5,850
Expense vouchers 1,125
Audit notes:

Date
7/05/18 Allowance for bad debts
Accounts receivable
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a. Cash collections from accounts receivable were erroneously recorded by the company as follows:

12,000
12,000
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12/10/18 Inventory 9,000
Accounts receivable 9,000
12/15/18 Bad debt expense 10,500
Accounts receivable 10,500
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b. Check deposit on January 5, 2019, amounting to P6,000 was not recorded in the books.

c. Undeposited collections on January 10, 2019 amounting to P13,500 was also not recorded in the books.
EO

Requirements:
1. What is the correct cash in bank balance as of December 31, 2018?
a. 729,060 c. 778,110
b. 773,110 d. 726,810
2. What is the net adjustment to cash as of December 31, 2018?
a. 46,500 c. 44,040
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b. 2,460 d. 4,620
3. What is the cash shortage as of December 31, 2018?
a. 2,460 c. 44,040
b. 46,500 d. 4,620
4. What is the total cash shortage as of January 15, 2019?
a. 81,645 c. 44,040
b. 37,605 d. 4,620

PROBLEM 6

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D. ASUNCION, CPA, MBA, F. MONTEROLA, CPA, R. PARAGAS, CPA

AUDIT OF CASH

1. Which of the following is generally appropriate in relation to the timing of the substantive test procedures in auditing the
cash account of a client?
a. Schedule the cash count in advance of the balance sheet date in order to discover any kiting operations at year-
end.
b. Correlate the count of cash with the cut-off of accounts payable.
c. Correlate the count of cash with the count of marketable securities and other negotiable assets.
d. Schedule the cash count immediately upon the return of the confirmation letters from the banks.

2. To gather evidence regarding the balance per bank in a bank reconciliation, the auditor would examine any of the

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following except:
a. Cutoff bank statement
b. Year-end bank statement

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c. Bank confirmation
d. General ledger

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3. Which of the following cash transfers indicates kiting which results in an overstatement of cash balance per books at
December 31, 2021?

Bank Transfer Schedule

Disbursement Receipt

a.
b.
c.
Recorded in books
1/2/22
12/31/21
12/31/21
Paid by Bank A
1/2/22
1/2/22
1/5/22
R Recorded in books
12/31/21
12/31/21
1/3/22
Received by bank B
12/31/21
12/31/21
1/4/222
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d. 1/4/22 1/11/22 1/4/22 1/4/22

4. A proof of cash used by an auditor

a. Provides that the client’s year-end balance of cash is fairly stated
b. Confirms that the client has properly separated the custody function from the recording function with respect to cash
c. Validates that the client’s bank did not make an error during the period being examined
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d. Determines whether any unauthorized disbursements or unrecorded deposits were made for the given time period

5. In relation to you audit of England Corp’s cash balances, you traced bank transfers for the last part of the audit period
and first part of the subsequent period. The audit objective in rendering this procedure is to detect whether ___________.
This is relevant to gather evidence regarding __________ assertion over cash.
EO

a. the cash receipts journal was held open for a few days after the year end; existence.
b. the last checks recorded before the year and were actually mailed by the year end; completeness.
c. cash balances were overstated because of kiting; existence.
d. any unusual payments to or receipts from related parties occurred; completeness.

6. What is the effect of not replenishing the petty cash at year-end and not making the appropriate adjusting entry?
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a. A detailed audit is essential

b. The petty cash custodian should turn over the petty cash to the general cashier
c. Cash will be overstated and expenses understated
d. Expenses will be overstated and cash will be understated

7. The following are appropriate procedures for controlling the petty cash fund except:
a. To replenish the fund, the general cashier issues a company check to the petty cash custodian, rather than cash.
b. To determine that the fund is being accounted for satisfactorily, surprise counts of the fund are made from time to
time by the internal auditor

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AUDIT OF CASH

c. To monitor variations in different types of expenditures, the petty cash custodian files petty cash vouchers by
category of expenditures by replenishing the fund
d. Each individual to whom petty cash is paid is required to present signed receipts to the petty cash custodian.

8. Two months before the year-end the bookkeeper erroneously recorded the receipt of a longterm bank loan by a debit
to cash and a credit to sales. Which of the following is the most effective procedure for detecting this type of error?
a. Analyze the notes payable journal.
b. Analyze bank confirmation information.
c. Prepare a year-end bank reconciliation.
d. Prepare a year-end bank transfer schedule.

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9. The auditors suspects that a clients’ cashier is misappropriating cash receipts for personal use by lapping customer
checks received in the mail. In attempting to uncover this embezzlement scheme, the auditors most likely would compare

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the:
a. Details of deposit slips with details of credits to customer accounts
b. Daily cash summaries with the sums of the cash receipts journal entries

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c. Individual bank deposit slips with the details of the monthly bank statements
d. Dates uncollectible accounts are authorized to be written off with the dates the write-offs are recorded.

10. Which of the following errors would not be discovered during the test of the bank reconciliation?
a. Cash received by the client subsequent to the balance sheet date but recorded as cash receipt in the current
year. R
b. Deposits recorded in the cash book near the end of the year, deposited in the bank, and included in the bank
reconciliation as a deposit in transit
c. The existence of payments on notes payable that were debited directly to the bank balance by the bank but were
PA
not entered in the client’s records
d. Payment to an employee for more hours than he worked.

--- END OF HANDOUTS ---

C
EO
R

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AUDIT OF RECEIVABLES
D. ASUNCION, CPA, MBA, F. MONTEROLA, CPA, R. PARAGAS, CPA

AUDIT OF RECEIVABLES
DARRELL JOE O. ASUNCION, CPA, MBA
FERNANDO M. MONTEROLA JR., CPA
RALLEY S. PARAGAS, CPA
PROBLEM 1

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You are assigned to audit Spectre Inc. for the year ending June 30, 2020. Spectre is using the periodic inventory system

Prior to any adjustments you were able to extract the following balances from the client’s records:

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Accounts receivable, control account ₱221,250
Allowance for doubtful accounts (8,000)

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Amortized cost ₱213,250

Accounts receivable, subsidiary records

60 days old and below ₱110,625
61 – 120 days 66,375
> 120 days
Credit balance
51,750
(7,500) R
The credit balance in the accounts receivable represents collection from a customer whose account had been
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written off as uncollectible in the previous year. The accountant forgot to record the entry for the recovery of this
balance.

Customer Balances Comments from Customers Audit Findings

C

This balance for invoice dated June 5, Specture Inc. received mailed check on July 2,
Alpha ₱4,000 2020 was paid in June 29, 2020. 2020.

The Balance for invoice dated June 1

was offset by our June 10, shipment of Spectre Inc. credited accounts payable for
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Beta 13,800 tires. ₱13,800 to record in error, purchase of tires.

The above balance for invoice dated The payment was credited to customer Delta
Gamma 16,600 April 20 has been paid. subsidiary records.
The records show a bigger balance, A new confirmation was mailed. All outstanding
Delta 20,000 please check. invoices to Delta are dated June.
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We do not owe Spectre Inc. anything The shipment costing ₱8,000 was made on June
as the goods were received July, 2020, 29, 2020 and the goods were included in
Eta 11,600 FOB Destination. recording the June 30, 2020 inventory summary.

Spectre Inc. had previously credited the deposit

Our deposit of ₱18,000 should cover to sales. The ₱14,000 balance was for a June
Iota 14,000 this balance shipment.

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D. ASUNCION, CPA, MBA, F. MONTEROLA, CPA, R. PARAGAS, CPA

AUDIT OF RECEIVABLES

Goods cost ₱4,400 and were appropriately

included in Spectre Inc.’s inventory, and
Amount okay. Since this is on segregated as inventory on consignment. The
consignment, we will remit payment amount is included in the “below 60 days”
Kappa 6,000 upon selling the goods. receivables.

The CM dated April 31, 2020 was recorded by

Spectre Inc. in July 2020. The amount is for an
Lambda 1,200 CM No. 8118 cancels this balance. April 15 sales invoice

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Based on your discussion with the client, the following estimated rates are appropriate for computing theuncollectible
accounts:
60 days and below

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2%
61 to 120 days 10%
More than 120 days 20%

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Requirements:
1. Prepare the relevant adjusting journal entries.
2. What is the adjusted accounts receivable account balance?
3. What is the required allowance for bad debts as of June 30?
4. Assuming that there were no other entries affecting the allowance account during the fiscal year, how much is the
bad debt expense?

PROBLEM NO. 2
R
PA
You were assigned to audit the receivables of Charleston Merchandising Company. As instructed by your audit
manager, you have performed a cut-off test of sales. The results of the cut-off test revealed the following:

Recorded Sales in December 2018

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Selling price Cost Terms Shipment Received by

Date customers
P18,000 P16,500 FOB shipping point 12/26/2018 12/29/2018
20,000 14,000 Shipped to consignee 12/26/2018 12/29/2018
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8,680 7,240 FOB destination 12/28/2018 01/02/2019

9,000 7,500 FOB shipping point 12/30/2018 01/02/2019
10,000 7,750 FOB destination 12/31/2018 01/03/2019
7,800 6,100 FOB shipping point 12/31/2018 01/02/2019
14,000 12,000 Shipped to consignee 12/31/2018 01/02/2019
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Recorded Sales in January 2019

Selling price Cost Terms Shipment Received by
Date customers
P21,000 P18,200 FOB shipping point 12/30/2018 01/03/2019
10,500 8,800 FOB shipping point 12/31/2018 01/03/2019
4,500 3,200 FOB destination 01/02/2019 01/03/2019
6,500 5,000 FOB shipping point 01/02/2019 01/05/2019

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D. ASUNCION, CPA, MBA, F. MONTEROLA, CPA, R. PARAGAS, CPA

AUDIT OF RECEIVABLES

A count of all inventories within the premises was made on December 30, 2018. The total cost of the count was
recorded as inventories as of December 30, 2018. Half of the goods shipped to consignee on December 26 are still
unsold at December 31. The agreed commission on consignment sales is 20% of the sales price.

The unadjusted ledger balances show the following:

Accounts receivables P376,500
Inventories 525,000
Sales 1,520,000

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Cost of sales 942,000

Determine the adjusted balances of the following:

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A B C D
1. Accounts receivable 363,320 329,620 361,120 389,320

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2. Inventories 506,800 524,340 547,440 549,500
3. Sales 1,522,320 1,504,620 1,508,820 1,551,500
4. Cost of sales 973,560 928,360 917,500 942,660

PROBLEM NO. 3
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During December 2023, the Accounts Receivable controlling account on the books of Snapfire Co. showed one debit posting
and two credit postings. The debit represents receivables from December sales, ₱130,000. One credit was for ₱78,400,
made as a result of cash collections on November and December receivables; the second credit was an adjustment for
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estimated uncollectibles, ₱15,000. The December 31 balance was ₱45,000.

When receivables were collected, the bookkeeper credited Accounts Receivable for the cash collected. All customers who
paid accounts during December took advantage of the 2% cash discount.

As of December 1, debit balances in customers’ subsidiary accounts totaled ₱29,500. An adjustment for estimated doubtful
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accounts of ₱3,000 had been posted to the Accounts Receivable controlling account at the end of 2022, and no write-offs
were recorded during 2023. In addition, a number of customers had overpaid their accounts, and as a result, some of the
customers’ subsidiary accounts had credit balances on December 1. No overpayments were made during December nor
were any credit balances in customers’ accounts reduced during December.
EO

1. How much is the customers’ credit balances?

a. ₱18,400 c. ₱11,400
b. ₱18,100 d. ₱29,500
2. How much is the adjusted balance of Accounts Receivable?
a. ₱61,500 c. ₱79,500
b. ₱63,100 d. ₱45,000
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PROBLEM NO. 4

From the inception of operations to December 31, 2023, Slark, Inc. provided for uncollectible accounts receivable under the
allowance method, provisions were made monthly at 2% of credit sales, bad debts written off were charged to the allowance
account, recoveries of bad debts previously written off were credited to the allowance account, and no year-end adjustments
to the allowance account were made. Slark’s usual credit terms are net of 30 days.

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D. ASUNCION, CPA, MBA, F. MONTEROLA, CPA, R. PARAGAS, CPA

AUDIT OF RECEIVABLES

The balance in the Allowance for Doubtful Accounts was ₱500,000 at January 1, 2024. During 2024 credit sales totaled
₱20,000,000, interim provisions for doubtful accounts were made at 2% of credit sales, ₱300,000 of bad debts were written
off, and recoveries of accounts previously written off amounted to ₱50,000. Slark installed a computer facility in November
2024 and prepared an aging of accounts receivable for the first time as of December 31, 2024.

A summary of the aging is as follows:

Classification by month of sale Balance in each category Estimated % collectible

November – December 2024 5,000,000 95%
July – October 2,000,000 90%

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January – June 1,000,000 75%
Prior to 1/1/2024 500,000 25%
8,500,000

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Based on the review of collectability of the account balances in ”prior to 1/1/2024” aging category, additional receivables
totaling ₱100,000 were written off as of December 31, 2024. Effective with the year ended December 31, 2024, Slark
adopted a new accounting method for estimating the allowance for doubtful accounts at the amount indicated by the year-

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end aging analysis of accounts receivable.

1. What is the allowance balance before adjustment?

a. ₱1,000,000 c. ₱950,000
b. ₱550,000 d. ₱450,000
2. What is the required allowance on December 31, 2024?
a. ₱1,075,000
b. ₱650,000
R c. ₱1,000,000
d. ₱775,000
3. What is the year-end adjustment to the allowance for doubtful accounts balance?
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a. ₱550,000 c. ₱1,000,000
b. ₱250,000 d. ₱450,000

PROBLEM NO. 5

On January 1, 2021, Gale Co. sold delivery equipment costing ₱1,000,000 with accumulated depreciation of ₱150,000 in
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exchange for a 3-year, ₱1,800,000 noninterest-bearing note receivable due as follows:

Expected date Amount of

of collection cash flow
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31-Dec-2021 ₱1,000,000
31-Dec-2022 600,000
31-Dec-2023 200,000
₱1,800,000

The prevailing rate of interest for this type of note is 12%.

R

Questions:
Based on the above data, answer the following:
1. How much is the gain or loss on sale of delivery equipment in 2021?
a. Nil c. ₱513,580
b. ₱663,580 d. ₱1,513,580

2. How much is the interest income for 2021?

a. Nil c. ₱83,425
b. ₱181,630 d. ₱188,728

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AUDIT OF RECEIVABLES

3. How much is the carrying amount of the note on December 31, 2021?
a. ₱695,210 c. ₱178,635
b. ₱876,008 d. ₱512,399

4. How much is the current portion of the note on December 31, 2021?
a. ₱600,000 c. ₱83,425
b. ₱516,575 d. ₱178,635

5. How much is the noncurrent portion of the note on December 31, 2021?

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a. ₱600,000 c. ₱83,425
b. ₱516,575 d. ₱178,635

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PROBLEM 6

Sky Enterprises reports a loan receivable from Silencer Co, in the amount of ₱5,000,[Link] initial loan’s repayment

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terms include a 10% interest rate plus annual principal payments on December 31 each year of ₱1,000,000. The loan
was made on January 1, 2023. Silencer made the ₱500,000 interest payment in 2023, but did not make the ₱1,000,000
2024 principal payment nor the ₱500,000 2024 interest payment. Sky is preparing its annual financial statements at
December 31, 2024. The loan receivable has a carrying value of ₱5,500,000 including the ₱500,000 interest receivable
for 2024. Silencer is having financial difficulty, and Sky has concluded that the loan is impaired. Analysis of Silencer’s

December 31, 2025

December 31, 2026
1,750,000
2,000,000
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financial conditions indicates the principal and interest currently due can be probably collected, but it is probable that no
further interest can be collected. The probable amount and timing of the collection is determined to be as follows:
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December 31, 2027 1,750,000

Based on the above and the result of your audit, answer the following: (Round present value factors to four decimal places)

1. The present value of the expected future cash flows as of December 31, 2024 is
a. ₱4,558,500 b. ₱5,500,000 c. ₱5,000,000 d. ₱6,000,000
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2. The loan impairment for the year 2024 is

a. ₱941,500 b. ₱500,000 c. ₱558,500 d. P0
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3. How much is the interest income for the year 2025, assuming that Sky’s assessment of the collectability of the loan
has not changed.
a. 326,435 b. 455,850 c. 485,650 d. 326,435

4. How much is the interest income for the year 2026, assuming that Sky’s assessment of the collectability of the loan has
not changed.
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a. 326,435 b. 455,850 c. 159,078 d. 175,000

5. How much is the carrying amount of the loan receivable as of December 31, 2026.
a. 3,264,350 b. 4,558,500 c. 1,590,785 d. 1,750,000

PROBLEM 7

In line with your audit of Shadow Corp.’s trade receivables for the period ended December 31, 2021, the client provided
you with the following SL and GL reconciliation:

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D. ASUNCION, CPA, MBA, F. MONTEROLA, CPA, R. PARAGAS, CPA

AUDIT OF RECEIVABLES

Balance per Subsidiary Ledger P2,590,000

Sales invoice dated December 29 for goods delivered on the same date
but were still in transit as of December 31. Goods were shipped FOB (27,000)
Shipping point, freight prepaid. The amount included the freight cost of
P2,000.
Sales invoice dated December 30 for goods delivered on January 2, (30,000)
2022.
Sales invoice dated December 30 for goods delivered on
December 30 on sale with a repurchase agreement. The right to resell

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rests with the customer and the customer has a significant economic 22,000
incentive to resell.

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Sales invoice dated December 31 for goods delivered on
January 2 under a Bill and Hold agreement with the customer, which was
executed in December. 18,000

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Credit balance in one of the customer accounts resulting from
overcollection (6,000)
Credit balance in one of the customer accounts resulting from a
collection of a previously written off account. This amount was deducted 5,000
from the “Current” accounts in preparing the aging schedule (see
information below) R
Customer check dated January 2, 2022. The collection was for a
customer invoice dated October 20, 2021 20,000
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Customer collection check dated December 1, 202, but was returned by
the bank with the December bank statement because of insufficiency of
fund. The check was for the payment of a customer invoice dated August 41,000
5, 2021
Customer collection check dated December 30, 2021 in payment of an (28,000)
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October 25 invoice
Subscriptions receivable on ordinary shares, due March 31, 2023 90,000
Balance per General Ledger P2,695,000
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An aging schedule and the company’s policy of providing bad debt allowance is shown below:

Age Amount % uncollectible

Current 1,040,000 -
1-60 days past due 1,200,000 5%
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More than 60 days past due 350,000 20%

The company’s sales term is 5/30, n/60. It was determined that based on past experience, 40% of accounts which are
considered current will probably pay within the discount period and that from the accounts that is more than 60 days past
due, P120,000 is definitely uncollectible and therefore must be written off.

1. What is the correct carrying value of the accounts receivable, trade as of December 31, 2021?
a. 2,351,740 c. 2,382,200
b. 2,389,540 d. 2,361,540

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D. ASUNCION, CPA, MBA, F. MONTEROLA, CPA, R. PARAGAS, CPA

AUDIT OF RECEIVABLES

2. Assuming that the allowance for bad debts had a January 1, 2021 balance at P127,000, what is the bad debt expense
per audit for 2021?
a. 111,800 c. 106,800
b. 103,200 d. 101,800

PROBLEM 8

The Accounts Receivable control account balance of Sand Inc. was ₱215,300 as of December 31, 2021. The subsidiary

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ledger accounts of the company are summarized below. Credit terms are 60 days net.

Account
No. Date Debit Credit Balance

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1 May 31 ₱ 5,000 ₱ 5,000
July 1 ₱ 3,000 2,000
7 5,000 7,000

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Sept. 1 3,000 4,000
25 8,000 12,000
Nov. 1 3,000 9,000
Dec. 10 3,000 12,000

2 Aug. 8
Oct. 4
Nov. 25
8,400

22,000
8,400
8,400
0
22,000
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3
Jan. 1 120,000 120,000 (Two month, 6%
Mar.1 121,200 (1,200) note)
Dec. 1 100,000 98,800
(Two month, 6%
note)
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4 Feb. 3 10,000 10,000

Aug. 3 10,000 20,000
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5 Feb. 10 30,000 30,000

Apr. 9 30,000 0
May 4 40,000 40,000
July 2 40,000 0
Sept. 6 52,780 52,780
Nov. 26 2,220 55,000
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6 July 17 5,000 5,000

Aug. 16 4,440 9,440
Sept. 30 7,500 16,940
Oct. 15 9,440 7,500
Oct. 18 6,000 13,500
Dec. 20 6,000 7,500

The provision for doubtful accounts before audit has a credit balance of ₱5,000. The provision for doubtful accounts is to
be adjusted to a balance determined as follows:

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D. ASUNCION, CPA, MBA, F. MONTEROLA, CPA, R. PARAGAS, CPA

AUDIT OF RECEIVABLES

Accounts not due ½ of 1 percent

Accounts 1-60 days past due 2 percent
Accounts 61-120 days past due 5 percent
Accounts over 120 days past due 50 percent

The provision is to be based only on the trade accounts receivables. Except where payments are earmarked, the oldest
items are paid first.

From the information presented, compute the adjusted balances of the following accounts:

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1. Trade accounts receivable at the end of 2021
a. ₱215,300 c. ₱216,500
b. ₱131,200 d. ₱116,500

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2. Allowance for bad debts at the end of 2021.
a. ₱6,402 c. ₱7,052

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b. ₱2,052 d. ₱5,000

3. Bad debts expense in 2021.

a. ₱6,402 c. ₱7,052
b. ₱2,052 d. ₱5,000

4. Interest income in 2021?

a. ₱500
b. ₱400
c. ₱1,200
d. ₱1,700
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PA
5. Accrued Interest income in 2021?
a. ₱500 c. ₱1,200
b. ₱400 d. ₱1,700

PROBLEM 9
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1. An auditor wishes to test the completeness assertion for sales. Which of the following audit tests would most likely
accomplish this objective?
a. Select a sample of shipments occurring during the year and trace each one to inclusion in the sales journal.
EO

b. Compare accounts receivable turnover (net credit sales/average gross receivables) in the current year to that
achieved in the prior year.
c. Use common size analysis to compare recorded sales to sales recorded by other companies in the same
industry.
d. Select large individual sales recorded during the year and review supporting documentation.
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2. An auditor is confirming accounts receivable using positive confirmation. The auditor decides to leave the accounts
receivable amount blank rather than stating the amount owed. The auditor should be aware that the blank form may be
less efficient because:
a. Subsequent cash receipts need to be verified.
b. Statistical sampling may not be used.
c. A higher assessed level of detection risk is required.
d. More nonresponses are likely to occur.

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AUDIT OF RECEIVABLES

3. In line with your audit of a manufacturing client’s financial statements, you were assigned to audit the trade receivables.
In preparing your audit program, which of the following control objectives would be the least concern?
a. Ensuring that all shipments made have been billed
b. No shipment has been billed more than once
c. Each shipment has been billed for the proper amount
d. All billings corresponds to actual shipments of goods

4. Which of the following alternative audit procedures is necessary in instances where replies on positive confirmation
requests are not received even after sending a second set of confirmation requests?
a. Examining subsequent receipts of year-end accounts receivable.

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b. Reviewing accounts receivable aging schedule prepared at the balance sheet date and at a subsequent date.
c. Requesting that management increases the allowance for uncollectible accounts by an amount equal to a certain

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percentage of the balances in those accounts that cannot be confirmed
d. Performing an overall analytical review of accounts receivable and sales on a year-to-year basis.

5. The auditor is studying internal control policies and procedures within the sales, shipping, and billing subset of the

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revenue cycle. Which of the following conditions suggests a need for additional testing of controls?
a. Internal control is found to be weak with regard to shipping and billing.
b. Internal control over sales, billing, and shipping appears strong, but 80% of sales revenue is attributable to three
major customers.

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c. Internal control over billing and shipping is thought to be strong and the auditor considers additional testing of
selected controls will result in a major reduction in substantive testing.
d. Internal control over the recording of sales is found to be weak and the sales are evenly divided among a large
number of customers.
PA
6. Kuku, CPA is engaged in audit of Veno Pick Corp., an internet provider which services a rural community. The
receivable balances are relatively small, and customers are billed monthly. As a result of his evaluation of internal control,
he concluded that the controls of interest are effective. To determine the validity of accounts receivable balances at the
balance sheet date, Kuku, CPA would most likely _____________, this is relevant to his audit objective to gather
evidence regarding __________ assertion over receivables.
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a. Send positive confirmation requests; valuation

b. Send negative confirmation requests; existence
c. Examine evidence of subsequent cash receipts instead of sending confirmation requests; valuation
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d. Use statistical sampling instead of sending confirmation request; existence

7. Returns of positive confirmation requests for accounts receivable were very poor. As an alternative procedure, the
auditor decided to check subsequent collections. The auditor had satisfied himself that the client satisfactorily listed the
customer name next to each check listed on the deposit slip; hence, he decided that for each customer for which a
confirmation was not received that he would add all amounts shown for that customer on each validated deposit slip for
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the two months following the balance sheet date. The major fault in the auditor’s procedure is that:
a. Checking of subsequent collection is not an accepted alternative auditing procedure for confirmation of accounts
receivable
b. By looking only at the deposit slip the auditor would not know if the payments was for the receivable at the
balance sheet date or a subsequent transaction
c. The deposit slip would not be received directly by the auditor as a confirmation would be
d. A customer may not have made a payment during the two-month period.

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AUDIT OF RECEIVABLES

8. As a result of your understanding of the client internal control over its Order to Cash Business Process (Formerly,
Revenue and Receipt Cycle), you have noted that there might be possible instances of unbilled deliveries to customers
since the billing department is not keen in monitoring the prenumbering of the delivery receipt in preparing sales invoices
to be sent to customers. An effective procedure to test for these suspected unbilled shipments is to _________. This
is to support the financial statement assertion of __________ over sales and receivables.
a. Vouch sales journal entries to shipping documents; existence/occurrence.
b. Trace shipping documents to the sales journal; completeness.
c. Vouch sales journal entries to the accounts receivable subsidiary ledger; existence/occurrence.
d. Trace sales journal to the general ledger sales account; completeness.

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9. The overall objective in the audit of the sales and collection cycle is to evaluate whether:
a. The sales account and the accounts receivable account are free of errors
b. The sales account and the accounts receivable account are free of materials errors

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c. The sales account and the accounts receivable account are presented fairly in accordance with financial reporting
standards
d. The relevant account balances affected by the cycle are fairly presented in accordance with financial reporting

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standards.

10. Which of the following would provide the most assurance concerning the valuation of accounts receivable?
a. Trace amounts in the accounts receivable subsidiary ledger to details on the shipping document

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b. Compare receivable turnover ratios to industry statistics for reasonableness
c. Inquire about receivables pledged under loan agreements
d. Assess the allowance for uncollectible accounts for reasonableness
PA
--- END OF HANDOUTS ---
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EO
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INVESTMENTS IN EQUITY SECURITIES

DARRELL JOE O. ASUNCION, CPA, MBA

[Link].F2.01.00

INVESTMENTS IN EQUITY SECURITIES

DARRELL JOE O. ASUNCION, CPA, MBA

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PROBLEM NO. 1 Purchase: Trade Date vs. Settlement Date Accounting

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On December 29, 2018, Bifurcation Company commits itself to purchase a financial asset to be classified as held for
trading for ₱600,000, its fair value on commitment (trade) date. This security has a fair value of ₱601,000 and ₱602,000

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on December 31, 2018 (Bifurcation's financial year-end), and January 5, 2019 (settlement date), respectively.

Questions:
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Based on the above data, answer the following:
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1. If Bifurcation applies the trade date accounting method to account for regular-way purchases of its securities, how much
should be recognized as trading securities on December 31, 2018?
C

a. ₱600,000 c. ₱602,000
b. ₱601,000 d. ₱ 0
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2. If Bifurcation applies the settlement date accounting method to account for regular-way purchases of its securities, how
much should be recognized as trading securities on December 31, 2018?
a. ₱600,000 c. ₱602,000
b. ₱601,000 d. ₱ 0
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PROBLEM NO. 2 Sale: Trade Date vs. Settlement Date Accounting

On December 29, 2018 (trade date), Subterfuge Corp. enters into a contract to sell an equity security classified as Fair
Value through Other Comprehensive Income (FVTOCI) for its current fair value of ₱506,000. The asset was acquired a

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INVESTMENTS IN EQUITY SECURITIES

[Link].F2.01.00

year ago and its cost was ₱500,000. On December 31, 2018 (financial year-end), the fair value of the asset is ₱510,000.
On January 5, 2019 (settlement date), the asset's fair value is ₱513,000.

Questions:
Based on the above data, answer the following:
1. If Subterfuge uses the trade date method to account for regular-way sales of its securities, how much is the carrying
amount of FVTOCI at December 31, 2018?
a. ₱506,000 c. ₱513,000
b. ₱510,000 d. ₱ 0

2. If Subterfuge uses the settlement date method to account for regular-way sales of its securities, how much is the carrying
amount of FVTOCI at December 31, 2018?
a. ₱506,000 c. ₱ 5,000
b. ₱510,000 d. ₱ 0

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PROBLEM NO. 3 Basic Journal Entries- Acquisitions in Between Dates of Declaration and Record

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The Stipend Company has the following transactions relating to its investments during 2021:
January 5 Acquired 10,000 shares of Hoax Co. for ₱1,000,000 paying

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additional ₱20,000 for brokerage and another ₱5,000 for
commission.
Acquired 15,000 shares of Defray Co. for ₱1,000,000 paying
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additional ₱20,000 for brokerage and another ₱5,000 for
commission.
February Received ₱20,000 dividends from Hoax Co. The dividends
PA

14 were declared on January 10, 2021 and ex-dividend date is on

January 31, 2021.
Received ₱15,000 dividends from Defray Co. The dividends
were declared on January 2, 2021 with an ex-dividend date on
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January 31, 2021.

On December 31, 2021 and 2022, the market value per share of the Defray stock is ₱80 and ₱90, respectively.
EO

Questions:
Based on the above data, answer the following:
1) How much is the initial carrying amount of investment in Hoax assuming it is classified as FVTPL?
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a. ₱1,025,000 c. ₱1,005,000
b. ₱1,000,000 d. ₱ 975,000
2) How much is the initial carrying amount of investment in Defray assuming it is designated as FVTOCI?
a. ₱1,025,000 c. ₱1,010,000
b. ₱1,000,000 d. ₱ 985,000

3) How much is the dividend income to be presented in P&L from the investment in Hoax assuming it is designated as
FVTOCI?
a. ₱20,000 c. ₱10,000
b. ₱15,000 d. Nil
4) How much is the dividend income to be presented in P&L from the investment in Defray assuming it is designated as
FVTPL?
a. ₱20,000 c. ₱10,000
b. ₱15,000 d. Nil

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5) On December 31, 2022, how much is the gain (loss) to be presented in the SFP from the investment in Defray assuming
it is designated as FVTOCI?
a. ₱190,000 c. ₱340,000
b. ₱150,000 d. Nil

PROBLEM NO. 4 Derecognition of Financial Assets - Sale of Investment

On January 1, 2018, Haphazard Corp. owns 15,000 ordinary shares representing 15% of the shares outstanding of Luke
Corporation. The ordinary shares were acquired on November 12, 2017 at a cost of ₱1,500,000 and have a fair value of
₱1,600,000 on December 31, 2017. On January 2, 2018, Haphazard sold half of its investment for ₱100 per share incurring
a brokerage and commission expense of ₱20,000.

Questions:

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Based on the above data, answer the following:
Case No. 1: Assume that the above securities are classified as fair value through profit or loss

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1. Unrealized gain (or loss) on December 31, 2017 to be presented in the statement of financial position.
a. Nil c. ₱(100,000)
b. ₱100,000 d. ₱20,000

a. Nil c. ₱(50,000) ev
2. Gain (or loss) on sale on January 2, 2018 to be recognized in the profit or loss.
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b. ₱(70,000) d. ₱20,000

Case No. 2: Assume that the above securities are designated as at fair value through other comprehensive income
PA

3. Unrealized gain (or loss) on December 31, 2017 to be presented in the statement of financial position.
a. Nil c. ₱(100,000)
b. ₱100,000 d. ₱20,000
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4. Gain or loss on sale on January 2, 2018 to be recognized directly in the retained earnings.
a. Nil c. ₱(50,000)
b. ₱(70,000) d. ₱20,000
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5. Prepare all the necessary entries for the years 2017 and 2018 (for both FVTPL and FVTOCI).

TRANSACTIONS SUBSEQUENT TO ACQUISITIONS

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DIVIDENDS
Three Different Dates Relating to Dividends
a) Date of declaration is the date when the board of directors announces the distribution of dividends. Dividend income
may or may not be recognized on this date.
b) Date of record is the cut-off date that determines who among the shareholders is entitled to dividend per listing as of
the record date. No journal entry is required on this date.
c) Date of payment - is the date when the dividend is received.

CASH DIVIDENDS
Cash dividend is the payment of cash to shareholders in proportion to the number of shares owned. Cash dividend may be:
a. certain amount of pesos per share
b. a certain percent of the par or stated value (e.g. 10% cash dividends = 10% x par value or stated value)

Journal entries:
Investor Company

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Date of declaration Dividend receivable XX

Dividend income XX

Date of record No formal accounting entry

Date of payment Cash XX

Dividend receivable XX

PROPERTY DIVIDENDS:
Property dividend is a dividend paid in the form of some asset other than cash.

Examples of Property dividends

1) Noncurrent assets covered by PFRS 5 (e.g., property, plant and equipment, Intangibles and Investment in Associate)
2) Assets other than those covered by PFRS 5 (e.g., current assets just like inventory, noncurrent assets covered by PFRS

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9 like FVTOCI)

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Accounting for Property Dividends
Property dividends, regardless of the types, should always be recorded at the fair value at the date of declaration

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irrespective of the fair value on the date of settlement.

Date of declaration Dividend receivable XX

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Dividend income XX

Date of record No formal accounting entry

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Date of payment Non-cash asset XX

Dividend receivable XX
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LIABILITY/SCRIP DIVIDENDS
A liability or scrip dividend is a deferred cash dividend.
Date of declaration Scrip dividend receivable XX
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Dividend income XX

Date of record No formal accounting entry

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Date of redemption Cash XX

Interest income XX
Scrip dividend receivable XX

CASH RECEIVED IN LIEU OF SHARE DIVIDENDS

Cash received in lieu of share dividends is accounted as if the stocks were received and subsequently sold at the amount
of cash received. This not a dividend income, however, gain or loss shall be recognized.

Date of declaration Memo entry: Received no. of shares

as a share dividend.

Date of record No formal accounting entry

Date of redemption Cash XX

Investment XX

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Gain on sale XX

The gain or loss on sale may be computed as follows:

Net selling price XX
Less: Carrying amount of the investment sold XX
Gain (or loss) on sale XX

For investment measured at cost, the carrying amount is computed as follows:

Original carrying amount of the shares XX
Divide by:
Original shares XX
Add: Share dividend XX XX
Carrying amount per share of the investment sold XX
Multiply by: Share dividends XX

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Carrying amount of the investment sold XX

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For investments measured at fair value, the carrying of the investment sold is the fair value of the share dividends that would
have been received.

SHARES RECEIVED IN LIEU OF CASH DIVIDEND

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Shares received in lieu of cash dividend are recognized as income at the fair value of the stock received. But for an
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investment from which dividends are received is measured at cost, the dividend income is equal to the cash dividends that
should have been received.
PA

DIVIDENDS OUT OF CAPITAL/LIQUIDATING DIVIDENDS/RETURN OF INVESTMENT

Dividends out of capital are actually liquidating dividend. It is not an income and therefore credited to the investment account.

Wasting Asset Doctrine

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Under wasting asset doctrine, partial liquidation (or liquidation by installment) is allowed only for Wasting Assets
Corporation. But if the corporation is not a wasting asset corporation, one-time liquidation should be done and shareholders
shall be paid accordingly.
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The journal entry upon receipt of dividends will be:

Wasting Asset Corporation Other than Wasting Asset Corp.

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To record partial liquidation

Cash xxx No journal entry
Investment xxx

To record full liquidation

Cash xxx Cash xxx
Loss on liquidation xxx Loss on liquidation xxx
Investment xxx Investment xxx
Gain on liquidation xxx Gain on liquidation xxx

PROBLEM NO. 5 Share Dividends

On October 1, 2018, Contentious Corp. owns 15,000 ordinary shares of Pulsate Corporation acquired at a cost of
₱1,500,000. The shares represent 15% of the ordinary shares outstanding of Pulsate Corporation.

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Required:
Record the receipt of the share dividends on the Contentious’ book under each of the assumption listed below:
Case No. 1: Assuming the shares are investment in unquoted securities measured at cost
1. Contentious received 15% ordinary shares as Share Dividends.
2. Contentious received 1,500 preference shares as Share Dividends. The par value of the preference share is ₱200 per
share while the ordinary shares has a par value of ₱100.

Case No. 2: Assuming the shares are financial assets at fair value through profit or loss
3. Contentious received 15% ordinary shares as Share Dividends. The fair value of the ordinary shares amounted to ₱100.
4. Contentious received 1,500 preference shares as Share Dividends. The fair value of each preference share is ₱150.

Case No. 3: Assuming the shares are investment in equity securities designated as at fair value through other
comprehensive income

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5. Contentious received 15% ordinary shares as Share Dividends. The fair value of the ordinary shares amounted to ₱100.
6. Contentious received 1,500 preference shares as Share Dividends. The fair value of each preference share is ₱150.

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PROBLEM NO. 6 Cash Received in Lieu of Share dividends

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On October 1, 2018, Qualms Corp. owns 15,000 ordinary shares of Sarcasm Corporation acquired at a cost of ₱345,000.
The shares represent 15% of the shares outstanding of Sarcasm Corporation. On the same date, Sarcasm Corp. declared
15% share dividends payable to stockholders on October 31. On October 31, the stock is selling at ₱40 per share. However,
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on October 31, Sarcasm Corp. gave ₱36 per share cash in lieu of the supposed share dividends previously declared.

Case No. 1: Assuming the shares are investment in unquoted securities measured at cost
PA

Case No. 2: Assuming the shares are financial assets at fair value through profit or loss
Case No. 3: Assuming the shares are investment in equity securities designated as at fair value through other
comprehensive income
C

Questions:
Based on the above data, compute for the following using the above independent cases:
1. Dividend income to be recognized in 2018
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2. Gain or loss on sale of investment to be recognized in 2018

PROBLEM NO. 7 Shares Received in Lieu of Cash Dividends

On October 1, 2018, Venus Corp owns 15,000 ordinary shares of Mercury Corporation acquired at a cost of ₱345,000. The
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shares represent 15% of the shares outstanding of Mercury Corporation. On the same date, Mercury Corp. declared ₱8
cash dividends on its outstanding shares payable to stockholders on October 31. However, on October 31, Mercury Corp.
issued 1 share for every 5 shares held by the shareholders in lieu of the supposed cash dividends previously declared.

Case No. 1: Assuming the shares are investment in unquoted securities measured at cost
Case No. 2: Assuming the shares are financial assets at fair value through profit or loss. October 1, 2018, the stocks were
selling at that time at ₱44 per share.

Requirements:
1. Based on the above data, compute for the dividend income to be recognized in 2018
2. Prepare all the necessary entries on
a. October 1, 2018
b. October 31, 2018

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STOCK SPLIT OR SHARE SPLIT

Stock split or share split is a decision by the company's board of directors to increase the number of shares that are
outstanding by issuing more shares to current shareholders. Stock split may either be split up or split down.

A. Split up
Split up is a transaction whereby the original shares are called in for cancellation and replaced by a larger number
accompanied by a reduction in the par value or stated value.

B. Split down or reverse share split

It is a transaction whereby the original shares are cancelled and replaced by a smaller number accompanied by an
increase in the par value or stated value.

Accounting Treatment of Stock Split

Accounting for stock split whether split up or split down is similar with share dividends. Upon receipt of all the shares as a

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result of share split and remeasurement of all the shares to fair value, the journal entries are as follows:
Category Accounting Treatment

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1. Investment in unquoted equity Recorded as memorandum entry only
securities measured at cost

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2. Financial asset at FVTPL Dr: FVTPL (@ fair value)
Cr: Unrealized gain - P&L
3. Investment in equity securities Dr: FVTOCI @ fair value)
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designated as at FVTOCI Cr: Unrealized gain - OCI

SPECIAL ASSESSMENTS
PA

Special assessments are additional contributions required by an entity to its shareholders especially during financial
difficulties. This is treated as additional cost of investment and recorded as debit to investment and credit to Cash.

PROBLEM NO. 8 Stock Split and Special Assessment

C

On January 1 of the current year, Phobos Company acquired 10,000 shares of Investment in equity designated as at Fair
Value through Other Comprehensive Income of Deimos Company at ₱400,000 plus brokerage expense of ₱20,000. On
March 1 of the current year, Deimos Company ordinary share was split on a 5-for-2 basis. On October 1, Deimos Company
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made a special assessment of ₱3.20 per share on all ordinary shareholders. Phobos Company accordingly paid the
assessment. The fair value on December 31 amounted to ₱30 per share.

Questions:
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Based on the above data, answer the following:

1. The total number of shares at the end of the year.
a. Nil c. 300,000
b. 140,000 d. 25,000

2. The unrealized gain to be presented in the other comprehensive income for the current year.
a. Nil c. ₱300,000
b. ₱140,000 d. ₱250,000

3. The necessary entries on January 1, will include a

a. Debit to Financial Asset at FVTOCI, ₱400,000
b. Debit to Financial Asset at FVTOCI, ₱420,000
c. Credit to Cash, ₱400,000
d. No journal entry

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4. The necessary entries on December 31, will include a

a. Debit to Financial Asset at FVTOCI, ₱400,000
b. Debit to Financial Asset at FVTOCI, ₱300,000
c. Credit to Unrealized gain, ₱250,000
d. Credit to Unrealized gain, ₱140,000

STOCK RIGHT
A stock right or preemptive right is a privilege giving current stockholders the first right to buy shares in a new offering, thus
maintaining their proportionate ownership interest.
Accounting for Stock Right
Accounting for stock rights will depend if the rights emanates from investment in equity securities measured at cost, fair
value through profit or loss securities or fair value through other comprehensive income.
Investment in unquoted Investment in equity
securities measured at cost Financial Asset at FVTPL designated as FVTOCI

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Upon receipt Memorandum entry Memorandum entry Record the stock rights at its fair
of stock rights value by debit to Stock rights and

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credit to Unrealized gain (P&L).
Upon exercise Debit Investment in equity and Debit FA at FVTPL and credit Debit Investment in equity-

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credit to Cash to Cash FVTOCI and credit to Cash and
Stock rights
When expired Memorandum entry Memorandum entry Debit to loss on stock rights and
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credit stock rights.
When sold Debit Cash and credit to Debit Cash and credit to FA at Debit cash or Loss on sale-P&L-
investment in equity at the net FVTPL at the net amount (if any) and credit to stock rights
PA

amount received. (No gain or received. (No gain or loss) or gain on sale if any.
loss)
Classification Stock rights are usually accounted for at fair value through profit or loss and are considered as
derivative and presented usually as current asset.
C

PROBLEM NO. 9 Stock Right

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On June 15, 2018, Mars Company owns 10,000 shares with a cost of ₱700,000 of Moon Company’s stocks. During the
same period, Moon Company issued stock rights to existing shareholders. Mars received 10,000 stock rights entitling him
to purchase 5,000 new shares at ₱80. The ordinary share was trading ex-rights at ₱80 a share and the rights had a market
value ₱20 per right.
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On July 15, 2018, Mars exercised all the stock rights. The share is quoted right-on at ₱90.

Questions:
Based on the above data, answer the following:
1. Assuming that the above securities are FVTPL, the stock rights should be initially recognized at
a. Nil c. ₱100,000
b. ₱200,000 d. None of the choices

2. Assuming that the above securities are FVTOCI, the stock rights should be initially recognized at
a. Nil c. ₱100,000
b. ₱200,000 d. None of the choices

3. Assuming that the above securities are FVTPL, the cost of investment acquired through exercised of stock rights should
be

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a. Nil c. ₱600,000
b. ₱400,000 d. None of the choices

4. Assuming that the above securities are FVTOCI, the cost of investment acquired through exercised of stock rights
should be
a. Nil c. ₱600,000
b. ₱400,000 d. None of the choices

Theoretical Value of the rights

If the fair value of the stock rights is not given, then the company can compute its value using the theoretical value of the
rights. The formulas are as follows:

a. When the stock is selling right-on:

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Market value of stock right-on minus
Value of one right = subscription price

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Number of rights to purchase one share plus 1

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b. When the stock is selling ex-right:
Market value of stock ex-right minus
Value of one right = subscription price
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Number of rights to purchase one share
PA

PROBLEM NO. 10 Theoretical Value of Rights

On January 2, 2015, Jupiter Company purchased 10,000 shares of ₱100 par value ordinary shares at ₱120 per share of
Saturn Company. On March 2, 2015, Saturn Company issued stock rights to its shareholders. The holder needs five rights
to purchase one share of ordinary stock at par. The market value of the stock on that date was ₱160 per share. There was
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no quoted price for the rights.

Questions:
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Based on the above data, answer the following:

1. Compute for the theoretical value of the rights assuming, the stock is selling right-on
a. Nil c. 12
b. 10 d. 27
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2. Compute for the theoretical value of the rights assuming, the stock is selling ex-right
a. Nil c. 12
b. 10 d. 27

EXCHANGE OF ONE FINANCIAL ASSET INTO ANOTHER FINANCIAL ASSET (FOR EXAMPLE CONVERSION OF
INVESTMENT IN CONVERTIBLE PREFERENCE SHARES)
Paragraph 3.2.1 of PFRS 9 provides that if, as a result of a transfer, a financial asset is derecognized in its entirety but the
transfer results in the entity obtaining a new financial asset or assuming a new financial liability, or a servicing liability, the
entity shall recognize the new financial asset,
Fair value of the new financial asset XX
Less carrying amount (or cost) of the old financial asset XX
Gain or loss on exchange XX

The journal entry would be:

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Financial Asset-new (at its fair value) XX

Loss on exchange (if any) XX
Gain on exchange (if any) XX
Financial asset (old) XX

RECLASSIFICATIONS OF INVESTMENTS IN EQUITY SECURITIES

No reclassifications to and from equity securities are allowed since equity securities are classified as FVTOCI, which is
prohibited from reclassification.

COMPREHENSIVE PROBLEMS
PROBLEM NO. 11
You were engaged by Governing Body Company to audit its financial statements for the year 2021. During the course of
your audit, you noted that the following Investment in equity securities designated as at FVTOCI securities were properly

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reported at December 31, 2020:

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Cost Market
Gerrit Corporation, 15,000 shares,
convertible preference shares ₱ 900,000 ₱ 975,000

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Loesch, Co., 10,000 shares of ordinary shares 550,000 451,000
₱1,450,000 ₱1,426,000
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The following transactions transpired during 2021:
Jan. 10 Acquired 20,000 shares of Barr designated as at FVTOCI at ₱400,000 cash. Additional ₱20,000 was also paid
for the brokerage and commissions.
PA

Feb. 10 Received the following dividends (all declared on January 5, 2021 to the stockholders of record January 20):
Loesch - 1,000 share dividends (The market value per share on this date is ₱60)
Gerrit ₱30,000
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Barr ₱10,000
Mar. 10 Converted 5,000 shares of Gerrit preference shares into 10,000 shares of Gerrit Ordinary shares when the market
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price was ₱70 per share for the preference share and ₱40 per share for the ordinary share.
April 1 Loesch Co. issued rights to ordinary shareholders for the acquisition of one additional share at ₱62 for every five
shares held. The ordinary share was trading ex-rights at ₱54 a share and the rights had a market value ₱6 per
right.
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May 1 Exercised all the stock rights.

Nov. 15 Sold 2,000 shares of the Loesch stocks for ₱70 per share.
Dec. 1 Received ₱1 per share dividends on the Loesch shares declared on November 2, 2021 to the stockholders of
record November 20.
Closing market quotation as of December 31, 2021:
Bid Asked
Gerrit Corporation, preference shares 70 75
Gerrit Corporation, ordinary shares 45 42
Loesch Co 72 75
Barr Co 20 24
Questions:
Based on the above and the result of your audit, you are to provide the answers to the following:

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1. How much is the correct cost of the investment acquired on January 10?
a. ₱400,000 c. ₱390,000
b. ₱420,000 d. ₱410,000
2. How much is the total dividend income for the year 2021?
a. ₱101,200 c. ₱43,200
b. ₱53,200 d. ₱41,200
3. How much is the gain on conversion of 5,000 Gerrit preference shares into 10,000 ordinary shares?
a. ₱100,000 c. ₱75,000
b. ₱50,000 d. ₱39,000
4. How much is the gain or loss on the disposal of 2,000 Loesch shares to be recognized in the other comprehensive
income in 2021?
a. ₱24,000 loss c. ₱ 39,000 gain
b. ₱24,000 gain d. ₱17,333 gain

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5. How much should be reported as unrealized gain on FVTOCI securities in the company’s SFP for the year 2021?

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a. ₱308,000 c. ₱298,000
b. ₱338,000 d. ₱342,000

PROBLEM NO. 12 Trading Securities

ev
You were able to obtain the following ledger details of Trading Securities in connection with your audit of the MUND
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Corporation for the year ended December 31, 2011:

Date Particulars DR CR
PA

Jan. 10 Purchase of FRANZ Co. – 6,000 shares, ₱220 par value shares
₱1,440,000
Feb. 20 Purchase of SCAL Co. – 7,200 shares 1,800,000
Mar. 01 Sale of SCAL Co. – 2,400 shares 540,000
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May 31 Receipt of FRANZ share dividend– Offsetting Credit to

retained earnings (₱220 par value x 600) 132,000
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Aug. 15 Sale of FRANZ Stocks – 4,800 shares 1,176,000

Sep. 01 Sale of FRANZ Stocks – 1,200 shares 276,000

From the Philippine Stock Exchange, the FRANZ dividends were analyzed as follows:
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Nature Declared Record Payment Rate

Cash 01/02/11 01/15/11 01/31/11 ₱20/share
Share 05/02/11 05/15/11 05/31/11 10%
Cash 08/01/11 08/30/11 09/15/11 ₱30/share

At December 31, 2011, FRANZ and SCAL shares were selling at ₱210 and ₱240 per share, respectively.

QUESTIONS:

Based on the above and the result of your audit, answer the following:

1. The gain or loss on sale of 2,400 SCAL shares on March 1, 2011 is

a. ₱540,000 gain c. ₱60,000 loss
b. ₱300,000 loss d. ₱60,000 gain

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2. The net gain/loss on sales of FRANZ shares in 2011 is

a. ₱108,000 gain c. ₱12,000 loss
b. ₱142,910 gain d. ₱ 1,090 loss

3. The total dividend income to be recognized in 2011 is

a. ₱198,000 c. ₱36,000
b. ₱180,000 d. ₱54,000

4. The carrying amount of Trading Securities as of December 31, 2011 is overstated by

a. ₱228,000 c. ₱102,000
b. ₱ 60,000 d. ₱ 0

5. The unrealized loss on Trading Securities to be recognized in 2011 profit or loss is

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a. ₱52,910 c. ₱48,000
b. ₱42,000 d. ₱ 0

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INVESTMENT IN ASSOCIATE
An associate is an entity over which the investor has significant influence.
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Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not
control or joint control of those policies.
PA

7 The existence of significant influence by an investor is usually evidenced in one or more of the following ways:
(a) representation on the board of directors or equivalent governing body of the investee;
(b) participation in policy-making processes, including participation in decisions about dividends or other distributions;
(c) material transactions between the investor and the investee;
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(d) interchange of managerial personnel; or

(e) provision of essential technical information.
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The Standard does not require the equity method to be applied when an associate is acquired and held with a view to its
disposal within twelve months of acquisition.
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T-ACCOUNTS ARISING FROM THE JOURNAL ENTRIES

Investment in Associate
Beginning balance or XX Dividends received
acquisition cost XX XX Amortization of excess
Share in net income of (excluding goodwill)
associate XX XX Impairment loss
Share in increase in OCI* XX XX Share in decrease in OCI*
XX Balance end
Total =

Net Investment Income

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INVESTMENTS IN EQUITY SECURITIES

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Amortization of excess Share in the net income of

excluding goodwill XX XX associate
Impairment loss XX
Balance end XX
Total =

Formula:
Acquisition cost (or purchase price) XX
Less: Book value of the net asset acquired ( XX )
Excess of cost over book value XX
Less: Undervaluation of Assets (XX )
Add: Overvaluation of Assets XX

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Goodwill (gain on bargain purchase) XX

Adjustments for Amortization:

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Assets Recognition of Amortization
Inventory Upon disposal or sale (as cost of sales)

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Land Upon disposal or sale
Depreciable asset (e.g. machine Every year through depreciation
& equipment)
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Goodwill When there is impairment

PROBLEM NO. 13 Investment in Associate

PA

At the beginning of the current year, the Catherine Company purchased 40% of the ordinary shares of Buban Company for
₱3,500,000.
At the acquisition date, the carrying amounts of the identifiable assets and liabilities of the investee were equal to their fair
value, except for equipment for which the fair value was ₱1,500,000 greater than the carrying amount and the inventory
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whose fair value was ₱500,000 greater than cost.

The equipment has a remaining life of 4 years and the inventory was all sold during the current year.
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The investee reported net income of ₱4,000,000 and paid ₱1,000,000 dividends on October 1 of the current year.

Assume the following independent cases, determine the balance of:

1. Investment income during the current year.
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2. Investment account balance at the of the current year.

Case NO. 1-Assume that the investment is accounted for as investment in equity designated as at fair value through other
comprehensive income and the fair value of the share is ₱4,000,000.
Case NO. 2-the carrying amount of net assets of the investee on the date of acquisition is ₱5,000,000.
Case NO. 3-the carrying amount of net assets of the investee on the date of acquisition is ₱5,000,000 also assume that the
date of acquisition is April 1 of the current year.
Case NO. 4-the carrying amount of net assets of the investee on the date of acquisition is ₱7,000,000.
Case NO. 5-the carrying amount of net assets of the investee on the date of acquisition is ₱9,000,000.
Case NO. 6-the carrying amount of net assets of the investee on the date of acquisition and at the end of the reporting
period is:
January 1 December 31
Share capital 4,000,000 4,000,000
Revaluation surplus 1,500,000

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Retained earnings 2,000,000 5,000,000

The revaluation surplus is the result of revaluation of the land recognized by Buban Company on December 31, of the
current year.
Additionally, depreciation is provided by Buban Company on the diminishing balance method whereas Catherine Company
uses straight-line method.
Had Buban Company used the straight-line, the accumulated depreciation would be increased by ₱200,000. The tax rate
is 30%.

Associate Having Outstanding Preference Shares

If an associate has outstanding cumulative preference shares that are held by parties other than the investor and classified
as equity, the investor computes its share of profits or losses after adjusting for the dividends on such shares, whether or
not the dividends have been declared.

Computation of Share in Net Income

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Net income of the associate XX
Less: Preference share dividend ( XX )

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Net income to ordinary share XX
Multiply by: Percentage of ownership - Ordinary shares %

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Share in net income of the associate XX

The preference dividend to be deducted from the net income is:

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Cumulative Fixed rate x total par value of outstanding preference shares for only one year, declared or not.
preference share
Noncumulative Actual dividends declared
PA

preference share

Redeemable Preference Shares

Redeemable preference shares are treated as financial liability. Thus, any dividends declared shall be treated as finance
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cost in the Profit and Loss Statement.

Therefore, the preference dividends shall no longer be deducted from the net income of the associate because such were
EO

already deducted as an expense (i.e., finance cost) in computing for the net income during the period.

PROBLEM NO. 14
On January 1, 2009, NCPAR Company acquired 20% of the outstanding ordinary shares of BRAYDEN Company for
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₱4,500,000. This investment gave NCPAR the ability to exercise significant influence over BRAYDEN. The book value of
the acquired shares was ₱3,000,000. The excess of cost over book value was attributed to a depreciable assets which was
undervalued on BRAYDEN’ statement of financial position and which had a remaining useful life of ten years.
For the year ended December 31, 2009, BRAYDEN’ share capital outstanding is as follows:
10% cumulative preference share capital 2,500,000
Ordinary share capital 10,000,000

BRAYDEN reported net income ₱1,500,000 for the year ended December 31, 2009.

CASE NO. 1- Assuming the cumulative preference share is treated as equity by BRAYDEN and that BRAYDEN declared
dividends of ₱200,000 on the preference shares, answer the following:
1. What amount should NCPAR record as investment income for the year ended December 31, 2009?
2. What amount should NCPAR record as investment in associate for the year ended December 31, 2009?

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CASE NO. 2- Assume instead that the preference shares are non-cumulative preference share treated as equity by
BRAYDEN and that BRAYDEN declared dividends of ₱200,000 on the preference shares, answer the following:
1. What amount should NCPAR record as investment income for the year ended December 31, 2009?
2. What amount should NCPAR record as investment in associate for the year ended December 31, 2009?

CASE NO. 3- Assuming the cumulative preference share is treated as Financial liability by BRAYDEN, answer the following:
1. What amount should NCPAR record as investment income for the year ended December 31, 2009?
2. What amount should NCPAR record as investment in associate for the year ended December 31, 2009?

PROBLEM NO. 15 CHANGE FROM COST TO EQUITY METHOD

On January 1, 2016, Christine Co. acquired 20,000 ordinary shares out of the 200,000 outstanding ordinary shares of Mary
Inc. for ₱3,400,000. The investment was classified as fair value through profit or loss (FVTPL). The fair values per share of
Mary are as follows: December 31, 2016, ₱160; December 31, 2017, ₱150 and December 31, 2018, ₱180.

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On January 1, 2018, Christine purchased an additional 24,000 of Mary’s stock representing 12% additional interest for
₱3,840,000, its fair value on that date, when the carrying amount of Mary's net assets was ₱10,000,000. The excess was

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attributable to the machinery having a remaining life of ten years.

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On December 31, 2016, Mary reported net income of ₱800,000 and declared and paid dividends of ₱400,000. On December
31, 2017, Mary reported net income of ₱1,400,000 and declared and paid dividends of ₱550,000. On December 31, 2018,
Mary reported net income of ₱1,300,000 and declared and paid dividends of ₱400,000.
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Questions:
Based on the above date, answer the following:
PA

1. How much is the amount of unrealized gain (or loss) to be recognized in the profit or loss in 2017?
a. Nil c. ₱(400,000)
b. ₱(200,000) d. ₱(300,000)
C

2. How much is the amount of investment income to be recognized in the profit or loss in 2017?
a. Nil c. ₱82,500
b. ₱55,000 d. ₱88,000
EO

3. How much is the gain on reclassification of January 1, 2018 as a result of acquisition of 12% interest in Mary Corp to
be recognized in the profit or loss?
a. Nil c. ₱200,000
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b. ₱88,000 d. ₱275,000

4. How much is the net share in the profit or loss of the associate (investment income) in 2018?
a. ₱286,000 c. ₱770,000
b. ₱(198,000) d. ₱308,000

5. How much is the carrying amount of the investment as of December 31, 2018?
a. ₱7,326,000 c. ₱7,810,000
b. ₱6,754,000 d. ₱7,722,000

PROBLEM NO. 16 DISCOUNTINUANCE OF EQUITY METHOD-CHANGE FROM EQUITY

On July 1, 2016 Marianne Corporation acquired 60,000 shares of the 200,000 shares outstanding of Sexy Inc. at ₱25 per
share. The company incurred ₱2 transaction cost per share. The book value of Sexy Inc.’s net assets on this date amounted
to ₱5,000,000. The fair value of one of its identifiable intangible with a 5 year remaining life higher than book value by

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₱50,000 while it’s Equipment having a remaining life of 8 years had a fair value ₱160,000 higher than book value. All other
identifiable assets had fair value approximating their book values.

Sexy reported total net income in 2016 at ₱800,000 and distributed dividends at year end at ₱300,000. Fair value of shares
on this date was ₱30 per share while cost to sell is at ₱2 per share.

Sexy reported total comprehensive income in 2017 at ₱1,250,000 which is net of a foreign translation loss amounting to
₱150,000. It also distributed dividends at year end at ₱500,000. Fair value of shares on this date was at ₱30 per share
while cost to sell remained ₱2 per share.

On January 1, 2018, Marianne Corp. sold 24,000 Sexy Corp. shares at ₱32/share, its fair value on that date, and reclassified
the remaining shares to investment in equity securities designated as at fair value through other comprehensive income.

Questions:

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Based on the above date, answer the following:
1. The investment in associate balance on December 31, 2016

ie
a. ₱1,645,500 c. ₱1,680,000
b. ₱1,740,000 d. ₱1,590,000

ev
2. The impairment loss on December 31, 2016
a. Nil c. ₱154,500
b. ₱34,500 d. ₱181,500
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3. The impairment loss on December 31, 2017
a. Nil c. ₱154,500
PA

b. ₱34,500 d. ₱181,500
4. The investment income to be recognized by the company in its income statement for 2017 should be
a. ₱150,000 c. ₱270,000
b. ₱420,000 d. ₱411,000
C

5. The total net gain (or loss) due to reclassification from investment in associate to fair value through other comprehensive
income to be recognized 2018 profit or loss
EO

a. ₱96,000 c. ₱(45,000)
b. ₱99,000 d. ₱195,000
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PROBLEM NO. 17 Deemed Disposal

Israel Company held an interest in Cristina Company. On January 1, 2018, Cristina issued 40,000 new shares of ₱8 each
to CJ Company. Cristina Company has the following data prior to issuance of the new shares:
• Share capital before its increase was ₱800,000 at ₱5 par.
• Net assets were ₱1,000,000.

Case No. 1: Israel has 20% interest in Cristina Company and the adjusted balances of the related accounts before deemed
disposal are:
• Investment in associate account is ₱200,000
• Cumulative share in the associate’s gain on exchange difference on translation of foreign operation is ₱100,000.
1. How much is the gain or loss on deemed disposal to be recognized in the 2018 profit or loss?
a. Nil c. ₱16,800
b. ₱11,200 d. ₱40,000

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2. How much is the amount of share in the other comprehensive income to be recycled to profit or loss in 2018?
a. Nil c. ₱16,000
b. ₱100,000 d. ₱4,000
3. Assume instead that the share in the other comprehensive of ₱100,000 arises not from translation gain of foreign
operations but from the share in the revaluation surplus of the associate, how much is the amount of share in the other
comprehensive income to be recycled to profit or loss in 2018?
a. Nil c. ₱4,000
b. ₱100,000 d. ₱20,000

Case No. 2: Israel has 30% interest in Cristina Company and the adjusted balances of the related accounts before deemed
disposal are:
• Investment in associate account is ₱300,000 before deemed disposal.
• Cumulative share in the associate’s gain on exchange difference on translation of foreign operation is ₱100,000.

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4. How much is the gain or loss on deemed disposal to be recognized in the 2018 profit or loss?
a. Nil c. ₱16,800

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b. ₱90,000 d. ₱106,800
5. How much is the amount of share in the other comprehensive income to be recycled to profit or loss in 2018?

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a. Nil c. ₱20,000
b. ₱100,000 d. ₱6,000
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6. Assume instead that the share in the other comprehensive of ₱100,000 arises not from translation gain of foreign
operations but from the share in the revaluation surplus of the associate, how much is the amount of share in the other
comprehensive income to be recycled to profit or loss in 2018?
PA

a. Nil c. ₱20,000
b. ₱100,000 d. ₱6,000

ADJUSTMENT OF INVESTEE’S OPERATIONS

C

Upstream Transactions
Profits and losses resulting from ‘upstream’ and ‘downstream’ transactions between an investor (including its consolidated
subsidiaries) and an associate are recognized in the investor’s financial statements only to the extent of unrelated investors’
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interests in the associate. ‘Upstream’ transactions are, for example, sales of assets from an associate to the investor.

Downstream Transactions
‘Downstream’ transactions are, for example, sales of assets from the investor to an associate. The investor’s share in
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the associate’s profits and losses resulting from these transactions is eliminated.

When downstream transactions provide evidence of a reduction in the net realizable value of the assets to be sold or
contributed, or of an impairment loss of those assets, those losses shall be recognized in full by the investor. When
upstream transactions provide evidence of a reduction in the net realizable value of the assets to be purchased or of an
impairment loss of those assets, the investor shall recognize its share in those losses.

The share in the profit or loss of an associate is recognized only to the extent of unrelated investors’ interest in the
associate. If the transaction is:
• Downstream sale - eliminate the entire unrealized profit. (i.e. 100%)
• Upstream sale - eliminate the investor’s share in unrealized profit. (percentage of ownership)

Basic Formula:
Net income x percentage of ownership XX
Less: Unrealized profit on upstream sale x percentage of ownership ( XX )

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Add: Realized profit on upstream sale x percentage of ownership XX

Less: Unrealized profit on downstream sale ( XX )
Add: Realized profit on downstream sale XX
Share in the net income XX

PROBLEM NO. 18
On January 1, 2017, Myrah Company acquired 30% of the ordinary shares of an associate for ₱5,000,000. On this date, all
the identifiable assets and liabilities of the associate were recorded at fair value. An analysis of the acquisition showed that
goodwill of ₱400,000 was acquired.

The net income and dividend of the associate for 2017 and 2018 were as follows:

2017 2018
Net income ₱2,500,000 ₱4,000,000

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Dividend paid 900,000 2,000,000

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On January 3, 2017, Myrah Company sold an equipment costing ₱300,000 to the associate for ₱400,000. The equipment
has a remaining life of 5 years.

ev
In December 2017, the associate sold inventory to Myrah Company for ₱350,000. The cost of the inventory was ₱300,000.
This inventory remained unsold by Myrah Company on December 31, 2017. However, it was sold by Myrah Company in
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2018.

In December 2018, Myrah Company sold inventory to the associate for ₱550,000. The cost of the inventory was ₱400,000.
PA

This inventory remained unsold by the associate on December 31, 2018.

Questions:
Based on the above date, determine the following: (ignore income tax on the intercompany sale)
C

1. Investment income in 2017

a. ₱575,000 c. ₱670,000
b. ₱655,000 d. ₱676,000
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2. Investment income in 2018

a. ₱1,106,000 c. ₱1,190,000
b. ₱1,085,000 d. ₱1,215,000
3. Carrying amount of the investment in associate on December 31, 2017
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a. ₱5,385,000 c. ₱4,440,000
b. ₱5,835,000 d. ₱4,170,000
4. Carrying amount of the investment in associate on December 31, 2018
a. ₱5,790,000 c. ₱5,912,000
b. ₱5,870,000 d. ₱5,975,000
5. Assuming the company is a small/medium entity and uses the equity method, the carrying amount of investment on
December 31, 2018 is
a. ₱5,790,000 c. ₱5,912,000
b. ₱5,870,000 d. ₱5,975,000

PROBLEM NO. 19
You were able to gather the following in connection with your audit of Diadi, Inc. On December 31, 2017, Diadi reported the
following fair value through other comprehensive income investments:
Unrealized
Cost Market Loss

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Solano Corp., 10,000 shares

of ordinary shares (a 1% interest) ₱250,000 ₱220,000 ₱30,000
A. Castaneda Corp., 20,000 shares
of ordinary shares (a 2% interest) 320,000 300,000 20,000
Pingkian Corp., 50,000 shares
of ordinary shares (a 10% interest) 1,400,000 1,350,000 50,000
Total ₱1,970,000 ₱1,870,000 ₱100,000

Additional information:
• On April 1, 2018, Solano issued 15% stock dividend (bonus shares).
• On August 30, 2018, A. Castaneda Company issued share rights to existing shareholders. Diadi received 20,000 share
rights entitling him to purchase 5,000 new shares at ₱27. The ordinary share was trading ex-rights at ₱27 a share and
the rights had a market value ₱3 per right. On October 1, 2018, Diadi exercised all the share rights.
• On July 1, 2018, Diadi acquired 100,000 additional shares of Pingkian Corp.’s ordinary share which represented a 20%

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investment in Pingkian and paid ₱30 per share, its fair value on that date. The fair value of all Pingkian’s identifiable
assets net of liabilities was equal to their carrying amount of ₱12,500,000. As a result of this transaction, Diadi owns

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30% of Pingkian and can exercise significant influence over Pingkian’s operating and financial policies.
• Diadi’s initial 10% interest of 50,000 shares of Pingkian’s ordinary share was acquired on January 2, 2017 for

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₱1,600,000. At that date, the net assets of Pingkian totaled ₱12,000,000 and the fair values of Pingkian’s identifiable
assets net of liabilities were equal to their carrying amount.
• On December 31, Diadi reclassified the Solano’s shares into fair value through profit or loss securities.
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• Market prices per share of the securities which are all listed in the Philippine Stock Exchange are as follows:
12/31/2018 12/31/2017
Solano Corp.-ordinary shares ₱23 ₱22
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A. Castaneda Corp.-ordinary shares 14 15

Pingkian Corp.-ordinary shares 31 27

•
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Pingkian reported net income and paid dividends of:

Dividend
Net income per share
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Year ended December 31, 2017 ₱1,000,000 1

Six months ended June 30, 2018 500,000 None
Six months ended December 31, 2018
(dividend was paid on 10/1/2018) 900,000 2
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There were no other intercompany transactions between Diadi and Pingkian.

Questions:
Based on the above and the result of your audit, determine the following:
1. Net unrealized gain (or loss) on financial asset at FVTOCI to be presented in the statement of financial position as of
December 31, 2018
a. ₱14,500 c. ₱(150,500)
b. ₱ (125,000) d. ₱ (165,000)
2. Gain or loss on reclassification of Solano’s shares
a. Nil c. ₱30,000
b. ₱14,500 d. ₱60,000
3. Gain or loss on reclassification on July 1, 2018 as a result of the purchase of additional shares of Pingkian Corp.
a. Nil c. ₱150,000
b. ₱100,000 d. ₱200,000

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4. Net investment income from Pingkian Corp. for year ended December 31, 2018.
a. ₱237,500 c. ₱262,000
b. ₱225,000 d. ₱270,000

5. Carrying amount of Investment in Pingkian Corp. as of December 31, 2018.

a. ₱4,674,500 c. ₱4,470,000
b. ₱4,565,000 d. ₱4,200,000

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PA
C
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INVESTMENT IN DEBT SECURITIES

DARRELL JOE O. ASUNCION, CPA, MBA

[Link].F2.01.00

INVESTMENT IN DEBT SECURITIES

DARRELL JOE O. ASUNCION, CPA, MBA

PROBLEM NO. 1

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GOODBYE INC’s portfolio of debt securities at December 31, 2015 and December 31, 2016 are shown below. All the bonds
were acquired by the company at the beginning of 2015.

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December 31, 2015 December 31, 2016
Face value Acquisition Amortized Fair values Amortized Fair values

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costs costs costs
12%, ADIOS Corp ₱1,000,000 ₱1,063,397 ₱1,049,737 ₱1,024,437 ₱1,034,711 ₱1,052,773
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10%, SAYONARA
Inc. 2,000,000 1,903,926 1,932,398 1,965,750 1,964,286 2,018,348
PA

12%, AUF
WIEDERSEHEN
Co. 3,000,000 3,190,191 3,149,211 3,073,311 3,104,132 3,158,320
ADIOS Corp. and AUF WIEDERSEHEN Co. bonds were acquired at prevailing market rate of interest at 10%, while
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SAYONARA Inc. bonds were acquired at an effective rate of 12%.

The prevailing market rate of interest at the end of 2015 and 2016 applicable to the bonds were at 11% and 9%,
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respectively.

SITUATION 1: Assuming that the above securities are properly classified as FVTPL under PFRS 9:
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SITUATION 2: Assuming that the above securities are financial assets that are held within a business model whose
objective is achieved by both collecting contractual cash flows and selling financial assets and the contractual terms of the
financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal
amount outstanding.

SITUATION 3: Assuming that the financial assets are held within a business model whose objective is to hold financial
assets in order to collect contractual cash flows and the contractual terms of the financial asset give rise on specified
dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

Answer the following:

1. How much is the unrealized holding gain or (loss) to be reported in the company’s income statements for 2015
and 2016?
a. (67,848); 126,312 b. (94,016); 165,943 c. (26,168); (28,217) d. 0; 0

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2. How much is the corresponding interest income to be reported in the company’s income statement for 2015 and
2016?
a. 680,000; 680,000 b. 653,832; 651,783 c. 585,984; 845,943 d. 0; 0

3. What is the carrying value of the investment in debt securities categorized as trading as of December 31, 2015
and 2016?
a. 6,000,000; 6,000,000 c. 6,157,514; 6,157,514
b. 6,131,346; 6,103,129 d. 6,063,498; 6,229,441

4. If the SAYONARA Inc. bonds were sold at ₱2,000,000 on January 2, 2017, how much realized gain or (loss) on
the sale should be recognized?
a. 35,714 b. 96,074 c. (67,602) d. (18,348)

PROBLEM NO. 2 Acquisition of FAAC Term Bonds on Interest Date

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Roxas Corporation purchased ₱1,000,000 financial assets at fair value through other comprehensive income, 10% bonds
for ₱1,079,870 on January 1, 2020. The bonds were purchased to yield 8% interest. Interest is payable annually on

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December 31. Roxas uses the effective interest method to amortize premium or discount. On January 2, 2022, Roxas
sold the bonds for ₱1,500,000 after receiving interest to meet its liquidity needs.

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The market values of the bonds are as follows; December 31, 2020, ₱1,032,370; December 31, 2021, ₱1,078,730
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Based on the above and the result of your audit, determine the following:
1. Interest income for the year 2020
a. 100,000 c. 85,301
PA

b. 86,390 d. 88,456
2. Unrealized loss on FVTOCI as of December 31, 2020
a. 33,890 c. 27,169
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b. 14,699 d. 19,191
3. Interest income for the year 2021
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a. 100,000 c. 85,301
b. 86,390 d. 88,456

4. Unrealized gain or loss on FVTOCI as of December 31, 2021

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a. 27,170 gain c. 61,059 loss

b. 46,360 loss d. 12,470 gain
5. Realized gain on sale of FVTOCI on January 2, 2022
a. 448,440 gain c. 467,360 gain
b. 421,270 gain d. 482,329 gain

PROBLEM NO. 3 Acquisition of FAAC - Serial Bonds

On January 1, 2018, Kabayan Co. acquired a 4-year bonds with a face value of ₱1,800,000 and stated interest of 10% per
year. The bonds mature in 4 equal annual installments every December 31. The interest is also payable every December
31. The bonds were acquired to yield 12%. The bonds are to be appropriately classified as financial asset at amortized cost.

Questions:
Based on the above data, answer the following: (Round off present value factors to four decimal places)

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1. How much is the purchase price of bonds on January 1, 2018?

a. Nil c. ₱1,727,834
b. ₱612,167 d. ₱1,030,521
2. How much is the interest income for 2018?
a. Nil c. ₱156,621
b. ₱207,340 d. ₱188,052
PROBLEM NO. 4 Reclassification
On January 1, 2016, Fortuner Company purchased 5-year bonds with face value of ₱2,000,000 and stated interest of 10%
per year payable annually every December 31. The bonds were acquired to yield 12%. The following data relate to the
bonds:
December 31, 2016 December 31, 2017
Acquisition cost Amortized cost Fair value Amortized cost Fair value
₱1,855,809 ₱1,878,506 ₱2,064,794 ₱1,903,927 ₱1,951,126

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The prevailing market rate of interest applicable to the bonds at the end of 2016 and 2017 were at 9% and 11%, respectively.

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The prevailing market rate of interest on January 1, 2018 is also 11%.

SCENARIO 1: Assuming that the above securities are properly classified as FVTPL under PFRS 9 and assuming that the

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bonds are reclassified into:
CASE NO. 1: Financial asset at FVTOCI
CASE NO. 2: Financial Asset at amortized cost (FAAC)
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SCENARIO 2: Assuming that the above securities are properly classified as FVTOCI under PFRS 9 and assuming that the
bonds are reclassified into:
PA

CASE NO. 1: Financial asset at FVTPL

CASE NO. 2: Financial Asset at amortized cost (FAAC)
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SCENARIO 3: Assuming that the above securities are properly classified as FAAC under PFRS 9 and assuming that the
bonds are reclassified into:
CASE NO. 1: Financial asset at FVTPL
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CASE NO. 2: Financial asset at FVTOCI

Required:
Under each item described above, prepare the necessary entries on January 1, 2018 and December 31, 2018. The fair
value of the bonds on December 31, 2018 is ₱2,020,000.
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PROBLEM NO. 5 Initial and Subsequent measurement, Derecognition and Reclassification of FAAC Securities
On January 1, 2017, Robelyn Co. acquired a 5-year bonds with a total face value of ₱5,000,000 and stated interest of 12%
per year payable annually on December 31. The bonds were acquired to yield 10%. The bonds are to be appropriately
classified as financial asset at amortized cost.

On January 3, 2018, the ½ of the bonds were sold at 105.

On November 1, 2018, Robelyn Co. changed its business model. It was determined that the remaining financial asset at
amortized cost should be reclassified to held for trading securities on reclassification date. On December 31, 2018, the
bonds are quoted at 102.

On January 1, 2019, the bonds were quoted at 104.

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Questions:
Based on the above data, answer the following:
1. How much is the interest income for 2017?
a. Nil c. ₱600,000
b. ₱537,908 d. ₱645,489
2. How much is the unrealized gain (loss) in 2017 to be recognized in the profit or loss?
a. Nil c. ₱200,000
b. ₱(179,079) d. ₱(379,079)
3. How much is the realized gain (loss) on sale in 2018 to be recognized in the profit or loss?
a. Nil c. ₱(33,494)
b. ₱25,000 d. ₱(64,540)
4. How much is the interest income for 2018?
a. ₱265,849 c. ₱531,699

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b. ₱300,000 d. ₱600,000

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5. How much is the gain (loss) on reclassification to be recognized in the profit or loss on January 1, 2019?
a. Nil c. ₱50,000

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b. ₱(24,343) d. ₱100,000
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EXPECTED CREDIT LOSS MODEL
THREE-STAGE MODEL (“GENERAL MODEL”) ALSO KNOWN AS THREE BUCKET APPROACH
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Scope
The new model should be applied to:
• Financial assets measured at amortised cost;
• Financial asset at fair value through other comprehensive income;
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• all loan commitments not measured at fair value through profit or loss;
• financial guarantee contracts to which IFRS 9 is applied and that are not accounted for at fair value through profit
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or loss; and
• lease receivables that are within the scope of IAS 16, Leases, and trade receivables or contract assets within the
scope of IFRS 15 that give rise to an unconditional right to consideration
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General approach
The general approach is based on three stages which are intended to reflect the credit deterioration and improvement of a
financial instrument. An overview of this ‘three-stage’ or ‘three-bucket’ approach is shown below:

BASIS OF Stage 1 Stage 2 Stage 3

COMPARISON
Change in credit quality since initial recognition

Applies to financial ▪ That had had ▪ that have had a ▪ that have had a
instruments NOT increase in significant significant
credit risk increase in credit increase in credit
significantly since risk since initial risk since initial
initial recognition. recognition recognition plus
(unless they there is objective

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▪ ‘Low credit risk’ have low credit evidence of

expediency risk at the impairment.
reporting date)
but that do not
have objective
evidence of
impairment
ECL recognition 12-month expected Lifetime expected Lifetime expected
credit losses credit losses credit losses
An entity shall
Interest revenue Based on gross Based on gross Based on the net recognize a loss
computation carrying amount of carrying amount of carrying amount (i.e., allowance for
the asset (without the asset (without gross carrying expected credit
deduction for loss deduction for credit amount less loss losses.

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allowance) allowance) allowance)
DEFINITION OF

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TERMS:

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LOSS ALLOWANCE – is the allowance for expected credit losses on financial assets that are within the scope of the
impairment requirements of PFRS 9. R
EXPECTED CREDIT LOSS – is the weighted average of credit losses with the respective risks of a default occurring as the
weights.
PA

CREDIT LOSS
Credit loss is the difference between all contractual cash flows that are due to an entity in accordance with the contract and
all the cash flows that the entity expects to receive (i.e. all cash shortfalls), discounted at the original effective interest
rate (or credit-adjusted effective interest rate for purchased or originated credit-impaired financial assets).
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Expected credit loss is classified as either:

a. 12-month expected credit losses – recognized if the credit risk on a financial instrument has not increased significantly
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since initial recognition. This is the portion of lifetime expected credit losses that represent the expected credit losses
that result from default events on a financial instrument that are possible within the 12 months after the reporting date.
b. Lifetime expected credit losses – recognized if the credit risk on that financial instrument has increased significantly
since initial recognition. It is the expected credit losses that result from all possible default events over the expected life
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of a financial instrument.

Credit risk is defined under PFRS 7 as the risk that one party to a financial instrument will cause a financial loss for the
other party by failing to discharge an obligation.

Cash shortfall is the difference between contractual cash flow and cash flow that the entity expects to receive.

ADDITIONAL NOTES:
Estimating Cash flows
An entity shall estimate cash flows by considering all contractual terms of the financial instrument (for example, prepayment,
extension, call and similar options) through the expected life of that financial instrument. The cash flows that are considered
shall include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual
terms.

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▪ LOW CREDIT EXPEDIENCY: An entity may assume that the credit risk has not increased significantly since initial
recognition if the financial instrument is determined to have low credit risk at the reporting date. This optional
simplification is designed to relieve entities from tracking changes in the credit risk of high quality assets. This option
can be applied on an instrument by instrument basis.

• Lifetime expected credit losses – The expected credit losses that result from all possible default events over the
expected life of a financial instrument.
▪ If the credit quality of an instrument improves, an entity may revert to measuring the loss allowance from the lifetime
expected credit losses to the 12-month expected credit losses. A decrease in the loss allowance is recognized as
a gain.
▪ PFRS 9 states that there is a rebuttable presumption that credit risk has increased significantly since initial
recognition when contractual payments are more than 30 days past due.

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Developing Credit Risk Assessment
• Past performance of specific assets or cohort of specific asset

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• Classifying past performance into behavior groups – what is the percentage of loss on retails loans that are overdue by
60 days
• Develop a probability of default and loss given default reference table for various kinds of assets and at various points
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of default
PA

Measurement of Expected Credit Loss

In measuring expected credit loss, an entity shall measure expected credit losses of a financial instrument in a way that
reflects:
(a) an unbiased and probability-weighted amount that is determined by evaluating a range of possible outcomes;
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(b) the time value of money; and

(c) reasonable and supportable information that is available without undue cost or effort at the reporting date about past
events, current conditions and forecasts of future economic conditions.
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Computation of Impairment
NOT CREDIT IMPAIRED FINANCIAL ASSET
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Present value of the contractual cash flows due under the contract XX
Less: Present value of the cash flows expected to be received XX
Impairment loss XX

CREDIT IMPAIRED FINANCIAL ASSET BUT NOT PURCHASED OR ORIGINATED

Gross Carrying amount XX
Less: the present value of estimated cash flows discounted at the
original effective interest rate XX
Impairment loss XX

CREDIT IMPAIRED FINANCIAL ASSETS

A financial asset is credit-impaired when one or more events that have a detrimental impact on the estimated future cash
flows of that financial asset have occurred.

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Evidence that a financial asset is credit-impaired include observable data about the following events:
a) Significant financial difficulty of the issuer or obligor;
b) Breach of contract, such as a default or delinquency in interest or principal payments;
c) The lender, for economic or legal reasons relating to the borrower’s financial difficulty, granting to the borrower a
concession that the lender would not otherwise consider;
d) It becoming probable that the borrower will enter bankruptcy or other financial reorganization;
e) The disappearance of an active market for that financial asset because of financial difficulties; or
f) The purchase or origination of a financial asset at a deep discount that reflects the incurred credit losses.

The impairment loss is computed as the difference between:

a. the asset’s gross carrying amount, and
b. the present value of estimated cash flows discounted at the original effective interest rate

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The carrying amount of a loan or note receivable before impairment includes any interest receivable accrued up to the
date the loss event has been determined.

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The original effective interest rate is the effective interest rate on the date the receivable was initially recognized.

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Impairment loss is deducted from the carrying amount of the impaired loan or note receivable either directly or through an
allowance account.
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After impairment, interest income is computed by multiplying the original effective interest rate by the net carrying amount
of the impaired receivable.
PA

Changes in lifetime expected credit losses approach

This approach is applicable to originated or purchased credit-impaired financial assets. Originated or purchased credit-
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impaired financial assets are those that are credit-impaired on initial recognition.

For this type of financial asset, the loss allowance recognized at the reporting date is equal to the cumulative changes in
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lifetime expected credit losses since initial recognition.

When discounting cash flows for purposes of measuring expected credit losses, the entity shall use a credit-adjusted
effective interest rate.
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Credit-adjusted effective interest rate is the rate that exactly discounts the estimated future cash payments or receipts
through the expected life of the financial asset to the amortized cost of a financial asset that is a purchased or originated
credit-impaired financial asset.

Simplified approach for trade receivables, contract assets and lease receivables
• DO NOT constitute a financing transaction (e.g. short-term):
▪ Allowance is always lifetime expected losses
▪ Provision matrix can be used
• DO constitute a financing transaction (e.g. long-term) and lease receivables
▪ Policy election:
▪ General model or
▪ Always recognize lifetime expected losses

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An advantage of this simplified approach is that the entity is not required to determine whether credit risk has increased
significantly since initial recognition, unlike under the ‘general approach’.

Applying the simplified approach

PFRS 9 does not require specific procedures in estimating lifetime expected credit losses under this approach. Instead,
PFRS 9 allows practical expedients and refers to the example of a “provision matrix” (e.g., the ‘aging method’). Another
possible practical expedient is the use of a “single-loss rate” approach (e.g., the ‘percentage of credit sales’ method or
‘percentage of ending receivables’ method).

PROBLEM NO. 6
On January 1, 2019, Global Bank loaned ₱3,000,000 to a borrower. The contract specified that the loan had a 6-year term
and a 9% interest rate.
Interest is payable annually every December 31 and the principal amount will be collected on December 31, 2024. Interest

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is collected for 2019.
On December 31, 2019, the bank determined that the loan has a 12-month probability of default of 2% and expected to

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collect only 90% of the loan.

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On December 31, 2020, the bank determined that there is significant increase in the credit risk of the loan but no objective
evidence of impairment. R
Based on relevant information, the bank concluded that there is a 30% probability of default over the remaining term of the
loan and it is expected that only 60% of the loan will be collected. Interest is collected for 2020.
PA

On December 31, 2021, the borrower was under financial difficulty and the loan was considered impaired.
The bank agreed that only 40% of the principal will be collected on due date. Interest is collected for 2021.

The present value of 1 at 9% is 0.65 for 5 periods, 0.71 for four periods and 0.77 for three periods.
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Required:
1. Prepare the journal entries for 2019, 2020 and 2021.
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2. Compute the carrying amount of the loan receivable on December 31, 2019, 2020 and 2021.

PROBLEM NO. 7 PAS 39

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On January 1, 2014, La Trinidad Co acquired a 4-year bonds with a face value of ₱4,000,000 for ₱3,756,920. The stated
interest is 10% per year payable annually on December 31. The bonds were acquired to yield 12%. The bonds are to be
appropriately classified as financial asset at amortized cost.

On December 31, 2015, after receiving the interest, the issuer of the financial instrument is in financial difficulties and it
becomes probable that an impairment loss should be recognized. The company assesses that only the principal amount
will be received on the maturity date. On that date, the prevailing rate of interest is 14%. The present value of the future
cash flows based on 14% is ₱3,078,000 while the present of expected cash flows for the remaining period using 12% is
₱3,188,800.

Questions:
Based on the above data, answer the following:
1) How much is the impairment loss in 2015?
a. Nil c. ₱786,680
b. ₱675,880 d. ₱110,800

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2) How much is the interest income for 2016?

a. ₱430,920 c. ₱471,599
b. ₱421,070 d. ₱382,656

PROBLEM NO. 8
Your audit of Un-unnoy Corporation disclosed that the company owned the following securities on December 31, 2017:

Trading Securities
Security Shares Cost Market
Panaghoy, Inc. 14,400 ₱216,000 ₱276,000
Lamentations, Inc. 24,000 648,000 432,000
Total ₱864,000 ₱708,000

Fair value through other comprehensive income securities:

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Equity Securities Shares Cost Market
Zephaniah, Inc. 360,000 9,360,000 8,760,000

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Net

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Debt Securities unrealized
Cost Fair Value Gain
12%, ₱5,000,000 face value, Genesis
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bonds, acquired on January 1, 2017
(interest payable every December 31) ? 5,350,000 38,600
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Financial Asset at Amortized Cost (FAAC):

13%, ₱2,000,000 face value, Exodus Cost Book value
bonds (interest payable annually Dec. 31) ₱1,881,000 ₱1,903,150
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The following transactions occurred:

March 1, 2018: Sold 12,000 shares of Lamentations, Inc. stock for ₱204,000.
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December 30, 2018: The Company changed its business model. It was determined that the Exodus bonds be reclassified
to held for trading.

On January 1, 2019, the bonds were quoted at 101. The Exodus bonds were purchased on January 2, 2017. The discount
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was amortized using effective interest method.

The market values of the stocks December 31, 2018, are as follows:

Panaghoy, Inc. ₱22 per share

Lamentations, Inc. ₱15 per share
Zephaniah, Inc. ₱28 per share
Genesis bonds 104

Un-unnoy Co reported net unrealized loss of ₱42,540 on the Genesis Bonds on December 31, 2018 statement of financial
position.

Questions:
Based on the above and the result of your audit, determine the following:
1. Gain (or loss) on sale of 12,000 Lamentations, Inc shares on March 1, 2018

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INVESTMENT IN DEBT SECURITIES

[Link].F2.01.00

a. ₱12,000 c. ₱(96,000)
b. ₱(12,000) d. ₱96,000
2. Interest income on the Genesis Bonds for the year 2018
a. ₱537,499 c. ₱531,140
b. ₱524,254 d. ₱600,000
3. Interest income on the Exodus bonds for the year 2018.
a. ₱260,000 c. ₱285,473
b. ₱282,150 d. ₱247,410
4. The gain (loss) on reclassification on January 1, 2019?
a. ₱228,590 c. ₱91,377
b. ₱185,460 d. Nil
5. The carrying value of the trading securities and Financial assets at FVTOCI as of December 31, 2018 should be

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Trading securities FA at FVTOCI
a. 496,800 15,280,000

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b. 496,800 17,300,000
c. 540,000 5,166,794

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d. 540,000 15,280,000

PROBLEM NO. 9
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Your audit of 12 Apostles Corporation disclosed that the company financial assets at fair value through other comprehensive
income securities on December 31, 2020:
Financial assets at fair value through other comprehensive income Securities
PA

Cost Unrealized gain

15%, ₱4,000,000 face value, Andrew bonds
(interest payable annually every December 31) ? P115,800
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Additional information:
• Acquired 40% interest in Simon Peter Company for ₱3,400,000 on January 1, 2021. The shareholders’ equity of
Simon Peter Company on January 1 and December 31, 2021 is presented below:
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January 1 December 31
Share capital 6,000,000 6,000,000
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Revaluation surplus 2,600,000

Retained earnings 2,000,000 3,000,000

On January 1, 2021, all the identifiable assets and liabilities of Simon Peter Company were recorded at fair value. Simon
Peter Company reported profit of ₱1,300,000, after income tax expense of ₱700,000 and paid dividend of ₱300,000 to
shareholders during the current year.

The revaluation surplus is the result of the revaluation of land recognized by Simon Peter Company on December 31, 2021.
Additionally, depreciation is provided by Simon Peter Company on the diminishing balance method whereas 12 Apostles
Company uses the straight line, the accumulated depreciation would be increased by ₱400,000. The tax rate is 35%.

• The ANDREW bonds were acquired on January 1, 2020. The bonds mature on December 31, 2023. The bonds
are quoted at 115% on December 31, 2020. On December 31, 2021, the company properly reported unrealized loss
on these bonds in the statement of changes in equity amounting to ₱252,620.

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INVESTMENT IN DEBT SECURITIES

[Link].F2.01.00

The market values of the stocks and bonds on December 31, 2021, are as follows:
SIMON PETER Company ₱200 per share.
ANDREW bonds 102%

QUESTIONS:
Based on the above and the result of your audit, determine the following

1. What is the investment revenue on SIMON PETER’s stock for the year ended December 31, 2021?
a. 520,000 c. 1,040,000
b. 640,000 d. 1,440,000
2. Carrying amount of Investment in SIMON PETER as of December 31, 2021.
a. 4,840,000 c. 3,800,000

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b. 3,400,000 d. 4,640,000
3. How much is the acquisition cost of the bonds on January 1, 2020?

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a. 4,115,800 c. 4,622,000
b. 3,884,200 d. 4,484,200

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4. How much is the interest income on ANDREW bonds for the year ended December 31, 2021?
a. 462,200 c. 600,000
b. 448,420 d. 411,580
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5. Net unrealized gain or loss on financial assets at fair value through other comprehensive income securities as of
December 31, 2021.
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a. 136,820 c. 252,620
b. 115,800 d. 368,420

PROBLEM NO. 10 Substantive Tests of Investment

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1. Which of the following is not one of the auditor's concerns in an examination of marketable securities?
a. To determine whether securities are the property of the client.
b. To determine whether securities actually exist.
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c. To determine whether securities are properly classified on the statement of financial position.
d. To determine whether securities are authentic.
2. To establish the existence and ownership of a long-term investment in the common stock of a publicly traded company,
an auditor ordinarily performs a security count or
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a. Relies on the client’s internal controls if the auditor has reasonable assurance that the control procedures are being
applied as prescribed.
b. Confirms the number of shares owned that are held by an independent custodian.
c. Determine the market price per share at the reporting date from published quotations.
d. Confirms the number of shares owned with the issuing company.
3. Of the following, which is the most efficient audit procedure for verification of interest earned on bond investments?
a. Tracing interest declarations to an independent record book.
b. Recomputing interest earned.
c. Confirming interest rate with the issuer of the bonds.
d. Vouching the receipts and deposit of interest checks.
4. Which of the following is the most effective audit procedure for verification of dividends earned on the investments in
equity securities?
a. Tracing deposit of dividend checks to the cash receipts book.

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INVESTMENT IN DEBT SECURITIES

[Link].F2.01.00

b. Reconciling amounts received with published dividend records.

c. Comparing the amounts received with preceding year dividends received.
d. Recomputing selected extensions and footing of dividend schedules and comparing totals to the general ledger.
5. To satisfy the valuation assertion when auditing an investment accounted for by the equity method, an auditor most
likely would
a. Examine the audited financial statements of the investee company.
b. Inspect the stock certificates evidencing the investment.
c. Review the broker’s advice or canceled check for the investment’s acquisition.
d. Obtain market quotations from financial newspapers or periodicals.

--- END OF HANDOUTS ---

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PA
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DARRELL JOE O. ASUNCION, CPA, MBA

CURRENT LIABILITIES

[Link].F2.01.00

CURRENT LIABILITIES
DARRELL JOE O. ASUNCION, CPA, MBA

PROBLEM NO. 1 (REFINANCING)

On December 31, 2016, McGrady Co. has a 12%, ₱2,000,000, loan payable due on June 30, 2017. Interest on the loan is
due every December 31. The financial statements were authorized for issue on March 1, 2017. How much is presented as
current liability in relation to the loan on December 31, 2016 statement of financial position?

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Questions:

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1. Assume that no other data are presented

a. Nil
b. ₱2,000,000
c. ₱40,000
d. ₱2,040,000
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2. Assuming both parties are financially capable of honoring the agreement’s provisions and McGrady Co has the
discretion to refinance or roll over the loan for at least twelve months from December 31, 2016.
a. Nil c. ₱40,000
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b. ₱2,000,000 d. ₱2,040,000
3. Assume that on December 15, 2016, McGrady Co. entered into a refinancing agreement with a bank to refinance the
loan on a long-term basis. The refinancing agreement was completed on December 31, 2016.
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a. Nil c. ₱40,000
b. ₱2,000,000 d. ₱2,040,000
4. Assume that on January 5, 2017, McGrady Co. entered into a refinancing agreement with a bank to refinance the loan
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on a long-term basis. The refinancing agreement was completed on January 31, 2017.
a. Nil c. ₱40,000
b. ₱2,000,000 d. ₱2,040,000
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PROBLEM NO. 2 Obligations Payable on Demand, Breach of Loan Agreement

On December 31, 2016, Tracy Co. has a 12%, ₱2,000,000 loan payable due on June 30, 2024. Interest on the loan is due
every December 31. The financial statements were authorized for issue on March 1, 2017. How much is presented as
current liability in relation to the loan on December 31, 2016 statement of financial position?

Questions:
Based on the above data, answer the following:
1. Assume that the loan is payable on demand although on December 31, 2016, there is no indication that the payee on
the note will demand payment over the next 12 months
a. Nil c. ₱2,000,000
b. ₱40,000 d. ₱2,040,000
2. Assume instead that the loan agreement requires Tracy to maintain a current ratio of 3:1. If the current ratio falls this
amount, the loan becomes payable on demand. As of December 31, 2016, Tracy’s current ratio is 2.5:1. On December
31, 2016, the creditor agreed not to collect the loan in 2017 and gave Tracy 12 months to rectify the breach of loan
agreement.

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CURRENT LIABILITIES

[Link].F2.01.00

a. Nil c. ₱40,000
b. ₱2,000,000 d. ₱2,040,000
3. Assume instead that the loan agreement requires Tracy to maintain a current ratio of 3:1. If the current ratio falls this
amount, the loan becomes payable on demand. As of December 31, 2016, Tracy’s current ratio is 2.5:1. On January 6,
2017, the creditor agreed not to collect the loan in 2017 and gave Tracy 12 months to rectify the breach of loan
agreement.
a. Nil c. ₱40,000
b. ₱2,000,000 d. ₱2,040,000

PROBLEM NO. 3( Warranty, Premiums)

Kieso’ Music Emporium carries a wide variety of music promotion techniques - warranties and premiums - to attract
customers.
Musical instrument and sound equipment are sold in a one-year warranty for replacement of parts and labor. The estimated

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warranty cost, based on past experience, is 2% of sales.
The premium is offered on the recorded and sheet music. Customers receive a coupon for each peso spent on recorded

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music or sheet music.

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Customers may exchange 200 coupons and ₱20 for an AM/FM radio. Kieso pays ₱34 for each radio and estimates that
60% of the coupons given to customers will be redeemed.
Kieso’ total sales for 2022 were ₱57,600,000 – ₱43,200,000 from musical instrument and sound reproduction equipment
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and ₱14,400,000 from recorded music and sheet music. Replacement parts and labor for warranty work
totaled₱P1,312,000 during 2022. a total of 52,000 AM/FM radio used in the premium program were purchased during the
year and there were 9,600,000 coupons redeemed in 2022.
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The accrual method is used by Kieso to account for the warranty and premium costs for financial reporting purposes. The
balance in the accounts related to warranties and premiums on January 1, 2022, were as shown below:
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Inventory of Premium AM/FM radio ₱ 319,600

Estimated Premium Claims Outstanding 358,400
Estimated Liability from Warranties 1,088,000
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Based on the above and the result of your audit, determine the amounts that will be shown on the 2022 financial statements
for the following:
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1. Warranty expense
a. ₱ 864,000 c. ₱1,312,000
b. ₱1,152,000 d. ₱ 640,000
2. Estimated liability from warranties
a. ₱ 864,000 c. ₱1,088,000
b. ₱1,312,000 d. ₱ 640,000
3. Premium expense
a. ₱ 604,800 c. ₱ 864,000
b. ₱1,468,800 d. ₱1,008,000
3. Inventory of AM/FM radio
a. ₱375,600 c. ₱618,800
b. ₱319,600 d. ₱455,600
4. Estimated liability for premiums

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CURRENT LIABILITIES

[Link].F2.01.00

a. ₱604,800 c. ₱507,600
b. ₱291,200 d. ₱358,400

PROBLEM NO. 4 (Warranty)

Sadanga Corporation manufactured television components and sells them with 6-month warranty under which defective
components will be replaced without charge. On December 31, 2005, Estimated Liability for Product Warranty had a
balance of ₱765,000. By June 30, 2006, this balance had been reduced to ₱120,375 by debits for estimated net cost of
components returned that had been sold in 2005.

The company started out in 2006 expecting 8% of the peso volume of sales to be returned. However, due to the introduction
of new models during the year, this estimated percentage of returns was increased to 10% on May 1. It is assumed that no
components sold during a given month are returned in that month. Each component is stamped with a date at time of sale
so that the warranty may be properly administered. The following table of percentages indicates the like pattern of sales
return during the 6-month period of the warranty, starting with the month following the sale of components.

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Percentage of Total

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Month Following Sale Returns Expected
First 20%

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Second 30
Third 20
Fourth through sixth – 10% each month 30
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100%

Gross sales of components were as follows for the first 6 months of 2006:]
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Month Amount
January ₱5,400,000
February 4,950,000
March 6,150,000
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April 4,275,000
May 3,000,000
June 2,700,000
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The company’s warranty also covers the payment of freight cost on defective components returned and on the new
components sent out as replacements. This freight cost runs approximately 10% of the sales price of the components
returned. The manufacturing cost of the components is roughly 80% of the sales price, and the salvage value of returned
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components averages 15% of their sales price. Returned components on hand at December 31, 2005, were thus valued
in inventory at 15% of their original sales price.

Based on the above and the result of your audit, answer the following:

1. The total estimated returns for the six-month period ended June 30, 2006 is
a. ₱2,232,000 c. ₱2,118,000
b. ₱2,647,500 d. ₱2,382,750
2. The warranty expense for the six-month period ended June 30, 2006 is
a. ₱1,985,625 c. ₱2,057,400
b. ₱1,674,000 d. ₱1,588,500
3. The Estimated Liability for Product Warranty as of June 30, 2006 should have a balance of
a. ₱956,400 c. ₱713,250
b. ₱795,938 d. ₱636,750

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CURRENT LIABILITIES

[Link].F2.01.00

4. The adjusting entry on June 30, 2006 will include a debit to Warranty Expense of
a. ₱592,875 c. ₱675,563
b. ₱740,385 d. ₱516,375

PROBLEM NO. 5 (Warranty-Sales are made evenly)

Vince Co. sells computer to various computers. Vince Co. has been offering a special service warranty on computer units
it sold. With the purchase of the computer unit, the customer has the right to purchase 3-year service contract for additional
amount of ₱1,500. Data concerning sales of computer and warranty contract are as follows:

2015 2016
Computer units sold 2,500 2,800
Sales price per unit 14,000 14,000
Number of service contracts sold 1,000 1,200
Expenses relating to computer warranties 45,000 60,000

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Vince Co. has estimated based on the available past records that the pattern of repairs has been:

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40% Year of sale

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36% 1st year after sale
24% 2nd year after sale R
Sales of the contracts are made evenly during the year.

Questions:
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Based on the above data, answer the following:

1. How much unearned service contract would be recognized in year 2016?
a. ₱930,000 c. ₱1,200,000
b. ₱1,440,000 d. ₱2,070,000
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2. How much profit on service contract would be recognized in year 2016?

a. ₱930,000 c. ₱570,000
b. ₱870,000 d. ₱360,000
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3. How much is unearned service contract on December 31, 2016?

a. ₱2,070,000 c. ₱1,440,000
b. ₱630,000 d. ₱930,000
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PROBLEM NO. 6 (Warranty-Uneven and even Sales)

On January 1, 20Y1, NCPAR Co began its business of selling computers to various customers. The computer carries a 2
- year warranty. Management believes that 4% of the computers will require repairs in the first year and 6% in the second
year at an average cost of ₱3,000 per computer. Each computer sells for ₱12,000.

Data concerning sales of computer and warranty contract follow:

20Y1 20Y2
Computer units sold 300 400
Actual warranty repairs ₱80,000 ₱100,000

1. How much is the warranty expense for the year ended December 31, 20Y1?
a. 90,000 c. 54,000

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CURRENT LIABILITIES

[Link].F2.01.00

b. 36,000 d. 80,000
2. How much is the warranty expense for the year ended December 31, 20Y2?
a. 120,000 c. 72,000
b. 48,000 d. 100,000
3. How much is the adjusted balance of the estimated warranty payable as of December 31, 20Y2?
a. 123,000 c. 63,000
b. 30,000 d. 96,000
4. Assuming sales are made evenly throughout the year, how much is the adjusted balance of the
estimated warranty payable as of December 31, 20Y2?
a. 123,000 c. 63,000
b. 30,000 d. 96,000

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Provisions and Contingent Liabilities
Provision Contingent liability

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Definition A liability of uncertain timing or amount Either: a) a possible obligation that
arises from past events and whose
existence will be confirmed only by the
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occurrence or non-occurrence of one or
more future events not wholly within the
control of the enterprise; or
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b) a present obligation that arises from

past events but is not recognized
because
-it is not probable that an outflow of
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resources embodying economic benefits

will be required to settle the obligation; or
- the amount of the obligation cannot be
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measured reliably.
Recognition Recognized as liabilities on the face of the Statement of Not recognized as liabilities on the face
financial position. of the Statement of financial position.
FS Presented separately on the Statement of financial position. Unless remote, disclosed on the notes to
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Presentation under liabilities. financial statements.

Measurement Best estimate of the expenditure required to settle the
present obligation at the reporting date.
Where the provision being measured involves a large
population of items, the obligation is estimated by weighting
all possible outcomes by their associated probabilities. The
name for this statistical method of estimation is ‘expected
value’. Where there is a continuous range of possible
outcomes, and each point in that range is as likely as any
other,
the mid-point of the range is used.
Where a single obligation is being measured, the
individual most likely outcome may be the best estimate
of the liability.

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CURRENT LIABILITIES

[Link].F2.01.00

OBLIGATION INVOLVING UNCERTAINTIES

Amount can be Accounting
Status Estimated Classification Treatment
reliably?
Probable Yes Provision Recognize by debiting an expense or loss and crediting
liability.
No Contingent Disclose in the notes to FS.
liability
Reasonably Yes/No Contingent Disclose in the notes to FS.
possible liability
Remote Yes/No Contingent Ignore (no need for recognition or disclosure.
liability

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CONTINGENCY TREATMENTS

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Accrued Disclose Amt
Amounts Nature Ignore

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1. LOSS contingency that is probable and:
a. Amount or range can be reasonably estimated X (or best est.) X
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b. Amount cannot be reasonably estimated Range X
2. LOSS contingency that is a reasonable possibility Range X
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3. LOSS contingency that is remote X

a. Loss contingency that is remote, but is guarantee for others X X
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4. GAIN contingencies that are virtually certain X X

5. GAIN contingencies that are probable X X
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6. GAIN contingencies that are reasonably possible or remote X*

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*Rule of conservatism

PROBLEM NO. 7 (Contingencies)

Rhad Company, a manufacturer of viagra has had a lawsuit filed against it by Vic Incorporated, another manufacturer of
viagra. The suit alleges patent right infringements by Rhad Company and asks for compensatory damages.

For the following likely situations, determine how Rhad Company should report the information concerning the lawsuit. The
choices are:
a. Accrue and disclose
b. Disclose only
c. Accrue only
d. Neither accrue nor disclose

Assume the following independent cases:

1. Rhad Company’s legal counsel is convinced that the likelihood of losing the case is probable, the potential amount of
the loss is estimated to be ₱2,300,000.

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CURRENT LIABILITIES

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2. Rhad Company’s legal counsel estimates that the infringement case may result in a loss of ₱2,000,000 but considers
the likelihood of losing the case as remote.
3. Rhad Company’s legal counsel estimates that the infringement case may result in a loss of ₱2,400,000 but considers
the likelihood of losing the case as reasonably possible.
4. Rhad Company’s legal counsel is convinced that the likelihood of losing the case is probable, the potential amount of
the loss, however, is currently undeterminable.
5. Rhad Company’s legal counsel is convinced that the likelihood of losing the case is probable, the potential amount of
the loss, based on reliable evidences would be as follows: 20% that the liability would be ₱1,600,000; 50% that the
liability would be at ₱2,000,000; 30% that the liability would be ₱2,400,000
6. Rhad Company’s legal counsel is convinced that the likelihood of losing the case is probable, the potential amount of
the loss, based on reliable evidences would be around ₱1,500,000 to ₱3,000,000.

PROBLEM NO. 8 (Contingencies)

During 2016, Smith Company filed suit against West Company seeking damages for patent infringement. In Smith's

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December 31, 2016 financial statements, how should this be reported? The choices are:
a. Accrue and disclose

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b. Disclose only
c. Accrue only

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d. Neither accrue nor disclose

Assume the following independent cases:

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1. It is virtually certain that Smith would be successful against West for an estimated amount of ₱1,500,000.
2. It is probable that Smith would be successful against West for an estimated amount of ₱1,500,000.
3. It is probable that Smith would be successful against West for an estimated amount of ₱1,500,000. Before the financial
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statement was issued, Smith was awarded ₱1,000,000 and received full payment thereof.
4. It is probable that Smith would be successful against West for an estimated amount of ₱1,500,000. After the financial
statement was issued, Smith was awarded ₱1,000,000 and received full payment thereof.
5. It is reasonably possible that Smith would be successful against West for an estimated amount of ₱1,500,000.
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6. During the year 2016, Smith won a litigation award for ₱1,500,000 which was tripled to ₱4,500,000 to include punitive
damages. The defendant, who is financially stable, has appealed only the ₱3,000,000 punitive damages. Counsel is
unable to estimate the outcome of this appeal.
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PROBLEM NO. 9
You were able to obtain the following from the accountant for TADIAN Corp. related to the company’s liabilities as of
December 31, 2006.
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Accounts payable ₱ 650,000

Notes payable – trade 190,000
Notes payable – bank 800,000
Wages and salaries payable 15,000
Interest payable ?
Mortgage notes payable – 10% 600,000
Mortgage notes payable – 12% 1,500,000
Bonds payable 2,000,000

The following additional information pertains to these liabilities.

a. All trade notes payable are due within six months of the balance sheet date.
b. Bank notes-payable include two separate notes payable to Allied Bank.
(1) A ₱300,000, 8% note issued March 1, 2004, payable on demand. Interest is payable every six months.

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CURRENT LIABILITIES

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(2) A 1-year, ₱500,000, 11 ½% note issued January 2, 2006. On December 30, 2006, TADIAN negotiated a
written agreement with Allied Bank to replace the note with a 2-year, ₱500,000, 10% note to be issued
January 2, 2007. The interest was paid on December 31, 2006.
c. The 10% mortgage note was issued October 1, 2003, with a term of 10 years. Terms of the note give the holder
the right to demand immediate payment if the company fails to make a monthly interest payment within 10 days of
the date the payment is due. As of December 31, 2006, TADIAN is three months behind in paying its required
interest payment.
d. The 12% mortgage note was issued May 1, 2000, with a term of 20 years. The current principal amount due is
₱1,500,000. Principal and interest payable annually on April 30. A payment of ₱220,000 is due April 30, 2007.
The payment includes interest of ₱180,000.
e. The bonds payable is 10-year, 8% bonds, issued June 30, 1997. Interest is payable semi-annually every June 30
and December 31.

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QUESTIONS:

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Based on the above and the result of your audit, answer the following:
1. Interest payable as of December 31, 2006 is

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a. ₱155,000 b. ₱143,000 c. ₱203,000 d. ₱215,000
2. The portion of the Note Payable-bank to be reported under current liabilities as of December 31, 2006 is
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a. ₱300,000 b. ₱500,000 c. ₱800,000 d. P0
3. Total current liabilities as of December 31, 2006 is
a. ₱3,950,000 b. ₱4,138,000 c. ₱3,938,000 d.₱3,998,000
PA

4. Total noncurrent liabilities as of December 31, 2006 is

a. ₱1,760,000 b. ₱2,560,000 c. ₱3,960,000 d.₱1,960,000
5. Which of the following is incorrect regarding the classification of financial liabilities?
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a. An entity classifies financial liabilities as current when they are due to be settled within 12 months after the balance
sheet date.
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b. If the entity expects, and has the discretion, to refinance or roll over an obligation for at least 12 months after the
balance sheet date under an existing loan facility, it classifies obligation as non-current, even if it would be otherwise
due within a shorter period.
c. When refinancing or rolling over is not at the discretion of the entity, the potential to refinance is not considered and
the obligation is classified as current.
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d. When an entity breaches an undertaking under a long-term loan agreement on or before the BS date with the effect
that the liability becomes payable on demand, the liability is classified as non-current, if, after the BS date, and
before the FS are authorized for issue, the lender has agreed not to demand payment as a consequence of the
breach.

PROBLEM NO. 10

In the audit process, the following data were obtained from the books of the Spurs Company which uses a voucher system.
All invoices are subject to term 2/10, n/30 and are entered net with the discount entered in the Purchase Discount column
of the voucher register. The accountant in charge of the books went on leave to attend to his family based in New Jersey.
A fresh accounting graduate has been assigned to record the transactions. At year-end, the substitute accountant finds
that the unpaid vouchers do not agree with the Vouchers Payable control account. You are called to adjust the matter.

A schedule of unpaid vouchers as of December 31, 2005, all of which are net of discount, is presented to you:

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DARRELL JOE O. ASUNCION, CPA, MBA

CURRENT LIABILITIES

[Link].F2.01.00

Date Voucher No. Supplier Amount

Nov. 27 797 Duncan Supply Co. P 78,400
Dec. 02 821 Ginobili Distributors 19,600
11 829 Parker Sales 44,100
20 836 Mohamed Dealers 17,150
21 842 Bowen Merchandising 22,050
22 856 Horry Mercantile 80,850
31 865 Jackson Traders 78,400
₱340,550

Vouchers Payable (control account)

Cash disbursements ₱1,309,500 Purchases journal ₱1,645,000
Purchase returns journal 36,750*

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* Voucher Nos. 821 and 836 cancelled as goods were returned in December.

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REQUIRED:
Based on the above and the result of your audit, compute for the following as of December 31, 2005:

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1. Adjusted balance of Vouchers Payable
a. ₱310,000 b. ₱306,750 c. ₱303,800 d. ₱344,250
2. Purchase discounts lost on unpaid vouchers
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a. ₱6,200 b. ₱2,950 c. ₱3,700 d. P0
3. Purchase discounts lost on paid vouchers
PA

a. ₱28,750 b. ₱8,000 c. ₱5,050 d. ₱41,800

4. Adjusting journal entry or entries to correct the accounts will include
a. A debit to Purchase Discounts Lost of ₱11,250.
b. A debit to Purchase Discounts Lost of ₱5,050.
C

c. A credit to Vouchers Payable of ₱8,000.

d. A credit to Vouchers Payable of ₱11,250.
EO

PROBLEM NO. 11 (Comprehensive)

As part of your examination to audit the financial statements of Chris Company as of December 31, 2021, you were able to
gather the following data:
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SSS Payable ₱ 10,000

Philhealth payable 9,000
Estimated liabilities under guarantee agreement 110,000
Estimated warranties on goods sold 120,000
Deferred tax liability 40,000
Utilities payable 6,000
Trade accounts payable net of debit balance in supplier’s
account of ₱30,000, net of unreleased checks of ₱20,000, and
net of postdated checks of ₱12,000. 170,000
Notes payable:
Arising from purchase of goods 200,000
Arising from 4-year bank loan 400,000
Arising from advances by officers, due in 3 years 300,000
Share dividends payable 60,000
Dividends in arrears, preferred shares undeclared 100,000

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CURRENT LIABILITIES

[Link].F2.01.00

Share options outstanding 120,000

Convertible bonds payable due July 1, 2022 1,000,000
Serial bonds payable maturing in semi-annual installments of
₱40,000. 800,000
Accrued interest expense 4,000
Advances from customers 25,000
Unearned rent income 36,000
Unearned interest on receivables 3,500
Income taxes payables 45,000
Cash dividends payable 100,000
Property dividends payable 120,000
Notes receivable, net of ₱40,000 credit balance 260,000
Cash in bank-Metrobank 1,100,000
Overdraft with Metrobank 100,000

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Cash in bank-RCBC 800,000
Overdraft with PNB 80,000

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Security deposit received from lessee 89,000
Container's deposit 45,000

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Reserve for contingencies 220,000
Loans payable-10% 150,000
Loans payable-12% 270,000
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Notes receivable discounted 20,000
Unused letters of credit 10,000
Financial liability designated as fair value through profit or loss 200,000
PA

Additional information:
• Cash in payment of accounts payable to supplier on December 31, 2021 amounting to ₱8,000 was not recorded by
Chris Company.
• The 10% loan payable is due on June 30, 2022. Interest on the loan is due every July 1 and December 31. On December
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1, 2021, Chris Co. entered into a refinancing agreement with a bank to refinance the loan on a long-term basis. The
refinancing and roll over transaction were completed on December 31, 2021.
• The 12% loan payable is due July 1, 2023. The loan agreement requires Chris to maintain a current ratio of 3:1. If the
EO

current ratio falls below this amount, the loan becomes payable on demand. As of December 31, 2021, the current ratio
of the company is 2.5:1. On January 5, 2022, the bank agreed not to demand payment giving Chris Co. one-year to
rectify the breach of loan agreement.
R

Questions:
Determine the following as of December 31, 2021:
1. Current liabilities
a. ₱2,527,500 c. ₱2,487,500
b. ₱2,727,500 d. ₱2,616,500
2. Noncurrent liabilities
a. ₱1,699,000 c. ₱1,659,000
b. ₱2,009,000 d. ₱1,779,000
3. Total liabilities
a. ₱4,226,500 c. ₱4,146,500
b. ₱4,426,500 d. ₱4,395,500

PROBLEM NO. 12 (Comprehensive)

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CURRENT LIABILITIES

[Link].F2.01.00

Eleanor Corp. has been producing quality disposable diapers for more than two decades. The company’s fiscal year runs
from April 1 to March 31. The following information relates to the obligations of Eleonor as of March 31, 2010.

BONDS PAYABLE
Eleonor issued ₱10,000,000 of 10% bonds on July 1, 2008. The prevailing market rate of interest for these bonds was 12%
on the date of issue. The bonds will mature on July 1, 2018. Interest is paid semiannually on July 1 and January 1. Eleonor
uses the effective interest rate method to amortize bond premium or discount.

The following present value factors are taken from the present value tables:

Present value of 1 at 12% for 10 periods 0.32917

Present value of 1 at 6% for 20 periods 0.31180
Present value of an ordinary annuity of 1 at 12%
For 10 periods 5.65022

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Present value of an ordinary annuity of 1 at 6%
For 20 periods 11.46992

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NOTES PAYABLE

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Eleonor has signed several long-term notes with financial institutions. The maturities of these notes are given in the schedule
below. The total unpaid interest for all these notes amounts to ₱600,000 on March 31, 2010.
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DUE DATE AMOUNT DUE
April 1, 2010 ₱400,000
July 1, 2010 600,000
PA

October 1, 2010 300,000

January 1, 2011 300,000
April 1, 2011 – March 31, 2012 1,200,000
April 1, 2012 – March 31, 2013 1,000,000
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April 1, 2013 – March 31, 2014 1,400,000

April 1, 2014 – March 31, 2015 800,000
April 1, 2015 – March 31, 2016 1,000,000
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₱7,000,000

ESTIMATED WARRANTIES
Eleonor has a one-year product warranty on some selected items in its product line. The estimated warranty liability on
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sales made during the 2008-2009 fiscal year and still outstanding as of March 31, 2009 amounted to ₱180,000. The warranty
costs on sales made from April 1, 2009, through March 31, 2010, are estimated at ₱520,000. The actual warranty costs
incurred during the current 2009-2010 fiscal year as follows:
Warranty claims honored on 2008-2009 sales ₱180,000
Warranty claims honored on 2009-2010 sales 178,000
Total warranty claims honored ₱358,000

OTHER INFORMATION
1. TRADE PAYABLES
Accounts Payable for supplies, goods and services purchased on open account amount to ₱740,000 as of March 31,
2010.

2. PAYROLL RELATED ITEMS

Accrued salaries and wages ₱300,000

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DARRELL JOE O. ASUNCION, CPA, MBA

CURRENT LIABILITIES

[Link].F2.01.00

Withholding taxes payable 94,000

Other payroll deductions 10,000
Total ₱404,000

3. MISCELLANEOUS ACCRUALS
Other accruals not separately classified amount to ₱150,000 as of March 31, 2010.

4. DIVIDENDS
On March 15, 2010, Eleonor’s board of directors declared a cash dividend of ₱0.20 per ordinary shares and a 10% stock
dividend. Both dividends were to be distributed on April 12, 2010, to the shareholders of record at the close of business on
March 31, 2010. Data regarding Eleonor ordinary share capital are as follows:

Par value ₱ 5.00 per share

Number of shares issued and outstanding 6,000,000 shares

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Market values of ordinary shares:

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March 15, 2010 ₱ 22.00 per share

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March 31, 2010 21.50 per share
April 12, 2010 R 22.50 per share

1. How much was received by Eleonor from the sale of the bonds on July 1, 2008?
A. ₱8,852,960
B. ₱10,000,000
PA

C. ₱10,500,000
D. ₱10,647,040
2. What is the current portion of Eleonor’s note payable at March 31, 2010?
A. ₱2,800,000
C

B. ₱1,600,000
C. ₱1,300,000
D. ₱3,800,000
EO

3. The balance of the estimated warranties payable at March 31, 2010 is

A. ₱342,000
B. ₱18,000
C. ₱520,000
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D. 180,000
4. On March 31, 2010, Eleonor’s statement of financial position would report total current liabilities of
A. ₱5,286,000
B. ₱4,386,000
C. ₱5,336,000
D. ₱5,462,000
5. On March 31, 2010 Eleonor’s statement of financial position would report total noncurrent liabilities of
A. ₱14,389,350
B. ₱14,352,217
C. ₱14,370,783
D. ₱14,252,960

Special Audit consideration for payables

1. Confirmation. Confirmation may be sent to vendors. However, such confirmation procedures are sometimes
omitted due to the availability of externally generated evidence (e.g. both purchase agreements and vendors’

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CURRENT LIABILITIES

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invoices) and due to the inability of confirmations to adequately address the completeness assertion. (Auditors are
primarily concerned about the possibility of understated payables; a major payable will not in general be confirmed
if the client completely omits it from the trial balance of payables.)
Accounts payable confirmations are most frequently used in circumstances involving (1) bad internal control, (2)
bad financial position, and (3) situations when vendors do not send month-end statements. However, when auditor
has chosen to confirm payables despite the existence of vendor statements, the confirmation will generally request
the vendor to send the month-end statement to the auditor. For this reason, the balance per the client’s books is
not included on such confirmation.
Confirmations are sent (1) major suppliers, (2) disputed accounts, and (3) a sample of other suppliers. Major
suppliers are selected because they represent a possible source of large credit lines. The size of the recorded
payable at year-end is of less importance than for receivables. While as a practical matter large year-end recorded
balances will normally be confirmed, the emphasis on detecting understated payables may lead the auditor to also
confirm accounts with relatively low recorded year-end balances. Also, if the payables to be confirmed are selected
from a list of vendors instead of from the recorded year-end payables, the completeness assertion as well as the

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existence assertion may be addressed.

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2. The search for unrecorded liabilities. The search for unrecorded liabilities is an effort to discover any liabilities that
may have been omitted from recorded year-end payables. Typical procedures include the following:

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a. Examination of vendors’ invoices and statements both immediately prior to and following year-end.
b. Examination, after year-end, of the following to test whether proper cutoffs have occurred:
1. Cash disbursements
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2. Purchases
3. Unrecorded vouchers (receiving reports, vendors’ invoices, purchase orders)
c. Analytical procedures
PA

d. Internal control is analyzed to evaluate its likely effectiveness in preventing and detecting the occurrence
of such misstatements.

SUMMARY OF AUDIT PROCEDURES

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Payables (Current)
EO

Payables (Current) Completeness

Presentation and disclosure 8. Perform search for
1. Review disclosures for unrecorded payables
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compliance with GAAP. (examine unrecorded

2. Review purchase invoices, receiving reports
Commitments purchase orders.)
Existence or occurrence 9. Inquire of management
3. Confirmation as to completeness
4. Inspect copies of notes Valuation
5. Vouch payables 10. Foot subsidiary ledger.
(examine purchase order, 11. Reconcile subsidiary
receiving reports, ledger to gen. ledger.
invoices.) 12. Recalculate interest
expense (if any).
Rights and obligations 13. For payroll, review

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CURRENT LIABILITIES

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6. Review cutoffs (purcha- year-end accrual.

ses, purchase returns, 14. Recalculate other acc-
disbursements.) rued liabilities.
Completeness
7. Perform analytical
procedures.

PROBLEM NO. 13
Select the best answer for each of the following;
1. A client’s purchasing system ends with the assumption of a liability and the eventual payment of the liability. Which of
the following best describes the auditor’s primary concern with respect to the liabilities resulting from the purchasing
system?

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a. Commitments for all purchases are made only after established competitive bidding procedures are followed.
b. Accounts payable are not materially understated.

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c. Authority to incur liabilities is restricted to one designated person.
d. Acquisition of material is not made from one vendor or one group of vendors.

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2. Which of the following functions is not appropriate for the accounts payable department?
a. Prepare purchase orders.
b. Prepare voucher and daily summary.
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c. File voucher package by due date.
d. Compare purchase requisitions, purchase orders, receiving reports, and vendors’ invoices.
PA

3. In a properly designed accounts payable system, a voucher is prepared after the invoice, purchase order, requisition,
and receiving report are verified.
a. Post the voucher amount to the expense ledger.
b. Cancel the supporting documents.
C

c. Enter the check amount in the check register.

d. Approve the voucher for payment.
4. Which of the following would be the best procedure to determine whether purchases were properly authorized?
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a. Discuss authorization procedures with personnel in the controller’s and purchasing functions.
b. Review and evaluate a flowchart of purchasing procedures.
c. Determine whether a sample of entries in the purchase journal is supported by properly executed purchase orders.
d. Vouch payments for selected purchases to supporting receiving.
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5. In conducting a search for unrecorded liabilities, the auditor should do all but the following:
a. Examine prior year’s audit workpapers to ascertain that adjustments for unrecorded liabilities have not been
overlooked.
b. Examine invoices paid a few days prior to the balance sheet date.
c. Examine paid invoices for a short period following the balance sheet date and trace to client’s year-end adjustment
for unrecorded liabilities.
d. Examine unpaid invoices for a short period following the balance sheet date and trace to client’s year-end
adjustment for unrecorded liabilities.
6. An audit procedure applicable to testing the year-end cut-off of liabilities is.
a. Reviewing the general journal for unusual entries recorded immediately after year-end.
b. Examining vendor invoices received subsequent to year-end for shipment date and terms of shipment.
c. Tracing recorded liabilities to supporting documents.
d. Preparing an aging schedule for accounts payable.

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7. An auditor usually examines receiving reports to support entries in the

a. Sales journal and sales returns journal.
b. Check register and sales journal.
c. Voucher register and sales journal.
d. Voucher register and sales returns journal.
8. Which of the following is not used to test overstatements and understatements of accounts payable?
a. Unmatched receiving reports.
b. Cancelled voucher packages.
c. Cash receipts records.
d. Cash disbursement records.
9. During the course of an audit, an auditor observes that the recorded interest expense seems excessive in relation to
the balance in long-term debt. This observation could lead the auditor to suspect that
a. Long-term debt is overstated.

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b. Long-term debt is understated.
c. Premium on bonds payable is understated.

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d. Discount on bonds payable is overstated.
10. An auditor’s program to examine long-term debt most likely would include that require

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a. Correlating interest expense recorded for the period with outstanding debt.
b. Inspecting the accounts payable subsidiary ledger for unrecorded long-term debt.
c. Comparing the carrying amount of the debt to its year-end market value.
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d. Verifying the existence of the holders of the debt by direct confirmation.
PA

We are what we repeatedly do. Excellence, therefore, is not an act but a habit.
Aristotle

When you get into a tight place and everything goes against you, till it seems you could not hang on a minute longer, never
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give up then, for that is just the place and time that the tide will turn.
Harriet Beecher Stowe
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The only way of finding the limits of the possible is by going beyond them into the impossible.
Arthur C. Clarke
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