📘 Cash and Cash Equivalents

1. Cash and Cash Equivalents

• Cash – currency, coins, undeposted checks, demand deposits.
• Unrestricted Cash – available for general business use (current asset).
• Restricted Cash – set aside for noncurrent obligations → noncurrent asset.
• Cash Equivalents (PAS 7) – short-term (≤ 3 months), highly liquid, readily convertible, insignificant risk.
• Examples: Treasury bills, time deposits ≤ 3 months, money market funds.
Not Cash:
• NSF (DAIF/DAUD) checks → receivable.
• Post-dated checks → receivable.
• IOUs, employee checks → receivable.
• Postage stamps → supplies.
• Pension funds → noncurrent asset.
• Bank overdraft → current liability.

2. Reporting in Financial Statements

• Measurement – nominal/face value (PAS 1, PAS 21).
• Foreign currency cash – closing rate at reporting date.
• Presentation – first line under Current Assets.
• Classification:
• Current → unrestricted, for operating use.
• Non-current → restricted, set aside for future.

3. Cash Management
• Objectives:
1. Accurate recording of cash.
2. Safeguard from theft/fraud.
3. Forecast cash needs.
4. Optimize idle cash.
• Internal Controls:
1. Segregation of duties.
2. Imprest system.
3. Voucher system.
4. Surprise audits.
5. Bank reconciliation.

4. Special Topics
Bank Overdraft
• Negative checking account balance.
• Classified as current liability unless offset is allowed (same bank, unrestricted).
• May be part of cash & cash equivalents if integral to cash management.
Petty Cash Fund
• Used for small payments (imprest system).
• Establishment: Petty Cash – Dr / Cash in Bank – Cr.
• Replenishment: Expenses – Dr / Cash in Bank – Cr.
• Adjustments: Cash Short/Over used for discrepancies.

5. Bank Reconciliation
• Purpose – match book balance vs. bank statement.
• Reconciling Items:

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 • Book side: credit memos (collections, interest), debit memos (service charge, NSF), errors.
• Bank side: deposits in transit, outstanding checks, bank errors.
• Methods:
• Adjusted Balance Method – bring both to adjusted balance.
• Book-to-Bank – start from book, adjust to bank.
• Bank-to-Book – start from bank, adjust to book.

6. Proof of Cash
• Verifies completeness of cash inflows and outflows across two periods.
• Formula: Beg. Balance + Receipts – Disbursements = End Balance.
• Useful for fraud detection and error tracing.

📌 Quick Problem-Solving Reminders

1. Cash & Cash Equivalent Test → Original maturity ≤ 3 months, unrestricted, highly liquid.
2. Bank Overdraft → Current liability unless offset (same bank, unrestricted account).
3. Petty Cash → Fund balance stays constant; only replenishments/shortage/overage affect expenses.
4. Bank Recon →
• Bank side: deposits in transit (+), outstanding checks (–).
• Book side: add credit memos, subtract debit memos, correct errors.
5. Proof of Cash → track both inflows & outflows, not just ending balance.

📘 Cash and Cash Equivalents

A. Multiple Choice (Concepts – 20 items)

1. Which of the following is cash?
a) Post-dated check
b) Customer IOU
c) Undeposited checks
d) Pension fund
2. Which is not a cash equivalent?
a) 90-day Treasury bill
b) 120-day time deposit
c) 3-month money market placement
d) Commercial paper, 2 months
3. Restricted cash for long-term loan repayment is reported as:
a) Current asset
b) Non-current asset
c) Liability
d) Equity
4. NSF check is classified as:
a) Cash
b) Receivable
c) Cash equivalent
d) Expense
5. Cash in foreign currency is measured at:
a) Historical rate
b) Average rate
c) Closing rate
d) None
6. Which is correct under PAS 7?
a) Cash equivalents have original maturity of ≤ 3 months
b) Must be equity instruments
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 c) Always restricted
d) Never measured at fair value
7. Bank overdraft is normally classified as:
a) Asset
b) Expense
c) Liability
d) Equity
8. Which is not an objective of cash management?
a) Safeguard from fraud
b) Forecast cash needs
c) Increase liabilities
d) Maximize use of idle funds
9. Which system ensures petty cash balance remains constant?
a) Accrual
b) Imprest
c) Voucher
d) Double entry
10. Which is not included in cash?
a) Currency
b) Bank demand deposits
c) Undeposited checks
d) Restricted sinking fund
11. Bank reconciliation compares:
a) General ledger vs. petty cash
b) Bank statement vs. cash book balance
c) Receivables vs. payables
d) Expenses vs. revenues
12. Which is a book reconciling item?
a) Outstanding checks
b) Deposits in transit
c) Bank service charge
d) Bank error
13. Which is a bank reconciling item?
a) NSF check
b) Credit memo (bank collection)
c) Outstanding checks
d) Book error
14. Credit memo from bank for customer collection is recorded as:
a) Increase cash in bank
b) Decrease cash in bank
c) Expense
d) Liability
15. Which is not an internal control for cash?
a) Segregation of duties
b) Surprise audits
c) Voucher system
d) Mixing personal & business cash
16. Postage stamps are classified as:
a) Supplies
b) Cash
c) Cash equivalents
d) Miscellaneous income
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 17. Petty cash fund replenishment entry includes:
a) Debit Petty Cash
b) Debit Expenses
c) Credit Petty Cash
d) Debit Cash in Bank
18. Proof of cash is used to:
a) Measure cash flow
b) Detect errors and fraud in cash transactions
c) Classify liabilities
d) Audit payables
19. Which is included in cash equivalents?
a) Equity shares held for trading
b) Treasury bills due in 2 months
c) Accounts receivable
d) Notes receivable, 6 months
20. Bank overdraft offset is allowed if:
a) Different banks
b) Same bank, unrestricted account
c) Different branches
d) Always prohibited

B. Problem Solving & Journal Entries (21–40)

21. Petty cash fund ₱5,000 established. Entry?
22. Replenishment: Expenses ₱3,000, cash short ₱200. Entry?
23. Beginning book balance ₱50,000. Add bank credit memo ₱10,000; subtract service charge ₱200; correct
book error ₱100 under-recorded check. Compute adjusted balance.
24. Bank balance ₱80,000. Deduct outstanding checks ₱20,000; add deposits in transit ₱5,000. Compute
adjusted bank balance.
25. Proof of cash formula?
26. If company receives post-dated check ₱15,000, how is it classified?
27. Cash fund for building project due in 2 years. Classification?
28. Journal entry: Bank statement shows ₱5,000 service charge not yet recorded.
29. Journal entry: Bank collected customer account ₱12,000, net of ₱500 fee.
30. Outstanding check ₱8,000 – adjust bank or book?
31. Deposit in transit ₱10,000 – adjust bank or book?
32. NSF check ₱6,000 – adjust bank or book?
33. Replenishment entry includes expenses ₱4,500, shortage ₱100. Prepare entry.
34. Book balance ₱120,000; adjusted bank balance ₱115,000. Identify likely reconciling items.
35. Cash equivalents must have original maturity of ___ months or less.
36. Journal entry for replenishment of petty cash showing supplies ₱1,000, transportation ₱800, entertainment
₱500.
37. If petty cash is decreased by ₱2,000, what is the entry?
38. Bank recon shows adjusted cash = ₱60,000. Book shows ₱65,000. Which side has reconciling item?
39. Cash in foreign currency $1,000, closing rate ₱56. Record conversion.
40. If bank overdraft ₱15,000 occurs, how is it presented?

C. Application & Situational (41–50)

41. Employee advances recorded in cash account. How to classify?
42. Cash surrender value of life insurance is classified as:
a) Cash
b) Non-current asset

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 c) Expense
d) Current liability
43. Restricted cash for plant expansion is classified as:
a) Current asset
b) Non-current asset
c) Cash equivalent
d) Liability
44. Which item increases book balance?
a) Credit memo
b) NSF check
c) Debit memo
d) Outstanding check
45. Which item decreases bank balance?
a) Deposit in transit
b) Outstanding check
c) Credit memo
d) Debit memo
46. A surprise cash count revealed shortage ₱500. Entry?
47. Why use imprest system for petty cash?
48. If deposit slip was ₱5,000 but recorded as ₱50,000 in books, how to adjust?
49. If check ₱12,000 recorded as ₱1,200 in books, what correction is needed?
50. Why prepare proof of cash instead of ordinary reconciliation?

✅ Answer Key (Condensed)

MCQ (1–20):
1c 11b
2b 12c
3b 13c
4b 14a
5c 15d
6a 16a
7c 17b
8c 18b
9b 19b
10d 20b
Problem Solving & JEs (21–40):
21. Dr Petty Cash 5,000 / Cr Cash in Bank 5,000
22. Dr Expenses 3,000, Dr Cash Short/Over 200 / Cr Cash in Bank 3,200
23. ₱59,900
24. ₱65,000
25. Beg. Bal + Receipts – Disbursements = End Bal
26. Receivable
27. Non-current asset
28. Dr Bank Service Charge 5,000 / Cr Cash in Bank 5,000
29. Dr Cash 11,500 / Dr Bank Charge 500 / Cr AR 12,000
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30. Bank
31. Bank
32. Book
33. Dr Expenses 4,500, Dr Cash Short/Over 100 / Cr Cash in Bank 4,600
34. Outstanding checks (₱5,000)
35. 3 months
36. Dr Supplies 1,000, Dr Transportation 800, Dr Entertainment 500 / Cr Cash in Bank 2,300
37. Dr Cash in Bank 2,000 / Cr Petty Cash 2,000
38. Book side
39. Dr Cash 56,000 / Cr Foreign Currency 56,000
40. Current liability (unless offset allowed)
Situational (41–50):
41. Receivable
42. b
43. b
44. a
45. b
46. Dr Cash Short/Over 500 / Cr Cash 500
47. To keep fund constant, ensure control
48. Correct by decreasing cash 45,000
49. Correct by decreasing cash 10,800
50. To detect errors in receipts/disbursements, not just ending balance

📘 Receivables (IA2)
1. Nature of Receivables
• Definition: Claims for future receipt of cash, goods, or services; classified as financial assets under PFRS 9.
• Types:
• Accounts Receivable – from sales of goods/services.
• Accrued Income – earned but uncollected revenues.
• Other Receivables – loans, claims, subscriptions, refunds, advances.
• Impairment: Apply Expected Credit Loss (ECL) model.

2. Accounts Receivable
Classification
• Trade Receivables – Accounts & notes from normal business.
• Non-Trade Receivables – Advances, loans, deposits, claims.
• Current vs Non-Current – Based on realization (within 12 months or operating cycle).
Recognition & Measurement
• Recognize simultaneously with revenue (PFRS 15).

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 • Initial Measurement – Transaction price.
• Long-term, non-interest-bearing – at present value.
• Subsequent – Amortized cost ≈ Net Realizable Value (NRV).
Presentation
• Presented net of allowances for discounts, returns, doubtful accounts.
• Overpayments → classified as liabilities.
Freight Terms
• FOB Destination – Seller pays, risk transfers at destination.
• FOB Shipping Point – Buyer pays, risk transfers at shipment.
• Freight Collect / Freight Prepaid – defines who shoulders payment.
Variable Considerations (affect receivable measurement)
• Trade Discounts – Deducted upfront, not journalized separately.
• Cash Discounts – Recorded either via Gross or Net method.
• Sales Returns & Allowances – Estimated using allowance account.
• Time Value of Money – Discount long-term receivables if significant financing component.

3. Uncollectible Accounts
Direct Write-Off
• Recognize Bad Debt Expense only when identified.
• Not acceptable under PFRS for material amounts.
Allowance Method (required)
• Estimate expected uncollectibles → Allowance for Doubtful Accounts.
• Complies with matching principle and NRV.
• Write-off: Debit Allowance, Credit Accounts Receivable.
• Recovery: Reinstate A/R then record collection.
Estimation Techniques
• % of Receivables.
• Aging of Accounts Receivable.
• Historical Loss Rate.

4. Notes Receivable
• Definition: Formal written promise to pay.
• Classification: Current or non-current depending on maturity.
Measurement
• Issued at Face Value – record at face if market = stated rate.
• Zero-Interest / Non-Face Value – record at present value; difference = Discount or Premium.
• Interest-Bearing Notes – accrue interest periodically.
• Discounting of Notes – Transfer to bank before maturity.
• With Recourse → secured borrowing.
• Without Recourse → derecognize note.

5. Loans Receivable
• Initial Measurement – Fair value + transaction costs.
• Subsequent – Amortized cost using Effective Interest Method.
• Origination Fees/Costs – affect interest income over loan life.
• Classification: Current (<12 months) vs Non-Current (>12 months).

6. Receivable Financing
• Definition: Using receivables for cash needs.
Methods
1. Secured Borrowing
• Pledging – All receivables used as collateral.

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 • Assignment – Specific receivables assigned; may be notified or non-notified.
2. Sale of Receivables
• Factoring – Sale to a factor; with or without recourse.
• Discounting Notes Receivable – With/without recourse.
Derecognition (PFRS 9)
• Remove receivables only if risks and rewards are transferred.

✅ Quick Reminders
• Always present receivables at Net Realizable Value.
• Gross vs Net method – Net is conceptually correct; Gross is widely practiced.
• Allowance Method is preferred to comply with PFRS 9.
• Discounting/Factoring may be treated as sale or borrowing depending on risk transfer.
• Proper classification in current vs non-current is critical in FS presentation.

📘 Receivables

A. Multiple Choice – Concepts (1–20)

1. Which of the following is not a receivable?
a) Accounts Receivable
b) Notes Receivable
c) Merchandise Inventory
d) Loans Receivable
2. Accounts receivable are classified as:
a) Financial assets
b) Liabilities
c) Equity
d) Income
3. Which standard governs recognition of revenue and related receivables?
a) PAS 2
b) PAS 1
c) PFRS 9 & PFRS 15
d) PAS 16
4. Receivables are initially measured at:
a) Fair value
b) Present value only
c) Transaction price
d) Replacement cost
5. Which is not a trade receivable?
a) Accounts receivable from sales
b) Notes receivable from sales
c) Advances to employees
d) Receivable from customers
6. Trade discounts are:
a) Recorded separately
b) Deducted upfront, not journalized
c) Recorded as expense
d) Included in allowance
7. Cash discounts are recorded under:
a) Gross or net method
b) Face value method
c) Direct write-off method
d) Effective interest method
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8. Which freight term means buyer shoulders freight, title passes at shipment?
a) FOB Destination
b) FOB Shipping Point
c) Freight Prepaid
d) Freight Collect
9. Accounts receivable are reported at:
a) Face value
b) Net realizable value
c) Fair value only
d) Book value
10. The direct write-off method violates:
a) Historical cost principle
b) Matching principle
c) Going concern assumption
d) Full disclosure principle
11. Allowance for Doubtful Accounts is:
a) Asset
b) Contra-asset
c) Liability
d) Expense
12. Which is an acceptable method under PFRS 9?
a) Direct write-off
b) Allowance method (ECL model)
c) Cash basis
d) Gross profit method
13. Notes receivable are formal written promises that are:
a) Always current
b) Either current or non-current
c) Never discounted
d) Recorded at cost only
14. Non-interest-bearing note is recorded at:
a) Face value
b) Present value
c) Fair value of collateral
d) Future value
15. The excess of face value over present value of note is called:
a) Discount on N/R
b) Premium on N/R
c) Interest income
d) Allowance
16. If a note is discounted with recourse, the transfer is treated as:
a) Sale of note
b) Secured borrowing
c) Equity contribution
d) Liability settlement
17. Factoring of receivables without recourse is:
a) Sale
b) Borrowing
c) Liability
d) Equity
18. In pledging of receivables:
a) Receivables are derecognized
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 b) Used as collateral
c) Recorded as income
d) Recorded as expense
19. Assignment of receivables differs from pledging because:
a) All receivables pledged
b) Only specific receivables assigned
c) Derecognized immediately
d) Always noncurrent
20. Receivables must be derecognized if:
a) Control retained
b) Risks and rewards transferred
c) Book value < FV
d) Maturity is > 12 months

B. Problem Solving & Journal Entries – Accounts Receivable (21–30)

21. Sales ₱100,000, terms 2/10, n/30. Customer paid within discount. Gross method entry?
22. Same as #21, but payment after discount period. Gross method entry?
23. Using net method, customer fails to take discount. Entry for late payment?
24. Sales ₱500,000; returns ₱20,000; discounts ₱10,000; estimated uncollectibles ₱15,000. Compute NRV of
receivables.
25. Beginning A/R ₱200,000, sales ₱500,000, collections ₱450,000, returns ₱10,000. Compute ending A/R.
26. Allowance method: A/R ₱100,000, 5% doubtful. Entry?
27. Write-off customer ₱4,000 under allowance method. Entry?
28. Recovery of ₱2,000 written-off previously. Entries?
29. A/R aging shows ₱30,000 required in allowance. Existing credit balance ₱10,000. Entry?
30. Same as #29, but existing debit balance ₱5,000. Entry?

C. Notes Receivable (31–40)

31. Accepted 12% note, ₱100,000, 1 year. Entry at issuance?
32. Same note, accrual after 6 months. Entry?
33. Same note, maturity collection?
34. Non-interest note face ₱120,000, PV ₱100,000. Entry at issuance?
35. Above note, recognize discount amortization ₱10,000. Entry?
36. Note discounted ₱50,000 at 10%, term 6 months, 2 months left. Bank discount?
37. If discounted with recourse, entry is treated as:
38. If discounted without recourse, entry is treated as:
39. Loan granted ₱500,000, transaction cost ₱10,000. Initial recognition amount?
40. Loan ₱500,000 at 12%, EIR 10%. Yearly interest income?

D. Receivable Financing & Advanced Situations (41–50)

41. Company pledges all receivables ₱1,000,000 for ₱600,000 loan. How presented?
42. Company assigns ₱500,000 receivables, receives ₱400,000 cash. Entry?
43. Factoring ₱200,000 receivables, without recourse, factor fee ₱10,000. Entry?
44. Factoring ₱300,000 receivables, with recourse, recourse liability ₱15,000. Entry?
45. Which is riskier: pledging, assignment, or factoring without recourse?
46. Derecognition under PFRS 9 requires: transfer of ___ and ___ of receivables.
47. If receivables sold but risks retained, treatment?
48. If collectibility highly uncertain, classify as:
49. Notes receivable due in 5 years are:
a) Current asset
b) Non-current asset

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 c) Equity
d) Liability
50. Which is NOT an example of “other receivables”?
a) Advances to suppliers
b) Accrued interest income
c) Accounts receivable from customers
d) Claims from insurance

✅ Answer Key (Condensed)

MCQ (1–20):
1c 11b
2a 12b
3c 13b
4c 14b
5c 15a
6b 16b
7a 17a
8b 18b
9b 19b
10b 20b

21. Sales P100,000, terms 2/10, n/30. Customer paid within discount period. Gross method entry?
Explanation: Under the gross method you record the full sale first (P100,000). If customer pays within the discount
period (2% discount), you record cash received net of discount and then record the discount separately.
Discount = 2% of 100,000 = 0.02 × 100,000 = P2,000.
Cash collected = 100,000 − 2,000 = P98,000.
Journal (when cash received within discount):
• Dr Cash 98,000
• Dr Sales Discounts 2,000
• Cr Accounts Receivable 100,000
(If the original sale entry was: Dr AR 100,000 / Cr Sales 100,000.)

22. Same as #21, but payment after discount period. Gross method entry?
Explanation: No discount taken. Customer pays full P100,000.
Journal (cash received after discount period):
• Dr Cash 100,000
• Cr Accounts Receivable 100,000

23. Using net method, customer fails to take discount. Entry for late payment?
Explanation: Under the net method you record the sale net of expected discount at the time of sale. For 2/10, n/30
you record sale at 98% of 100,000 = P98,000 and set up a contra (Sales Discounts Forfeited) if discount is not taken.
When customer pays late (no discount), you record the extra 2,000 as interest / discount forfeited (Other Income or
Sales Discounts Forfeited).
At sale (net method):
• Dr Accounts Receivable 98,000
• Cr Sales 98,000
When customer pays after discount period (pays full 100,000):
• Dr Cash 100,000
• Cr Accounts Receivable 98,000
• Cr Interest Income / Sales Discounts Forfeited 2,000
(That 2,000 is income because customer didn’t take the discount.)
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24. Sales P500,000; returns P20,000; discounts P10,000; estimated uncollectibles P15,000. Compute NRV of
receivables.
Explanation & math (digit-by-digit):
Gross receivables from sales = P500,000.
Less returns: 500,000 − 20,000 = 480,000.
Less discounts: 480,000 − 10,000 = 470,000 (this is net receivables before bad-debt).
Less estimated uncollectibles: 470,000 − 15,000 = P455,000.
Answer: NRV of receivables = P455,000.

25. Beginning A/R P200,000; sales P500,000; collections P450,000; returns P10,000. Compute ending A/R.
Explanation & math:
Start A/R = 200,000.
Add sales: 200,000 + 500,000 = 700,000.
Less collections: 700,000 − 450,000 = 250,000.
Less returns (if returned goods reduce receivables): 250,000 − 10,000 = P240,000.
Answer: Ending A/R = P240,000.

26. Allowance method: A/R P100,000, 5% doubtful. Entry?

Explanation: 5% of A/R → 0.05 × 100,000 = P5,000 required allowance.
If no allowance yet (record estimate):
• Dr Bad Debt Expense 5,000
• Cr Allowance for Doubtful Accounts 5,000

27. Write-off customer P4,000 under allowance method. Entry?

Explanation: Remove the specific AR and use the allowance.
Journal:
• Dr Allowance for Doubtful Accounts 4,000
• Cr Accounts Receivable 4,000
(No effect on expense at write-off time — expense was estimated earlier.)

28. Recovery of P2,000 written-off previously. Entries?

Explanation: Two steps — reinstate AR, then record cash collection.
1. Reinstate receivable:
• Dr Accounts Receivable 2,000
• Cr Allowance for Doubtful Accounts 2,000
2. Record cash collection:
• Dr Cash 2,000
• Cr Accounts Receivable 2,000
(After both entries, net effect is Cash +2,000 and allowance remains as before.)

29. A/R aging shows allowance required = P30,000. Existing credit balance in allowance = P10,000. Entry?
Explanation: Need allowance to be 30,000 but currently already +10,000. Increase by 20,000.
Journal:
• Dr Bad Debt Expense 20,000
• Cr Allowance for Doubtful Accounts 20,000

30. Same as #29, but existing debit balance in allowance = P5,000. Entry?
Explanation: A debit balance of 5,000 means previous estimates were too low and write-offs exceeded allowance.
To get to a credit balance of 30,000 you must record 35,000 (because −5,000 + 35,000 = +30,000).
Journal:
• Dr Bad Debt Expense 35,000

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 • Cr Allowance for Doubtful Accounts 35,000

C. Notes Receivable (31–40)

31. Accepted 12% note, P100,000, 1 year. Entry at issuance?
Explanation: If customer gave a note in settlement of Accounts Receivable, you remove AR and record Notes
Receivable.
Journal (on acceptance of note):
• Dr Notes Receivable 100,000
• Cr Accounts Receivable 100,000
(If the note was received for cash sales, you’d credit Sales instead of AR.)

32. Same note, accrual after 6 months. Entry?

Explanation & math: Interest for 6 months = Principal × rate × time = 100,000 × 0.12 × (6/12)
Do the math: 100,000 × 0.12 = 12,000; × 0.5 = 6,000.
Journal (to accrue interest earned for 6 months):
• Dr Interest Receivable 6,000
• Cr Interest Revenue 6,000

33. Same note, maturity collection (after 1 year). Entry?

Explanation & math: Interest for 12 months = 100,000 × 0.12 × 1 = 12,000. Total cash collected = principal + interest =
100,000 + 12,000 = 112,000.
If you already accrued 6,000 earlier:
• Dr Cash 112,000
• Cr Notes Receivable 100,000
• Cr Interest Receivable 6,000
• Cr Interest Revenue 6,000
(That records the remaining 6,000 interest and collects everything.)
If no prior accrual:
• Dr Cash 112,000
• Cr Notes Receivable 100,000
• Cr Interest Revenue 12,000

34. Non-interest note with face P120,000, PV P100,000. Entry at issuance?

Explanation: A non-interest (zero-coupon) note: the difference between face and present value is a discount that
will be amortized as interest.
Face = 120,000; Present value = 100,000 → Discount = 120,000 − 100,000 = P20,000.
Journal at issuance (when you receive PV cash):
• Dr Cash 100,000
• Dr Discount on Notes Receivable 20,000
• Cr Notes Receivable (face) 120,000
(Discount is a contra to Notes Receivable; amortize it to interest revenue over time.)

35. Above note, recognize discount amortization P10,000. Entry?

Explanation: Move part of the discount into interest revenue when amortized.
Journal:
• Dr Discount on Notes Receivable 10,000
• Cr Interest Revenue 10,000
(After this, unamortized discount decreases and interest revenue increases.)

36. Note discounted P50,000 at 10%, term 6 months, 2 months left. What's the bank discount?
Explanation & math: Bank discount is usually computed on the face (or maturity) amount for the remaining time.
Using the simple approach: Discount = Face × bank rate × time remaining.
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Face = 50,000; rate = 10% = 0.10; time remaining = 2/12 = 0.166666...
Compute step by step:
50,000 × 0.10 = 5,000.
5,000 × (2/12) = 5,000 × 0.1666667 ≈ 833.33.
Answer: Bank discount ≈ P833.33.
(So the holder would receive maturity − 833.33 as proceeds, ignoring any other fees.)

37. If discounted with recourse, entry is treated as:

Explanation (simple): With recourse means the seller guarantees collectibility — the bank can demand payment
from the seller if the maker fails. Economically this is treated like a loan (a financing), not a sale. You either keep the
note on the books or record a liability (recourse liability) and recognize interest/fees.
Typical treatment: record cash received, record liability for proceeds (or keep Note Receivable and record
borrowing). Example (if you treated as borrowing):
• Dr Cash (proceeds)
• Dr Loss on Discount (fee)
• Cr Notes Receivable (full face) — OR Cr Loan Payable / Recourse Liability (amount of proceeds as a liability)
(Exact wording depends on company policy; main point: treated as a loan/financing.)

38. If discounted without recourse, entry is treated as:

Explanation: Without recourse is a true sale — remove note from books and recognize any gain or loss. You
derecognize the note and record cash received and any loss (discount).
Typical journal (sale):
• Dr Cash (proceeds)
• Dr Loss on Sale of Notes (if proceeds < carrying amount)
• Cr Notes Receivable (carrying amount removed)
(Here the note is removed from seller’s books; risk transfers to bank.)

39. Loan granted P500,000, transaction cost P10,000. Initial recognition amount?
Explanation: Transaction costs reduce the net proceeds. The initial carrying amount of the loan (if measured at
amortized cost) is the net of cash advanced less transaction costs (or fair value depending on rules). So net initial
recognition = 500,000 − 10,000 = P490,000.
Practical journal (if you consider net):
• Dr Loan Receivable 500,000
• Dr Loan Origination Costs (or Capitalized fees) 10,000 (or net as discount)
• Cr Cash 500,000
Then amortize the 10,000 over life as part of interest income.
(But short answer: initial amount net = P490,000.)

40. Loan P500,000 at 12%, EIR 10%. Yearly interest income?

Explanation: If using the effective interest rate (EIR) method, interest income recognized = carrying amount × EIR.
So interest income = 500,000 × 0.10 = P50,000 per year.
(If coupon cash interest is 12% you'd actually receive 500,000 × 0.12 = 60,000 cash, but interest income for
accounting = 50,000 if EIR = 10%. The 10,000 difference is adjustment to carrying amount.)

CEZAR, LORINE
Financing (41–50):
41. Disclosure only (secured borrowing)
42. Dr Cash 400k / Cr Loan Payable 400k
43. Dr Cash 190k / Dr Loss 10k / Cr A/R 200k
44. Dr Cash 285k / Dr Loss 15k / Cr A/R 300k / Cr Recourse Liability 15k
45. Factoring with recourse
46. Risks and rewards
47. Secured borrowing
48. Non-current asset (impaired receivable)
49. b
50

📘 Inventories (PAS 2, PFRS)

1. Nature of Inventories
Defined by PAS 2 as assets that are:
1. Held for sale – Finished goods (e.g., clothes in retail, cars in dealership).
2. In process of production – Work in process (WIP) (e.g., half-assembled furniture, bread dough).
3. Materials or supplies – Raw materials used in production or services (e.g., flour, wood, cleaning supplies).

2. Ownership of Inventories
Ownership depends on control, not always physical possession.
• FOB Shipping Point – Buyer owns once shipped. Freight in → inventory.
• FOB Destination – Buyer owns once received. Freight out → selling expense.
• Freight Collect – Buyer pays freight.
• Freight Prepaid – Seller pays freight.
Special Cases
• Consigned goods → belongs to consignor.
• Inventory financing agreements → borrower still owns.
• Sales with right of return → buyer owns unless unsalable.
• Sale on trial/approval → seller owns until accepted.
• Installment sales → ownership depends on contract.
• Bill-and-hold → buyer owns if conditions met.
• Layaway sales → seller owns until paid.

3. Cost of Inventories
Measured at cost, including:
1. Purchase costs (price, import duties, freight in, brokerage, handling).
2. Conversion costs (direct labor + overhead).
3. Other necessary costs (bringing to present condition/location).
Excluded Costs
• Abnormal waste, selling costs, admin overhead, unnecessary storage.
Discounts
• Trade discounts – deducted from invoice price, not recorded separately.
• Cash discounts
• Gross method → discount recognized when taken.
• Net method → assume discount taken; if missed, record as expense.

4. Classification of Inventories
• By Nature: Merchandise, Raw materials, WIP, Finished goods, Supplies.
• By Function: For sale, For production.

CEZAR, LORINE
 • By Ownership: Owned, Consigned, With third parties.
Measured at lower of cost and NRV.

5. Systems of Recording
• Perpetual system – real-time updating, continuous COGS.
• Periodic system – update only at period end using stock count.

6. Cost Formulas
• Specific Identification – for unique, non-interchangeable items.
• FIFO (First-In, First-Out) – oldest costs → COGS, newest → inventory.
• Weighted Average – average cost per unit (periodic or moving).
• LIFO – prohibited under PAS 2.

7. Inventory Valuation
• NRV = Estimated selling price – (completion + selling costs).
• Always use lower of cost and NRV.
Write-downs
• Recorded as expense (COGS).
• If significant/abnormal → record as loss.
• Reversals allowed up to original write-down.
Raw Materials
• Not written down if finished goods will sell at/above cost.

8. Purchase Commitments
• Firm, non-cancelable contracts.
• If market value < contract price → recognize loss.
• If price rises later → reversal only up to loss recognized.

✅ Key Takeaways for Exams:

• Always check ownership rules under FOB/consignment.
• Know what costs are capitalized vs. expensed.
• Distinguish gross vs. net method of cash discounts.
• Compare FIFO vs. Weighted Average results.
• Apply LCNRV rule for valuation.
• Remember: LIFO not allowed under PAS 2.

📘 Inventories Reviewer

A. Multiple Choice (Concepts)

1. Which of the following is NOT considered inventory under PAS 2?
a) Finished goods
b) Raw materials
c) Office furniture used by admin staff
d) Work in process
2. Goods shipped under FOB shipping point become the property of the:
a) Seller upon shipment
b) Buyer upon shipment
c) Buyer upon arrival
d) Seller upon arrival

3. Freight-in is treated as:

a) Selling expense
CEZAR, LORINE
 b) Part of inventory cost
c) Deduction from purchases
d) Administrative expense
4. Consigned goods are included in the inventory of:
a) Consignee
b) Consignor
c) Buyer
d) Carrier
5. Which cost is excluded from inventory?
a) Freight charges to warehouse
b) Broker’s commission
c) Sales commissions
d) Import duties
6. Trade discounts should be:
a) Added to purchases
b) Deducted from list price
c) Recorded as expense
d) Shown as income
7. Under the net method of cash discounts, if the discount is not availed:
a) It reduces inventory cost
b) It is recorded as “Purchase Discounts Lost” (expense)
c) It is ignored
d) It increases sales revenue
8. Which method is prohibited by PAS 2?
a) FIFO
b) Weighted Average
c) LIFO
d) Specific Identification
9. Under FIFO, the cost assigned to ending inventory comes from:
a) Oldest purchases
b) Most recent purchases
c) Average of purchases
d) Any unit
10. NRV is defined as:
a) Current replacement cost
b) Selling price less selling expenses
c) Cost + profit
d) Market value

B. Situational / Problem Solving (Basic Applications)

11. LJB Co. sells goods at P100,000 under FOB shipping point, freight collect (P10,0oo). Who records the freight-
in?
12. A company buys goods at list P10,000, less 20% and 10% trade discounts, with 2/10 n/30. Compute invoice
amount (gross of cash discount).
13. Using the same data, under net method, if paid within discount, what is the entry for Accounts Payable? 14.
Aman Co. has items in bodega P4,0o0,000. Goods FOB Destination P300,00o0 were excluded, and damaged
goods P50,000 included. Compute correct inventory.
15. Beginning inventory P1o0,000; Purchases Pso0,000; Freight-in P20,000; Ending inventory Pi20,000. Compute
COGS (periodic).
16. FIFO vs. LIFO: Units available 3,00o, costs Ps,800; ending inventory soo units. Under FIFO, El = P1,250; under
LIFO, El = Pso0. Compute difference in COGS.
CEZAR, LORINE
17. ABC Co. has 2,000 units @ P36, purchases 3,000 @ P37.20, sold 4,200, return 60o, purchase 4,800 @ P38.
Under FIFO, compute ending inventory.
18. Leah Co. inventory: Product X cost Pı20, NRV Pı28; Product Y cost P230, NRV P210. Which products need
write-down?
19. If write-down in 2022 was P20,00o but NRV rose in 2023, prepare the reversal entry.
20. A firm purchase commitment obligates buyer to accept delivery. If goods decline in value, how should buyer
record the loss?

C. Problem Solving (Numerical - Computation)

21. Beginning Inventory: 1,00o units @ Pso. Purchases: 2,0oo units @ Ps5. Sales: 2,500 units. Compute El under
FIFO.
22. Using same data, compute El under Weighted Average.
23. Company buys goods P5,0o0,000, import duties P400,000, freight P1,000,000, brokerage P200,000.
Compute total purchase cost.
24. Which method (FIFO or Weighted Average) gives same result under both periodic & perpetual?
25. A company has: Beginning Inv P20o,000, Net Purchases P8o0,00o, Ending lnv P250,000. Compute COGS. 26.
Beginning Inv P300,000; Purchases Po0,000; Freight-in P5o,o00; Purchase returns P20,000. Ending Inv P280,000.
Compute Net Purchases and COGS.
27. Aman Co. had goods in transit: FOB SP P100,000, FOB Dest P8o,0o0. Which should be included in El?
Compute total if El physically counted = P500,000.
28. A company writes down Product A from P150 to NRV Pı20 for 1,000 units. Compute write-down and adjusting
entry.
29. Company pledges inventory Pi,000,000 as collateral. Should it be included in El? Explain.
30. If sales returns occur under perpetual system, how are accounts affected compared to periodic system?

D. Advanced Situational Problems

31. Beginning inventory 500 (@ P40. Purchases: 70o @ P4z; 80o @ P44. Sales: 1,500 units. Compute El under
FIFO.
32. Same data: compute El under Weighted Average -periodic.
33. Compute El if perpetual weighted average is used (with recalculation after each purchase).
34. A company sold 1,000 units but discovered 5o damaged goods included in count at Pz5/unit. Compute
corrected El.
35. Aman Co. had ending inventory per count P1,00o,000, including P200,000 consigned goods and P1o0,000
FOB Dest goods. Compute corrected EI.
36. Compute loss if firm purchase commitment requires 15,000 units at P25, but market falls to P18.
37. Compute gain if next year market rises to P22. Assume loss in #B6 was recognized.
38. A company has raw materials P60,000 (NRV P5o,000) and finished goods P100,000 (NRV P120,000). Should
raw materials be written down? Why?
39. Compute adjustment entry for reversal: 2022 El write-down P30,000, 2023 NRV recovery P20,000. 40. A
company reports El P500,000 but forgot to include freight-in P20,00o. What is corrected EI?

E. Higher Thinking/ Essay-Type Problem Solving

41. Why is LIFO prohibited in PAS 2? Give 2 reasons.

42. What's the effect of FIFO on income during rising prices?
43. Why are abnormal costs excluded from inventory? Give examples.

CEZAR, LORINE
 44. Why does PAS2 use lower of cost and NRV?
45. Why is specific identification impractical for interchangeable goods? 46. In consignment, why does consignee
not record inventory?
47. Compare perpetual vs periodic in terms of control and accuracy.
48. How is sales return handled differently in perpetual vs periodic?
49. Why is freight-in added but freight-out excluded from inventory?
50. Why are reversals of write-downs limited only to the original amount?

✅ Answer Key
MCQ:
1c
2b
3b
4b
5c
6b
7b
8c
9b
10b

B. Situational / Problem Solving (Basic Applications)

11 Facts: LJB sells goods P100,000 FOB shipping point, freight collect P10,000.
Who records freight-in?
Answer: The buyer.
Why: FOB shipping point means ownership transfers to buyer at shipment → buyer pays freight (even if billed
“collect”) and treats it as freight-in (part of inventory cost).

12 Buy at list P10,000, trade discounts 20% and 10% (successive), terms 2/10, n/30. Compute invoice amount (gross of
cash discount).
Step 1: Apply 20%: 10,000 × (1 − 0.20) = 10,000 × 0.80 = P8,000.
Step 2: Apply 10%: 8,000 × (1 − 0.10) = 8,000 × 0.90 = P7,200.

Answer (invoice, gross of cash discount): P7,200.

13 Same data, net method — paid within discount (2%). What is the Accounts Payable entry?
Under net method you record the purchase net of the expected cash discount at purchase.

Invoice net of 2% discount = 7,200 × (1 − 0.02) = 7,200 × 0.98 = P7,056.

At purchase (on credit) — journal:

• Dr Inventory P7,056
• Cr Accounts Payable P7,056

When paying within discount period:

• Dr Accounts Payable P7,056
• Cr Cash P7,056

CEZAR, LORINE
14 Aman Co. items in bodega P4,000,000. Goods FOB Destination P300,000 were excluded (not counted). Damaged
goods P50,000 included. Compute correct inventory.
• FOB Destination goods are not owned by buyer until delivered → excluding them is correct.
• Damaged goods that should be excluded (unsellable at normal cost) must be removed.

Correct inventory = 4,000,000 − 50,000 = P3,950,000.

15 Beg Inv P100,000; Purchases P500,000; Freight-in P20,000; End Inv P120,000. Compute COGS (periodic).
COGS = Beg Inv + Purchases + Freight-in − Ending Inv
= 100,000 + 500,000 + 20,000 − 120,000 = P500,000.

16 Units available cost P5,800; units available = 3,000; ending units = 500.
Under FIFO, EI = P1,250. Under LIFO, EI = P500. Compute difference in COGS.

Total cost available = P5,800.

COGS_FIF O = 5,800 − 1,250 = P4,550.
COGS_LIFO = 5,800 − 500 = P5,300.
Difference in COGS (LIFO − FIFO) = 5,300 − 4,550 = P750.

(So LIFO COGS is P750 higher than FIFO.)

17 ABC Co. beginning 2,000 units @P36; purchase 3,000 @P37.20; sold 4,200; return 600; purchase 4,800 @P38.
Under FIFO, compute ending inventory.

Interpretation: sales of 4,200 with returns of 600 → net sold = 4,200 − 600 = 3,600 units.
Units available = 2,000 + 3,000 + 4,800 = 9,800.
Ending units = 9,800 − 3,600 = 6,200.

Under FIFO the oldest units are sold first. After selling 3,600, remaining inventory is:
• 1,400 units from the P37.20 layer (3,000 − 1,600 sold from that layer)
• 4,800 units from the P38 layer (untouched)

Compute cost:
1,400 × 37.20 = 52,080
4,800 × 38.00 = 182,400
Ending inventory = 52,080 + 182,400 = P234,480.

18 Leah Co.: Product X cost P120, NRV P128; Product Y cost P230, NRV P210. Which need write-down?
• Product X: cost (120) < NRV (128) → no write-down.
• Product Y: cost (230) > NRV (210) → write down to NRV.
Answer: Only Product Y needs write-down (amount P20 per unit or total depending on quantity).

19 Write-down P20,000 in 2022; NRV rose in 2023. Prepare reversal entry.

(If reversal is permitted — IFRS allows; US GAAP generally does not.)
If allowed, reverse up to the amount previously written down, here P20,000 or up to the recovered amount.

Journal (reversal):
• Dr Inventory P20,000
• Cr Reversal of Inventory Write-down (Other income) P20,000

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(Note: disclose reason; reversal cannot exceed original write-down.)

20 Purchase commitment obligates buyer to accept delivery. If goods decline in market value, how does buyer
record the loss?
Answer: Recognize a loss for the difference between the contract price and the lower market/NRV and record a
liability for the purchase commitment.
Journal (at recognition):
• Dr Loss on Purchase Commitment (or Inventory Loss) (contract price − market)
• Cr Liability for Purchase Commitment (same amount)

C. Problem Solving (Numerical — Computation)

21 Beg inv 1,000 units @P50; Purchases 2,000 units @P55; Sales 2,500 units. Compute EI under FIFO.

Units available = 1,000 + 2,000 = 3,000.

Units sold = 2,500 → EI units = 500.
Under FIFO ending units are the most recent: they come from purchase @P55.
EI = 500 × 55 = P27,500.

22 Same data — EI under Weighted Average (periodic).

Total cost = 1,000×50 + 2,000×55 = 50,000 + 110,000 = 160,000.
Average cost/unit = 160,000 ÷ 3,000 = P53.3333.
EI = 500 × 53.3333 = P26,666.67 (rounded P26,667).

23 Company buys goods P5,000,000; import duties P400,000; freight P1,000,000; brokerage P200,000. Compute
total purchase cost.
Total cost = 5,000,000 + 400,000 + 1,000,000 + 200,000 = P6,600,000.

(These freight/duties/brokerage are capitalized as part of inventory cost.)

24 Which method yields same result under periodic & perpetual?

Answer: FIFO (FIFO produces the same ending inventory under periodic and perpetual when no other complications
exist). (Weighted average differs if perpetual uses moving average.)

25 Beg Inv P200,000; Net Purchases P800,000; Ending Inv P250,000. Compute COGS.
COGS = Beg + Net Purchases − Ending = 200,000 + 800,000 − 250,000 = P750,000.

26 Beg Inv P300,000; Purchases P700,000; Freight-in P50,000; Purchase returns P20,000; Ending Inv P280,000.
Net purchases = Purchases − Returns + Freight-in = 700,000 − 20,000 + 50,000 = P730,000.
COGS = Beg + Net purchases − Ending = 300,000 + 730,000 − 280,000 = P750,000.

27 Goods in transit: FOB SP P100,000; FOB Dest P80,000. Which included in EI? Physical counted = P500,000.
Compute corrected EI.
• FOB shipping point (SP) belongs to buyer → include P100,000.
• FOB destination belongs to seller until delivered → do not include P80,000.
Corrected EI = Physical count + 100,000 = 500,000 + 100,000 = P600,000.

CEZAR, LORINE
28 Write down Product A from P150 → NRV P120 for 1,000 units. Compute write-down & entry.
Write-down per unit = 150 − 120 = 30.
Total write-down = 30 × 1,000 = P30,000.

Journal:
• Dr Loss on Inventory Write-down (or Expense) P30,000
• Cr Inventory P30,000

29 Company pledges inventory P1,000,000 as collateral. Included in EI?

Answer: Yes. Pledging as collateral does not transfer ownership — inventory remains part of ending inventory but
must be disclosed in the notes (that P1,000,000 is pledged).

30 Sales returns — perpetual vs periodic: how accounts are affected?

• Perpetual system: record the return immediately with two entries:
1. Reverse sales: Dr Sales Returns (or Sales Returns & Allowances) / Cr Cash or Accounts Receivable.
2. Put goods back into inventory: Dr Inventory / Cr Cost of Goods Sold (COGS) for the cost of returned
goods.
• Periodic system: only record a Sales Returns account (Dr Sales Returns / Cr A/R). Inventory and COGS are
adjusted only at period-end via physical count and ending inventory computation.

D. Advanced Situational Problems

31 Beg inv 500 @P40; Purchases 700 @P42; 800 @P44; Sales 1,500. Compute EI under FIFO.
Total units available = 500 + 700 + 800 = 2,000. Sales 1,500 → EI units = 500. FIFO: sell oldest first, remaining are from
last layer (P44).
EI = 500 × 44 = P22,000.

32 Same data — El under Weighted Average (periodic).

Total cost = 500×40 + 700×42 + 800×44 = 20,000 + 29,400 + 35,200 = P84,600.
Average cost/unit = 84,600 ÷ 2,000 = P42.30.
EI = 500 × 42.30 = P21,150.

33 Perpetual weighted average (moving average) — compute El (recalculated after each purchase).
If the sales occur after all purchases, the moving average after the last purchase equals the periodic average so EI =
P21,150 (same as #32).
If sales happened between purchases, the perpetual result would differ — you’d recalc average after each purchase
and use that average for subsequent sales.

34 Company sold 1,000 units but discovered 50 damaged goods included in count at P25/unit. Compute corrected EI.
The damaged goods reduce the count of salable units by 50 × 25 = P1,250.
Adjustment amount: reduce inventory by P1,250 (and record loss if unsellable).

35 Ending inventory per count P1,000,000 includes P200,000 consigned goods and P100,000 FOB Destination goods.
Compute corrected EI.
• Consigned goods are not owned → exclude P200,000.
• FOB Destination goods not yet delivered belong to seller → exclude P100,000.
Corrected EI = 1,000,000 − 200,000 − 100,000 = P700,000.

CEZAR, LORINE
36 Purchase commitment: 15,000 units at P25; market falls to P18. Compute loss.
Loss per unit = 25 − 18 = P7. Total loss = 7 × 15,000 = P105,000.
Journal:
• Dr Loss on Purchase Commitment P105,000
• Cr Liability for Purchase Commitment P105,000

37 Next year market rises to P22. Assume prior loss (P105,000) was recognized. Compute gain on recovery.
Recovery per unit = 22 − 18 = P4. Total recovery = 4 × 15,000 = P60,000.
Journal to reverse part of prior loss (up to previously recognized amount):
• Dr Liability for Purchase Commitment P60,000
• Cr Gain on Purchase Commitment (or Other Income) P60,000

(You only reverse up to the loss previously recognized.)

38 Raw materials P60,000 (NRV P50,000); Finished goods P100,000 (NRV P120,000). Should raw materials be
written down? Why?
Yes — raw materials cost (60,000) > NRV (50,000) → write down raw materials by P10,000. Finished goods need no
write-down because NRV > cost.

39 2022 EI write-down P30,000; 2023 NRV recovery P20,000. Compute reversal entry.
You may reverse up to the original write-down. Here recovery = P20,000 (less than 30,000), so reverse 20,000.

Journal:
• Dr Inventory P20,000
• Cr Recovery of Inventory Write-down (Other income) P20,000

(Net effect: inventory is increased back by 20k; disclose.)

40 Company reports EI P500,000 but forgot freight-in P20,000. Corrected EI?

Freight-in is part of cost of purchases and should be included in ending inventory if relating to goods on hand.
Corrected EI = 500,000 + 20,000 = P520,000.

D. Essay-Type Problem Solving

41. Why is LIFO prohibited in PAS 2? Give 2 reasons.
42. What’s the effect of FIFO on income during rising prices?
43. Why are abnormal costs excluded from inventory? Give examples.
44. Why does PAS 2 use lower of cost and NRV?
45. Why is specific identification impractical for interchangeable goods?
46. In consignment, why does consignee not record inventory?
47. Compare perpetual vs periodic in terms of control and accuracy.
48. How is sales return handled differently in perpetual vs periodic?
49. Why is freight-in added but freight-out excluded from inventory?
50. Why are reversals of write-downs limited only to the original amount?

Essay (41–50)
41 – LIFO distorts values, reduces comparability.
42 – Lower COGS, higher income.
43 – Not normal production cost (e.g., waste, spoilage).
44 – Prevents overstatement of assets.
45 – Tracking cost impractical for mass items.
46 – No ownership by consignee.
47 – Perpetual = real-time; Periodic = end-of-period only.
CEZAR, LORINE
48 – Perpetual reverses COGS immediately; Periodic adjusts later.
49 – Freight-in necessary to bring asset to condition; Freight-out = selling cost.
50 – Conservatism, avoid overstating assets.

📘 Investment in Equity and Debt Securities

1. Nature of Investments
Definition: Assets acquired to earn returns, secure relationships, meet requirements, or protect against losses.
Purposes of Investments:
1. To Earn Profit
• Held-for-trading securities (short-term gains).
• Equity securities at FVOCI (long-term gains/dividends).
• Debt securities at FVOCI or Amortized Cost (interest).
• Investment property (rent/long-term appreciation).
2. To Secure Strategic/Beneficial Relationships
• Associate (significant influence).
• Subsidiary (control).
• Joint venture (joint control).
3. To Meet Business Requirements
• Long-term funds (sinking fund, redemption, expansion, replacement).
4. To Provide Protection Against Losses
• Contingency/insurance fund.
• Cash surrender value of life insurance.
• Derivatives as hedging instruments.

2. Investment in Securities
Securities = financial instruments traded in markets.
• Equity securities: ownership (ordinary shares, preference shares, warrants).
• Debt securities: creditor relationship (bonds, debentures, notes).
⚖️ Rule: Substance > form (e.g., redeemable preference shares → treated as debt).

3. Classification & Accounting for Investments

Initial
Classification Composition Measurement Subsequent Effect on Income

FVPL Debt/Equity (trading) Fair value Fair value P&L (gains/losses)

FVOCI (election) Equity (non-trading) FV + costs Fair value OCI (no recycling)

FVOCI OCI (recyclable), interest &

(mandatory) Debt (hold & sell, SPPI) FV + costs Fair value impairments → P&L

Debt (hold to collect, Amortized

Amortized Cost SPPI) FV + costs cost Interest & impairments → P&L

CEZAR, LORINE
4. Financial Assets
Definition: Assets that represent cash, ownership, or contractual right.
Examples: cash, receivables, investments, derivatives, funds, insurance value.
Tests for Classification:
1. Business Model Test – hold to collect / hold to sell.
2. Cash Flow Characteristics (SPPI Test) – cash flows = principal + interest only.

5. Recognition & Measurement

• Recognize when entity is party to the contract.
• Initially measured:
• FVPL → fair value.
• FVOCI/Amortized Cost → fair value + transaction costs.
• Subsequent: depends on classification (see table above).

6. Equity Investments (Examples)

• FVPL – held for trading; changes in value → P&L.
• FVOCI – long-term election; changes in value → OCI.
• Subsequent transactions:
• Share split → memo entry only.
• Dividends → income (cash/property/scrip) or equity adjustment (share).
• Rights issue → adjust carrying value.

7. Debt Investments
a. Amortized Cost
• Business model: hold to collect; SPPI test passed.
• Use Effective Interest Method to amortize premiums/discounts.
• Disposal: update amortization, derecognize, record gain/loss.
b. FVPL
• Held for trading or not meeting amortized/FVOCI conditions.
• All fair value changes → P&L.
• Transaction costs expensed immediately.
c. FVOCI
• Business model: hold to collect & sell; SPPI test passed.
• Interest → P&L.
• Changes in FV → OCI (recycled to P&L upon disposal).

8. Impairment of Debt Investments (PFRS 9 – ECL Model)

• Uses Expected Credit Loss (ECL) model, not incurred loss.
Stages:
1. Stage 1 (Performing) – 12-month ECL.
2. Stage 2 (Underperforming) – Lifetime ECL.
3. Stage 3 (Credit-impaired) – Lifetime ECL; interest on net basis.
Simplified Approach: Always use lifetime ECL (for receivables, lease, contracts).

✅ Key Takeaways:
• Classification depends on business model + SPPI test.
• FVPL = always in profit/loss, FVOCI = goes to OCI.
• Amortized cost = effective interest method.
• Equity FVOCI = no recycling, Debt FVOCI = recyclable to P&L.

CEZAR, LORINE
 • Impairment → ECL model (forward-looking).

📘 Investment in Equity & Debt Securities

Part A. Equity Investments

1. FVPL (Trading)
On January 1, 2025, Alpha Co. purchased 1,000 shares of XYZ Corp. at ₱50 per share plus ₱10,000 broker’s
commission. On December 31, the shares are quoted at ₱60 each.
Required: Record initial recognition and year-end adjustment.
Solution:
• Initial:
Dr Investment in FVPL ₱60,000 (₱50,000 + ₱10,000)
Cr Cash ₱60,000
• Year-end FV adj:
FV = 1,000 × ₱60 = ₱60,000
Carrying = ₱60,000
→ No change (already at fair value including costs).
⚖️ If purchased at ₱50,000 only (no costs), adj = ₱10,000 gain → P&L.

2. FVOCI (Election – Equity)

Beta Co. bought 2,000 shares at ₱80 each (₱160,000). FV on Dec 31 = ₱200,000.
Required: Adjust investment value.
Solution:
• Initial: Dr Equity FVOCI ₱160,000 / Cr Cash ₱160,000
• Year-end: FV increase = ₱40,000
Dr Equity FVOCI ₱40,000
Cr OCI – Unrealized Gain ₱40,000
📌 Gains go to OCI (no recycling to P&L).

3. Dividends on FVOCI
Using #2, company received ₱4,000 dividends in cash.
Entry:
Dr Cash ₱4,000
Cr Dividend Income ₱4,000

Part B. Debt Investments

4. Amortized Cost – Bond at Discount
On Jan 1, 2025, ABC Co. buys ₱1,000,000 bonds for ₱950,000 (10% coupon, payable annually, 5 years, market yield
12%).
Required: Compute interest income (Year 1) using effective interest method.
Solution:
• Interest received = ₱1,000,000 × 10% = ₱100,000
• Effective income = ₱950,000 × 12% = ₱114,000
• Amortization = ₱14,000 (increase in carrying amount).
Entry:
Dr Cash ₱100,000
Dr Investment in Bonds ₱14,000
Cr Interest Income ₱114,000

5. Amortized Cost – Bond at Premium

XYZ Co. buys ₱500,000 bonds for ₱540,000 (12% coupon, yield 10%).
Year 1 Interest:
CEZAR, LORINE
 • Cash received = ₱500,000 × 12% = ₱60,000
• Effective income = ₱540,000 × 10% = ₱54,000
• Amortization = ₱6,000 (decrease in carrying amount).
Entry:
Dr Cash ₱60,000
Cr Investment in Bonds ₱6,000
Cr Interest Income ₱54,000

6. FVOCI – Debt Investment

Company buys bonds ₱1,000,000 (cost = FV). Year-end FV = ₱1,050,000.
Entry:
Dr Debt FVOCI ₱50,000
Cr OCI – Unrealized Gain ₱50,000
📌 Upon disposal → recycle to P&L.

7. FVPL – Debt Investment

If same ₱1,000,000 bonds are at FVPL, year-end adj is:
Dr Debt FVPL ₱50,000
Cr Gain on FVPL ₱50,000
📌 Goes straight to P&L.

Part C. Impairment (ECL Model)

8. Stage 1 (12-month ECL)
A loan of ₱1,000,000 has 2% default probability. Loss given default (LGD) = 40%.
ECL = Exposure × PD × LGD
= ₱1,000,000 × 2% × 40% = ₱8,000
Entry:
Dr Impairment Loss ₱8,000
Cr Allowance for ECL ₱8,000

9. Stage 2 (Lifetime ECL)

Same loan deteriorates; PD increases to 10%.
ECL = ₱1,000,000 × 10% × 40% = ₱40,000
Adjustment needed = ₱32,000 more (40,000 – 8,000).
Entry:
Dr Impairment Loss ₱32,000
Cr Allowance ₱32,000

10. Stage 3 (Credit-Impaired)

Borrower defaults; expected recovery = ₱300,000.
Carrying = ₱1,000,000 – ₱40,000 = ₱960,000
Impairment required = ₱660,000 more.
Entry:
Dr Impairment Loss ₱660,000
Cr Allowance ₱660,000

✅ Key Practice Takeaways

• Equity FVPL → gains/losses in P&L.
• Equity FVOCI → gains/losses in OCI, no recycling.
• Debt FVOCI → OCI but recyclable upon disposal.
• Amortized cost → effective interest method.
• Impairment → use ECL model (forward-looking).
CEZAR, LORINE
 📘 Investments in Equity & Debt Securities

A. Multiple Choice (Concepts – 15 items)

1. Which of the following is a debt security?
a) Bonds
b) Warrants
c) Ordinary shares
d) Share options
2. Preference shares redeemable at a fixed date are classified as:
a) Equity securities
b) Debt securities
c) Derivatives
d) OCI reserves
3. Under PFRS 9, classification of financial assets depends on:
a) Business model & SPPI test
b) Maturity date
c) Company size
d) Interest rate
4. An investment classified as FVPL should be measured at:
a) Cost
b) Fair value through P&L
c) Fair value through OCI
d) Amortized cost
5. Which is not a purpose of investment?
a) Earning returns
b) Strategic control
c) Meeting legal requirements
d) Paying salaries
6. Which of the following may be measured at amortized cost?
a) Trading equity securities
b) Debt securities held-to-collect
c) Equity FVOCI investments
d) Derivatives
7. A business model test aims to determine:
a) If investment is short-term or long-term
b) How entity manages its assets
c) Interest income method
d) Whether dividends are reinvested
8. FVOCI for equity investments allows:
a) Gains/losses recycled to P&L
b) Gains/losses permanently in OCI
c) Always amortized cost
d) None of the above
9. In Effective Interest Method, premium amortization results in:
a) Increasing carrying amount
b) Decreasing carrying amount
c) No effect on carrying amount
d) Ignored
10. Which is correct for Debt FVOCI?
a) Interest in OCI
b) Gains/losses in P&L only
CEZAR, LORINE
 c) Gains/losses in OCI, recycled at disposal
d) Gains/losses ignored
11. Which investment classification is mandatory for derivatives?
a) FVOCI
b) Amortized cost
c) FVPL
d) At cost
12. Which investment records transaction costs as expense immediately?
a) FVPL
b) FVOCI
c) Amortized cost
d) Held-to-collect
13. Dividends received on FVOCI equity securities are recorded as:
a) Increase in OCI
b) Dividend income in P&L
c) Deduction from carrying amount
d) Increase in share capital
14. Impairment model used under PFRS 9:
a) Incurred loss model
b) Expected credit loss (ECL) model
c) Historical cost model
d) Matching model
15. Which of the following is NOT included in financial assets?
a) Cash
b) Accounts receivable
c) PPE
d) Investments in bonds

B. Problem Solving – Equity Securities (10 items)

16. On Jan 1, 2025, A Co. buys 1,000 shares at ₱80 each, ₱5,000 commission. Classify as FVPL. At year-end FV =
₱90. Record year-end adj.
17. Same as #16, but FVOCI election. Record year-end adj.
18. Company buys 500 shares at ₱100 each, FVOCI. At year-end FV = ₱120. Compute unrealized gain.
19. Share dividend of 10% declared. Holding = 2,000 shares @ FVPL. Record dividend.
20. Cash dividend ₱2/share received for 1,000 FVOCI shares. Record entry.
21. A Co. buys equity for ₱200,000 at FVPL. FV at year-end = ₱180,000. Record loss.
22. FVOCI equity: cost ₱300,000, FV at year-end ₱360,000. Record gain.
23. FVOCI shares later sold for ₱380,000 (cost ₱300,000, FV adj ₱360,000). Record disposal.
24. A Co. buys equity at ₱100,000 FVPL. FV decreased by ₱20,000. What is P&L effect?
25. Which is correct: For equity FVOCI, gains are ____________.

C. Problem Solving – Debt Securities (15 items)

26. Bonds face ₱1,000,000, bought at ₱950,000. 10% coupon, 5 years, yield 12%. Compute Year 1 effective
interest income.
27. Same as #26. Compute amortization (discount).
28. Bonds face ₱500,000, bought at ₱540,000. 12% coupon, yield 10%. Compute Year 1 interest income.
29. Same as #28. Compute amortization (premium).
30. Debt FVPL cost ₱1,000,000, FV year-end ₱1,050,000. Record adj.
31. Debt FVOCI cost ₱1,000,000, FV year-end ₱900,000. Record adj.
32. Amortized cost: purchased bonds ₱2,000,000 at 98, 10% coupon, 5 years, yield 12%. Compute first-year
interest income.
33. Bonds purchased ₱1,000,000 FVOCI, FV at disposal ₱1,100,000. Record disposal (recycle).
CEZAR, LORINE
 34. Compute journal entry if FVPL bond rises from ₱500,000 to ₱520,000.
35. FVOCI debt purchased ₱400,000, FV at YE ₱450,000. Record adj.
36. Bonds purchased ₱1,200,000, FVOCI, sold ₱1,250,000. FV adj prior ₱1,230,000. Record sale.
37. Bonds purchased ₱1,000,000 FVPL, FV end ₱980,000. Record loss.
38. Debt security classified at amortized cost: purchased ₱600,000, coupon 8%, yield 10%. Compute interest
income Year 1.
39. Compute discount amortization in #38.
40. Debt FVOCI with FV gain ₱40,000. How does it affect P&L?

D. Impairment & ECL (10 items)

41. Loan ₱1,000,000, PD = 2%, LGD = 40%. Compute 12-month ECL.
42. Same loan, PD increases to 10%. Compute lifetime ECL.
43. What adjustment needed from #41 to #42?
44. Loan becomes credit-impaired, recovery only ₱300,000. Compute loss.
45. Entry to recognize ₱8,000 impairment loss.
46. Entry to increase allowance by ₱32,000.
47. Simplified approach is used for:
a) Bonds
b) Receivables
c) Equity securities
d) FVPL
48. Stage 3 loans recognize interest on:
a) Gross carrying amount
b) Net carrying amount
c) FVOCI
d) Historical cost
49. Which of the following triggers Stage 2?
a) Loan default
b) Credit risk increase
c) Loan origination
d) FV increase
50. Why does PFRS 9 adopt ECL model instead of incurred loss model?

✅ Answer Key
MCQ (1–15):
1a 9b
2b 10c
3a 11c
4b 12a
5d 13b
6b 14b
7b 15c
8b

CEZAR, LORINE
Equity Problems (16–25):

16 (FVPL)
Facts: Jan 1, 2025 — buy 1,000 shares @ P80 = P80,000, commission P5,000 → total cost P85,000. Year-end fair
value = P90,000 (P90/share).
What to do: FVPL securities are remeasured to fair value and unrealized gains/losses hit profit or loss.
Unrealized gain = FV − carrying amount = 90,000 − 85,000 = P5,000.
Journal entries:
At purchase:
• Dr Equity Investments (FVPL) P85,000
• Cr Cash/Bank P85,000
• At year-end remeasurement:
• Dr Equity Investments (FVPL) P5,000
• Cr Unrealized Gain (P&L) P5,000
(That P5,000 increases profit.)

17 (FVOCI election)
Same purchase (cost P85,000) and FV at year-end P90,000.
Under FVOCI, changes in fair value are recorded in OCI, not in profit or loss.
Unrealized gain = P5,000.
Journal (remeasure):
• Dr Equity Investments (FVOCI) P5,000
• Cr Other Comprehensive Income — FVOCI reserve P5,000
(No effect on P&L; shown in OCI / equity.)

18 (compute unrealized gain

Facts: Buy 500 shares @ P1,000 each → cost = P500,000. Year-end FV = P1,200 per share → FV total P600,000.
Classified FVOCI
Unrealized gain = 600,000 − 500,000 = P100,000
Journal (to record FV increase into OCI):
• Dr Equity Investments (FVOCI) P100,000
• Cr OCI — FVOCI reserve P100,000

19 (share dividend 10%, holdings 2,000 @ FVPL

Facts: You hold 2,000 shares classified FVPL; a 10% stock/share dividend is declared → you receive 200 additional
shares (2,200 total)
Short answer / simplest: A share dividend simply increases number of shares — no cash flows. You do not record
dividend income. Instead you update number of shares and remeasure at fair value (for FVPL) if fair value changed
Practical steps:
1. Increase investment by no journal entry for “dividend” itself — reflect new share count.
2. Immediately remeasure the investment to fair value and record any difference in P&L (because FVPL)
(So: no “dividend income” entry. Remeasure to FV — any gain/loss goes to profit or loss.)

CEZAR, LORINE
20 (cash dividend on FVOCI shares
Facts: You own 1,000 FVOCI shares and received cash dividend P2 per share. Cash received = 1,000 × 2 = P2,000
Under IFRS: Dividends from equity instruments are recognized in profit or loss when right to receive is established
Journal:
• Dr Cash P2,000
• Cr Dividend Income (P&L) P2,00
(OCI classification of the investment doesn’t change the fact that dividends go to P&L.)

21 (loss on FVPL
Facts: Purchase for P200,000 (FVPL). Year-end FV = P180,000
Unrealized loss = 200,000 − 180,000 = P20,000 (record in P&L)
Journal (remeasure):
• Dr Unrealized Loss (P&L) P20,000
• Cr Equity Investments (FVPL) P20,000
(This reduces profit.)

22 (gain on FVOCI
Facts: Cost P300,000; year-end FV = P360,000
Unrealized gain = 360,000 − 300,000 = P60,000
Journal:
• Dr Equity Investments (FVOCI) P60,000
• Cr OCI — FVOCI reserve P60,00
(Shows unrealized gain in OCI / equity.)

23 (sell FVOCI shares

Facts: Cost P300,000. Carrying amount at sale = last FV = P360,000 (OCI reserve = P60,000). Sold for P380,000.
What happens on disposal (FVOCI rules)?
• Remove the investment from the books.
• The cumulative FV gains that were in OCI (P60,000) are not recycled to profit or loss; instead they
are transferred within equity to retained earnings.
• The excess of proceeds over carrying amount (P380,000 − P360,000 = P20,000) also increases equity (goes
to retained earnings), not P&L
Journal entries (one common presentation):
1. Remove the investment and record cash received, and transfer cumulative OCI to retained earnings:
• Dr Cash P380,000
• Dr OCI — FVOCI reserve P60,000 (clear the OCI reserve)
• Cr Equity Investments P300,000 (remove original cost)
• Cr Retained Earnings P140,000 (this total credit = 60k + 80k? — see explanation below
Explanation of numbers: This single combined entry clears the investment and OCI and nets the effect into retained
earnings so total equity increases by the realized amount (P80,000 = proceeds − cost). The practical effect: the
cumulative OCI (P60k) is moved to retained earnings and the remaining realized gain (P20k) also increases retained
earnings (total P80k transferred).
(If you prefer split entries: remove investment and recognize gain to retained earnings; then clear OCI to retained
earnings. Either way, the gain does not hit P&L.)

CEZAR, LORINE
24 (FVPL decreased by P20,000 — P&L effect)\
Facts: Bought at P100,000 (FVPL). FV fell by P20,000.
Effect: You recognize a P20,000 unrealized loss in profit or loss, which reduces net income.
Journal:
• Dr Unrealized Loss (P&L) P20,000
• Cr Equity Investments (FVPL) P20,000

25 (correct statement about equity FVOCI gains)

Correct answer (short): For equity investments designated FVOCI, changes in fair value are recognized in OCI,
and these OCI amounts are not recycled to profit or loss on disposal — instead the cumulative gain or loss
is transferred within equity (usually to retained earnings) when the investment is derecognized.

Debt Problems (26–40)

26. Bonds face P1,000,000, bought at P950,000. 10% coupon, 5 years, yield 12%. Year-1 effective interest income?
What’s what:
• Purchase price (carrying at purchase) = P950,000.
• Coupon (cash received each year) = Face × coupon rate = 1,000,000 × 10% = P100,000.
• Effective interest income = Carrying amount × yield = 950,000 × 12% = P114,000.
Answer (Year-1 interest income): P114,000
Reason in plain words: You receive P100,000 cash coupon but you earn P114,000 for accounting (because you
bought at a discount). The extra P14,000 increases the bond carrying amount.

[Link] (if recognizing interest income and amortizing):

• Dr Cash P100,000
• Dr Bonds (or Bond investment) P14,000
• Cr Interest Income P114,000

(Or two-step: Dr Cash 100,000 / Cr Interest Income 100,000; then Dr Bonds 14,000 / Cr Interest Income 14,000 —
combined effect above.)

Carrying amount at end of Year-1 = 950,000 + 14,000 = P964,000.

28. Bonds face P500,000, bought at P540,000. 12% coupon, yield 10%. Year-1 interest income
What’s what:
• Carrying = P540,000 (premium).
• Cash coupon = 500,000 × 12% = P60,000.
• Effective interest income = Carrying × yield = 540,000 × 10% = P54,000
Answer (Year-1 interest income): P54,000
Plain words: You get P60,000 cash but only recognize P54,000 as interest income — the extra P6,000 reduces the
carrying amount (premium amortization).

CEZAR, LORINE
29. Same as #28. Compute amortization (premium) for Year-1
Amortization (decrease in carrying) = Cash coupon − Interest income = 60,000 − 54,000 = P6,000
Journal:
• Dr Interest Income P54,000
• Dr Premium on Bonds (or Cr Bonds?) — typically: Dr Interest Income? Better to show amortization:
Practical combined entry:
• Dr Cash P60,000
• Cr Bonds (investment) P6,000
• Cr Interest Income P54,000

(This reduces carrying to 540,000 − 6,000 = P534,000.)

30. Debt FVPL cost P1,000,000, FV year-end P1,050,000. Record adjustment

Unrealized gain = 1,050,000 − 1,000,000 = P50,000.
Journal (FVPL → P&L):
• Dr Debt Investments (FVPL) P50,000
• Cr Unrealized Gain — Profit or Loss P50,000

(Gain flows to profit or loss immediately.)

31. Debt FVOCI cost P1,000,000, FV year-end P900,000. Record adjustment.

Unrealized loss = 900,000 − 1,000,000 = −P100,000.\
Journal (FVOCI → OCI):
• Dr Other Comprehensive Income — Loss P100,000
• Cr Debt Investments (FVOCI) P100,000

(Loss recorded in OCI — does not hit P&L now.)

32. Amortized-cost: purchased bonds P2,000,000 at 98, 10% coupon, 5 years, yield 12%. First-year interest income?

Step 1 — purchase price: 2,000,000 × 0.98 = P1,960,000 (this is initial carrying amount).
Step 2 — cash coupon each year: Face × coupon = 2,000,000 × 10% = P200,000.
Step 3 — interest income (EIR): Carrying × yield = 1,960,000 × 12% = P235,200.

Answer (Year-1 interest income): P235,200.

Amortization of discount (Year-1) = Interest income − Cash coupon = 235,200 − 200,000 = P35,200. New carrying =
1,960,000 + 35,200 = P1,995,200.

Journal (combined):

• Dr Cash P200,000
• Dr Bonds (or Bond investment) P35,200
• Cr Interest Income P235,200

CEZAR, LORINE
33. Bonds purchased P1,000,000 FVOCI, FV at disposal P1,100,000. Record disposal (recycle).
Assumption: At the time of disposal the carrying amount equals fair value P1,100,000, and the cumulative OCI
reserve contains P100,000 unrealized gain. Under IFRS for debt instruments at FVOCI, on derecognition the
cumulative gain/loss in OCI is recycled to profit or loss.
Typical steps / entries:
1. Derecognize the investment and record cash proceeds:
• Dr Cash P1,100,000
• Cr Debt Investments (FVOCI) P1,100,000
2. Move cumulative OCI to profit or loss (recycle):
• Dr OCI — FVOCI reserve P100,000
• Cr Gain on Derecognition (Profit or Loss) P100,000

(Effect: the P100k unrealized gain in OCI is recognized in P&L on disposal.)

34. Journal entry if FVPL bond rises from P500,000 to P520,000.

Unrealized gain = P20,000.

Journal (FVPL):

• Dr Debt Investments (FVPL) P20,000

• Cr Unrealized Gain — Profit or Loss P20,000

35. FVOCI debt purchased P400,000, FV at YE P450,000. Record adjustment.

Unrealized gain = 50,000.

Journal (FVOCI):

• Dr Debt Investments (FVOCI) P50,000

• Cr Other Comprehensive Income — FVOCI reserve P50,000

(Gain in OCI.)

36. Bonds purchased P1,200,000 FVOCI, sold for P1,250,000. Prior FV adjustment = P1,230,000. Record sale.

Interpretation: The investment’s carrying amount right before sale = P1,230,000 (i.e., cost + prior OCI). That means
cumulative OCI reserve = 1,230,000 − 1,200,000 = P30,000. On sale: proceeds P1,250,000.

Total realized gain = Proceeds − Cost = 1,250,000 − 1,200,000 = P50,000. Under FVOCI for debt instruments,
cumulative OCI (P30,000) is recycled to P&L and the remaining P20,000 is recognized on derecognition.

Journal (two steps):

1. Transfer cumulative OCI to P&L:

• Dr OCI — FVOCI reserve P30,000
• Cr Gain on Derecognition (P&L) P30,000
2. Derecognize investment and record cash & additional gain:
CEZAR, LORINE
 • Dr Cash P1,250,000
• Cr Debt Investments (FVOCI) P1,230,000
• Cr Gain on Disposal (P&L) P20,000

(Combined P&L impact = 30,000 + 20,000 = 50,000 total gain.)

37. Bonds purchased P1,000,000 FVPL, FV end P980,000. Record loss.

Unrealized loss = 1,000,000 − 980,000 = P20,000.

Journal (FVPL):

• Dr Unrealized Loss (P&L) P20,000

• Cr Debt Investments (FVPL) P20,000

(Loss reduces profit.)

38. Debt security classified at amortized cost: purchased P600,000, coupon 8%, yield 10%. Compute interest income
Year-1.

Assumption: coupon rate applies to face value = P600,000 (common exam assumption when face not given).

• Cash coupon = 600,000 × 8% = P48,000.

• Effective interest income = Carrying × yield = 600,000 × 10% = P60,000.

Answer (Interest income Year-1): P60,000.

(If carrying at purchase is different from face, use that carrying amount × yield.)

39. Compute discount amortization in #38.

Amortization (increase in carrying) = Interest income − Cash coupon = 60,000 − 48,000 = P12,000.

Journal (combined):

• Dr Cash P48,000
• Dr Debt Investment P12,000
• Cr Interest Income P60,000

(New carrying = 600,000 + 12,000 = P612,000.)

40. Debt FVOCI with FV gain P40,000. How does it affect P&L?

Answer (simple): It does not affect profit or loss now.

Under FVOCI (for debt instruments), unrealized fair-value gains and losses are recorded in Other Comprehensive

CEZAR, LORINE
Income (OCI). They do not hit profit or loss until the instrument is derecognized — at derecognition the cumulative
OCI is recycled to P&L (for debt instruments). So at year-end the P40,000 gain is in OCI (equity), not in net income.

Journal (to record gain):

• Dr Debt Investment P40,000

• Cr Other Comprehensive Income — FVOCI reserve P40,000
Same as #26. Compute amortization (discount) for Year-1
Amortization (increase in carrying amount) = Interest income − Cash coupon = 114,000 − 100,000 = P14,000.

ECL (41–50):
41. ₱8,000
42. ₱40,000
43. ₱32,000
44. Loss ₱660,000
45. Dr Impairment Loss 8,000 / Cr Allowance 8,000
46. Dr Impairment Loss 32,000 / Cr Allowance 32,000
47b
48b
49b
50 – forward-looking, avoids delayed recognition.

📘 Investments in Associate & Joint Venture (PAS 28)

1. Definitions
• Associate – entity over which the investor has significant influence but no control (20%–50% voting power is
presumed).
• Joint Venture – arrangement with joint control, requiring unanimous consent for major decisions.
• Significant Influence – power to participate in financial & operating policy decisions but not to control them.
• Joint Control – contractually agreed sharing of control, no single party can decide alone.

2. Key Features
Aspect Associate Joint Venture

Ownership Usually 20–50% Usually equal or proportionate (e.g., 50%-50%)

Nature of
control Influence only Equal, shared control

Equity Method (sometimes proportionate consolidation under older

Accounting Equity Method rules)

30% shareholding + board

Example seat Two companies own 50% each

3. Recognition & Initial Measurement

• Investments in associate & joint venture are initially measured at cost.

CEZAR, LORINE
 • Cost includes: purchase price + transaction costs + other considerations (cash, non-cash assets, equity
issued, contingent consideration).
• Goodwill – arises when investment cost > share of net assets.
• Bargain Purchase Gain – arises when share of net assets > investment cost, recognized in P&L.

4. Equity Method (Subsequent Measurement)

• Carrying amount of investment is:
Initial cost
• Share of net income/loss
• Share of OCI (e.g., revaluation, FX translation)
– Dividends/distributions received
– Impairment losses
• Dividends = NOT income, but reduction of investment.
• Loss recognition limit:
• Investor recognizes share of losses until the carrying amount of investment + advances is reduced to
zero.
• Losses beyond that are not recognized, unless investor has legal/constructive obligations.
• Resumption of recognition: If investee reports profits later, investor resumes recognition only after covering
prior unrecognized losses.

5. Illustrative Equity Method Application

• Net income of investee → increases investment.
• Net loss of investee → decreases investment.
• Cash dividend → reduces investment.
• Share dividend → memo only (ownership % unchanged).
• Advances to associate → can absorb losses once investment balance is zero.

6. Impairment of Investment
• Indicators:
• Financial difficulty of associate.
• Probability of bankruptcy/reorganization.
• Adverse market/economic conditions.
• Decline in fair value.
• Measurement: Carrying amount vs. Recoverable amount.
• Recoverable amount = higher of:
• Fair Value Less Costs of Disposal (FVLCD), or
• Value in Use (VIU).
• If Carrying > Recoverable → record impairment loss.

7. Joint Ventures
• Characteristics:
1. Joint control (unanimous consent).
2. Separate entity (corp, partnership, etc.).
3. Sharing of net assets (not direct asset/liability recognition).
• Recognition & Measurement:
1. Initial = cost.
2. Subsequent = Equity Method (similar to associate).
• Dividends/distributions = reduce investment (not income).
• Share of OCI = recorded in investor’s OCI.
• Impairment = assessed like associates (recoverable amount vs carrying).

CEZAR, LORINE
8. Elimination of Unrealized Profits/Losses
When investor & investee transact, unrealized gains/losses must be eliminated:
1. Downstream transactions (Investor → Associate/JV):
• Eliminate entire unrealized profit from investor’s income.
2. Upstream transactions (Associate/JV → Investor):
• Eliminate only investor’s share of unrealized profit.
3. Losses: eliminated same way, unless they indicate impairment (then impairment must be recognized).

✅ Key Takeaways
• 20%–50% ownership = presumed significant influence (associate).
• Equity method applies for both associates & joint ventures.
• Dividends = reduction of investment, not income.
• Losses limited to carrying amount of investment + advances.
• Impairment test: Carrying vs Recoverable (FVLCD or VIU).
• Elimination of unrealized profits/losses ensures proper reporting.

📘 Associates & Joint Ventures

A. Basic Equity Method Applications (1–10)

1. On Jan 1, 2025, Alpha Co. acquired 30% of Beta Co. for ₱600,000. Beta’s net income = ₱400,000; dividends =
₱100,000. Compute ending investment.
2. Same as #1, but Beta reports a net loss ₱200,000 instead. Compute ending investment.
3. A Co. bought 25% of X Co. for ₱300,000. X earned ₱120,000. Compute share of income.
4. Z Co. owns 40% of Y Co. Beginning balance ₱1,000,000. Y net income = ₱200,000, dividends = ₱50,000.
Compute ending balance.
5. M Co. has 35% of N Co. Investment cost = ₱800,000. N’s net income = ₱100,000, OCI = ₱20,000. Compute
increase in carrying amount.
6. P Co. owns 20% of Q Co. Beginning inv. ₱500,000. Q declares share dividend 10%. Effect on investment
account?
7. Investor A owns 30% of B Co. B earned ₱300,000, declared ₱60,000 cash dividends. Record journal entries in
Investor A’s books.
8. Investor holds 40% of an associate. Beginning inv. ₱600,000. Share of income ₱40,000; share of OCI
₱10,000; dividend ₱8,000. Compute ending balance.
9. Investor’s share of associate loss = ₱700,000, but investment balance = ₱500,000. How much is recognized?
10. Same as #9, but investor also advanced ₱150,000 loan to associate. How much loss is recognized?

B. Loss Recognition & Resumption (11–15)

11. Carrying balance reduced to zero. Associate incurs ₱100,000 more loss. Investor has no obligations. How
much additional loss is recognized?
12. Following year, associate earns ₱200,000. Investor previously had unrecognized losses ₱100,000. How much
income is recognized this year?
13. Investor’s share in losses exceeded investment + advances. What must be disclosed?
14. If investor resumes recognizing income after losses, what must be done first?
15. Investor owns 25% of C Co. Investment ₱250,000. C reports ₱1,200,000 loss. What is investor’s share and
recognition limit?

C. Unrealized Profits & Transactions (16–20)

16. Downstream: Investor sells inventory (cost ₱200,000) to associate at ₱250,000. 40% remains unsold.
Eliminate unrealized profit.
17. Upstream: Associate sells goods (cost ₱100,000) to investor at ₱120,000. Investor owns 30%. 25% remains
unsold. Compute unrealized profit elimination.
18. If in #17 the goods are impaired, what adjustment is required?
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 19. Distinguish between upstream and downstream elimination in terms of scope of adjustment.
20. Why must unrealized profits be eliminated under equity method?

D. Joint Ventures (21–25)

21. Two companies form JV, each invests ₱1,000,000. JV earns ₱400,000 and pays ₱100,000 dividends. Record
entries for one venturer.
22. Same JV, but reports ₱200,000 loss. How much is recognized by each venturer?
23. If JV distributes non-cash asset to venturers, how is this treated in books of venturer?
24. JV reports OCI gain ₱50,000. How is this recognized?
25. Why do venturers use equity method for JV?

E. Impairment & Other Applications (26–30)

26. Investment in associate carrying ₱1,200,000. Recoverable amount = ₱1,000,000. Record impairment.
27. Recoverable amount later increases to ₱1,150,000. Can reversal be recognized?
28. List two main indicators of impairment for investments in associate/JV.
29. If investor holds 15% only, but has board representation & significant influence, how should investment be
classified?
30. If investor holds 40% but does not exercise significant influence (due to restrictions), how is investment
classified?

✅ Suggested Answers (Condensed)

1. 600,000 + 120,000 – 30,000 = 690,000
2. 600,000 – 60,000 – 30,000 = 510,000
3. 120,000 × 25% = 30,000
4. 1,000,000 + 80,000 – 20,000 = 1,060,000
5. 800,000 + 35,000 + 7,000 = 842,000
6. No effect (memo only).
7. Dr Investment 90,000 / Cr Equity Income 90,000; Dr Cash 18,000 / Cr Investment 18,000
8. 600,000 + 40,000 + 10,000 – 8,000 = 642,000
9. Recognize 500,000 only.
10. Recognize 650,000 (500,000 + 150,000).
11. None (limit at zero).
12. Recognize 100,000 only (offset prior).
13. Disclose unrecognized losses.
14. Offset past unrecognized losses first.
15. Share = 300,000; Recognize 250,000 only.
16. Unrealized = (50,000 × 40%) = 20,000 → eliminate fully.
17. Unrealized = (20,000 × 25%) × 30% = 1,500.
18. Impairment recognized regardless of elimination.
19. Downstream = full elimination; Upstream = investor’s share only.
20. To avoid overstating profits.
21. Dr Investment 200,000 / Cr Equity Income 200,000; Dr Cash 50,000 / Cr Investment 50,000
22. Each recognizes 100,000 loss.
23. Reduce investment account.
24. Share in OCI recognized in investor’s OCI.
25. Because control is shared, not unilateral.
26. Dr Impairment Loss 200,000 / Cr Investment 200,000
27. Yes, up to recoverable amount.
28. Financial difficulty, bankruptcy, decline in FV.
29. Associate (due to significant influence).
30. Financial asset (FVPL or FVOCI).

CEZAR, LORINE
 📘 Investment in Associate & Joint Venture (PAS 28)

A. Multiple Choice – Concepts (1–15)

1. Which ownership percentage generally presumes significant influence?
a) Below 10%
b) 10%–20%
c) 20%–50%
d) Over 50%
2. An associate is an entity over which the investor has:
a) Joint control
b) Significant influence
c) Full control
d) No influence
3. A joint venture requires:
a) Equal ownership
b) Joint control by contractual agreement
c) Majority voting power
d) Minority interest
4. The equity method records the investment initially at:
a) Fair value only
b) Cost
c) Net assets share
d) Par value
5. Dividends received from an associate are:
a) Income
b) Deduction from investment account
c) OCI gain
d) Asset revaluation
6. Under equity method, share of net income is recorded as:
a) Income in P&L
b) OCI
c) Increase in investment account
d) Both a and c
7. Share dividends from associate affect the investor by:
a) Increasing investment
b) Decreasing investment
c) Memo entry only
d) Recognized as income
8. Goodwill in associate investment arises when:
a) Cost < share of net assets
b) Cost > share of net assets
c) Dividends > net income
d) Income > OCI

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 9. Unrealized downstream profits must be:
a) Fully eliminated
b) Eliminated proportionately
c) Ignored
d) Deferred
10. Unrealized upstream profits are eliminated:
a) Fully
b) By investor’s share only
c) Not at all
d) Through OCI
11. If investment balance is zero, losses are recognized further only if:
a) Investor wishes
b) Investor has obligations to support associate
c) Losses are temporary
d) Investor sells shares
12. Which of the following is an indicator of impairment?
a) Decline in fair value
b) Financial difficulty of associate
c) Probability of bankruptcy
d) All of the above
13. Recoverable amount of investment is:
a) FV less costs of disposal
b) Value in use
c) Higher of a or b
d) Lower of a or b
14. Under equity method, losses are recognized:
a) Until investment is zero
b) Beyond zero without restriction
c) Only if dividends are paid
d) Never
15. Which statement is TRUE?
a) Equity method is applied to both associate & JV
b) Dividends increase investment
c) Unrealized gains are ignored
d) Associates are consolidated

B. Problem Solving – Equity Method (16–30)

16. Investor acquires 30% of Beta for ₱600,000. Beta net income ₱400,000; dividends ₱100,000. Compute
ending balance.
17. Same as #16, but Beta reports ₱200,000 loss. Compute ending balance.
18. Investor buys 25% of X for ₱300,000. X earns ₱120,000. Compute investor’s share of income.
19. Investor holds 40% of Y. Beginning inv. ₱1,000,000. Y net income ₱200,000; dividends ₱50,000. Compute
ending inv.
20. M Co. owns 35% of N. Cost ₱800,000. N net income ₱100,000; OCI ₱20,000. Compute adjusted carrying
amount.
21. P Co. owns 20% of Q. Beginning inv. ₱500,000. Q declares 10% share dividend. What is the effect?
22. Investor A owns 30% of B. B earns ₱300,000; declares ₱60,000 dividends. Prepare entries.
23. Investor holds 40% of associate. Beginning ₱600,000; share of income ₱40,000; OCI ₱10,000; dividends
₱8,000. Compute ending.
24. Investor’s share of associate loss = ₱700,000; investment balance = ₱500,000. How much recognized?
25. Same as #24, but investor advanced ₱150,000. How much recognized?
26. Carrying = ₱800,000. Share of loss = ₱300,000. Compute new balance.
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 27. Beginning ₱1,200,000. Share of profit ₱180,000; OCI ₱20,000; dividends ₱40,000. Compute ending.
28. If associate reports ₱100,000 gain on revaluation, investor (30%) recognizes what?
29. If dividends exceed net income, what happens to investment account?
30. Investor holds 25% of Z. Z reports ₱1,200,000 loss. What is investor’s recognition limit if investment =
₱250,000?

C. Unrealized Profits & Transactions (31–40)

31. Downstream: Investor sells goods cost ₱200,000 to associate at ₱250,000. 40% unsold. Compute unrealized
profit elimination.
32. Upstream: Associate sells goods cost ₱100,000 to investor at ₱120,000. Investor owns 30%. 25% unsold.
Compute elimination.
33. If inventory in #32 is later impaired, what happens?
34. Why must unrealized profits be eliminated?
35. Distinguish between upstream vs downstream elimination.
36. Journal entry: Investor sells PPE to associate at gain ₱50,000; associate owns 60%. Unsold at year-end.
Record elimination.
37. Associate sells equipment to investor, profit ₱40,000, remaining useful life 4 yrs. Investor owns 25%. Record
annual elimination.
38. If downstream transaction profit is ₱60,000, and 25% goods unsold, how much is eliminated?
39. If upstream transaction profit is ₱80,000, investor owns 40%, 50% goods unsold, how much is eliminated?
40. What happens to eliminated profits when inventory is sold externally?

D. Joint Ventures & Impairment (41–50)

41. A & B form JV, each invests ₱1,000,000. JV earns ₱400,000, pays ₱100,000 dividends. Compute A’s share.
42. Same JV reports ₱200,000 loss. How much does each venturer record?
43. JV reports OCI gain ₱50,000. How does investor record this?
44. If JV distributes non-cash assets to venturer, how is it recorded?
45. Why must JVs be accounted using equity method?
46. Carrying amount ₱1,200,000. Recoverable = ₱1,000,000. Record impairment entry.
47. If recoverable later increases to ₱1,150,000, can reversal be recorded?
48. Name two impairment indicators.
49. Investor holds 15% but has board seat & influence. Classify investment.
50. Investor holds 40% but cannot exercise influence. Classify investment.

✅ Answer Key (Condensed)

MCQ (1–15):
1c
2b
3b
4b
5b
6d
7c
8b
CEZAR, LORINE
9a
10b
11b
12d
13c
14a
15a
Equity Problems (16–30):
16. 690,000
17. 510,000
18. 30,000
19. 1,060,000
20. 842,000
21. Memo only
22. Dr Inv 90k / Cr Equity Inc 90k; Dr Cash 18k / Cr Inv 18k
23. 642,000
24. 500,000
25. 650,000
26. 500,000
27. 1,360,000
28. 30,000 in OCI
29. Investment decreases
30. 250,000 limit
Unrealized Profits (31–40):
31. 20,000
32. 1,500
33. Impairment recognized
34. Avoid overstating income
35. Downstream = full; Upstream = investor’s share
36. Eliminate 50,000
37. 2,500/yr
38. 15,000
39. 16,000
40. Recognized back to income.
JV & Impairment (41–50):
41. Share = 200,000 income – 50,000 dividends = 150,000
42. 100,000 each
43. Share in OCI
44. Reduce investment
45. Shared control → no consolidation
46. Dr Impairment Loss 200k / Cr Inv 200k
47. Yes, up to recoverable
48. Financial difficulty, FV decline
49. Associate
50. Financial asset (FVPL/FVOCI).

CEZAR, LORINE