Pre-Week – 20th Batch (Oct. 12, 2010) C. O.

Uberita

1. CORRECTION OF ERRORS
Where the requirement is the effect of errors in Net income:
1. Consider all the current period error (counter balancing or non-counter balancing)
2. Consider all immediate Prior Year Counter Balancing errors
3. Ignore all Prior Year Counter Balancing errors.
** The effect of a COUNTERBALANCING ERROR in net income of the year of incurrence and the year following the
year of incurrence shall be:

Year of incurrence Subsequent year

CB Error in an ASSET Direct Indirect
(e.g. Prepayments, Accrued income,
Inventory end, AR sales)

CB Error in a LIABILITY Indirect Direct

(e.g. Unearned income, Accrued expense,
AP and Purchases)

Where the requirement is the effect of errors in the Retained Earnings, beg (January 1 or RE before closing)
1. Ignore all Current Period Errors (Counter Balancing and Non-Counter Balancing)
2. Consider all Immediate Prior Year Counter Balance Errors (as they affected last years’ income)
3. Consider all Prior Year’s Non-counterbalancing Errors (as they affected the prior year’s net income)

Where the requirement is the effect of errors in the Retained Earnings, end (December 31 or RE after closing)
1. Consider all Current Period Errors (CB or NCB)
2. Ignore all Prior Year Counter Balancing Errors
3. Consider all Prior Year’s Non-counterbalancing Errors (as they affected the prior year’s net income)

Where the requirement is the effect of errors in the working capital (current assets – current liabilities)
a) Consider all errors affecting current assets and current liabilities as of the end of the current period
only.
b) The errors in the current asset is directly related to the WC (overstated current asset
means overstated WC, and vice versa)
c) The error in current liability is inversely related to the WC (overstated liability means understated WC ,
and vice versa)

2. CASH/ACCRUAL AND SINGLE ENTRY

Solution guide:
For CASH-ACCRUAL PROBLEMS related to SALES and PURCHASES:

Accounts Receivable/Notes Receivable-Trade Accounts Payable/Notes Payable-Trade

ncexxx xxx Beg. Balance
Payments
Acct. xxxx Collections (Accrual Basis)(Cash Basis) Recoveries of **xx Sales Discounts Prev. Write offs xx xxSales Returns* xx xx Purchase on Acct.
Allowances xx Write offs (Cash Basis) (Accrual Basis)
Purch. Disc xx
Purch. Ret. xx
Purch. Allow. xx

End Balance xxx xxx End Balance

*excluding refunded sales return to customer *excluding refunded purchase returns

**include in the analysis only if collections from suppliers
Included the said recovery

For CASH-ACCRUAL PROBLEMS related to item of income and expenses (e.g. rental income and
expense, royalty income and expense and other similar items)

Accrued Income/Unearned Income Prepaid Expense/Accrued Expense Beg. Bal. (Prep.) XX XX Beg. Bal. (Acc. Exp) Payment of cashRecog. of Exp. (Cash ba
End Bal. (Prep.)
Beg. Bal. (Acc. Inc.) XX XX Beg. Bal (Unear. Inc) Recog. IncomeCollection XX XX
of cash End Bal.
(Accrual (Acc. Exp.)
Basis)XX XX (Cash basis)
End Bal. (Acc. Inc.) XX XX End Bal. (Unear. Inc)

Note: If the problem indicates increase or decrease in the related balance sheet accounts, instead of the beginning
and ending balances, simply place in the beginning balance if it is net decrease (since this indicates that the
beginning is higher than ending balance) or place In the ending balance if it is net increase (since this indicates
that ending is higher than the beginning balance).

2. CASH
Cash Count Problems
1. Identify the accountability first:
a. If Petty Cash Fund, the accountability is the Imprest Balance
b.If Undeposited Collections, the accountability is total undeposited collections per books/records
adjusted further for any unrecorded collections (based on additional information of the
problem)
If there is no direct information about collections per records, accountability is collections per
Official Receipts, Cash receipt vouchers or other documents evidencing collections.
2. Identify valid supports to the accountability as presented in the problem

Page 1 of 15
 a. For Petty Cash Fund
-Bills and Coins, Replenishment Check, Valid Accommodation Checks
-Unreplenished PC Expense Vouchers (Adjusted to Various Expense)
-Employee IOUs (Adjusted Receivable)
-Post-dated/NSF Accommodation Checks (Adjusted to Receivable)
* unused postage is not a valid support where the accountability is the Petty Cash
** return of an expense advances (e.g. excess from travel advance) is added to the
accountability to get the total accountability and not added to valid supports
b. For Undeposited Collections
-Bills and Coins
-Customer Collection Checks (not technically defective)
-Copies of expense vouchers evidencing the use of the collection to pay certain expenses
-Unused postage stamps (valid support where accountability is undep. Coll.)
*Post-dated and other technically defective checks are not valid support for Undep. Coll.)

Bank Reconciliation Problems

*use the adjusted balance method, thus:
BANK BOOK
Unadjusted Balance XX XX(b) Unadjusted Balance
Deposits in Transit/ XX Unrecorded Bank Credits
Undeposited Coll. XX (Note collection by bank,
Customer payments to bank)
Outstanding Checks (XX) (XX) Unrecorded Bank Debits
(BSC, NSF Checks, Note/Loan
Payments direct thru bank)
Bank Errors XX(XX) XX(XX) Book Errors
Adjusted Balance XX (a) XX (c) Adjusted Balance
(a): the balance per bank shall be the CORRECT CASH BALANCE
(a) – (b): the net adjustment to cash shall be the difference between the
unadjusted balance per books and the adjusted balance per bank
(a) – (c): the cash shortage/overage shall be the difference between the two adjusted
balances
SHORTAGE if: Bank < Book
OVERAGE if: Bank > Book

Two-Date Bank Reconciliation Problems

Deposit in Transit, beginning XX
Add: Total Deposits per book
Total book debits/collections XX
Less: Prior period bank credit (XX)
Add/Less: Book receipts error (over)/under for the current period (X)X
Less: Book overstatement of disbursement in the prior period or
Book understatement of receipts in the prior period
(if these errors were corrected in the current period) (XX) XX
Total Deposits to clear the bank during the period XX
Less: Total Deposits clearing the bank in the current period
Total bank credits XX
Less: Current period bank credits (e.g. Cust. note collection) (XX)
Add/Less: Bank credit errors for the current period X(X)
Less: Bank overstatement of debits/charges in the prior period or
Bank understatement of receipts in the prior period (XX) (XX)
Deposit in transit, ending XX

Outstanding Checks, beginning XX

Add: Total Checks issuances per books
Total book credits/disbursements XX
Less: Prior period bank credits (NSF checks, BSC) (XX)
Add/Less: Book disbursements error for the current period X(X)
Less: Book overstatement of receipts in the prior period or
Book understatement of disbursement in the prior period
(if these errors were corrected in the current period) (XX) XX
Total Checks Issued to clear the bank XX
Less: Total Checks clearing the bank in the current period
Total bank debits XX
Less: Current period bank debits (e.g. NSF checks, BSC) (XX)
Add/Less: Bank debit errors for the current period X(X)
Less: Bank overstatement of credit in the prior period or
Bank understatement of disbursement in the prior period (XX) (XX)
Outstanding Checks, ending XX
Proof of cash Problems(Adjusted Balance Method)
Beg. Reciepts. Disburse. End.
Unadjusted balance per bank XX XX XX XX
Deposit in transit, Beginning XX (XX)
,End XX XX
Outstanding checks, Beginning (XX) (XX)
,end XX (XX)
Bank Errors (receipt beg is over) (XX) (XX)
(Receipt, beg is under) XX (XX)
(Disbursement,beg is over) XX (XX)
(Disbursement,beg is under) (XX) (XX)
(Reciept, end is over) (XX) (XX)
(Reciept,end is under) XX XX
(Disbursement, end is over) (XX) XX
(Disbursement, end is under) XX (XX)
Adjusted Balances XX
XX XX XX

Beg Receipts Disburse End

Unadjusted balance per book XX XX XX XX
Unrecorded credit,beg. XX (XX)
,End XX XX
Unrecorded debit,beg. (XX) (XX)
,end XX (XX)
NSF check, beg. (XX) (XX)
NSF check, end. XX (XX)
NSF check received and deposited
The same period (not recorded by the book) XX XX
Book errors (receipt beg is over) (XX) (XX)
(receipt, beg is under) XX (XX)
(disbursement beg is over) XX (XX)
(Disbursement,beg is under) (XX) (XX)
(Receipt, end is over) (XX) (XX)
(Receipt, end is under) XX XX
(Disbursement, end is over) (XX) XX
(Disbursement, end is under) XX (XX)
Adjusted Balances XX XX XX XX
*An NSF check which is recorded correctly during the current period no longer becomes a reconciling item.
*An NSF check which is recorded as a reduction against the receipt for the period shall be added to both receipt
and disbursement columns.(Cash ending balance is unaffected)
*An NSF check received from the bank and deposited during the same period shall no longer be included in the
proof of cash statement if receipt and redeposit were recorded in the books correctly, otherwise if the same was
not recorded by the book, the item shall be added to both the receipt and disbursement column.

4. RECEIVABLES
For Aging of Accounts Receivable Problems.
-the aging schedule should be based on and should agree with the subsidiary ledger
-the aging schedule should be adjusted first with all possible adjustments before a required allowance is
computed. Possible adjustments include.
a. Adjustment to both the GL and the SL (thus to aging)
-Additional write –off of accounts
-unrecorded sale over recorded sale
-Unrecorded collections
-credit balance in account with one costumer
b. Adjustments to SL only (no adjusting entry required, but aging schedule should be adjusted)
-sales/collections already recorded in the GL but not yet in the SL
-posting errors.
**adjustments to GL only – will not affect the aging schedule anymore (e.g. sales/collections
not yet recorded by the GL but already posted to the SL)
-The adjusted balance of the subsidiary ledger shall ultimately be the correct/adjusted balance of the
accounts receivable gross of the required allowance.
-If the general ledger ultimately does not coincide or equal to the subsidiary ledger, an additional
adjustment should be in place to correct the general ledger to equal the adjusted balance of the
subsidiary ledger. The adjustments is either debited or credited to SALES account.
-To compute for the bad debt expense for the period, the adjustments balance per computation is
compared to the adjusted balance. (Do not forget to consider interim provisions, if there are any)

For impairment of Loans and Receivables:

Carrying value of the loans and Receivable** XX
Less: Present value of expected cash to be recovered
Using the ORIGINAL EFFECTIVE INTEREST RATE (XX)
Impairment Loss/Bad Debt Expenses XX
**include accrued interest if problem indicates so. (e.g. loss is computed after interest had been accrued)
5. INVENTORY
Cut-off problems (sales/Purchase)
1. Identify validity of the sales or purchase (payable) has been recorded
2. Determine whether inventories were excluded or included**
3. Determine whether inventories were excluded or included.
Thus: If it is a valid sale, the receivable should be recorded, the inventory should be excluded
If it’s not a valid sale, receivable should not be recorded, the inventory should be included
If it’s a valid purchase, the payable should be recorded, the inventory should be included.
If it’s not a valid purchase, the payable should not be recorded, the inventory should be included.

*in considering the validity of the sale or purchase transaction, considering the following items:
1. As a rule of thumb assumption, a Sale is valid upon delivery and a purchase is valid upon receipt
2. Goods in transit
-FOB shipping point/FOB Buyer or Buyer’s Location include as inventory of buyer(plus freight in)
-FOB Dist. /FOB Seller or Seller’s location include as inventory of seller (exclude freight out)
-Cost of insurance and freight (CIF) include as inventory of buyer upon delivery to carrier (plus cost of
insurance and freight)
-Free Alongside (FAS) the vessel include as inventory of buyer upon possession of the carrier (exclude
freight cost to vessel, include freight cost from vessel to costumer)
3. Goods in consignment-include as inventory of the consignor or seller
4. Sale on approval-include as an inventory of seller, unless information identified that a manifestation of
approval has already been made.
5. Inventory financing/park sale/product financing – include as inventory of seller
6.Sale with right of return – include as inventory of seller, not unlessthe right of return is considered
normal in the industry (e.g. retail) or time for right of return has already lapsed for the return.
7. Instalment sales – goods considered sold upon delivery, therefore inventory of buyer.
8.Segregated goods – mere segregation of goods does not exclude the same from the seller’s inventory
unless the problem identified that sale is covered by a special sale agreement (BILL AND HOLD) as in
when goods were already billed and waiting the pick-up of the costumer.

**All deliveries (on sale) made on or before the count date areexcludedfrom the count, all deliveries
made after the count date are included in the count.
**All receipts (on purchase) of goods on or before the count date shall be included in the count; all receipts
after the count date are excluded from the count.

Inventory Estimation Problems

1. Gross profit Method
Cost of Goods Available for Sale(actual)* XX
Less: Cost of Sales (Estimate)** (XX)
Estimate ending inventory XX
*COGAS is actual meaning consider all items normally included in the computation of cost of goods
available for sale.
**COS is estimated by:
Gross Sales * Cost Rate (if GP is based on sales)
Gross Sales/ Selling Price Rate (if GP is based on cost)
***For the purpose of estimating Cost of Sales:
-Assume that all Sales were made under the normal GP rate thus:
-Gross Sales shall not include Sales Discount
-Add back special discounts to Gross Sales (Employee Discounts
-Gross Sales shall not include Sale allowance
Deduct from Gross Sales, Sales returns (Deduct if sales return and allowance)
-Add to Gross Sales normal spoilage, breakage, shoplifting losses at selling price.

2. Retail Method
Cost of Goods Available for Sale (at Retail)(a) XX
Less: Cost of Sales (at retail)=Gross Sales(b) (XX)
Estimated ending inventory (at Retail) XX
Multiply by: Cost rate (LCA or Ave)(c) x%
Estimated ending inventory (at Cost) XX

Cost Retail
Beginning Inventory XX XX
Add: Purchases XX XX
Freight-in XX
Less: Purchase allowance (XX)
Purchase discount (XX)
Purchase returns (XX) (XX)
Add: Departmental transfer-in or Debit XX XX
Less: Departmental transfer-out or Credit (XX) (XX)
Add: Mark-ups, net of cancellations XX
(c) COGAS under CONSERVATIVE/LCA XX / XX x% Cost rate under LCA
Less: Mark-downs, net of cancellations (XX)
(c) COGAS under AVERAGE APPROACH XX / XX (a) x% Cost rate under Ave

Retail
Gross Sales XX
Less: Sales Return (XX)
Add: Special Discounts (Employee Disc) XX
Normal Spoilage/Breakages/Shoplifting losses XX
Sales/ Cost of Sales at Retail XX (b)
 *For FIFO Conservative or Average, simply disregard in the computation of % the beginning inventories. If
the problem is silent, use FIFO Average (consider both mark-up and mark-down)

Cost% = COGAS @ Cost – Beg inventory at Cost

COGAS @ Retail – Beg inventory at Retail

Inventory Validation Problems

Inventories shall be valued at lower of cost or NRV:
a. Cost shall be measured through
1. FIFO/Periodic – the cost shall be computed as: (# Inventory on hand * Cost of latest purchases)
2. FIFO/Perpetual – the computation of cost shall be the same as FIFO/Periodic
3.AVE/Periodic (aka WEIGHTED AVERAGE): # of Inventory on hand * WA unit cost
WA unit Cost = COGAS / # of GAS
4. AVE/Perpetual (aka MOVING AVERAGE): # of Inventory on hand * MA unit Cost
The average cost is recomputed after every purchase transaction. The last Moving average unit cost
(after the last purchase transaction of the year) shall be used for the computation of the inventory cost
at year end.)
b. Net realizable value shall be:
1. Finished goods/Merch. Inventory = Est. Selling Price – Est. cost to sell
2. Work-in process inventory = Est. Selling Price – Est. cost to complete – Est. cost to sell
3.Raw materials and Supplies – The NRV of raw materials shall be the Current Replacement Cost
(Current Purchase Price). The same shall be written down only if the finished goods to which they
are related to are also written down.

Note: Difference between cost and NRV, if NRV is lower becomes the required allowance for inventory write-
down (like allowance for bad debts) to determine how much the loss is during the period, determine the increment
from the unadjusted balance of the account. Thus, if cost is lower the NRV, required balance is zero/nil; any
unadjusted credit balance of the account shall generally be recognized as gain from recovery in the income
statement.

Allowance for Inventory Write-down

Beginning Balance
Dr Adjustment for Gain on Cr Adjustment for Loss on
Recovery Write-down for the period
Required Ending Balance

6. INVESTMENTS

Investment in Equity Securities

a) Control Exists (>50% equity) – Investment in Subsidiary
b) Significant Influence exists (20% - 50%) – Investment in Associate (Equity Method)
c) No control nor Significant influence:
1. Marketable (if with fair value information) (Fair Market Value
Method) 1.1) Trading Securities- if held for short-term profit
intention
1.2) Available-for-Sale- if no short-term profit intention (e.g financial flexibility)
2. Non Marketable (if no fair value information) – AFS – non-marketable (Cost Method)

Equity Method(At cost adjusted for post-acquisition changes in the net assets of the associate)
Beginning Balance (Cost of Acquisition) XX
Dividends (XX)
Share in net income/(net loss)** XX(XX)
Ending Balance XX
**Share in net income or net loss:

Associate Net income or Net Loss XX

Multiply by % of interest x% aXX
Less: Amortization of Excess of fair value over book value
Of identifiable net asstes:
Depreciable asset understatement/remaining life XX
Depreciable aaset overstatement/remaining life (XX)
Current asset understatement XX
Current asset overstatement (XX)
Current liability overstatement XX
Current liability understatement (XX)
Adjusted share in net income XX
Note: Excess of Acquisition cost over Fair value of identifiable asset (Goodwill) shall
not be included in the computation of share in net income/loss, except of there is an
impairment.
Excess of fair value over book value of non-depreciable asset (land) shall not be
included in the computation of share in net income/loss, except if there is impairment.

**If the acquisition cost is lower than the FMV of identifiable asset, the negative excess
shall be included (added) in the share in the net income in the year of acquisition.
Fair Market Value Method:

Trading Securities Available-for-Sale

At fair value (fair value of At fair value (fair value of
a) Initial recognition consideration given up), transactions consideration given up) plus any
costs shall be expended as incurred. transaction costs incurred
Fair value Balance Sheet Date
Fair value Balance Sheet
b) Balance sheet valuation Less: Carrying Value
Date Less: Original Cost
(temporary changes in value) Unrealized gain/loss – I/S
Unrealized gain/loss – BS

Proceeds, gross of transaction cost Proceeds, net of transactions costs

c) Disposal Less: Original Cost Less: Original Cost
Realized gain/loss – I/S Realized gain/loss – I/S

Fair value Balance Sheet Date

d) Impairment loss Not applicable Less: Original Cost
Impairment Loss - I/s

No recovery recognized in the

income statement, thus:
e) Recovery of impairment loss Not applicable Fair value Balance Sheet Date
Less: Impaired Value/New Cost
Unrealized gain/loss – BS

Transfer from AFS-ASSOCIATE

Not applicable (transfer into and out – Retroactive application
of the TS category is not allowed) Transfer from ASSOCIATE – AFS
f) Transfer
Unless under RARE -the carrying value of the
CIRCUMSTANCES investment at equity shall be the
cost of the AFS investment
*NOTES –
1) If shares are acquired Dividend on (Between Declaration and Record date of Dividends),
the purchases price shall be debited to dividend receivable first before debiting the
investment account for the balance. (Initial Cost = Purchase Price – Dividend Receivable)
2) Cash dividends shall be credited to dividend income upon declaration at face.
3) Property dividends shall be credited to dividend income at fair value in declaration date.
4) Stock dividend shall be recorded only through memo (update carrying value per share)
5) Stock in lieu of Cash shall be recorded as dividend income at the fair value of shares
received or the supposed cash dividend (in order of priority)
6)Cash in lieu of Stock shall be accounted for under the “as if” approach, that is, as if shares
were received and sold at the cash received. Gain or loss shall be recorded accordingly
(see disposal of TS and AFS)
7) Special dividends (preference shares received as dividend on ordinary shares held) shall
be accounted for by allocating the carrying value of the original shares held (if trading) or
the original cost of the original shares held (if AFS) to the preference dividends received
and to the original investment based on aggregate fair values on a PROPATA basis.
8) Share assessment shall be debited to the investment account and credited to cash
9)Share rights received shall be accounted for by allocating the carrying value of the original
shares held (if trading) or the original cost of the original shares held (if AFS) to the
investment in share rights received and to the original investment based on their
aggregate fair values or unit fair value on a PROPATA basis.
- After initial recognition, Share rights shall be remeasured accordingly, depending on
whatever they are classified as trading or AFS (see table above)
- If share rights are exercised the pro-forma entry shall be:
Investment in stock (TS or AFS) XX
Investment in stock rights (carrying value/cost) XX
Cash (exercise price) XX

- If the share rights are sold, gain or loss shall be computed depending on whether the shares are
categorized as trading or AFS (see above table)
- If share rights expires without exercise, the carrying value (if TS) or cost (if AFS) is simply written off
as a loss.

Investment in Debt Securities

a) There is an intention and ability to hold the investment until maturity – HTM (Amortized Cost)
b) Either no intention or ability:
b.1) Marketable (if with fair value information) (Fair Market Value Method)
b.1.1) Trading Securities – if held for short-term profit intention
b.1.2) Available-for-Sale – if no short profit information (e.g. financial flexibility)
b.2) Non Marketable (if no fair value information) – Loans and Receivable
 Fair Market Value Method and Amortized Cost
**Debt security categorized as Trading shall follow the same principles with that of Equity Investment
categorized at trading (see previous table).

Available-for-Sale Held-to-Maturity
At Fair value (fair value of
At Fair value plus any transaction
consideration given up) plus any
a) Initial recognition costs incurred, net of any accrued
transaction costs incurred, net of
any accrued interest. (a) interest. (a)
Fair Value @ Balance Sheet Date
Less: Amortized Cost
b) Balance sheet measurement At Amortized Cost. (b)
Unrealized gain/loss – BS

Proceeds, net of transactions costs,

Proceeds, net of transactions costs,
net of accrued interest (a)
net of accrued interest (a)
c) Disposal Less: Amortized Cost
Less: Amortized Cost
Gain/loss on sale
Realized gain/loss – IS
Carrying value of HTM
Less: PV of remaining future cash
Fair Value @ Balance Sheet Date
d) Impairment, if decline is flows at original effective interest
Less: Amortized Cost
permanent. Less: Carrying value of HTM
Impairment loss – IS
Impairment loss – IS (c)

Amortized Cost had there been no

impairment
Amortized Cost had there been no
Less: Amortized cost based on the
impairment
prior impaired value
Less: Amortized cost based on the
Gain on recovery – IS
e) Recovery of previous impairment remaining future cash flows at
original effective interest
Fair Value @ Balance Sheet Date
Gain on recovery - IS
Less: Amortized Cost had there
Been no impairment
Unrealized gain/loss – BS
HTM – AFS
(when HTM becomes tainted)
- Transfer at FMV, difference b/n
f) Transfer AFS – HTM
fair value and amo. cost shall be
reported as unreal. gain/loss-BS

*if Fair value is provided through a prevailing interest rate, simply get the present value of all cash flows from the bonds
using the said prevailing interest rate.
a) If bonds were acquired or sold in between interest payment dates, the acquisition price or the selling price
includes accrued interest not unless specifically expressed by the problem (e.g. at 105 plus accrued interest)
b) If bonds were acquired at a premium (acq. price > face value), the premium is a loss to be allocated over the remaining
term of the bonds by deducting the same to the related interest income.
If bonds were acquired at a discount (acq. price < face value), the discount is a gain to be allocated over the remaining
term of bonds by adding the same to the related interest income
In summary:
Amortization of premium, decreases carrying value of investment and interest income.
Amortization of discount, increase carrying value of investment and interest income.
c) Computation of impairment loss on investment in HTM is actually the same with the computation of impairment of
loans and receivables.

Property Investments:
- Initial measurement shall follow the same rules on initial recognition of PPE (PAS 16)
- Balance sheet measurement shall either based on Fair Value Method or Cost Method

Cost Method
- Similar valuation of PPE under (PAS 16), Cost, net of accum.depr. and impairment

Fair Value Method

- Property investment under fair value shall be valued at the current Fair Value of the property, the difference
between its fair value and carrying value shall be recognized in the statement.

- Transfer into and out of Property Investment

classification: If Fair Value Method is used for
Investment Property:
Transfer from PPE – Investment Property – increment in value shall be credited to Rev.
surplus decrement shall be recognized as impairment loss – IS
Transfer from Inventory – Investment Property – increment/decrement/ shall be recognized
in the IS
Transfer from Investment Property –PPE – increment/decrement shall be recognized in the IS
Transfer from Investment Property –Inventory- increment/decrement shall be recognized in
the IS

If the Cost Method is used for Investment Property, transfer into and out of the Investment
Property be at carrying value, unless asset is impaired, where the asset shall be transferred at the impaired
value, recognizing the impairment loss in the income statement.
 7. PROPERTY, PLANT AND EQUPMENT
INITIAL MEASUREMENT at Cost. Cost of PPE shall include:
a. Cost of acquisition**
b. Incidental cost in bringing the asset to its present location and condition necessary for use.
c. Initial estimate of dismantling, removal or site restoration cost (to the extent that the
company has incurred an obligation over these future costs, credit to a provision account –
asset retirement obligation)
**Cost of acquisition depends on the mode of acquisition:
a. Cash purchase
b. On account
c. Instalment/Deferred payment basis
d. Share/Bond issue
e. Exchange with commercial substance
f. Exchange without commercial substance
g. Donation where the donor is a related party
h. Donation where the donor is a non-related party(e.g. Govt. Grant)

SUBSEQUENT MEASUREMENT
a. Cost method: At cost, net of accumulated depreciation, and impairment
b. Appraisal/Revaluation method: At fair market value
Depreciation Methods
1. Uniform/Fixed Charge Method
straight line = Depreciable cost/Useful life
2. Variable Charge Methods
Working Hours = Depreciable cost/ life terms of working hours * actual hours used
Output method = Depreciable cost/ life terms of total output * actual output
3. Diminishing balance methods
SYD = Depreciable cost * SYD rate
Declining balance = Cost*DB rate (consider salvage value only on the last year of depr.)
4. Others (useful for depreciating small tools and similar items)
Inventory method = Beg tools + Purchases – End tools – Proceeds from disposal of tools
Replacement method = Tools disposed * Cost of latest purchases – proceeds from disposal
Retirement method = Tools disposed * Cost of earlier purchases – proceeds from disposal

*For the computation of depreciation, where there are several transactions happening during the period
- List down all the items which became outstanding at one time or another during the period:
Disposed (depreciate from Jan. 1 to date of disposal)
Newly Acquired (Depreciate from Date of acquisition to Dec. 1)
Outstanding during the entire year

- Impairment loss
An asset is impaired if only if the Carrying value is > that the Net recoverable value
*Net recoverable value is the higher between the Fair Value less Cost or the Sell or the Value in use
*Fair value less Cost to Sell = Estimated Selling Price – Estimated Cost to Sell
* Value in use = PV of the future net cash flows from the continued use of the asset and
from its ultimate disposal using a pre-tax discount rate.

Revaluation/Appraisal (If fair value is available:)

*Fair Value of Asset
Less: Carrying Value
Revaluation Surplus

**If Replacement Cost is available:

Original Cost XX XX Replacement Cost
Accum Dep. (XX) (XX) Replacement AD
Carrying Value XX XX Fair Value/ Sound Value/ Depreciated Repl. Cost ***

***Replacement Cost*Condition Percent

The condition percent= (remaining life/ total life, original estimate)
(Carrying value/ depreciable cost, original estimate)

Realization of Revaluation Surplus: (credit to retained earnings)

a. Piecemeal: RS/ Remaining life of depreciation asset.
b. Lump Sum: Realize upon disposal or retirement.

Impairment with subsequent revaluation

a) Recognized impairment loss on the year of incurrence.
b) Continue Depreciation based on impaired value.
c) Upon Revaluation, recognize the gain on recovery=
CV had there been no impairment – CV based on impaired value
d) Recognize as revaluation surplus (under revaluation method)=
Fair Value- CV had there been no impairment
Revaluation with subsequent impairment

a. Recognize the revaluation surplus in stockholder’s

equity.
b. Continue Depreciation based on the revalued
amount (realize revaluation surplus on a piecemeal basis if applicable)
c. Upon impairment, write off the remaining rev.
surplus=
CV based on revalued amt. – CV had there been no revaluation
d. Recognize as impairment loss in the income
statement=
CV had there been no revaluation – Impaired Value/ Fair Value

Compensation for Impairment Loss of PPE

a. Compensation for Impairment loss of PPE shall be
recognized as an asset in the BS and income in the income statement, when and only when it becomes virtually
certain (when it becomes receivable)
b. The Impairment loss shall be recognized separately
at gross amount in the income statement.
c. The impairment loss and the compensation shall be
separately recognized and are not to be offset.

PFRS for SMESs, SEC 17. PPE

 (Along with Sec 25. Borrowing Cost,), requires all borrowing cost to be expensed as incurred
 Requires to measure PPE at the balance sheet date at Cost, less Accumulated
Depreciation, less Impairment Loss (and does not allow the use of revaluation method)

8. INTANGIBLES
INITIAL MEASUREMENT
a. Separate Acquisition: Cash Purchase, installment basis, share/ bond issue
b. Grants
c. Business Combination
d. Exchange
e. Internally Developed
Intangibles SUBSEQUENT MEASUREMENT
 For Intangibles without definite life (including GOODWILL), no amortization but test for impairment.
 For Intangibles with definite life, amortize over the useful life or legal life (if applicable) whichever is
shorter.

MATTERS ABOUT GOODWILL

Indirect: Acquisition Cost XX
Less: Fair Value of identifiable asset, excluding goodwill (XX)
Goodwill XX

Direct: a. Purchase of excess earnings (excess earnings *#years)

b. Present value (excess earnings*PV factor)
c. Capitalization of excess earnings (Excess earnings/%)
d. Capitalization of normal/ average earnings (Acq Price-[Norm Earnings/%])

*Excess Earnings shall be computed as:

1. If Average or Normal Earnings is given as percentage:
Fair market value of net asset, excl goodwill* (Entity normal earnings% - Industry ave. earnings/%)
2. If normal earnings is given in terms of actual historical earnings:

Historical Earnings XX
Adj: Nonoperating (gains)/losses X(X)
Historical Earnings from operations XX
Divided by: Number of year (usually 5 years) xYears
Average Earnings XX
Add/Ded: Incremental/ Decremental expenses X(X)
Entity Average Earnings XX
Less: Industry Normal Earnings (XX)
Excess Earnings XX

IMPAIRMENT LOSS ON GOODWILL

Carrying Value of the Cash Generating Unit (including goodwill) XX
Recoverable Value of the Cash Generating Unit * (XX)
Impairment loss XX
 *Higher between the Value in use (present value of remaining future cash flows from continued use and eventual
disposal of the net assets comprising the CGU) and the fair value less cost to sell of the CGU.
a. Impairment loss shall be charged first against the goodwill attributed to the CGU.
b. If not any excess shall be charged to all other assets of the CGU in the ratio their carrying value before
any impairment. In allocating the remaining loss, the resulting carrying value of all other assets should
not result to amounts lower than the higher between and among:
 The individual asset’s fair value less cost to sell
 The individual asset’s fair value less cost to sell
 Zero

PFRS for SMESs, SEC 18. INTANGIBLES

 Requires all research and development costs to be expensed as incurred unless it forms part of the costs
of another asset that meets the recognition criteria in terms of IFRS for SMEs.
 Requires intangibles be subsequently measured at each balance sheet date cost less any
accumulated amortization and impairment loss (and does not allow the use of revaluation method)
 Require to consider that all intangibles have finite (definite) useful life (if not reliably measurable, assumed to
be 10 years)

PFRS for SMESS, SEC 19. BUSINESS COMBINATION AND GOODWILL

 Require to measure goodwill at each blance sheet date at cost less accumulated amortis=zation and
impairment losses. If an entity cannot determine the period which the economic benefits are
expected, goodwill shall be amortized over a period not to exceed 10 years.

9. LIABILITIES
-Refinancing and Breach of Contract
Refinancing: Generally, a currently maturing obligation has to be presented as current liability. A currently
maturing obligation may be presented as a long term liability under refinancing agreement, only if:
1. The company has the prerogative/ option/ unconditional right to refinance the liability OR
2. If there is no prerogative but the refinancing agreement was completed before or at the balance
sheet date.
NOTE: Refincing mabe thru: a. extension of maturity date, b. issuance of stocks or bonds the
proceeds of which is used to settle the currently maturing obligation.
Breach of Contract: Generally if the company breaches a covenant or contract the long-term obligation becomes
due and demandable, thus is presented as short-term liability. The obligation may still be presented as long-term
only under the following conditions:
1. If the creditor agreed to give the debtor a grace period for at least 12 months after the balance sheet
date AND
2. The said grace period should have been provided on or before the balnce sheet date.

ESTIMATED LIABILITIES/ PROVISIONS (PAS 37)

 A liability whose either amount or timing is uncertain.

ACCRUED, under the following conditions:

1. Present obligation (legal or constructive) resulting form a past event or transaction (obligation event should
have happened on or before the balance sheet date)
2. It is probable that an outflow of economic benefits will be required to settle the obligation.
3. The amount of obligation should be capable of of being reliable measured.
Common examples of provision are: Product warranties and guarantees, Premiums and coupon
obligations, Liability from litigation, Guaantee of liability of others, Provisions from onerous contracts,
Unlawful environmental damages.

ESTIMATED LIABILITIES FOR PREMIUMS/ WARRANTIES/ COUPONS

Total expense, per estimation policy XX
Less: Actual Cost incurred to date (XX)
*Provision/ Estimated Liability at year end XX

Note: for premiums, expense and liab shall be net cost (cost of prem. + additional processing cost
– collections made prior to distribution if there are any)
*Before accruing liability at year end, consider if all provision / estimated liability are still valid, that
is, are still probable to be settled in the next period (e.g. if, warranty, consider warranty period, if
GCP consider validity period, etc.)

REIMBURSEMENTS – these are amounts to be expected to be received as reimbursements if entity settles the
provision. Reimbursements shall be accounted for as follows:
1. If the entity has no obligation for the part of the expenditure to be reimbursed, the reimbursable amount
shall be deducted against the losses recognized in the income statement. The liability shall be presented
in the balance sheet net of the reimbursable amount.
2. If the obligation for the amount expected to be reimbursed remains with the entity and reimbursement is
Virtually Certain, the reimbursements shall be accrued as an asset (receivable) in the balance sheet any
 maybe offset against the losses recognized in the income statement. The amount recognized for the
expected reimbursement should not exceed the liability.
3. If the obligation for the amount expected to be reimbursed remains with the entity and the
reimbursement is not virtually certain, the expected reimbursement may be disclosed.

CONTINGENT LIABILITIES

1. Possible obligation whose existence is to be determined in the future contingent upon the happening of a future
event; or
2. Present obligation, but is not accrued because it is either remotely possible that economic benefits will be
required to settle the obligation and/ or the amount of the obligation is not capable of being reliably measured.

BONDS PAYABLE

Bonds issued at a discount (Proceeds < Face value; Effective interest > Normal Interest)

 Discount is a transaction loss (amount received/ proceed is lower than the amount to be paid/face value) to
be amortized over the remaining term of the bonds using the EFFECTIVE INTEREST METHOD .
 The amortization is added to the related expense- INTEREST EXPENSE

Dr: Interest Expense xx

Cr: Discount on Bonds Payable xx

 As a result of the amortization, the interest expense recognized in the income statement is higher than the
interest paid and/ or accrued. The difference is the amount of amortization.
 correct interest is computed as: (Carrying value of Bonds * Effective interest)
 Normal interest is computed as: (Face value of Bonds * Normal interest)
 Bonds issued at a Premium (Proceeds > Face value; Effective Interest < Normal interest)
 Premium is a transaction gain (amount received/proceed is higher than the amount to be paid/face value) to
be amortized over the remaining term of the bonds using the EFFECTIVE INTEREST METHOD.
- the amortization is deducted from the related expense – INTEREST EXPENSE

Dr: Premium on the bonds Payable XX

Cr: Interest expense XX

 As a result of the amortization, the interest expense recognized by the income statement is lower than the interest
paid/ accrued. The difference is the amount of amortization.

Bonds Issued Costs- are deducted from net cash proceeds, thus in the process are deducted from premium or added to
discount on bonds payable (after which a new effective interest rate shall be computed)

Retirement Bonds – if bonds are retired prior to their maturity dates, gain or loss shall be recognized in the profit or loss
(difference between the retirement price and updated amortized cost of bonds)

Accrued interest – in accounting for bond issuance and retirement, consider inclusion of accrued interest specially if bonds
were issued or retired in between interest payment dates.

CONVERTIBLE BONDS

1. ISSUANCE – Proceeds from the issuance of Convertible Bonds should be allocated between the dept component (bonds
payable) and the equity component (Share Premium from Bond Conversion Privilege) using the RESIDUAL APPROACH. To
wit, the pro-forma entry to record issuance is:

Dr: Cash XX

Dr: Discount on bonds payable XX (or)

Cr: Premium on bonds payable XX

Dr: Bonds payable XX

Cr: Share Premium from Bonds conv. Priv. XX

2. CONVERSION – if convert bonds are converted into ordinary shares, the carrying value of the bonds (updated
amortized bonds payable) shall be cancelled out. The difference between the carrying value of the bonds and the
aggregate par value of the converted shares shall be credited to share premium account. An allowed alternative
is the cancel out the equity component originally credited to share premium account upon issuance of the bonds.
The same shall be added to the amount credited to the share premium account upon conversion. To wit, the pro-
forma entry to record the conversion is:
ALTERNATIVE 1 ALTERNATIVE 2

DR: Bonds Payable XX DR: Bonds Payable XX

DR: Premium on Bonds Payable XX(or) DR: Sh Premium from Bond Conv. Priv. XX
CR: Discount on Bonds Payable XX DR: Premium on Bonds Payable XX(or)
CR: Ordinary Shares XX CR: Discount on Bonds Payable XX
CR: Share Premium XX CR: Ordinary Shares XX
CR: Share Premium XX

3. EARLY RETIREMENT – if convertible bonds are retired prior to maturity date, the retirement price shall be
allocated between the bonds and the equity component, consistent with how the original issue price was allocated
(Residual Approach). The difference between the retirement price allocated to the equity component and the
original share premium from bond conversion privilege shall be credited to share premium account.

10. STOCKHOLDERS’ EQUITY

COMPOSITION:

1. Contributed Capital/Paid-in capital

a. Share Capital- Aggregate Par or Stated Value of:
i. Shares issued
ii. Subscribed
b. Additional –paid-in-capital (Share premium) – contributions from stockholders other than the aggregate
par or stated value of shares. This category includes:
i. APIC or share premium from excess over par or stated
ii. Treasury stock transactions (reissuance and retirement)
iii. Ordinary share warrants and Ordinary share option outstanding
iv. Donated capital
v. Bond conversion privilege
vi. Others
2. Unearned Capital/OTHER COMPREHENSIVE INCOME/LOSSES
a. Revaluation Surplus/Revaluation increment in properties
b. Translation Reserves
c. Unrealed holding gain or loss from Available-for-sale securities
d. Unrealized gain or loss on derivatives (Swaps)
e. Actuarial gain or loss on Accum Ben Oblig or Plan Asset under the direct recogn. Approach.
3. Accumulated Profits or Retained Earnings
a. Unappropriated (free for dividends distribution)
b. Appropriated:
i. Voluntary (e.g. plant expansion)
ii. Contractual (e.g. sinking fund)
iii. Legal (e.g. treasury stock)

SHARE ISSUE

 Issuance of Share Capital for Preference or Ordinary shares is credited equal to par and the excess to
additional paid in capital.
 Share Issuance Costs- include registration fees, underwriter commissions, legal fees, accounting fees,
share certificate cost, promotional costs and postage.
 Generally, for subsequent issuances- charged to APIC relative to that particular issue.
 For initial issuance- charged to Organizational Expense

 Issuance of Preference and Ordinary Shares for Lump sum Price- This is accounted as follows:
a. If Preference are effectively equity securities, use pro rata approach in reference to the
aggregate market value of [reference and ordinary shares.
b. If preference are effective debt securities (e.g. redeemable), use approach assigning the fair value of
the preference shares first with residual value assigned to the ordinary shares.
 Issuance of Share Capital on a Subscription Basis- The agreed purchase price is debited to Subscription
Receivable, Share Capital Subscribed is credited at par and the difference is credited to APIC. Upon full payment,
The Share Capital Subscribed is closed to Share Capital.
The Subscription Receivable is presented as current asset if collection is expected within one year of the
balance sheet date. If there is no definite due date set for subscription receivable, it is shown as a contra to
stockholder’s equity, an offset against the Ordinary Shares Subscribed Account.
Default on Subscriptions:
a. Shares are offered in auction.
b. The entire amount collected is returned to the defaulting subscriber
c. The entire amount collected is returned to the defaulting subscriber less any costs incurred
by the corporation in reissuing the shares.
d. A corresponding number of shares are issued to the defaulting subscriber based upon the
total amount collected, or
e. The entire amount collected is forfeited
  Issuance of Share Capital for NON-Cash Consideration (PFRS 2)
Non cash consideration (Asset or Services) received shall be valued at their fair market value, unless the
fair value of shares are more clearly determinable (as when the shares are actively traded in the market)

PFRS for SMESs, SEC 22 LIABILITIES AND EQUITY

 When shares are issued before the cash or other resources are received, the amount receivable
is presented as an offset to equity in the statement of financial position and not as an asset.

TREASURY SHARES

 Acquisition of Treasury Shares, use cost model

Treasury Stock @ cost XX
Cash XX
 Sale of Treasury Shares- When treasury shares are reissued, the journal entry is:
a. Sold at a price higher than the cost, resulting in a capital gain

Cash XX
Treasury Shares (at cost) XX
APIC TSTransactions/ Reacquired Shares XX

b. At price less than the cost, resulting in capital loss

Cash XX
(1)APIC from Treasury Shares
Transactions (until balance is exhausted) XX
(2)Retained Earnings XX
Treasury Shares (at cost) XX

*Note: When treasury shares are acquired at different costs, specific shares may be identified. Otherwise a
FIFO or average cost per share is used to determine the cost of the treasury shares sold.

 Retirement of Treasury Shares

Retire treasury Shares at their carrying value, which is original issue price:
a. If original issue price (carrying value)> Cost of TS: = “capital gain”

Ordinary Share (at par) xxx

APIC in Excess of par (from orig issue/pro-rata) xxx
Treasury Shares at cost xxx
APIC from TS Transactions/Retirement xxx

b. If Original Issue Price (carrying value) < Cost of TS: “capital loss”

Ordinary shares (at par) xxx

APIC in Excess of Par (from orig. issu/pro-rata) xxx
(1) APIC from Treasury Shares Transactions (until exhausted) xxx
(2) Retained Earnings xxx
Treasury Shares (at Cost) xxx
 RIGHT, WARRANTS AND OPTIONS
These securities entitle holders to acquire shares at an exercise rate ordinarily lower than the prevailing market
rate. The following illustrate how to account for thier issuance, exercise and expiration:

ISSUANCE EXERCISE EXPIRATION

RIGHTS- are issued to entitle Normal entry for issuance
the general stockholders in of shares:
relation to their pre-emptive No entry (memo entry only)
rights, to protect their Cash (Ex. P) XX
One right for every one No entry (memo entry only)
proportional interest whenever OS XX
stock issued
corporations issue fresh new Share Prem XX
shares.
PS with warrants:
Cash XX Cash (Ex P) OSWO** XX
PS XX Share Premium XX
Share Prem XX XXX OSWO** XXX From expired
OSWO XX OS XXX warrants
WARRANTS- normally Share Premium XXX
attached to a principal security *Use pro-rata or
(Bond or Pref. Shares) as an residual approach **debit OSWO at the carrying
inducement to buyers of the value of the warrants
principal securities. Bonds with warrants: exercised.
Cash XX
Discount XX
Premium XX
Bonds Payable XX
OSWO XX
Comp exp. XX Cash (Ex P) XX
OPTIONS- normally issued to OSOO XX OSOO** XX
OS XX OSOO** XX
key executives and officers as
At FMV of options or the Share Prem XX Share Premium XX
additional compensation for
intrinsic value, whichever is From expired
either past or future services
appropriate. **debit OSOO at the carrying options
provided to the company.
(see note below) value of the warrants
exercised.

Notes on Accounting for Option Issuance (Equity-settled based payment):

1. Determine if options vest immediately or do not vest immediately
a. If options vest immediately or do not vest immediately
**The value option should be at FAIR VALUE of option, otherwise at INTRINSIC VALUE
 If fair value method is used, value of the option shall be fixed at whatever is the fair value of
the options on the grant date.
 If intrinsic value (FMV of stocks-Exercise Price) is used the intrinsic value is updated at each
balance sheet date until the end of the last year of the vesting period. Any changes in intrinsic
value within the vesting period shall be treated as mere change in estimate (current and
prospective), charged to profit or loss.
2. If options do not vest immediately, determine if option plan is fixed or variable
a. If options are under FIXED OPTION PLAN (the only vesting condition is the vesting period. Options/VP)
b. In estimating the compensation expense for each period, always consider in the analysis the estimated
number of employees who shall remain within the company’s employs until the end of the vesting
period. Any changes in the number of employees remaining in the company until the options vest shall
be accounted for as mere change in estimate.
3. If options are under VARIABLE OPTION PLAN (if apart from the vesting period, there is an additional vesting
condition), determine what is the nature of the additional vesting condition (MARKET BASED OR NON-MARKET
BASED)
a. If additional vesting condition is MARKET BASED (e.g. share price), account for the option as if it is
FIXED. That is, options shall vest regardless whether the additional market condition is achieved or not.
This is because the determination of the fair valuation of the options addition, market based condition
cannot directly influenced by key employees.
4. If additional vesting condition is NONMARKET BASED (e.g. target sales, earnings, increases in sales etc.), consider
whether the additional nonmarket based condition is achieved or not in vesting the options. This means that the
options shall only become exercisable if the additional vesting condition are variable/varies in response to the
nonmarket based condition:
a. Number of options
b. Vesting period
c. Fair value of options
If non-market based vesting condition is not achieved, the option shall revert to the company.

STOCK APPRECIATION RIGHTS (Cash settled share-based payments)

SARs are accounted for similar with options (follow the same steps above) with the following exceptions:
 SAR Payable is a liability to pay in cash
 Measurement: The value of the SAR Payable (at fair value or intrinsic value) shall be updated at the end of each
reporting year during and after the vesting period until the liability is settled.
 The liability is settled at the prevailing fair/ intrinsic value of the SAR
 Any changes in fair valuation at each balance sheet date and on the settlement date shall be treated as mere
changes in estimate (current and prospective), charged to profit or loss.
 RETAINED EARNINGS
RETAINED EARNINGS
RE,BEGINNING
Prior period adjustments:
a. PPErrors a. PPErrors
b. Change in Policies b. Change in Policies

RE, beg as adjusted

c. Capital loss from TST
d. Capital loss from Recapitalization
e. Dividends declared from earnings
f. Appropriations (legal, contractual, voluntary) g. Reversal appropriations
h. Net loss
i. Net income
RE, END
CASH DIVIDENDS
Computation of Cash Dividends Payable:
Number of shares outstanding and subscribed * (% of cash dividend*PAR per share)

PROPERTY DIVIDEND
IFRIC 17 on “Distributions of NON-cash Assets to Owners”, effective 1 July 2009 states that the following guidelines in
accounting for property dividends:
 A dividend payable should be recognized only when the dividend is appropriately authorized and is no longer at
the discretion of the entity.
 An entity should measure the dividend payable a Fair Value of the assets to distributed
 At the end of each reporting period and at the date of settlement, the entity shall review and adjust the
carrying amount of the dividend payable, with any changes in the carrying amount of the dividend payable
recognized in equity as adjustments to the amount of the distribution.
 Upon distribution, an entity should recognize the difference between the dividend payable and the carrying
amount of the assets distributed in the profit or loss.

STOCK DIVIDENDS OR CAPITALIZATION OR BONUS ISSUES

An ordinary stock dividend is a stock dividend of the same class; i.e. Ordinary shares to Ordinary shareholders. A
special stock dividend is a stock dividend of a different class; i.e. Preference shares to Ordinary shareholders.
a. Less than 20% of the shares previously outstanding and subscribed, the stovck dividend is termed small, in which
case the amount to be charged to retained earnings is equal to its current market value.
b. At least 20% of the shares previously outstanding and subscribed, the stock dividend is termed large, in which
case the amount charged against Retained Earnings is equal to par value.

SCRIP DIVIDENDS
A corporation may issue scrip dividends by issuing promissory notes called scrip. This arises when the corporation
may have adequate retained earnings to meet the legal dividend requirements but has insufficient funds to disburse. If the
promissory note bears interest, this is charged to Interest Expense.

BALANCE SHEET CLASSIFICATION

Dividends payable, Property Dividends Payable and Scrip Dividends Payable are classified as liabilities whereas
Stock Dividends Distributable s an addition in the Stockholder’s Equity.