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Chapter 44
Notes
NAME: Date:
Professor: Section: Score:

QUIZ 1: TRUE OR FALSE – ACCOUNTING POLICIES, CHANGES IN ESTIMATES

& ERRORS

1. The primary distinction between a change in accounting estimate and the correction
of an error is the timing of availability of information; a change in estimate is based
on new information not previously available.

2. All changes in accounting policy are accounted for by retrospective application.

3. A company changes its depreciation method for machinery and equipment from sum-
of-the-years'-digits depreciation to the straight-line method. This is a change in
accounting estimate.

4. A company reduces the lives of several patents from 17 to 10 years because of rapid
technological change. This is a change in accounting policy.

5. An analysis of the allowance for doubtful accounts showed the balance should be
reduced by ₱27,500 due to recent changes in economic conditions. This is a change
in accounting estimate.

6. A company changes from a non-acceptable to an acceptable accounting principle.

This is a change in accounting policy.

7. A company changes its depreciation method at the same time it recognizes a change
in the estimated useful life of the asset. This is a change in accounting policy.

8. The understatement of merchandise inventory is an example of an error that

counterbalances after two years.

9. Failure to record amortization is an example of a non-counter balancing error.

10. An understatement in ending inventory results to overstatement of profit during the

period.

“Do not be anxious about anything, but in everything by prayer and supplication with
thanksgiving let your requests be made known to God. And the peace of God, which
surpasses all understanding, will guard your hearts and your minds in Christ Jesus.”
(Philippians 4:6-7)

- END -

ANSWERS TO QUIZ 1:
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1. TRUE 6. FALSE
2. FALSE 7. FALSE
3. TRUE 8. TRUE
4. FALSE 9. TRUE
5. TRUE 10. FALSE
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NAME: Date:
Professor: Section: Score:

QUIZ 2: ACCOUNTING POLICIES, CHANGES IN ESTIMATES & ERRORS

1. Conn Co. reported a retained earnings balance of ₱400,000 at December 31, 20X8.
In August 20X9, Conn determined that insurance premiums of ₱60,000 for the three-
year period beginning January 1, 20X8, had been paid and fully expensed in 20X8.
Conn has a 30% income tax rate. What amount should Conn report as adjusted
beginning retained earnings in its 20X9 statement of retained earnings?
a. 420,000 b. 428,000 c. 440,000 d. 442,000

2. Foy Corp. failed to accrue warranty costs of ₱50,000 in its December 31, 20X4,
financial statements. In addition, a change from straight-line to accelerated
depreciation made at the beginning of 20X5 resulted in a cumulative effect of
₱30,000 on Foy's retained earnings. Both the ₱50,000 and the ₱30,000 are net of
related income taxes. What amount should Foy report as prior period adjustment in
20X5?
a. 0 b. 30,000 c. 50,000 d. 80,000

3. Loeb Corp. frequently borrows from the bank in order to maintain sufficient
operating cash. The following loans were at a 12% interest rate, with interest
payable at maturity. Loeb repaid each loan on its scheduled maturity date.
Date of loan Amount Maturity date Term of loan
11/1/x1 ₱ 5,000 10/31/x2 1 Year
2/1/x2 15,000 7/31/x2 6 Months
5/1/x2 8,000 1/31/x3 9 Months

Loeb records interest expense when the loans are repaid. As a result, interest expense
of ₱1,500 was recorded in 20x2. If no correction is made, by what amount would 20x2
interest expense be understated?
a. 540 b. 620 c. 640 d. 720

The next three items are based on the following:

Declaration, Inc., is a calendar year corporation. Its financial statements for the years
20x2 and 20x1 contained errors as follows:
20x2 20x1
Ending inventory ₱1,000 understated ₱3,000 overstated
Depreciation expense ₱800 understated ₱2,500 overstated

4. Assume that the proper correcting entries were made at December 31, 20x1. By how
much will 20x2 income before income taxes be overstated or understated?
a. ₱200 understated. c. ₱2,700 understated.
b. ₱500 overstated. d. ₱3,200 understated.

5. Assume that no correcting entries were made at December 31, 20x1. Ignoring
income taxes, by how much will retained earnings at December 31, 20x2, be
overstated or understated?
a. ₱200 understated. c. ₱2,700 understated.
b. ₱500 overstated. d. ₱3,200 understated.
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6. Assume that no correcting entries were made at December 31, 20x1, or December
31, 20x2, and that no additional errors occurred in 20x3. Ignoring income taxes, by
how much will working capital at December 31, 20x3, be overstated or understated?
a. ₱0. c. ₱1,000 understated.
b. ₱1,000 overstated. d. ₱1,700 understated.

7. Bren Co.'s beginning inventory at January 1, 20x3, was understated by ₱26,000, and
its ending inventory was overstated by ₱52,000. As a result, Bren's cost of goods sold
for 20x3 was
a. Understated by ₱26,000. c. Understated by ₱78,000.
b. Overstated by ₱26,000. d. Overstated by ₱78,000.

The next three items are based on the following:

The bookkeeper of Latsch Company, which has an accounting year ending December 31,
made the following errors:
 A ₱1,000 collection from a customer was received on December 29, 20x0, but not
recorded until the date of its deposit in the bank, January 4, 20x1.
 A supplier's ₱1,600 invoice for inventory items received in December 20x0 was not
recorded until January 20x1. (Inventories at December 31, 20x0 and 20x1, were
stated correctly, based on physical count.)
 Depreciation for 20x0 was understated by ₱900. In September 20x0, a ₱200 invoice
for office supplies was charged to the Utilities Expense account. Office supplies are
expensed as purchased.
 December 31, 20x0, sales on account of ₱3,000 were recorded in January 20x1.

Assume that no other errors have occurred and that no correcting entries have been
made. Ignore income taxes.
8. Profit for 20x0 was
a. Understated by ₱500. c. Overstated by ₱2,500.
b. Understated by ₱2,100. d. Neither understated nor overstated.

9. Assume the same facts as above. Working capital at December 31, 20x0, was
a. Understated by ₱3,000. c. Understated by ₱1,400.
b. Understated by ₱500. d. Neither understated or overstated.

10. Assume the same facts as above. Total assets at December 31, 20x0, were
a. Overstated by ₱2,500. c. Understated by ₱2,500.
b. Overstated by ₱2,100. d. None of the above.

“The name of the Lord is a strong tower; the righteous run to it and are safe.” (Proverbs
18:10)
- END -

SOLUTIONS TO QUIZ 2:

1. B 400,000 + [(60,000 x 2/3) x 70%] = 428,000

2. C 50,000 – the correction for the prior period error. The change from straight-line to accelerated
depreciation is a change in accounting estimate that should be accounted for prospectively.

3. A
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Solution:
The correct interest expense in 20x2 is computed as follows:
(5,000 x 12% x 10/12) 500
(15,000 x 12% x 6/12) 900
(8,000 x 12% x 8/12) 640
Correct interest expense - 20x2 2,040

Correct interest expense - 20x2 2,040

Interest expense recognized 1,500
Understatement 540
4. A

Solution:
Ending inventory - 20x2 1,000
Depreciation expense - 20x2 (800)
Understatement 200

The counter-balancing error in 20x1 does not affect the 20x2 profit because proper correcting entries were made on
December 31, 20x1.

5. C

Solution:
Effect on profit (over) under statement:
Errors on: 20x1 20x2
Ending inventory - 20x1 (3,000) 3,000
Ending inventory - 20x2 1,000
Depreciation expense - 20x1 2,500
Depreciation expense - 20x2 (800)
(500) 3,200

Effect on profit - 20x1 (500)

Effect on profit - 20x2 3,200
Effect on R/E, 20x2 - understatement 2,700

6. A The working capital on December 31, 20x3 is not affected because all of the counter-balancing errors
would have counter-balanced already as of this point. Errors on depreciation do not affect working
capital.

7. C

Solution:
Effect on COGS -
(over)/understateme
nt
Understatement in beg. Inventory 26,000
Overstatement in end. Inventory 52,000
Net effect on COGS –
understatement 78,000
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8. A

Solution:
Effect on profit (over)/understatement
Unrecorded collection -
Unrecorded purchases (1,600)
Understatement in depreciation (900)
Erroneous debit of office supplies
expense to utilities expense -
Unrecorded sales 3,000
Net effect on profit - understatement 500

9. C

Solution:
Effect on working capital
(over)/understatement
Unrecorded collection -
Unrecorded purchases (1,600)
Understatement in depreciation -
Erroneous debit of office supplies
expense to utilities expense -
Unrecorded sales 3,000
Net effect on working capital - understatement 1,400

10. D

Solution:
Effect on total assets
(over)/understatement
Unrecorded collection -
Unrecorded purchases (Inventory is
properly stated) -
Understatement in depreciation (900)
Erroneous debit of office supplies
expense to utilities expense -
Unrecorded sales (Unrecorded
accounts receivable) 3,000
Net effect on total assets - understatement 2,100
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NAME: Date:
Professor: Section: Score:

QUIZ 3: EVENTS AFTER THE REPORTING PERIOD

Instruction: State whether the following events are adjusting or non-adjusting events
after the reporting period. All events took place after the end of the reporting period but
before the financial statements are authorized for issue

1. The entity guarantees the debt of another entity.

2. Settlement of a contingent event at an amount below the provision recognized as at

the end of the reporting period.

3. Major acquisition of a competitor company.

4. The actual sale of noncurrent assets held for sale provides information on the asset’s
fair value less costs to sell as at the end of the reporting period.

5. The resolution of a contingent event which provides evidence of the entity’s

obligation to pay bonus to a key management personnel for the services he has
rendered during the reporting period.

6. The conditions under PFRS 5 Non-current Assets Held for Sale and Discontinued
Operations for classifying a noncurrent asset or disposal group as held for sale are
met.

7. Change in income tax rate.

8. The discovery that the accumulated patent amortization is understated.

9. A board resolution to change the depreciation method used for buildings.

10. Adoption and announcing of a formal plant to close a business segment.

“For the Lord gives wisdom; from his mouth come knowledge and understanding.”
(Proverbs 2:6)

- END -
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ANSWERS TO QUIZ 3:
1. NON-ADJUSTING
2. ADJUSTING
3. NON-ADJUSTING
4. ADJUSTING
5. ADJUSTING
6. NON-ADJUSTING
7. NON-ADJUSTING
8. ADJUSTING
9. NON-ADJUSTING
10. NON-ADJUSTING

NAME: Date:
Professor: Section: Score:

QUIZ 4: EVENTS AFTER THE REPORTING PERIOD

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1. BOWDLERIZE TO EDIT Company’s current reporting period ends on December 31,

20x1. The following transactions occurred after the end of reporting period:
a. On January 5, 20x2, BOWDLERIZE declared ₱4,000,000 dividends.
b. On January 15, 20x2, BOWDLERIZE issued 1,000 shares with par value per share
of ₱200 for ₱1,200 per share.
c. On January 20, 20x2, BOWDLERIZE installed an oil rig. Current legislation
requires that the oil rig be uninstalled at the end of its useful life and the site
where it was installed be restored. BOWDLERIZE estimates the present value of
the decommissioning and restoration cost at ₱2,000,000.
d. On February 1, 20x2, a building with a carrying amount as of December 31, 20x1
of ₱1,000,000 was totally razed by fire.
e. On February 10, 20x2, BOWDLERIZE received notice of a litigation in relation to
an accident that happened on December 31, 20x1. BOWDLERIZE estimates a
probable loss of ₱400,000.
f. On March 5, 20x2, BOWDLERIZE purchased a subsidiary for ₱20,000,000 in a
business combination accounted for using the acquisition method. Goodwill of
₱5,000,000 was recognized on the business combination.
The financial statements were authorized for issue on March 1, 20x2.

Requirement: Compute for the total amount of adjusting events.

2. PANTALOON TROUSER Company’s current reporting period ends on December 31,
20x1. The following transactions occurred after the end of reporting period:
a. On January 20, 20x2, a pending litigation was resolved requiring a settlement
amount of ₱200,000. The 20x1 year-end financial statements included a provision
for loss on litigation of ₱240,000.
b. Inventories costing ₱2,000,000 were recognized at their net realizable value of
₱1,800,000 in the 20x1 year-end financial statements. During January 20x2, the
inventories were sold for ₱1,760,000. Actual selling costs amounted to ₱60,000.
c. The year-end accounts receivable include a ₱200,000 receivable from XYZ, Inc.
No allowance for doubtful accounts was recognized on this receivable as of
December 31, 20x1. On February 3, 20x2, XYZ filed for bankruptcy. It was
estimated that the receivable will not be collected.
d. The fair value of financial assets measured at fair value through profit or loss
significantly declined to ₱160,000 on February 28, 20x2. The financial assets are
recognized in the 20x1 year-end financial statements at ₱600,000 which is their
fair value as of December 31, 20x1.
e. On March 5, 20x2, a case was resolved requiring a settlement amount of
₱400,000. The 20x1 year-end financial statements included a provision for loss on
litigation of ₱300,000.
PANTALOON Company’s profit for the year ended December 31, 20x1 before
consideration of the above transactions is ₱4,400,000. The financial statements were
authorized for issue on March 1, 20x2.
Requirement: Compute for the adjusted profit for the year. Provide journal entries.

“I press on toward the goal to win the prize for which God has called me heavenward in Christ Jesus.”
(Philippians 3:14)
- END –

SOLUTION TO QUIZ 4:

1. Solution:
Estimated liability on pending litigation 400,000
Total adjusting events 400,000
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Adjusting events are those that provide evidence of conditions that existed at the end
of the reporting period. Those that are indicative of conditions that arose after the
reporting period are non-adjusting events.
Thus, the declaration of dividends, issuance of shares, and impairment of the
building after the reporting period are non-adjusting events. There is no present
obligation for decommissioning and restoration costs as of the end of reporting period
because the oil rig was installed after the reporting period.
The business combination is neither recognized nor disclosed in the December
31, 20x1 financial statements because the business combination is not an event after
the reporting period, i.e., it occurred after the financial statements were authorized for
issue.

2. Solution:
Unadjusted profit, December 31, 20x1 4,400,000
Reduction in provision for loss on pending litigation
(240K – 200K) 40,000
Reduction in NRV of inventories [1.8M - (1.76M – 60K)] (100,000)
Impairment loss on receivables (200,000)
Adjusted profit, December 31, 20x1 4,140,000

Pertinent adjusting entries are:

Dec. 31, 20x1 Estimated liability on pending litigation 40,000
Probable loss on litigation 40,000
Dec. 31, 20x1 Cost of goods sold 100,000
Inventory 100,000
Dec. 31, 20x1 Impairment loss on receivables 200,000
Accounts receivable 200,000

NAME: Date:
Professor: Section: Score:

QUIZ 5: RELATED PARTIES

1. Which of the following statements is incorrect?
a. Related party transactions and outstanding balances with other entities in a
group are disclosed in an entity’s financial statements.
b. Intragroup related party transactions and outstanding balances are not
eliminated in the preparation of consolidated financial statements of the group.
c. Related party relationships are a normal feature of commerce and business.
d. A related party relationship could have an effect on the profit or loss and
financial position of an entity.
 P a g e | 11

e. Knowledge of related party transactions, outstanding balances and

relationships may affect assessments of an entity’s operations by users of financial
statements, including assessments of the risks and opportunities facing the entity.

2. An entity’s ability to affect the financial and operating policies of an investee is

through the presence of
I. Control
II. Joint control
III. Significant influence
a. I only b. I or III c. Any of I, II, or III d. I, II and III

3. Which of the following statements is correct?

I. The profit or loss and financial position of an entity may be affected by a related
party relationship even if related party transactions do not occur.
II. The mere existence of the relationship may be sufficient to affect the transactions
of the entity with other parties.
a. True, true b. True, false c. False, false d. False, true

4. All of the parties enumerated are related to an entity , except

a. the entity is a subsidiary, an associate, or a venture in a joint venture.
b. the party is a member of the key management personnel of the entity or its
parent.
c. the party is a close member of the family of an individual having control,
significant influence, or joint control over the entity or a member of the key
management personnel of the entity or its parent.
d. the party is a post-employment benefit plan for the benefit of employees of the
entity, or of any entity that is a related party of the entity.
e. two entities simply because they have a director or other member of key
management personnel in common

5. The following relates to the transactions of MISCELLANY MIXTURE Company

during 20x1:
4,000,00
Directors' and officers' remuneration 0
Post-employment benefits of officers 400,000
Fringe benefits in the form of housing assistance to
directors 10,000,0
and officers 00
Share options granted to officers 600,000
Officers' expenses on travels, representation and
entertainment subject to liquidation and
reimbursement 200,000
6,000,00
Loans to directors and officers 0
20,000,0
Sales to related entities 00

Requirements: Determine the amount of related party disclosures on MISCELLANY’s (a)

separate financial statements and (b) the group’s consolidated financial statements.
 P a g e | 12

“So do not fear, for I am with you; do not be dismayed, for I am your God. I will
strengthen you and help you; I will uphold you with my righteous right hand.”
(Isaiah 41:10)

- END -
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ANSWERS TO QUIZ 5:
1. B
2. C
3. A
4. E

5. Solutions:
(a) Separate financial statements
Key management personnel compensation:
4,000,00
Directors' and officers' remuneration 0
Post-employment benefits of officers 400,000
Fringe benefits in the form of housing
10,000,0
assistance
00
to directors and officers
Share options granted to officers 600,000
15,000,0
00
Related party transactions and outstanding
balances:
6,000,00
Loans to directors and officers 0
20,000,0
Sales to related entities 00
26,000,0
00
20,500,0
Total 00

Advances to officers for necessary expenses of the entity and subject to liquidation are
not treated as key management personnel compensation.

(b) Consolidated financial statements

Key management personnel compensation:
4,000,00
Directors' and officers' remuneration 0
Post-employment benefits of officers 400,000
Fringe benefits in the form of housing
10,000,0
assistance
00
to directors and officers
Share options granted to officers 600,000
15,000,0
00
Related party transactions and outstanding
balances:
6,000,00
Loans to directors and officers 0
6,000,00
0
10,500,
Total 000
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Intercompany transactions and outstanding balances are eliminated in the

consolidated financial statements.
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NAME: Date:
Professor: Section: Score:

QUIZ 6: OPERATING SEGMENTS

1. MISCREANT UNBELIEVING Co. is preparing its year-end financial statements and

has identified the following operating segments:
Segme Profit
nts Revenues (loss) Assets

A 2,000,000 400,000 28,000,000

B 2,400,000 280,000 36,000,000

C 540,000 (140,000) 24,000,000

D 480,000 (1,400,000) 2,000,000

E 580,000 100,000 2,800,000

Totals 6,000,000 (760,000) 92,800,000

Requirement: Identify the reportable segments.

2. LIMPID CLEAR Company engages in five diversified operations namely, operations A,

B, C, D, and E. Information on these segments are shown below:

Segmen Profit
ts Revenues (loss) Assets
A 1,600 400 20,000
B 1,600 200 4,000
C 100 20 2,000
D 300 40 4,000
E 400 140 14,000
Totals 4,000 800 44,000

Additional information:
a. For internal reporting purposes, segments A and B are considered as one operating
segment.
b. Segment E is considered as an operating segment for internal decision making
purposes.
c. Segments C and D have similar economic characteristics and share a majority of the
aggregation criteria.

Requirement: Identify the reportable segments.

3. TACITURN SILENT Co. is preparing its year-end financial statements and has
identified the following operating segments:
Inter-
External segment Total
Segments revenues revenues revenues Profit Assets
A 2,400,000 1,200,000 3,600,000 1,400,000 24,000,000
B 800,000 200,000 1,000,000 800,000 14,000,000
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C 500,000 - 500,000 200,000 2,000,000

D 400,000 400,000 160,000 1,600,000
E 300,000 300,000 140,000 1,400,000
F 200,000 200,000 100,000 1,000,000
Totals 4,600,000 1,400,000 6,000,000 2,800,000 44,000,000

Management believes that between segments C, D, E and F, segment C is most relevant

to external users of financial statements.
Requirement: Identify the reportable segments.

4. FIDELITY LOYALTY Co. has the following information on its operating segments.
Inter-
External segment Total
Segments revenues revenues revenues Profit Assets
A 2,400,000 1,200,000 3,600,000 1,400,000 24,000,000
B 800,000 200,000 1,000,000 800,000 14,000,000
C 500,000 - 500,000 200,000 2,000,000
D 400,000 - 400,000 160,000 1,600,000
E 300,000 - 300,000 140,000 1,400,000
F 200,000 - 200,000 100,000 1,000,000
Totals 4,600,000 1,400,000 6,000,000 2,800,000 44,000,000

Question: FIDELITY Co. shall provide disclosure for major customers if revenues from
transactions with a single external customer amount to how much?

“Let us therefore come boldly to the throne of grace, that we may obtain mercy and find
grace in time of need.”
(Hebrews 4:16)

- END –

SOLUTIONS TO QUIZ 6:
 P a g e | 17

1. Answer: The reportable segments are segments A, B, C and D.

Solutions:
Revenue test
The threshold under the revenue test is P600,000 or (P6,000,000 x 10%). Segments A and B are
reportable because each of their revenues is at least P600,000 or 10% of the total revenues.

Asset test
The threshold under the revenue test is P9,800,000 or (P92,800,000 x 10%). Segments A, B, and C are
reportable because each of their total assets is at least P9,800,000 or 10% of the total assets.

Profit or loss test

Segments Profit Loss
A 400,000
B 280,000
C (140,000)
D (1,400,000)
E 100,000
Totals 780,000 (1,540,000)

Based on the table above, the aggregate losses of P1,540,000 is higher than the aggregate profits.
Therefore, the 10% limit of profit or loss is P154,000 or (P1,540,000 x 10%). Segments A, B and D are
reportable under this test since each of their reported profits or loss is at least P154,000 or 10% of
P1,540,000.

Based on the tests performed, the reportable segments to be disclosed in ABC’s notes to financial
statements are segments A, B, C, and D.

2. Answer: LIMPID Co. shall disclose three reportable segments in its notes to financial statements,
namely, “A/B,” “E” and “C/D.”

Solution:
Under the “management approach,” segments A and B (aggregated as one segment) and segment E are
reportable operating segments because these segments are used by ABC Co. in its internal reporting.

Segments C and D are subjected to the quantitative thresholds as shown below:

Segments Revenues Revenue test Profit Profit test Assets Asset test
A 1,600 N/A 400 N/A 20,000 N/A
B 1,600 N/A 200 N/A 4,000 N/A
C 100 3% 20 3% 2,000 5%
D 300 8% 40 5% 4,000 9%
E 400 N/A 140 N/A 14,000 N/A
Totals 4,000 800 44,000

Segments C and D do not individually meet any of the quantitative thresholds. However, since the problem
states that segments C and D have similar economic characteristics and share a majority of the
aggregation criteria, they are aggregated and tested if their combined results qualify under the
quantitative thresholds.

The combined revenue of C and D of P400 (100 + 300) is equal to the revenue threshold of P400 (4,000 x
10%). Therefore, C and D shall be disclosed as one reportable segment.

ABC Co. shall disclose three reportable segments in its notes to financial statements, namely, “A/B,” “E”
and “C/D.”
 P a g e | 18

3. Answer: The three reportable segments are segments A, B, and C. The other segments are combined
and disclosed as “all other segments.”

Solution:
Under the revenue test, segments A and B are reportable because they each have total revenues (external
and internal) exceeding the threshold of P600,000 or (6,000,000 x 10%).

Under the profit or loss test, segments A and B are reportable because they each have profit exceeding
the threshold of P280,000 (2,800,000 x 10%).

Under the total assets test, segments A and B are reportable because they each have total assets
exceeding the threshold of P4,400,000 (44,000,000 x 10%).

However, the sum of the external revenues of segments A and B does not meet the 75% limit as shown
below:
External
Segments revenues
A 2,400,000
B 800,000
Total external revenues of A and B 3,200,000

Total entity's external revenues 4,600,000

Multiply by: 75%
Limit on external revenues of reportable segments 3,450,000

Since management believes that of the other segments (i.e., C, D, E, and F), information on segment C is
most relevant to users, segment C shall be disclosed as a reportable segment even if it does not meet any
of the quantitative thresholds in order for the “75% limit” to be met.

If segment C is included as reportable segment, the total external revenues of reportable segments A, B,
and C is P3,700,000 (2,400,000 + 800,000 + 500,000) which meets the “75% limit” of P1,725,000.

4. Answer: at least P460,000 or (10% x P4,600,000 total external revenues)