INTERMEDIATE ACCOUNTING 1

Cash Cash Equivalent

Readily available for unrestricted use.  short, highly, liquid investment or readily convertible to
Cash is measured at: cash
a) face value.  acquired within three months or less before maturity
b) foreign currency at the current exchange rate. a) Treasury bill, notes, bonds acquired in 3 months
c) measured at its estimated realizable value b) money market instrument
c) commercial paper
CASH ON HAND. This includes undeposited cash collections
d) certificate of deposit
and other cash items awaiting deposit such as customers’
 compensating balance against short-term borrowing
checks, cashier’s or managers.
arrangement and not legally restricted is included in cash
CASH IN BANK. This includes demand deposit or checking  time deposits closed by the bank is a non-current asset
account and saving deposit which are unrestricted as to  pension fund, not included in cash
withdrawal.
Not included
CASH FUND. set aside for current purposes such as petty cash
fund, payroll fund, and dividend fund 1) Equity shares cannot qualify as cash equivalents because
shares do not have a maturity date.
Examples
2) Preference shares with specified redemption date and
1) Coins And Currency acquired three months or less before the redemption
2) Demand Deposit date can qualify as cash equivalents.
3) Checks Concealment of Cash
4) Bank Draft
5) Money Order Window dressing
6) Stale Checks
7) Checks Drawn Postdated/Not Mailed  practice of opening the books of accounts beyond the
8) Cash Funds for Use in Current Operations such as: close of the reporting period for the purpose of showing
a) petty cash fund a better financial position and performance.
b) revolving fund Lapping
c) change fund dividend fund
d) tax fund  a practice used for concealing a cash shortage.
e) travel fund interest fund other types of account used  consists of misappropriating a collection from one
in current operation. customer and concealing the defalcation by applying a
 > Cash in bank – value added tax account subsequent collection made from another customer.
 a series of postponements of the entries for the
Not Included collection of receivables.
1) Customer Check/ Postdated Check Received Kiting
2) Compensating Balance Legally Restricted
3) IOU or Advances From Employee, It Is Receivable  when an entity maintains current accounts in different
4) NSF Check banks.
 employed at the end of the month. It occurs when a
Accounting Treatment for Checks check is drawn against a first bank and depositing the
same check in a second bank to cover the shortage in the
Postdated checks received
latter bank.
 do not qualify as cash because these checks are not  no entry is made for both the drawing and deposit of the
presently available for immediate use. check

Unreleased checks drawn and Postdated checks drawn

 Unreleased checks drawn and postdated checks drawn

are still part of cash.

Stale Checks

 checks that are not encashed within a relatively long

period of time, normally 6 months. This is reverted back

Petty Cash Fund

Balance of PF = Coins and Currencies + order of the PF

custodian

Shortage/Overage = Total cash counts – Ledger bal. PF

Compensating Balance

 minimum amount that must be maintained in an entity’s

bank account as support for funds borrowed
 when legally restricted as to withdrawal, excluded from
cash and shown as part of other current assets or other
noncurrent assets depending on the nature of the
restriction
Bank Reconciliation d. Overstatement Understatement Credit
on bank debit
 prepared for bringing the balance of cash per record Deposit In Transit
and per bank statement into agreement.
 prepared on monthly basis immediately upon receipt DIT, beg
of the monthly bank statement these things Total Debit per book Total credit per bank
Less: CM last month Less: CM this month
Balance per book Balance per bank Less: Effect book error last Less: Error bank error last
Add: Credit Memo (CM) Add: Deposit in Transit (DIT) Add/Less: Effect book error Add/Less: Effect bank error
Less: Debit Memo (DM) Less: Outstanding Checks (OC) current current
Add/Less: Book errors Add/Less: Bank Errors
Adjusted balance Adjusted balance DIT, end

Credit Memo – additions made by the bank, not recorded by

Outstanding Check
the depositor.
a) Collections made by the bank on behalf of the debtor OC, beg
b) Interest income earned by the deposit Total Debit per bank Total credit per book
c) Proceeds from the loan directly credited for added by the Less: DM current month Less: DM last month
bank to the depositor Less: Effect bank error last Less: Error book error last
d) unrolled over mature time deposit transferred by the Add/Less: Effect bank error Add/Less: Effect book error
bank to the empty account current current

OC, end
Debit Memo - deductions made by the bank to the
depositor’s bank account but not yet recorded by the
depositor Proof of Cash

a) Bank Service Charges represent bank charges for  Expanded bank reconciliation includes proof of cash
fees, interest, penalties, and sub charges receipts and cash disbursement
b) No Sufficient Fund Check Or Drawn Against  Useful in discovering discrepancies in handling cash
Insufficient Funds Check - these are checks deposited over a certain.
and already recorded by the bank but subsequently  Prepared when needed, usually in fraud
returned to the depositor because the drawers fund investigations.
is insufficient
c) Automatic Debit - such as when the depositor and
the bank agreed the bank will make automatic
payment of bills on behalf of the depositor payment
of loans
d) Payment Of Loans

Deposit in Transit - deposit made but not yet credited by the

bank to the depositor’s account

Outstanding Checks - are checks drawn and released to

payee but are not yet encash with the bank

 Certified Check when certifying check automatically

debits the depositors account and assumes the
direct liability to paying the certified check to the
payee. it is already deducted from the account
though they are no longer outstanding
 Stale Checks are reverted back to cash, meaning
added back to cash balance and are excluded in OC.

EFFECTS OF UNDERSTATEMENT AND OVERSTATEMENT

Book Error

Nature Effect on cash Correction

a. Understatement Understatement Debit
in book debit
b. Understatement Overstatement Credit
on book credit
c. Overstatement of Overstatement Credit
book debit
d. Overstatement on Understatement Debit
book credit
Bank Error

Nature Effect on cash Correction

a. Understatement Understatement Credit
in bank credit
b. Understatement Overstatement Debit
on bank debit
c. Overstatement Overstatement Debit
of bank credit
 Under allowance method:

Account Receivable - Bad debt expense decreases the profit, total current
assets, and current ration
 initially measured at fair value plus transaction cost - While write-offs and recoveries do not affect profit,
while trade receivable is by transaction price. total current assets, current ratio and working
 Subsequently measured at net realizable value capital

 Trade receivable – operating cycle or one year Working capital = current asset – current liabilities
 Non-trade receivable – current asset if expected to be Current ratio = current asset/current liabilities
realized in one year.
 Credit bal. account payable (customer account) – ESTIMATING DOUBTFUL ACCOUNTS
included a. Percentage of net product sales
 Debit bal. account payable (suppliers account) – b. Percentage of receivables
included c. Aging receivables
 Advances to – means an asset
 Advances from – means a liability PERCENTAGE OF CREDIT SALES
FOB shipping – buyer ownership, freight collect - This method favors income statement
FOB destination – seller ownership, freight prepaid - Bad debt expense is computed by applying
Trade discounts – encourage large quantities (20%) percentage of net credit sales
Cash discount – prompt payment (n/30)
 Bad debt expense = net credit sales x percentage
 Allowance for doubtful, end = use T account

Allowance for Doubtful Accounts

Beg.
Written-off Recovery
Bad debt expense

End.

ACCOUNTING FOR CASH DISCOUNTS:  Net realizable value = Account receivable end –
PFRS 15 allowance for doubtful account end
 Portion collected within = invoice price x estimate to
be taken (%) x cash discount Account Receivables
 Portion collected beyond = invoice price x remaining Beg.
estimated (%) Net credit sales Written- off
Recovery Collections
Traditional Method (Gross Method & Net Method)
 Invoice amount = list price x trade discount remain. End.
 Transaction price = invoice amount x cash discount
PERCENTAGE OF RECEIVABLES
- The required allowance for bad debts is computed
ACCOUNTING FOR BAD DEBTS: by applying % of end. of receivables.
Allowance Method - Favors statement of financial position
- Conforms of accrual, matching, and conservatism
- In the accordance of PFRS  Allowance for bad debt, end / required balance for
- bad debts are recognized when become probable doubtful = Account receivable end x percentage of
- written off is recognized when it become certain of receivables
being worthless
- when written off is recovered, the entry would be  Bad debt expense = use T account, compute allowance
debit cash and credit A/R end first.

Direct Method  Net realizable value = Account receivable gross, end –

- not an acceptable for financial purposes, except allowance for doubtful end
micro-entities
- no entry in doubtful accounts
- bad debts are directly written off from the account
receivable, only when it become worthless.
AGING RECEIVABLES
- When the written off is recovered, it is recognized as
- Under this method, the required balance of bad debt
gain by debiting cash and crediting gain on recovery.
accounts is computed by applying various estimated
Allowance for Doubtful Accounts percentages.
Beg. - Favors statement of financial position
Written-off Recovery - This method usually used as control device rather to
Bad debt expense find bad debt expense
- It is to determine the composition of receivables and
End. identify delinquent accounts

Before that let’s know how to compute for the percentage:

 - used for inventories that are not ordinary needed
Percentage = (Write Offs – Recoveries) interchangeable and those are segregated for
Net credit sales specific projects

Note: Each year end, so many of it.  First in, first out (FIFO)

a. FIFO – periodic
 Bad debt expense
Beginning inventory in units
Days A/R balance Percentage Req. bal of Net purchases in units
Outstanding allowance Total goods available in units
0-60 120,000 1% 1,200
61-120 90,000 2% 1,800 Total goods available in units
Total 210,000 9,000 Quantity of goods sold
Ending inventory units
 Allowance for doubtful, end = use T account
Total goods available in pesos
 NRV = total receivables – allowance for doubtful, end. Ending inventory, cost
Cost of goods sold
RISK OF ACCOUNTING LOSS & OFF BALANCE SHEET RISK

 Risk accounting loss – risk that carrying amount of b. FIFO – perpetual

recognized assets will not very recovered.
 Off balance sheet risk - potential last that may exceed Note: Different procedure above but similar answer.
the amount recognized as an asset
 Weighted average
INVENTORY a. Weighted – periodic
- held for sale in the ordinary course of business
- the production processes Weighted average cost = TGAS in pesos
- in the form of materials or supplies TGAS in unit
- subsequently measured at the lower of cost and NRV
End, inventory = weighted ave. cost x end, units
Goods in transit – FOB COGS = TGAS in pesos – end, inventory
Consignment
 Held on consignment = not included b. Weighted – perpetual (moving average)
 On consignment = included - Can be computed by doing the table.
The transfer of goods from consignor (owner) to the
consignee is recorded through memo entries. SUBSEQUENT MEASURE:
 Freight and incidental costs form fart of consigned
goods  Lower of cost and NRV
 While repairs, commissions are expensed and do not Choose what’s lowest between NRV per unit and cost per
affect the consigned goods. unit

Cost per unit = Purchase cost – Delivery cost

(freight in)
NRV per unit = selling price – selling cost

 Write down – the product which have higher cost unit

Type Included in the inventory than NRV unit
FOB Shipping Point Buyer Computed by = (NRV unit – Cost per unit ) x total units
FOB Destination seller
consigned goods consignor  Inventory Valuation
product financing and borrower = LCRNV cost per unit x total units of the product
pledge
sale with unusual right of Buyer, except if unsalable INVENTORY ESTIMATION
return
sale on trial Seller The cost of inventories may be computed by:
bill and hold Buyer a. Gross profit method
leeway he's so seller
b. Retail method

Beg, inventory
GROSS PROFIT METHOD
Freight in
 Based on sales
Net purchases
Total available for sale
Computed by : Gross profit / Net sales
(Ending Inventory)
Cost Ratio = 100% net sales – GPR based on sales
Cost of goods sold
 Based on cost of goods sold
COST FORMULAS
Computed by : Gross profit / COGS
 Specific identification
Cost Ratio = 100% COGS / (100% + GPR based on cost)
RETAIL METHOD (used when there’s a table provided)
This is applied either using:
a. Average cost method
b. FIFO Cost Method
Financial Asset
 Average Cost Method  Recognized when the entity becomes a party of the
contractual provisions of the instrument
Cost Ratio = TGAS at cost / TGAS at sale retail price
COGS = Net sales x Cost Ration a) Cash
Ending inventory cost = end, at retail x cost ratio b) Equity of another entity
c) A contractual right to receive cash or another financial
 FIFO Cost Method asset from another entity
d) A contractual right to exchange financial instruments
Cost Ratio = TGAS at cost – beg. At cost from another entity under favorable condition
TGAS at sale retail price – beg at retail e) A contract that will or maybe settled in the entity’s own
equity instrument and is not classified as entity’s own
Ending inventory cost = end, at retail x FIFO cost ratio equity instrument
COGS = TGAS at cost – End, inventory at cost
Includes:
FORMULAS:  Cash and cash equivalents
 Receivables (account, notes, loans, finance, lease)
 Raw materias, beg
 Investment in equity or debt securities in other entities
Purchases
 Sinking fund and other long term funds composed of
Freight-In
cash and other financial assets
( Purchase Return & Discounts
 Commodity contract to be settled in cash, under
Total raw available for use
favorable conditions
Others:

 Allowance for bad debts (deducted)

 Investment in associate
 Investment in subsidiary
 Raw materials, beg
Purchases  Investment in equity instrument
Freight-In  Investment in bonds
( Purchase Return & Discounts)  Cash surrender value
Raw materials, end.
Raw materials issued to production Excludes:
 Physical assets
 Work in process, beg  Intangible assets
Raw materials issued  Advances to suppliers
Direct Labor  Prepaid assets
Factory Overhead  Repaid interest
(Work in process, end)  The entities own equity and statement (eg. Treasury
Cost of goods manufactured shares)

 Finished goods, beg Classification

Cost of goods manufactured a) Amortized Cost
Total goods avail. for sale b) Fair Value Through Other Comprehensive Income
c) Fair Values Through Profit or Loss
 Finished goods, beg
Cost of goods manufactured
(Finished goods, end) Basis Classification Classification
Cost of goods sold Business Model : hold financial asset Amortized Cost
to collect contractual cash flows: SPPI
 Raw issued for use Business Model : both collecting FVOCI
contract cash flows and selling
Direct labor
financial assets : SPPI
Factory Overhead
 If it doesn’t meet under the FVPL
Factory Cost
amortized cost or FVOCI, then
it FVPL.
 EXCEPTIONS: Investment in
equity instrument at FVOCI,
Option to designate a
financial asset at FVPL

SPPI = solely payments of principal and interest

 3. Carrying amount of asset given up + cash paid or –
cash received

Gain/Loss = FV of asset given up – carrying amount of asset

NON-CURRENT ASSETS given up
Property Plant And Equipment
Gain/loss = FV of asset received (can determine by squeezing
 Tangible asset in journal entry)
 Used in business
 Long term in nature  Without substance
1. Carrying amount of the asset given up + cash paid or
INITIALLY MEASURED AT COST – cash received
comprises of cost:
Gain/Loss = no gain or loss
 purchased cost (import duties, nonrefundable taxes, less
trade discounts and rebates) SUBSEQUENT MEASUREMENT
 direct costs (directly attributable costs) see book
 initial dismantlement, removal, and site restoration cost  COST MODEL
Under this method, PPE is carried at its cost less any
DIRECT COSTS: accumulated depreciation and impairment loss.
1. Cost of employee benefits directly attributable
2. Cost of site preparation METHOD OF DEPRECIATION METHOD
3. Freight costs (initial and assembly)
4. Installation and assembly cost  Straight line Method
5. Testing costs Annual depreciation =
6. Professional fees (Initial cost – Residual Value) / estimated useful life

Includes: Accumulated depreciation =

 Land used in business Depreciable amount x year passed/ estimated useful life
 land hill for future plant site
 building used in business Carrying amount = Depreciable amount ( remaining
 equipment used in production of goods yrs/estimated life) + residual amount
 equipment held for environmental and safety reasons
 equipment held for rentals  Sum of the years digits (SYD)
 major spare parts SYD denominator = Life x (life + 1 )/2
 furniture and fixture
 bear plants Depreciation =
n/SYD denominator x depreciable amount
CLASSES OF PPE:
a. Land Accumulated depreciation =
b. Land and buildings depreciable amount x ( (5+4) /SYD deno)
c. Machinery
d. Ships Carrying amount =
e. Aircraft Depreciable amount X ( ( 3+2+1) / SYD deno)
f. Motor vehicles
g. Furniture and fixture  Double declining method
h. Office equipment
i. Bearer plants DDB rate = 2/life eg. 40%

DEMOLITION COSTS Depreciation = (initial cost x rate)

Depreciation 2 = (initial cost – depreciation) x rate
DECOMMISIONING AND RESTORATION COSTS Or Depreciation 2 = initial cost x 60% x 40%

Purchase price Carrying amount = initial cost x 60%

Direct cost Carrying amount 2 = initial cost x 60% x 60 %
Decommissioning costs (price x PV factor)
Cost of Equipment  Units of production method
(refer to the table given)
SELF CONSTRUCTED ASSETS
a. Materials, labor, overhead costs incurred Depreciation rate = depreciable amount / estimated total
b. Architectural, supervision, permits costs hours or units
c. Excavation cost Depreciation = hours of that year x rate
d. Insurance cost and safety inspection fees
e. Costs of temporary structures built GROUP DEPRECIATION
f. Borrowing costs
 Composite Method
OTHER MODES OF ACQUISITION OF PPE
 With substance Composite life = Depreciable amount / annual depreciation
1. FV of asset given up + cash paid or – cash received Composite rate = Annual depreciation x total cost
2. FV of the asset received
 Retirement Method
Cost of old tools retired
Less: Proceeds from sale of old tools Biological Assets
Depreciation expense
PAS 41 prescribes the accounting and disclosure of
 Replacement Method agriculture activity

Cost of new tools acquired as replacement a. Biological assets except for bearer plants
Cost of old tools retired, not replaced b. Agricultural produce at the point of harvest
Less: Proceeds from sale of old tools c. Unconditional grants related to biological assets
Depreciation expense
BIOLOGICAL ASSETS – is a living plant or animal
 Inventory Method (squeeze)
TOOLS Either:
Beg. balance Proceeds from asset a. Consumable biological assets
disposal b. Bearer biological assets (a PPE)
Additions Depreciation expense
Ending bal. Examples:
 Sheep  Pigs
CHANGE IN ACCOUNTING ESTIMATES  Trees in timber  Cotton plants
 Pigs  Sugarcane
Step 1. Determine the carrying amount of the equipment  Dairy Cattle  Tobacco plants
Step 2. Depreciate the carrying amount using the changed
depreciation method and useful life

AGRICULTURAL PRODUCE – the harvested produce of the

 REVALUATION MODEL entity’s biological asset
- Subsequently measured at revalued amount less
subsequent accumulated depreciation and Examples:
accumulated impairment loss  Wool  Harvested Cane
 Felled Trees  Picked leaves
Fair Value  Milk  Picked grapes
Less: Carrying Amount  Carcass  Picked fruits
Revaluation Surplus  Harvested cotton  Harvested latex

Annual depreciation = FV / remaining useful life

PPE (BEARER PLANTS) – PAS 16
 COST APPROACH
Examples:
Compute for revaluation surplus:  Tea bushes  Mango Trees
 Grapefruits  Oil Palms
 Fruit trees  Rubber trees
Replacement Cost
Less: Depreciation ( replacement cost x effective life / total
COMMON FEATURES OF AGRICULTURAL ACTIVITY:
economic life
a. Capability to change
FAIR VALUE
b. Management of change
c. Measurement of change
Fair Value
Less: Carrying Amount
BIOLOGICAL TRANSFORMATION
Revaluation Surplus
a. Growth
b. Procreation
 TRADITIONAL GAAP
c. Degeneration
Replacement cost
BIOLOGICAL ASSETS
Less: Depreciation
- Initially measured at fair value lest cost to sell
Fair Value
Carrying Amount
Fair Value = Price in Market – Transport costs
Revaluation Surplus
Cost to sell:
a. Commission on brokers
 MARKET APPROACH
b. Transfer of taxes and duties
a. Proportional Method
c. Levies by commodity exchange
b. Elimination Method
Biological Assets attached to land
(Like trees in a plantation forest)
- The fair value of the raw land and the land
improvements maybe deducted from the fair value
of the combined assets, to arrive at the FV of
biological assets

Government Grants – only those that related to biological

assets measured at FV less cost to sell
 Unconditional – the grant is recognized in PL when it
becomes receivable
 Conditional – the grant is recognized in PL when the
conditions are met
 Conditional but the terms of the grant allow part of it to
be retained according to the time elapsed.

 DUE TO PHYSICAL CHANGE

Formula:
(FVLS, end. Age as of beg) – (FVLS, beg. Age as of beg) x Qty.

 DUE TO PRICE CHANGE

Formula:
(FVLS, end. Age as of end) – (FVLS, end. Age as of beg) x Qty. +
FVLS newborn at the date of birth

TOTAL GAIN:

FVLS, end
Carrying amount, exclude newborn
(Beginning period)
(increase due to purchase)
Total gain from the change in FVLS

Or simply the sum of due to price and due to physical

changes