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    ACT114 INTERMEDIDATE ACCOUNTING 3

    Notes to Financial Statements

    Instructions: Solve each item independently. Show your solutions on yellow


    paper, handwritten, to be submitted on Monday (April 15, 2024).

    Problem 1

    A truck owned and operated by KONTINGTIIS Company was involved in an accident


    with an auto driven by Juan on December 12, 2023. KONTINGTIIS Company received
    notice on December 24, 2023 of a lawsuit for P350,000 damages for a personal
    injury suffered by Juan.

    KONTINGTIIS’s counsel believes that it is probable that Juan will be successful


    against the company for an estimated amount in the range between P100,000 and
    P 400,000. Each point within that range of amounts is considered as likely as
    any other point.

    On December 25, 2023, an employee filed a P3,000,000 lawsuits against


    KONTINGTIIS Company for damages suffered when one of its equipment malfunctioned
    in August of 2023. The legal counsel of the company believes that it is probable
    that KOTNINGTIIS will pay the damages ranging between P500,000 to 1,000,000 but
    P820,000 is considered to be the best estimate of the obligation. On March 1,
    2024, the employee has offered to settle the lawsuit out of court for P925,000
    and the company accepted the offer. The financial statements were authorized to
    be issued on April 1, 2024.

    On April 5, 2024, KOTNINGTIIS 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.

    Inventories costing ₱1,800,000 were recognized at their net realizable value of


    ₱1,600,000 in the 2023 year-end financial statements. During January 2024, the
    inventories were sold for ₱1,560,000. Actual selling costs amounted to ₱60,000.

    How much is the correct provision that should be reported on December 31, 2023?
    (10 points)
    Problem 2

    The following comparative information for the years 2018 and 2019
    2019 2018
    Sales P6,000,000 P4,500,000
    Cost of goods sold (2,800,000) (2,400,000)
    Gross income 3,200,000 2,100,000
    Operating expenses (1,500,000) (1,800,000)
    Net profit 1,700,000 300,000
    Accumulated profits, beg 1,150,000 1,000,000
    Dividends paid (500,000) (150,000)
    Accumulated profits, end P2,350,000 P1,150,000
    Other information:
    ▪ The management pronounced that changing the company’s inventory costing
    from FIFO to weighted average is justified as it will present a more
    relevant and reliable financial information given the prevailing
    current circumstance. The following summarizes the inventory cost at
    yearend under both methods:
    2019 2018
    FIFO 625,00 727,50
    0 0
    Weighted 715,00 827,50
    average 0 0
    The said change has not been implemented as at the end of the period.
    ▪ The company decided to change its method of depreciation from the
    double declining balance method to the straight-line. The depreciable
    assets had a 10-year useful life and has been depreciated for five
    years at the end of 2018. The salvage value of the said assets was
    estimated to be P50,000. Expenses in the income statements included
    P350,000 and P437,500 depreciation expenses in 2019 and 2018,
    respectively, computed based on double declining balance method.
    ▪ On August 1, 2018, the company started the construction of a building
    it plans to use as a second factory. As of the current balance sheet
    date, the construction is yet to be done. Total accumulated costs
    incurred on the construction and recorded in its Construction-in-
    progress account, amounted to P1,250,000, which excluded a P25,000
    borrowing cost in 2018 which has been charged to expense. You have
    ascertained that such borrowing cost should have been capitalized
    following PAS 23. Actual borrowing cost in 2019 amounted to P75,000
    which have been charged to expense.

    Requirement:
    Compute for the adjusted net income in 2019 (10 points)

    Problem 3

    An entity reported net income for 20x1 P1,500,000; 20x2 P2,000,000 and 20x3
    P2,800,000. An audit disclosed the following:

    Accounts receivable instead of notes receivable was 20,000


    debited in 20x3
    Purchases account was debited in 20x3 instead of office 5,000
    supplies
    The physical inventory on December 31, 20x1 was 10,000
    overstated
    The physical inventory on December 31, 20x2 was 15,000
    understated
    Advances to supplier were recorded as purchases but the
    merchandise was received in subsequent year
    20x1 30,000
    20x2 40,000
    Advances from customers recorded as sales but the goods
    were delivered in the following year:
    20x1 25,000
    20x2 50,000
    Insurance premium for three years paid on 2013 was
    charged entirely to expense in 20x1 15,000
    Salaries accrued not recorded:
    20x1 30,000
    20x2 60,000
    Rent for two years received in 20x2 was entirely credited 10,000
    to income
    Unrecorded accrued interest receivable
    20x2 10,000
    20x3 25,000
    Improvements on building had been charged to expense on
    January 1, 20x2. Improvements have a life of 5 years. 100,000
    On January 1, 20x2, an equipment costing P40,000 was
    sold for P20,000 At the date of sale, the equipment had
    an accumulated depreciation of P25,000. The cash
    received was recorded as other income in 20x2.

    Requirement:
    Compute for the Corrected Net Income in 20x1, 20x2 and 20x3. (30 points)

    Problem 4 (10 points)

    1. TACITURN SILENT Co. is preparing its year-end financial statements and has
    identified the following operating segments:
    External Inter-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

    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.
    2. FIDELITY LOYALTY Co. has the following information on its operating
    segments.
    External Inter-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?

    Problem 5 (10 points)

    Apol Company is subject to the requirements of segment reporting. In the income


    statement for the current year, the entity reported revenue of P50,000,000
    excluding intersegment sales of P10,000,000, expenses of P47,000,000 and net
    income of P3,000,000. Expenses included payroll costs of P15,000,000. The
    combined total assets of all operating segments at year-end amounted to
    P45,000,000

    a. What is the minimum amount of sales to a major customer?

    b. What is the minimum amount of external revenue to be disclosed by reportable


    segments?

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