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Financial accounting 2 SUMMARY

*Conceptually, all liabilities are measured at present value
1. The essence of provision is that there is an uncertainty about the timing or amount of the future expenditure.
2. Recognition of provision
a. present obligation- legal or constructive
b. probable outflow of benefit
c. amount of obligation can be measure reliably
3. Constructive obligation is derived from entity’s actions. Creates a valid expectation
4. An accounting provision cannot be created in anticipation of future event.
5. An entity shall determine whether a present obligation exists at the end of reporting period by taking into
account all available evidence, including the opinion of experts. Evidence considered includes any additional
evidence provided by events after the end of the reporting period
6. The estimates of outcome are determined by the judgement of management of the entity supplemented by the
experience of similar transactions and reports from independent experts
7. Midpoint of the range is used
8. Other measurement considerations:
a. Risks and uncertainties—describes the variability of outcome. May increase or decrease the amount of
liability. Prudence is required
b. present value
c. Future events—there must be sufficient evidence that they will occur (new legislation, changes in
d. Cash inflows from disposal are treated separately from provision
e. Reimbursement shall be treated as a separate asset and not netted against estimated liability
f. Change in provision—should be reversed if it is no longer probable
g. Expectation of future operating losses is an indication that certain assets may be impaired. An
impairment test is necessary.
9. Restructuring is a program that is planned and controlled by management and materially changes either the
scope of a business of an entity or the manner in which that business is conducted
a. Sale or termination of a line of business
b. closure of business location or relocation
c. Change in management structure
d. fundamental reorganization of an entity
10. In Provision for restructuring there must be a detailed plan and valid expectation
11. It shall include only direct expenditures that are necessarily incurred for the restructuring and not associated
with the ongoing activities of the entity. Example: salaries and benefits of employees to be incurred after
operations cease and that are associated with the closure of operation. It excludes:
a. cost of retraining and relocating continuing staff
b. Mktg and admin
c. Investment in new system and distribution network.
*These are considered to be expenses relating to the future conduct of business.
12. Onerous contract is measured at the least net cost of exiting from the contract or the lower of cost between
to pay for the penalty of not fulfilling it or for the lease payments.
Bonds payable
1. Bond indenture or deed of trust is the document which shows in detail the terms of the loan and the
rights and duties of the borrower and other parties to the contract.
2. If property is pledged as security for the loan, a trustee is named to hold title to the property serving as
security. Trustee acts as the representative of the bondholders and is usually a bank or trust entity
3. First mortgage bonds—bonds with senior claims on entity assets.
4. Second mortgage—bonds with subordinated claims on entity assets
[Type here]

Financial accounting 2 SUMMARY

5. Collateral trust bonds—bonds secured by stocks and bonds of other corporation
6. Debenture—without collateral. Unsecured and therefore rank as general creditors in the preference of
7. Coupon or bearer bonds- interest is paid to the person submitting a detachable interest coupon.
8. Registered bonds—interest is paid to bondholders of record.
9. Journal entry:
10. Bond issue costs or transaction costs include printing and engraving cost, legal and accounting fee,
registration fee, commission paid to agents and underwriters. It is amortized over the life of the bond
issue. It is conceived as cost of borrowing and therefore will increase interest expense. It shall be
included in the initial measurement of a financial liability. It shall be presented as a deduction from
bonds payable. Under effective interest method, bond issue cost must be lumped with the discount on
bonds payable and netted against premium
(if not effective)Interest expense
Bond issue cost
11. If bonds are sold between interest dates, an accrued interest is involved and it is paid by the buyer. The
unexpired life is computed from the date of sale to the maturity date. Monthly amortization would be the
best approach.
12. In premature retirement, the discount and bond issue cost are updated up to the date of retirement. Total
cash payment is equal to retirement price + accrued interest from the last payment date up to the
retirement date.
Operating lease
1. Operating lease is the rental approach
2. Lease bonus is treated as a prepaid rent expense to be amortized over the lease term on the part of the lessee.
On the part of the lessor, it is unearned income.
3. Lessor may pass to the lessee the payment insurance and maintenance cost.
4. Initial direct cost shall be added to the CV of the leased asset
5. Security deposit refundable should be accounted for as a liability by the lessor
Rent deposit-lessee

Prepaid rent(lease bonus) deferred initial direct cost
Cash Cash
Rent deposit Amortization of initial direct cost
Cash-lessor deferred initial
6. Idle property is subject to depreciation as long as it is available for its intended use.
7.The balance of deferred shall be presented as an addition to the CV of machinery.
8. Unequal rental payments(rent free of 6months):
2010(1Mx6/12) 500,000
2011 1,250,000
2012 1,250,000
3,000,000/3= 1,000,000

Cash 500,000
[Type here]

any gain or loss shall be recognized immediately.000 Rent income 1.000. Income Unearned Finance lease-lessee 1.250. Dep. liabilities.000 Acc.000.520.000 *depreciation is based on useful life *amortization is based on lease term Purchaser-lessor: Equipment Lease receivable Cash Unearned Cash equipment Lease receivable. Leaseback as an operating: Cash 2.000 Lease liability 4. 1. any gain on sale is deferred and amortized over the lease term but any loss is recognized immediately.000 9.000.520.000 Rent receivable 250.000 2012 Cash 1. If the sale and leaseback transaction is an operating lease.000 Cash 100.000.000 Accumulated depreciation 1.000 2011 Cash 1.520.250. 2. A land lease with a lease term of several decades or longer may be classified as a finance lease even if title will not pass to the lessee at the end of lease term 3. Date of which recognition of assets. Commencement is the date which the lessee is entitled to use the leased asset.000 Rent receivable 250.000 Rent Exp.000 Leaseback as a finance lease: Seller-lessee Cash 4. If it is a finance lease. the asset would become the property of the lease by reason of bargain purchase option that is certain.000 Rent income 1.000 Machinery 3.000 Equipment 4.000.000 Equipment 5.000 Deferred gain on sale and leaseback 770.250. If the [Type here] . 100.000.000 Gain 200. income and expenses.000 Rent income 1.200. 10. The minimum lease payments are allocated between the land and building elements in proportion to the relative fair value of the leasehold interests in the land and building elements at the inception of the lease. In finance lease.Financial accounting 2 SUMMARY Rent receivable 500. depreciation is based on the life of asset because ultimately.

Leased asset is of such specialized nature that only the lessee can use it without major modification e. Transfer of ownership b. Sales type lease 2.300 Net investment 1. it is expensed immediately Machinery(initial direct cost) 66. rental payments b.650 Unearned interest income 481. Exercise of bargain purchase option: Lease liability Cash 7.650 Initial direct cost 66.350 4. then the lease is likely to be an operating lease. if there is an option to cancel the lease and the lessee likely to exercise such an option.000. initial direct cost is added to the cost of the leased asset while in sales type.950 *this requires computation of new effective rate. On the part of the lessor. The lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than the market rent. the net investment in the lease is the present value of rental payments so that there would be no gross profit to be realized—only interest income 3.Financial accounting 2 SUMMARY lease payments cannot be allocated reliably between the 2 elements.518.000 Machinery 1. whichever is lower. Guaranteed residual value 6.518.584. Direct financing lease b.75% of the economic life of the asset even if title is not transferred d. the lessor’s losses associated with the cancellation are borne by the lessee. In direct financing. The lessee can cancel the lease.300 66. Finance lease-Lessor 1. Criteria for finance lease: a. Bargain purchase c. This reduces the interest income because the initial cost is effective spread over the lease term. entire lease is classified as a finance lease or operating 4. In general. Lease receivable 2. In direct financing lease. 5. Cost of machinery 1. Fair value or present value of lease payments. f.300 Cash [Type here] . a finance lease is either the following: a. Minimum lease payments: a. Gains or losses from the fluctuation in the fair value of the residual accrue to the lessee in the form of a rent rebate equaling most of the sale proceeds at the end of the lease. g. Bargain purchase option c. If not exercised: Acc depreciation Lease liability Loss on finance lease Machinery 8. 9.

000 Machinery 1.000. 200T) Cost of sales 2.000 Residual value 500.200. there would be a gross profit or loss to be realized.000 Sales 1.000) Gross profit: 440.000 Unearned interest 560. so that.950 Unearned interest income 415.000 1.000 Gross rentals(900Tx4) 3.910 Divide by PV of ordinary annuity 3.000.Financial accounting 2 SUMMARY Lease receivable Net investment to be recovered from rental 2. (no residual value): Lease receivable 2.000 [Type here] .000 Inventory 1.584.440.000(800Tx5+residual value.683) (341. With guaranteed residual value: Lease receivable 4. present value of lease payments does not necessarily equal to the cost of the leased asset.590 Machinery 500T Lease receivable 500T Under guaranteed scenario (fair value is 400T): Cash 100T Machinery 400T LR 500T Unguaranteed: Machinery 400T Loss on finance lease 100T LR 500T 6.000 (1.1699 Annual rental 900.000.410) Unearned 905.410 Present value of residual value(500Tx.100.852.194. In sales type lease.000 Cost of machinery ( Cost of sales 1. Direct financing lease-with residual value Cost of machinery 3.440.050 5.600.000 Gross investment 4.000 7.

043. When the note is issued solely for cash.31 of each year.032.000 payable in 5 annual equal installments every dec.500.875.043. Gross income is the same in both guaranteed and unguaranteed. Straight line method of depreciation is used.200.640 Unearned 1.000 Note Payable and Debt Restructuring 1. 1/1/11: [Type here] . Example: an entity acquired equipment for 1. Unguaranteed residual: LR 4.000 Loss on sale 300.820 Unearned 1.000.000 Unearned 1. the entry is: Cash 880.000.Financial accounting 2 SUMMARY Sales 3. Interest is 10percent on the unpaid balance. the purchase price is the present value.000 Note payable 1. If unguaranteed.000 3.156.000 Initial 100T Cost of Sales 1.000 Lease receivable 5. If a promissory note is interest-bearing. Using 12%.000. Inventory 200T Lease receivable 200T * If it is guaranteed. But the same method of accounting for LR and unearned is applied. it is Inventory 150T accounted for as a loss LR 200T Inventory 150T Loss 50T LR 200T 9. Actual sale: Cash 3. the cash proceed is the present value using a discount rate.000.000.000 Initial direct cost 100T Cash 100T 8.820 Cash 100T Sales 3. lessee pays for the excess of residual Cash 50T value over fair value of the asset.180 Inventory 2. Note Payable is initially measured at fair value which is equal to the present value and subsequently measured at amortized cost 2.000 *The present value of residual value is deducted from cost of sales and revenue because the asset is conceived as not sold.180 Inventory 2.000 Discount on N/P 120.200.

On NP 60T * Bond outstanding method is used to amortize discount. 100T down and the balance payable in 4 equal annual installments: 1/1 Equipment 350T 12/31 NP 100T Discount on N/P 150T Cash 100T Cash 100T N/P 400T Interest Exp 60T Disc. Using 10percent prevailing market interest.000 *Since the equipment has no established fair value. [Type here] . 400-250=150T discount on note payable.Financial accounting 2 SUMMARY Equipment 1M Note payable 1M 12/31 Interest Expense 100T Note payable 200T Cash 300T 12/31/12: Interest Expense 80T Note Payable 200T Cash 280T 4. Note Payable Lumpsum using a present value factor of .000.160 12/31 NP 200T Discount on N/P 241.000 Note payable 900.816 *Effective interest method is used. the entry is: 1/1 equipment 758.7513: Equipment 776.000 Interest exp 75. * the cash paid is not added to the cost of equipment since the 350T cash value includes already the 100T cash paid.on NP 75. 5. Thus. mortgage properties are being given to extinguish a liability. we shall discount the 900T payable + 100T cash paid to get the cash value of the equipment. present value/cash price is determined by multiplying the annual installment by the present value factor. Entity acquired an equipment for 1M payable in 5 annual installments on every dec.31 of each year.170 Discount on NP 223.830 Cash 100. So the 400T note payable applies to the 250T portion of the equipment. The discount is 900T minus the PV.816 Disc. 6. Book value is used. Entity acquired an equipment with a cash price of 350T for 500T. the cash price is assumed to be the present value of the note issued. In Dacion en pago accounting. 7. If there is no cash price in a noninterest bearing note.840 Cash 200T Note payable 1. Interest Method is used. When a noninterest-bearing note is issued for a property with cash price.

5M.Financial accounting 2 SUMMARY Mortgage Payable 3M Accrued interest 200T Bank service 50T Loss on extinguishment 450T Acc. Accordingly. It is as if Gain on exchange 700T the land was sold and the proceeds is used Gain on debt restructuring 200T to extinguish the obligation b.5M Gain on extinguishment 900T USA GAAP: Note Payable 2M *fair value is 2.5M 9.7M Gain 800T Bonds payable 5M *carrying amount of bonds is used Accrued 500T *no gain is recognized(PAS32) Share capital 2M Share premium 3. a. Debt restructuring. To recognized the Accrued interest 400T increase in value. Any costs or fees incurred are recognized as part of gain or loss. Asset swap(PAS39): Note payable 2M Accrued interest 400T Land 1.5M Gain on extinguishment 1M Bonds payable 5M *fair value of Bonds is 4. There is a substantial modification if the gain/loss is at least 10perecent of the old liability. 2-way transaction. Depreciation 800T Land 500T Building 4M 8. Maturity value-extension of maturity date or reduction of the maturity value. Equity Swap: Bonds payable 5M *fair value of SC is 4.5M credited.7M Accrued 500T Share capital 2M Share premium 2. 2-way transaction Accrued interest 500T Share capital 2M Share premium 2. Interest concession-reduction of interest rate or forgiveness of unpaid interest b. Modification of terms a.2M. gain on exchange is Land 1. it shall be accounted for as an extinguishment of the old liability and the recognition of a new liability. Illustration: [Type here] .granting of concession to the debtor to maximize investment recovery. 10.

Accounting income after permanent differences is equal to accounting income subject to tax. It is income seen in the income statement computed in accordance with accounting standards. Any costs incurred in modifying the terms are adjusted to the carrying amount of the old liability and amortized over the remaining term of the modified liability Note payable-old 5M PV Accrued 1M NP-new 5M Premium on NP 1M Accounting for Income Tax: 1. Nontaxable: Interest income on deposits and dividends received.466. It doesn’t give rise to deferred tax asset and liability because they have no future tax consequences. Accounting income-financial income or the net income for the period before income tax expense.6M Gain 400T 12. Permanent differences. It pertains to nontaxable revenue and nondeductible expenses. Taxable income. Taxable temporary difference-will result in future taxable amount in determining taxable income of future periods when the asset or liability is recovered or settled. Income tax return. Note payable-old 5M Accrued interest 1M Note payable-restructured 5.Financial accounting 2 SUMMARY Note payable-due now-14% 5M Note payable old 5M Accrued 1M Accrued interest 1M Discount 466. Under USA GAAP. Nondeductible: Life insurance premium. tax penalties. The carrying amount of the old liability shall be the aggregate present value of the principal liability and future interest payments of the new liability using a NEW EFFECTIVE RATE. 2.120 -accrued interest is forgiven Note payable-new 4M -principal is reduced to 4M Gain 2. If the gain/loss is not atleast 10percent of the old liability. 4.items of revenue and expenses which are included in either accounting income or taxable but will never be included/recognized in the other. fines 5. Accounting income subject to tax after temporary difference is equal to taxable income 6. Public entity is an entity whose equity and debt securities are traded in stock exchange or over-the-counter market or whose equity or debt securities are registered with SEC in preparation for the sale of it. [Type here] . Thus. there would be no gain or loss to be recognized. 7.120 -new interest is 10percent payable very dec. It is temporary because eventually a certain item’s treatment will be the same in accounting and taxable income. old liability minus the absolute amount of restructured liability (total cash to be paid) is gain or loss on debt restructuring.31.2013 11. Timing differences are items of income and expenses which are included in both accounting and taxable income but at different time periods (what is recognized in accounting income now may not be recognized yet in taxable until future periods). resulting to a temporary difference. 3.31 -new date of maturity is dec. there would be no gain or loss to be recognized upon modification. surcharges.the income for the period determined by the rules of taxation authorities.

14. Just a reversal. 10. deferred tax asset and liability shall be presented separately on balance sheet as line items. Income statement approach focuses in timing differences only while statement of financial approach considers all temporary differences(asset revaluation) 18. Subsidiaries. 13.amount of income tax payable in future periods with respect to taxable temporary diff.000) Accounting subject to tax 6. Intraperiod tax allocation. deferred tax liability exists. 15.000 Taxable temporary: Excess tax depreciation (200. In deferred tax asset. associates or joint venture has not distributed its entire income to the parent or investor resulting to higher carrying amount of investment in subsidiary. 25. 16. When asset is revalued upward and no equivalent adjustment is made for tax purposes B. or venturer is able to control the timing of the reversal of undistributed profit or temporary difference or the temporary difference is not probable to reverse in the future.000) Taxable Income 6. Deferred tax liability is not recognized when the taxable temporary difference arises from: A. It is the amount of income tax paid or payable for a year 20.200. Standard prohibits a deferred tax liability for goodwill on initial recognition or where any reduction in the value of goodwill is not allowed for tax purposes. [Type here] . 21. deferred tax liability shall not be recognized. Tax base. When the parent.000.will result to a future deductible amount 9.000 Deductible temporary: Doubtful 200. goodwill resulting from a business combination and which is nondeductible for tax purposes B. If it deductible.amount of asset or liability that is recognized or allowed for tax purposes.000) Installment sale (100.taxable income times tax rate. It is deferred asset if the items are on the disadvantage of the entity at the first year (accrual of expenses) and deferred tax liability if it is on the advantage of the entity (excess tax depreciation or installment sale).Financial accounting 2 SUMMARY 8. Deductible temporary difference. 12.accounting income subject to tax multiply by the tax rate.investor. Other taxable temporary differences: A.000 Nontaxable (300. entity benefits but later suffer from an increase in future taxable income. entity is at first at loss but will receive benefit in the future in the form of reduced taxable income (future deductible amount). Initial recognition of an asset or liability in a transaction that is not a business combination and affects neither accounting or taxable income.recognition of a deferred tax asset or liability 19. Interperiod tax allocation. associate or joint venture C. 17. Deferred tax and liability shall be classified as noncurrent regardless of the reversal period. Cost of a business combination that is accounted for as purchase is allocated to the identifiable assets and liabilities acquired at fair value and no equivalent adjustment is made for tax purposes.000 23. C.500. If the goodwill arises from business combination and the goodwill is not deductible for tax purposes. Acctg income per book 6.000 Est. Deferred tax liability. Current tax expense. deferred tax liability for goodwill could be recognized to the extent that it does not arise from initial recognition. Total income tax expense.000 Permanent differences: Nondeductible 500.allocation of income tax expense to the various revenues that brought about the tax. 24. 11.Warranty cost 400. While in deferred tax liability. 22.

Plan assets include assets held by a long-term benefit fund and qualifying insurance policies.Financial accounting 2 SUMMARY 26. Under unfunded. Short-term compensated absences such as paid annual leave and sick leave c. Qualifying insurance policy is an insurance policy issued by an insurer that is not a related party of a reporting entity and the proceeds of the policy can be used only to pay employee benefits and are not available to the reporting entity’s own creditors even in bankruptcy 15. 8. car. Profit sharing and bonuses payable d. as well as any nontransferable financial instruments held by the fund. Postemployment benefit plans are informal if evidenced only by an entity’s practice to pay postemployment benefits and formal if required by law whereby entities are required to contribute to national benefit plans(SSS) or to provide postemployment benefits to qualified public sectors. Postemployment benefit plan may be contributory/noncontributory or funded and unfunded. RA 7641 is a defined benefit plan because the entity’s obligation is to provide specific level of benefit for every year of service. 5. Under Defined benefit plan. If the plan is poor. life insurance. Entitlement to compensated absences may be accumulating and nonaccumulating. military service. SSS is classified as defined contribution plan because entity’s obligation is limited to specified contributions to the plan as a percentage of salary. Once the defined contribution is paid. Employees include directors and other management personnel under PAS 19 2. Current tax liability or asset is measured at the current tax rate but deferred liability and asset shall be measured at the newly enacted tax rate at the end of the period which is expected to apply next periods Employee Benefits: 1. 12. employer has no more obligation under the plan. Accumulating are those that are carried forward and can be used in future periods if current period’s entitlement is not used in full. the benefit is definite but the contribution is indefinite. entity must make additional contributions for any expected shortfall in order to satisfy the promised future benefits 10. Salaries. Postemployment benefits include retirement benefits(pension). Benefit expense is equal to the contribution 9. employer and employee contribute to the fund but they do not necessarily contribute equal amounts. free or subsidized goods) 3. PAS19 encourages but does not require an entity to involve an actuary in measuring benefit obligation under defined benefit plan. medical care. such as trustee. Short-term employee benefits require no actuarial assumptions because they are all payable no later than 12 months and thus are not discounted. [Type here] . Plan assets exclude unpaid contributions due from the reporting entity to the fund. Employee therefore bears the investment risk. 14. Under funded plan. wages. Short-term benefits include: a. 4. Nonmonetary benefits ( medical care. the entity retains the obligation for the payment of retirement benefits without the establishment of a separate fund. contribution is definite but the benefit is indefinite. 6. bank or insurance company. 11. and SSS contributions b. Non-accumulating is common for sick pay. maternity or paternity leave. 7. The conditions are: (1)The fund is legally separate from the reporting entity (2)assets are available only to pay only employee benefits(3)assets are not available to the reporting entity’s own creditors even in bankruptcy (4) assets cannot be returned or can be returned only if there is surplus funds or to reimburse it for employee benefits already paid. It also requires that the projected unit credit method(accrued benefit method) shall be used in determining the present value of the defined benefit obligation 13. In noncontributory. Entity sets aside funds for future retirement benefits by making payments to a funding agency. Under Defined contribution plan. housing. only the employer makes contributions. In contributory.

32. an entity deducts expected administration costs 17. In many cases. 30. Only unrecognized gains and losses from prior years or at the beginning of the year are subject to amortization. 20. If there is no such bonds. This is to conform with the expected balance or actuarial assumption 24. future medical costs and expected return. Under full recognition approach. plan trustees will mandate that retirement plans hold only marketable investments 34. In determining the expected and actual. benefit expense for the current year increases and prepaid/accrued decreases/increases.right to do business. Hybrid plan is deemed to be a defined benefit plan 33. Actuarial assumptions comprise of demographic and financial assumptions. rate of employee turnover. rates of salary increase. The standard does not make it incumbent upon the plan to use annual actuarial valuation. for returns over the entire life of the related obligation. In corridor approach. 27. The measurement of other long-term employee benefits expense includes actuarial gains and losses and past service cost recognized immediately. If transitional liability is more than the liability that would have been recognized at the same date under the entity’s previous accounting policy. benefit expense or accrued or deferred benefit cost is yet to be adjusted next year or the following year 23. Unamortized actuarial losses and past service cost are shown as debit in the memorandum records. Plan assets shall be carried at fair value. Full recognition approach is an option available when fluctuations are so great that deferral is not deemed to be wise. Corridor approach is the deferral approach required by the standard 19. Expense is deferred. it shall recognize the transition loss as expense immediately to be included in the total benefit expense or amortize it over a maximum of 5years(the choice is irrevocable.Financial accounting 2 SUMMARY 16. Financial deals with discount rate. 31. The 10percent corridor represents materiality threshold in determining whether actuarial gains and losses are included in the computation of total benefit expense 21. [Type here] . Actuarial assumptions are mutually compatible if they reflect the economic relationships between factors such as inflation. It is unbiased if they are neither imprudent nor excessively prudent. Juridical personality and legal existence commences. early retirement. Shareholders Equity: 1. Transition gain is recognized immediately. future salary and benefit levels. the most recent valuation is used and the date of actuarial valuation is disclosed. Settlement occurs with a curtailment if a plan is terminated 29. Actuarial gains and losses in the current year are amortized starting next year 22. return on plan assets and discount rates. Demographic deal with mortality. As it is amortized. Discount rate shall be determined by reference to market yields at the balance sheet date on high quality bonds. actuarial gains and losses occurring in the current year are recognized immediately in the current year as component of OCI rather than as part of total benefit expense. If an actuarial valuation has not been prepared on the date of report. It reflects changes in the fair value of plan assets as a result of contribution and benefits paid. 35. 25. In many countries. actuarial valuations are every 3 years. the reported benefit expense is not saddled with the amortization of deferred gains and losses that may have occurred years before. 28. The expected return on plan assets is based on the market expectations at the beginning of the period. Unamortized past service cost is already included in the benefit obligation. Thus. plan assets will have determinable fair value because in discharge of their fiduciary responsibility. Unamortized past service cost and actuarial losses are added to the fair value of plan assets and unamortized actuarial gain is added to the benefit obligation in reconciliation to get the prepaid/accrued benefit cost per book. Certificate of incorporation. Termination is the event which gives rise to an obligation rather than the employee service. 26. market yields on government bonds is used. claim rates under medical plans. Accumulated benefit obligation is based on current salary while projected is based on future salary 18.

A gets 4.000 shares * the 10. share issuance cost shall be debited to share premium arising from the issuance of share capital. But in wasting asset entity. aggregate par value of issued and subscribed 15.shall be debited to share premium arising from issuance of share capital. Par value.corporation 12. 8. Call-official declaration of due and payable unpaid subscription 27.4.000-beg Unissued share capital (2.000)-end Issued 1.000 Cash 30. 10.5. Formal organization -adoption of by laws and election of officers by the board of directors.500 Advances on delinquency sale 30. Financial reward is dependent on the operation of the entity 17. Ordinary shareholders have no fixed or specific return on investment. Artificial person. Secret reserve-opposite of watered share.900. Authorized share capital 4. 6. In case of par value share. 21. Watered Share: land’s FV is 800T Land 1M SC 1M no discount is recorded. However. Corporation must formally organize and commence operations within 2 years from the date of incorporation 7. 5.000 [Type here] . Corporation code prohibits the issue of share at a discount.100. 25 percent of authorized shall be subscribed and at least 25% of the subscription has been paid. Normal balance of unissued share capital is debit. Place of shareholders meeting must be the principal place of business. Organization cost shall be expensed immediately. Delinquency sale followed with an offer price of 450. Share issuance cost.000 22. The excess is charged to expense.000.500 shares B. Cash 800T Disc. 16. SC 200T Share capital 1M 23. 14. shareholders. Ordinary shareholders have no fixed or specific return on investment.000 shares C. juridical personality and legal existence commences. Discount is a deduction from total SHE 24. or members. Articles of incorporation. it is up to the accumulated depletion balance 19. Contributed capital includes SP.incorporators/corporators 13.000. legal capital is the aggregate par value of the shares issued and subscribed.000 are deemed fully paid. 9.minimum issue price. Asset is understated or liability is overstated 26. By-laws-rules of action adopted by the corporation for its internal government and for the government of its officers. no indication of market price. excess is charged to expense. Corporation can pay dividends to shareholders limited only to the retained earnings balance. 11.500 while Mae gets 5. Mae failed to pay the remaining balance of 400. It is illegal to pay dividends if the entity has a deficit. Natural.000.6. Their financial reward is dependent on the operations of the entity. No par shares contributed capital is the total consideration received 18. including interest and other costs A. 20. 3.Financial accounting 2 SUMMARY 2.corporation’s right to do business. Debited all to land account 25. If SP is not sufficient to absorb the issuance cost.

000 28. Mandatory. If rights are exercised.Donated shares are treasury shares. memorandum is made for the decrease in the no. RE Retirement: a.000 Advances 30. No entry is required when share warrants are issued to existing shareholders because these warrants are issued usually without consideration. Classified as a financial liability 30. SP. Callable preference. Redeemable. SP-treasury c. the value of the warrants is the residual after deducting the market price of the the option of the holder.000 Interest Income 20.can be called in for redemption at a specified price at the option of the corporation. Just indicate the no. Right of preemption. Reissuance of TS below cost: a. SP-TS b. RE 35. 29. “Received from shareholders as donation 10.000 OS with par value of 100” Reissuance: Cash xx Donated capital xx Canceled: OS xx Donated capital xx Subterfuge Land’s value is 800T Land xx OSC xx Correcting entry upon reissuance: Cash xx Land xx Donated capital xx * the should-have-been payment has been recovered upon reissuance of donated shares [Type here] .Financial accounting 2 SUMMARY Cash 450. of rights issued to shareholders and the number of shares that can be purchased through the exercise of rights 33.original issuance b. of shares claimable through the exercise of rights 34. If bonds payable is issued with right of stockholders 31.000 Subscription receivable 400. Rights issue-accounting term for preemptive right (stock right) 32.

3. Mandated by PFRS 2 b. It is like the entity pays cash and the same was subsequently invested.000 SWO 750.000 SOO 2.000 *So outstanding account is reported as component of share premium. 2 methods for measuring compensation: a. If it doesn’t vest immediately.500.000 OS 5.000 Dec.000. therefore not a liability 4.500.000. Fair value—compensation is equal to the fair value of SO on the date of grant. Intrinsic—excess of market price over option price Rules: 1.000. it is capitalization of RE.000 2012: Cash 6.000 SWO 750. If SO vest immediately.000 Exercise: Cash 6. On grant date.000 SP 3.31. With vesting period: Total fair value/compensation(100Tx15) 1. compensation is recognized as expense over the service period (matching) Salaries—SO (100Tx20fair value) 2.000. employee is not required to complete a specified period of service before unconditionally entitled to SO.000. From RE (salaries) to SWO or SP.2010: Salaries—SO 750.000 OSC 5.000. Cash settled—incurs liability and the liability is based on the entity’s equity instruments(share appreciation rights) 3.500. as a result of 5-for-1 split of 10.000.000 SP 2. entity shall recognize the compensation expense in full with corresponding increase in equity 2.000 old shares with par value of 100.000 *In effect. Share-based compensation 1.000 2011: Salaries—SO 750. SO shall be adjusted and credited to SP [Type here] .Financial accounting 2 SUMMARY Share split: Issued 50. Share option.000/ the option of a shareholder.000.000 SWO 1.000 new shares with par value of 20. Equity settled—share option 2. IF not subsequently exercised.000 SOO 2.

250.2012(exercise date) 200 2011 (180) Increase in intrinsic 20x10.000 2011: No of employees 500 2010 (30) 2011 (28) Expected (25) 417x100=41.000=394.000 SP 1.2010 150 Option price (125) 25x10.000=200.000 OS 1.000 Fair value 30 Total compensation 1.000/3=440.000/3x2=834.000 2012: No of employees 500 2010 (30) 2011 (28) 2012 (22) 420x100=42.700x30=1.000(end of vesting period) Dec 31.000 4.000=550.000/2=125.000 2011 Salaries-SO 425.000(additional compensation) 2010 salaries-SO 125.000=250.000. Intrinsic value: MV(OS).Financial accounting 2 SUMMARY 2010: No of employees 500 Employees who left 2010 (30) Expected (30) Employees entitled to SO 440 SO X100 Total SO 4.260. dec.251.31.000 SOO 425.000x30=1.000 SOO 200.000-834.000-440.000.000-125.000 SO 125.000 2012 Salaries 200.000 Execise: Cash 1.000=426.000 SOO 750.000 2011 180 (125) 55x10.320.000 [Type here] .000=425.

000 Salaries (expense) 450.500.000 [Type here] . entity is deemed to have issued a compound financial instrument.000 SOO 4.500. 8. entity shall account for the instrument either as a liability or equity.000 Exercise in 2012 Cash 3. The predetermined price is the beginning of the earliest period. Accrued salaries payable 650. Fair value of the equipment purchased 5.000 Share capital 300. it is as if the vesting date had been brought forward and the balance of the fair value not yet expensed is recognized immediately Total compensation 4.050. if there are increases or decreases in the market value of share over a predetermined price for a given number of shares. the liability for the compensation shall be adjusted. It shall be accounted for as partly liability (cash alternative) and partly equity (share alternative) 11.000x51) 510.000 Share options outstanding 66.000 Share premium 416.Financial accounting 2 SUMMARY 5.000 Equity component 600. Cash alternative: Accrued salaries payable 650.000.000 7.950.000x48) 576.500.000 Fair value of liability on grant date. Fair value of share alternative(12.000 14.000 6.000 Equity component 66. If the employee has the right to choose the settlement. If there is no increase at the end of the service period.050. Market value of shares at the end of the period less the predetermined price times the no. Share appreciation creates liability. During the vesting period from the date of grant to the exercise date. If it is settled in cash: SOO 2.000.000 Compensation expense 2012 1. the entry is: Accrued salaries payable Gain on reversal of SAR 10.000 Cash 650. 9.000 Fair value of the liability(40Tx110) 4.400. of shares equals the total compensation to be distributed equally over the service period.000.000 12.000(65x10. If the entity has the choice of settlement.000 Cash 2.000.000 Share premium 66. If SO are canceled or settled during the vesting period.000) Share options outstanding 66.000 SC 2.000 Share alternative: 13.000 Cumulative 2010 and 2011 2.jan1(10.000 SP 4.

000 Share alternative: Accounts payable 4. retained earnings shall be capitalized only to the extent of par value or stated value of the shares.000.Financial accounting 2 SUMMARY Equipment 5. Dividends paid to holders of mandatorily redeemable preference share shall be accounted for as interest expense as component of finance cost 6.000 Acc. Quasi-reorganization is a permissive but not a mandatory procedure under which a financially troubled entity restates its accounts and establishes a fresh start in accounting sense.000 5.000.000. if stock dividends are declared.000. Depletion 2.000 Share premium 2.500.200.000 Share premium 600.500.400. there is impairment loss.000 Share options outstanding 600. or voluntary.000 Share options outstanding 600.400.000 PPe 1.000 Accounts payable 4.000 RE 500. 3.500.000. It is called corporate readjustment. It may be accomplished through recapitalization or revaluation of PPE.000.400.000 Revaluation surplus 2.000 SC 2. 4. Property dividends is distribution of noncash assets or shares of another entity to owners 2.000 Cash alternative(market price is 130.31) Accounts payable 4. Dep 1. Entity shall measure a noncurrent asset classified for distribution at the lower of carrying amount and fair value less cost to distribute.000 Interest expense 800. Appropriation may be legal. (PPE’s fair value is 6. In closely held entities.000 Revaluation: PPE 4.800.000) Accumulated dep 1. 7.200. If fair value is lower. contractual.000 Dividends payable 5.dec. Distribution to holders of an equity instrument classified as financial liability are recognized in the same way as interest expense on a bond. Wasting asset doctrine states that entity can declare dividends not only to the extent of the retained earnings balance but also to the extent of the accumulated depreciation balance Retained earnings 3.000 [Type here] .000 Retained earnings and Book value per share 1.000 Capital liquidated-acc.000 Share options outstanding 600.000.000 Cash 5.

mechanics. purpose and effect of quasi- reorg on the entity’s statement 12.000 8. Retained earnings subsequent to the quasi-reorg shall be restricted to the extent of the deficit wiped out during the reorganization and therefore cannot be declared as a dividend 11. 14. [Type here] . Since the preference share already receives 12% as basic dividend for the current year. Subscribed shares are entitled to dividends. Dep(30%) (1.000. Participating up to 16% means that the preference share shall receive for the current year a maximum of 16 percent on the par value.000.500. An entity shall present basic and diluted earnings per share on the face of income statement with equal prominence for all periods presented 5. The result of revaluation of PPE must be made by an independent expert or specialist 9. Subscription receivable is not deducted for book value purposes.000.500.700.000 2. When an entity presents both consolidated and separate. An entity that chooses to disclose earnings per share on its separate financial statements shall present such earnings per share info on the face of its separate income statement.000) 2. When dividends has preference as to assets. An entity shall not present such earnings per share on the consolidated financial statements.Financial accounting 2 SUMMARY Cost Replacement cost PPE 5. Public entities are required to present earnings per share 4.000) Outstanding 3. the lower rate shall be the basis for allocation to the ordinary share. disclosures required by the standard need be presented only on the basis of the consolidated info.000 3. the preference shareholders are entitled to payment not only for the liquidation value but also for dividends in arrears.500.000 Acc. EPS pertains only to ordinary shareholders. Total deficit is charged to Ordinary shareholders. 2.500. Quasi-reorganization must be approved by SEC.000 9.000 Treasury at par (500. 17. 19. 13.000 or 100.000  treasury shares are treated as retired for book value purposes. Issued 2.000 Total 3. The resulting deficit from the reorganization is offset against the revaluation surplus 10. When preference as to assets.000.000 Subscribed 1. In case where there are two classes of preference share with different dividend rates and both are participating.200. 2 computations of earnings per share is covered by PAS 33 which requires two presentations of earnings per share: basic earnings per share and diluted 3. No dividends can be declared when there is deficit. Earnings per share: 1. then it participates only to the extent of 4% on the par of 2. Preference and ordinary share on the deficit on a pro rata basis. 16. 6. The quasi-reorg shall be disclosed for at least 3 years—date.000 6. it shall be given dividends even when there is a deficit. Preference as to dividends means that preference holders will receive first dividends if and when dividends are declared. Preference share capital 500T Treasury 400T SP 100T 20. Dividends in arrears usually include current dividends 15. 18.000. 1.000 1.500.000.800.300.000 4.

If the preference share is cumulative. preference dividend for the current year is deducted from net income only if there is declaration 9. the increase and decrease in the number of shares shall be recognized retroactively. If there is a significant change in the ordinary share capital during the year.Financial accounting 2 SUMMARY 7. JKYAP [Type here] . preference dividend for the current year only is deducted from the net income whether such dividend is declared or not. 10. weighted average no. of ordinary shares outstanding during the period should be used. Where stock dividends or share splits create a change in the capital structure. meaning the stock dividends or split shall be treated as a change from the date the original shares were issued. Net income is equal to the amount after deducting dividends on preference share 8. If the preference share is noncumulative.