INTERIM REPORTING

TRUE OR FALSE

1. Conceptually, interim financial statements can be described as emphasizing reliability over

timeliness. False

2. Interim period is a financial reporting for a period of one year or less. False

3. For external reporting purposes, it is appropriate to use estimated gross profit rates to determine the
cost of goods sold for both interim and year-end financial reporting. False

4. An interim financial report contains either a complete set or condensed set of financial statements.
True

5. There is a presumption that anyone reading interim financial reports shall have access to the most
recent annual report. True

6. Publicly traded entities are encouraged to provide interim financial reports at least quarterly and
such reports are to be made available not later than 60 days after the end of interim period. False

7. Under the integral view, each interim period is considered a separate accounting period with status
equal to a fiscal year. False

8. Under the independent view, each interim period is an integral part of the annual accounting period.
False

9. An entity shall apply the same accounting policies in its interim financial statements as are applied in
its annual financial statements. True

10. Expenses associated directly with revenue are matched against revenue in those interim periods in
which the related revenue is recognized. True

MULTIPLE CHOICE

1. For interim financial reporting, a loss from flash flood occurring in the third quarter should be:
a. Recognized in the third quarter
b. Disclosed by a note only in the third quarter
c. Recognized equally during the third and fourth quarters
d. Deferred and recognized during the last quarter of the year

2. Which statement in relation to an interim financial report is true?

a. An interim financial report must consist of a complete set of financial statements
b. An interim financial report must consist of a condensed set of financial statements
c. An interim financial report may consist of a condensed set or complete set of financial statements
d. All of these statements are true

3. Interim financial statements are usually presented on a:

a. Monthly basis
b. Quarterly basis
c. Semiannual basis
d. Nine-month basis

4. Advertising costs incurred shall be deferred to provide an appropriate expense in each period for:
a. Interim reporting
b. Year-end reporting
c. Interim reporting and year-end reporting
d. Neither interim reporting nor yearend reporting

5. Conceptually, interim financial statements can be described as emphasizing:

 a. Timeliness over reliability
b. Reliability over relevance
c. Relevance over comparability
d. Comparability over neutrality

6. For interim reporting, an inventory loss from a market decline in the third quarter shall be
recognized as a loss:
a. In the fourth quarter
b. Proportionately in each of the third and fourth quarters
c. Proportionately in each of the first, second, third and fourth quarters
d. In the third quarter

7. For interim reporting, an expropriation loss occurring in the second quarter shall be:
a. Recognized ratably over the last three quarters
b. Recognized ratably over all four quarters with the first quarter being restated
c. Recognized in the second quarter
d. Disclosed in the second quarter

8. An inventory loss from a market price decline occurred in the first quarter. However, in the third
quarter, the inventory had a market price recovery that exceeded the market decline that occurred in
the first quarter. For interim financial reporting , the amount of inventory should:

a. Decrease in the first quarter by the amount of the market price decline and increase in the third
quarter by the amount of the market price recovery
b. Decrease in the first quarter by the amount of the market price decline and increase in the third
quarter by the amount of decrease in the first quarter
c. Not be affected in the first quarter and increase in the third quarter by the amount of the market
price recovery
d. Not be affected in either the first quarter or the third quarter

9. Which statement is incorrect regarding interim financial reporting?

a. A complete set of financial statements at the interim reporting date is required
b. Interim amount like advertising that could benefit later interim periods is expensed immediately
c. The integral and independent view are the two approaches of interim financial reporting
d. No accruals or deferrals in anticipation of future events during the year should be reported

10. Due to a decline in market price in the second quarter, an entity incurred inventory loss. The market
price is expected to return to previous level by the end of the year. At the end of the year, the decline
had not reversed. When should the loss be reported in the interim income statement?
a. Ratably over the second, third, and fourth quarters
b. Ratably over the third and fourth quarters
c. In the second quarter
d. In the fourth quarter

STRAIGHT PROBLEMS

1. MAC COMPANY provided the following information for the first quarter:

Loss from typhoon 700,000

Insurance for the calendar year 300,000
Loss on inventory writedown 200,000
Property taxes for the calendar year 600,000
Advertising of a new product 200,000
Depreciation expense for the year 800,000
Year-end bonuses to employees 2,000,000
Ordinary repairs to equipment 100,000

Question: What total amount of expenses should be reported in the first quarter? P 2,125,000.00

2. BELL Company reported P 950,000 net income for the quarter ended September 30, 2019 which
included the following after-tax items:
  A P600, 000 loss from expropriation incurred on April 30, 2019 was allocated equally to
the second, third and fourth quarters of 2019.
 A P160, 000 gain resulting from reversal on inventory writedown was recognized on
August 1, 2019. BELL Company has previously recognized P100, 000 loss on inventory
writedown during the second quarter.
 In addition, the entity paid P480, 000 on February 1, 2019 for 2019 calendar-year
property taxes. Of this amount, P120, 000 was allocated to the third quarter of 2019.

Question: For the quarter ended September 30, 2019, what amount should be reported as net
income? P 1, 090,000.00

3. ABC Co. reports profit before tax of P1,200,000 in its 2nd quarter interim financial statements
before consideration for the following:
 Inventory with a carrying amount P100, 000 has a net realizable value of P70, 000. It is
expected that the decline in value will reverse in 3rd quarter.
 An investment property measured under the cost model has a carrying amount of P250,
000 but its recoverable amount is P220, 000.
 An investment in FVPL measured at acquisition cost of P20, 000 has a fair value of P30,
000 as at the end of 2nd quarter. However, the increase in fair value is expected to be only
temporary
 No depreciation is recognized during the 2nd quarter. The annual straight-line
depreciation of items of PPE is P400, 000.
 ABC Co. has a policy of providing 12 days paid vacation leaves for its employees. Total
paid vacation leaves are vesting and accumulating. Total paid vacation leaves eligibility
of employees for the full year is P240, 000. However, only P30, 000 worth of paid
vacation leaves have been availed of during the quarter.
 It was discovered that depreciation in the previous year was overstated by P9, 000.00.

Question: Compute for the adjusted profit before tax? P990, 000.00

4. Among the transactions of ABC Company for the first two quarters of 2019 were the following:

 ABC recognized a P100, 000 writedown in its inventory during the first quarter. ABC
had expected that the writedown will reverse in the second quarter, and in fact, in the
second quarter, the recovery exceeded the previous writedown by P20, 000.
 ABC provides warranty for its sales. In the first quarter, ABC estimated a 5% warranty
obligation on its first quarter sales of P1, 000,000. In the second quarter, a change in
accounting estimate was made. It was estimated that the cost of warranty should be 10%
of total sales. The second quarter sales amounted to P1, 200,000.
 ABC has been estimating its bad debts expense as 2% of credit sales. However, in the
second quarter, a change was made to the percentage of ending receivable. Under this
method, the required balance of the allowance for doubtful accounts as of June 30, 2019
is computed at P30, 000. The allowance has a balance of P5, 000 at the beginning of the
year. Total write-offs during the first six month of 2019 amounted to P12, 000; recoveries
totaled P3, 000. Credit sales for the 1st and 2nd quarters amounted to P1, 000,000 and P2,
000,000, respectively.

Question: What are the effects of the transactions listed above on profit or loss before tax in the
first and second quarter interim financial statements of ABC?
1st Quarter – (170,000); 2nd Quarter- (84,000)

5. Advertising Expenses. The following are independent transactions:

 In the first week of April, 2019, SIMON Company made advertising campaign and paid
P600, 000. These advertisements are expected to benefit operations for the remainder of the
calendar year. What is the advertising expense to be reflected in the second quarter?P
600,000.00
  BLUE Company operates in the travel industry and incurs costs unevenly throughout the
year. Advertising costs of P2, 000,000 were incurred on March 1, 2019. What is the
advertising expense to be reflected in the first quarter? P 2,000,000.00

 CASPER Company is preparing financial statements for the first quarter ended March 31,
2019. Expenses in the first quarter totaled P4, 000,000, which includes television advertising
expense of P1, 500,000 representing air time to be incurred evenly during 2019. What is
the advertising expense to be reflected in the first quarter? P 375,000.00

 GRANGER Company paid newspaper advertisement costing P90, 000 on April 1, 2019. The
advertisement shall appear in the weekly newspaper publications over the remaining months
of the year. What is the advertising expense to be reflected in the second quarter?
P 30,000.00

6. Year-end Bonuses. The following are independent transactions:

 Staff bonuses, which are paid at year-end end based on sales, are expected to be around P20,
000,000 for the year 2019. Of that sum, P3, 000,000 would relate to the period ending March
31, 2019. What amount of bonus expense shall be included in the first quarter? P
3,000,000.00.

 The terms and conditions of employment with Pauline Company include entitlement to share
in the staff bonus system, under which 5% of the profit for the year before charging the bonus
is allocated to the bonus pool, provided the annual profit exceeds P50, 000,000. The profit
before accrual of any bonus for the first half of 2019 amounted to P40, 000,000 and the latest
estimate of the profit before accrual of any bonus for the year as a whole is P60, 000,000.
What amount should be recognized in profit or loss in respect of the staff bonus for the
half year ended June 30, 2019? P 2,000,000.00

 Vilo Company has estimated that year-end bonuses to employees for 2019 will total P1,
200,000. In the interim income statement for the six months ended June 30, 2019, what
amount of expense should be reported? P600,000.00

 Karen Co. is preparing its interim financial statement for the period ended March 31, 2019.
Year-end staff bonuses are expected to be around P92, 000. Employees become entitled to the
bonuses as they provide services to Karen Co. during the year. What amount of expense
should be reported in the first quarter? P23,000.00

COMPREHESIVE PROBLEM

1. PRIM COMPANY encounters the following product cost situations as part of the quarterly financial
reporting.

 The entity conducts inventory count at the end of the second quarter and the end of the
fiscal year.

 Typical gross profit rate 30%

Actual gross profit rate at the end of the second quarter 35%
Actual gross profit rate at the end of the year 25%

 Quarterly Sales

First quarter 10,000,000

Second quarter 8,000,000
Third quarter 7,000,000
Fourth quarter 15,000,000

 There is a temporary decline in inventory value of P100, 000 in the first quarter which is
recovered fully in the second quarter.
  There is a net realizable value adjustment of P150, 000 in the third quarter. The inventory
value increases by P200, 000 at the end of the fourth quarter.

Requirements: Compute the following:

Quarter Sales Cost of Goods Sold Gross Income

First Quarter 10,000,000 7,100,000 2,900,000
Second Quarter 8,000,000 4,600,000 3,400,000
Third Quarter 7,000,000 5,050,000 1,950,000
Fourth Quarter 15,000,0000 13,250,000, 1,750,000

2. JAS COMPANY prepared the following condensed trial balance on March 31, 2019:

Cash 1,000,000
Accounts receivable 2,000,000
Inventory 1,500,000
Prepaid insurance 400,000
Note receivable 5,000,000
Land 1,500,000
Buildings and equipment 18,000,000
Accounts payable 8,500,000
Share capital 5,000,000
Share premium 4,000,000
Retained earnings 9,500,000
Sales 25,000,000
Purchases 17,000,000
Distribution costs 3,200,000
Administrative expenses 2,400,000
52,000,000 52,000,000

 Uncollectible accounts typically average 1% of net sales.

 On January 1, 2019, buildings and equipment have an average remaining life of 10 years. One-
third of the account balance consists of assets related to selling activities. The entity uses the
straight line method.
 The note receivable is dated January 1, 2019, matures on January 1, 2021, and carries a 12%
interest. Interest will be collected annually starting January 1, 2020.
 On January 1, 2019, the entity had purchased a one-year insurance policy debiting the payment to
prepaid insurance.
 The gross profit method is used to determine the interim inventory. Gross profit has averaged
40% of net sales.
 The income tax rate is 30% and the income tax will be paid on or before April 15, 2019.

REQUIREMENT: Prepare an income statement for the first quarter of year 2019.

JAS COMPANY
Income Statement
For the quarter ending March 31, 2019
Sales 25,000,000
Cost of Sales (60%) 15,000,000
Gross Income 10,000,000
Interest Income ( 5,000,000 x 12% x (3/12) 150,000
Total Income 10,150,000
Selling Expenses ( 3,200,000 + 150,000) (3,350,000)
Administrative Expenses (2,400,000 + 300,000 + 100,000 + 250,000 ) (3,050,000)
Income Before Tax 3,750,000
Income Tax (30%) (1,125,000)
Net Income 2, 625,000