CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING

MODULE 4: PREPARING THE FINANCIAL STATEMENTS

C. Statement of Financial Position. The accounts below were taken from the unadjusted
trial balance of RED Company as at December 31, 2019:

Cash and cash equivalents P 1,240,000 CA

Investment at fair value through profit or loss, at cost 870,000 CA
Investment at fair value through other comprehensive income, at cost 2,500,000 NCA
Notes receivable 920,000 NCA
Accounts receivable 1,220,000 CA
Allowance for bad debts 60,000 (CA)
Merchandise inventory 1,360,000 CA
Notes payable 1,500,000 NCL
Accounts payable 750,000 CL
Withholding tax payable 40,000 CL
Bonds payable 2,500,000 NCL
Share dividends distributable 150,000 Equity
Income tax payable 280,000 CL

An analysis of the above accounts disclosed the following:

a. Included in the cash and cash equivalents is a 120-day P500,000 time deposit
certificate dated October 1, 2019 and maturing on January 28, 2020. The time
deposit certificate bears an interest rate of 4.80%. RED has not recorded any
accrued interest on this time deposit at December 31.

First, cash equivalents, to be considered as part of cash in the statement of

financial position, are “short-term highly liquid investments” that were purchased
three months before its maturity. However, in this case, the time deposit certificate
should be presented as “Short-term investments”, rather than cash equivalents,
but is still classified as current assets.

Second, interest receivable should also be recognized as part of current assets

computed as follows:

Accrued interest income = P500,000 x 4.80% x 92/360 = P6,133

b. The accounts receivable was net of short-term customer deposits of P50,000.

Let us say, you are buying your favorite soda at the sari-sari store and the owner
asks you to pay a certain amount as a deposit for the bottle. If you return the bottle,
the store owner will return to you the deposit; hence, it is recognized as a liability
of the store owner to the customer.

Also, we learned that we should not offset assets and liabilities, unless permitted
by IFRS, or there is a legal right to do offsetting. In this case, the customer deposits
(which is a liability), were inadvertently offset or deducted from the accounts
receivable. Therefore, the accounts receivable balance was understated.

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 To determine the correct balance of the accounts receivable:

Accounts receivable, as presented above P 1,220,000

Add back: customer deposits 50,000
Correct balance of accounts receivable P 1,270,000

Also, a correcting entry has to be made as follows:

Accounts receivable P 50,000

Customer deposits P 50,000

Short-term customer deposits should be presented separately as a current liability

in the statement of financial position.

c. Merchandise worth P150,000 received December 30, 2019 was correctly included
in the year-end inventory but was not recorded as a purchase. Said purchase is
still unpaid at December 31.

Since the merchandise was included in the year-end inventory, the balance of the
inventory account at December 31 is correct. However, if there is an unrecorded
purchase, the accounts payable account is understated. Hence, a correcting entry
has to be made as follows:

Purchases P 150,000
Accounts payable P 150,000

d. Accounts payable was net of customers’ debit balances of P100,000.

Customer’s debit balances are in fact, receivables from customers. Also, we

learned that we should not offset assets and liabilities, unless permitted by IFRS,
or there is a legal right to do offsetting. In this case, the customer’s debit balances
(which is a receivable), were inadvertently deducted from the accounts payable.
Therefore, the accounts payable balance was understated.

To determine the correct amount of accounts payable:

Accounts payable, as presented above P 750,000

Add back: customer deposits 100,000
Correct balance of accounts receivable P 850,000

Also, a correcting entry has to be made as follows:

Accounts receivable P 100,000

Accounts payable P 100,000

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e. A bank loan of P300,000 due of December 31, 2022 was included in the notes
payable balance.

The bank loan and the notes payable account should be presented separately in
the statement of financial position. Therefore, a correcting entry should be made
as follows:

Notes payable P 300,000

Bank loan payable P 300,000

Both are presented as non-current liabilities in the statement of financial position.

f. Bonds payable, which bear interest of 10%, were issued on June 30, 2019. It is to
be paid in five annual installments starting June 30, 2020. RED has not recorded
any accrued interest on these bonds at December 31.

The first installment payment of P500,000 on the bonds payable which will happen
on June 30, 2020 (within twelve months from the end of the reporting period) is
classified as current liability.

Further, the accrued interest, as computed below is also presented as a current

liability.

Accrued interest expense = P2,500,000 x 10% x 6/12 = P125,000

g. The investment at fair value through profit or loss has a fair value of P900,000,
while the investment at fair value through other comprehensive income has a fair
value of P2,420,000.

Adjusting entries to record the fair value gain or loss on these investments are as
follows:

Investment at fair value through profit or loss P 30,000

Fair value gain on investment at FVPL P 30,000
[P900,000 – P870,000 = P30,000 increase]

Fair value loss on investments at FVOCI P 80,000

Investment at fair value through OCI P 80,000
[P2,420,000 – P2,500,000 = P80,000 decrease]

Hence, these investments are subsequently measured at fair value in the

statement of financial position.

Required: Determine the amount of current assets and current liabilities to be

presented by RED Company in its December 31, 2019 Statement of Financial
Position.

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Solution to Problem C

Current assets:

Cash and cash equivalents [P1,240,000 – P500,000] P 740,000

Short-term investments 500,000
Investments at fair value through profit or loss (at fair value) 900,000
Accounts receivable, net of allowance for bad debts
[P1,220,000 + 50,000 + 100,000 – allowance of P60,000] 1,310,000
Interest receivable 6,133
Merchandise inventory 1,360,000
Total current assets P 4,816,133

Current liabilities:

Accounts payable [P750,000 + 150,000 + 100,000] P 1,000,000

Current portion of bonds payable 500,000
Income tax payable 280,000
Interest payable 125,000
Short-term customer deposits 50,000
Withholding tax payable 40,000
Total current liabilities P 1,995,000

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