T. VALIX JOSE F. PERALTA CHRISTIAN ARIS M. VALIXINTERMEDIATE ACCOUNTING Volume One CONRADO T. VALIX, BSC, LLB Certified Public Accountant and Lawyer President, CPA Review Director and CPA Reviewer CPA Review School of the Philippines CPAR Lifetime Member Integrated Bar of the Philippines JOSE F. PERALTA, BBA, MBA, DBA Certified Public Accountant President and CPA Reviewer Philippine School of Business Administration CHRISTIAN ARIS M. VALIX, BSME, BSA Certified Public Accountant Ateneo Management Engineering Graduate Former Faculty Member, Ateneo and San Beda Assistant Review Director and CPA Reviewer CPA Review School of the Philippines CPAR 2020 Revised EditionCopyright 2020 by Conrado T. Valix Jose F. Peralta Christian Aris M. Valix Any copy of this book not bearing the Signature of one of the authors on this Page is unauthorized and shall be considered as proceeding from an illegal source. 5 ALL RIGHTS RESERVED ISBN: 978-621-416-087-7 Published & Printed by: GIC ENTERPRISES & CO., INC. “National Book Development Board Registered 2017 C.M. Recto Avenue, Sampaloc Manila, PhilippinesPREFACE Intermediate Accounting Volume One is in conformity the undergraduate course syllabus for Intermediate Accounting I as promulgated by the Commission on Higher Education. with Volume One is designed to cover the financiel accounting standards and disclosure requirements relative to cash and cash equivalents, accounts receivable, notes receivable, loan receivable, inventories, investments and financial assets. ‘The book also covers the financial accounting standards and disclosure requirements relative. to property, plant and equipment, depreciation, revaluation, wasting assets, depletion, intangible assets, research and development cost, and impairment of assets. counting Standards and The following Philippine Ac Standards are extensively Philippine Financial Reporting discussed and illustrated in Volume One. PAS 2 Inventories PAS 28 Investments in associates PAS 32 Financial instruments — disclosure and presentation PAS 40 Investment property PFRS 6 Exploration and Evaluation of mineral resources PFRS PFRS 9 Financial instruments Financial instruments — disclosures PFRS 13 Fair value measurementThe problems and multiple choice questions at the end of each chapter are lifted from the following sources: PHILCPA Philippine CPA Licensure Examinations given by the Board of Accountancy AICPA Adapted CPA Examinations given by the American Institute of Certified Public Accountants TAA Adapted problems and questions from various intermediate accounting textbooks ACP Author constructed problems and questions to exemplify Philippine standards and IFRS PAS Questions based on provisions of Philippine Accounting Standards PFRS Questions based on provisions of Philippine Financial Reporting Standards IAS Questions based on __ provigions, interpretations and application guidance of International Accounting Standards IFRS Questions based on __ provisions, interpretations and application guidance of International Financial Reporting Standards VALIX PERALTA VALIX January 2020 MaCONTENTS CHAPTER 1 1 CASH AND CASH EQUIVALENTS Definition of cash Definition of cash equivalents Valuation and statement presentation of cash Investment of excess cash Foreign currency, cash fund for a certain purpose, bank overdraft and compensating balance Undelivered check, postdated check delivered, and stale check Imprest system Petty cash fund — imprest fund system and fluctuating fund system CHAPTER 2 BANK RECONCILIATION 38 Bank deposits What is a bank reconciliation? Book reconciling items — credit memo, debit memo and errors Bank reconciling items — deposits in transit, outstanding checks and errors Forms of bank reconciliation ~ adjusted balance, book to bank and bank to book CHAPTER 3 PROOF OF CASH Two-date bank reconciliation Computation of book balance Computation of bank balance Computation of deposits in transit Computation of outstanding checks108 CHAPTER 4 ACCOUNTS RECEIVABLE Definition of receivables ivables Classification and presentation of r2cei™ Customers’ credit balances coivable Initial measurement of accounts re eivable Subsequent measurement of sco Te credit sales Gross method and net method of oe method Allowance method and direct writeo! CHAPTER 5 ESTIMATION OF DOUBTFUL ACCOUNTS Aging of accounts receivable Percentage of accounts receivable Percentage of sales CHAPTER 6 164 NOTES RECEIVABLE Definition of notes receivable Dishonor2d notes receivable Initial measurement Subsequent measurement Interest bearing note Noninterest bearing note CHAPTER 7 190 LOAN RECEIVABLE 184 Initial measurement of loan receivable Subsequent measurement of loan receivable Origination fees Direct origination costs Inpairment of loan Measvrement of impairment ‘Three-stage impainnent approachCHAPTER 8 220 RECEIVABLE FINANCING Pledge, assignment and factoring Pledge of accounts receivable Assignment of accounts receivable Factoring of accounts receivable CHAPTER 9 251 RECEIVABLE FINANCING Discounting of note receivable Discounting of note receivable without recourse Discounting of note receivable with recourse Discounting with recourse as conditional sale Discounting with recourse as secured borrowing CHAPTER 10 INVENTORIES 271 Definition of inventories Classes of inventories Goods includible in inventory Goods in transit Freight collect and freight prepaid FOB destination and FOB shipping point Maritime shipping terms ~ FAS, CIF and ex-ship Periodic and perpetual system Trade discount and cash discount Gross method and net method of recording purchases Cost of purchase, cost of conversion and other cost Cost of inventories of a service provider31) CHAPTER 11 INVENTORY COST FI FIFO Average method _ Specific identification LIFO Standard cost Relative sales price method LOW 335 CHAPTER 12 i .E VALUE LOWER OF COST AND NET REALIZABL WV | Meas: t at lower of cost and NR’ | Accounting Ge inventory writedown and reversal of | writedown Purchase commitments | 7 | Disclosures with respect to inventories | Agricultural, forest and mineral products Commodities of broker-traders | CHAPTER 13 356 GROSS PROFIT METHOD | Use of estimate in inventory valuation Basic formula for gross ‘profit method Gross profit rate based on sales Gross profit rate based on cost Cost of goods sold using gross profit rate CHAPTER 14 381 RETAIL INVENTORY METHOD Information required for retail method Basic formula for retail method Conventional or conservative or LCNRV Average cost approach epyroaah FIFO approachCHAPTER 15 402 FINANCIAL ASSET AT FAIR VALUE Definition of investments Statement classification Definition of financial asset Classification of financial assets Equity and debt security Initial measurement of financial assets Subsequent measurement of financial assets Financial assets at fair value through profit or loss Financial asset held for trading Equity investment at fair value through other comprehensive income Debt investment at amortized cost Debt investment at fair value through other comprehensive income Fair value of investment Impairment of financial assets at fair value Impairment of financial assets at amortized cost CHAPTER 16 435 INVESTMENT IN. EQUITY SECURITIES Dividends, share split and share right Acquisition of equity securities Investment categories Investment in unquoted equity instruments Sale of equity securities Cash dividend, property dividend, liquidating . dividend, share dividend Shares received in lieu of cash dividend Cash received in lieu of share dividend Share split, special assessment, redemption of shares Share right accounted for separately Share right not accounted for separatelyCHAPTER 17 INVESTMENT IN ASSOCIATE Basic principles Intercorporate share investment Definition of significant influence Presumption of significant influence Equity method Excess cost and excess fair value Investee with heavy losses. te Impairment of investment in associa Investee with preference shares Other changes in equity CHAPTER 18 INVESTMENT IN ASSOCIATE Other accounting issues Upstream and downstream transactions Discontinuance of equity method Measurement after loss of significant influence Equity method not applicable Investment of less than 20% Cost method Investment in associate achieved in stages Change from cost method to equity method Change from fair value method to equity method CHAPTER 19 519 FINANCIAL ASSET AT AMORTIZED COST Bond investment 493 Definition of bond Initial measurement of bond investment Subsequent measurement of bond investment Amortizacion of bond discount and bond premium Callable, convertible, serial and term bonds Straight line method of amortization Bond outstanding method of amortizationCHAPTER 20 545 EFFECTIVE INTEREST METHOD Amortized cost, FVOCI and FVPL Nominal interest rate Effective interest rate Effective interest method of amortization Bond investment - FVOCI Fair value option Market price of bonds CHAPTER 21 RECLASSIFICATION OF FINANCIAL ASSET Requirement for reclassification Exemptions from reclassification FVPL to amortized cost Amortized cost to FVPL Amortized cost to FVOCI FVOCI to amortized cost FVPL to FVOCI FVOCI to FVPL CHAPTER 22 INVESTMENT PROPERTY Cash surrender value Definition of investment property Definition of owner-occupied property Partly investment and partly owner-occupied Property leased to affiliate Recognition and measurement of investment property Fair value of investment property Transfers of investment property between categories Disclosures related to investment property Cash surrender value of life insuranceCHAPTER 23 PROPERTY, PLANT AND ET Definition of property, plant and equipo | Recognition of property, plant and equipo Measurement of property, plant and equip} Acquisition of property Cash acquisition On account subject to cash discount Installment acquisition Issuance of share capital Issuance of bonds payable Exchange Donation Government grant Construction Fully depreciated property Property classified as held for sale Idle or abandoned property CHAPTER 24 GOVERNMENT GRANT Definition of government grant Recognition and measurement Classifications of government grant Accounting for government grant Repayment of government grant Grant of interest-free loan Government assistance Disclosures related to government grant 625 666CHAPTER 25 690 BORROWING COSTS Definition of borrowing cost Qualifying asset Accounting for borrowing cost Asset financed by specific borrowing Asset financed by general brrowing Asset financed both by specific and general borrowing Specific borrowing for asset used for general purposes Disclosures related to.borrowing cost CHAPTER 26 ay LAND, BUILDING AND MACHINERY Land — classification, costs, land improvement, special assessment, real property tax Building — costs when purchased and constructed Sidewalks, pavements, parking lot, driveways Claims for damages Building fixtures Ventilating system, lighting system, elevator PIC Interpretation-on land and building Cost of machinery acquired by purchase Tools Patterns and dies Delivery equipment Store and office equipment Furniture and fixtures Returnable containers Capital expenditure and revenue expenditure Additions, improvements or betterments, replacements, repairs, rearrangement cost Accounting for major replacement756 CHAPTER 27 DEPRECIATION Concept of depreciation Depreciation in finan Depreciation perio ae Physical and functional depreciation Factors of depreciation Methods of depreciation Straight line Composite and group method Working hours method Output or production method Sum of years’ digits . Declining balance and double declining balance Inventory, retirement and replacement method Change in useful life Change in depreciation method CHAPTER 28 806 DEPLETION | statements Exploration and evaluation of mineral resources Exploration and evaluation expenditures Exploration and evaluation asset Wasting asset Acquisition cost Exploration cost Development cost Estimated restoration cost Depletion and depletion method Revision of depletion rate Depreciation of mining prope: Trust fund doctrine mS : Wasting asset doctrine Maximum dividend under the wasting asset doctrineCHAPTER 29 is REVALUATION Cost model Revaluation model Frequency and basis of revaluation Revalued amount Fair value Depreciated replacement cost Revaluation surplus Proportional approach Elimination approach Treatment of revaluation surplus Sale of revalued asset Disclosures related to revaluation CHAPTER 30 857 IMPAIRMENT OF ASSETS Definition of impairment Indication of impairment Measurement of recoverable amount Fair value less cost of disposal Value in use Recognition of impairment loss Reversal of impairment loss Definition of cash generating unit Impairment of cash generating unit Reversal of impairment of goodwill Corporate assets Impairment of corporate assets893 CHAPTER 31 INTANGIBLE ASSETS Goodwill Definition of intangible ae in anna Essential criteria for intang® ; Recognition of intangible ass nt of intangible asset Initial and subsequent ane hsapeern Internally generated intangible tangible aset Identifiable and bnidentipable ization of intangible ass : ae period, amortization inethot useful life Change in amortization method an Ma Disclosures related to intangible asset Definition of goodwill Recognition and measurement of goodwill Impairment of goodwill CHAPTER 32 928 IDENTIFIABLE INTANGIBLE ASSETS Definition of patent Cost of patent Amortization and impairment of patent Definition of trademark Cost of trademark Amortization and impairment of trademark Definition of copyright Cost of copyright Amortization and impairment of copyright Definition of franchise Initial and periodic franchise fee Amortization and impairment of franchise Leasehold improvement Broadcasting license Airline right Customer list Amortization and impairment of broadcasting license, airline right and customer list, Organization cost and start-up cost Web site development costCHAPTER 33 962 RESEARCH AND DEVELOPMENT COST Computer Software Definition of research Definition of development Research activities Development activities Accounting for research cost Accounting for development cost Internally developed computer software Classification of computer softwareCHAPTER 1 CASH AND CASH EQUIVALENTS TECHNICAL KNOWLEDGE To understand the concept of cash. To understand the concept of cash equivalents. To identify items considered cash. To identify items considered cash equivalents. To know the accounting for petty cash fund.Definition of cash From the point of view of a layman, “cash” simply meang money, Money is the standard medium of exchange in businegg transactions. Money refers to the currency and coins which are in circulation and legal tender. However, in the accounting parlance, the term (ee has a special and broader meaning. It connotes more than money. As contemplated in accounting, cash includes money and any other negotiable instrument that is payable in money and acceptable by the bank for deposit and immediate credit, Accordingly, cash includes checks, bank drafts and money orders because these are acceptable by the bank for deposit or immediate encashment. For example, when checks are received in full settlement of an account receivable, cash is immediately debited. But postdated checks received cannot be considered as cash yet because these checks are unacceptable by the bank for deposit and immediate credit or outright encashment. Unrestricted cash There is no specific standard dealing with "cash", The only poidance is found in PAS 1, paragraph 66, which provides that an entity shall classify an asset as current when the asset is cash or a cash equivalent unless it is restricted to settle a liability for more than twelve months after the end of the reporting period. Accordingly, to be reported as “cash”, " » an item must be unrestricted in use. This meang that the cash must be readily available in the payment of current obligations and not be subject to any restrictions, contractual or otherwise, 2Cash items included in cash a. Cash on hand — This includes undeposited cash collections and other cash items awaiting deposit suc h as customers’ checks, cashier's or manager's checks, traveler’s checks, bank drafts and money orders. checking b. Cash in bank ~ This includes demand deposit account and saving deposit which are unrest withdrawal. c. Cash fund set aside for current purposes such 4s petty cash fund, payroll fund and dividend fund. Cash equivalents PAS 7, paragraph 6, defines cash equivalents as short: highly liquid investments that are readily convertible into cas! and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. The standard further states that only highly liquid investments that are acquired three months before maturity can qualify as cash equivalents. Examples of cash equivalents are: a. Three-month BSP treasury bill b. Three-year BSP treasury bill purcha. before date of maturity c. Three-month time deposit Three-month money market instrument or commercial paper ted as to term and sed three months Equity securities cannot qualify as cash equivalents because shares do not have a maturity date. However, preference shares with specified redemption date and acquired three months before redemption date can qualify as cash equivalents. Note that what is important is the date of purchase which should be three months or less before maturity. Thus, a BSP treasury bill that was purchased one year ago cannot qualify as cash equivalent even if the yemaining maturity is three months or less.