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.hiehhy paragraph 6, defines cash equivalents as short-term ana ghly liquid investments that are readily convertible into cash 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 invesiments 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 purchased three months before date of maturity c. Three-month time deposit d. Three-month money market instrument or commercial paper 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 remaining maturity is three months or less.Investment of excess cash The control and proper use of cash is an Sa ee of ash management. Basically, the entity must mai ufficient cash for use in current operations. Any cash accumulated in excess of that needed for curren, Operations should be invested even temporarily in some type of revenue earning investment. Accordingly, excess cash may be invested in time deposits, money market instruments and treasury bills for the purpose of earning interest income. Classifications of investment of excess cash Investments in time deposit, money market instruments and treasury bills should be classified as follows: a. If the term is three months or less, such instruments are classified as cash equivalents and therefore included in the caption “cash and cash equivalents”. b. Ifthe term is more than three months but within one year, such investments are classified as short-term financial assets or temporary investments and presented separately as current assets. c. If the term is more than one year, such investments are classified as noncurrent or long-term investments, However, if such investments become due within one year from the end of the reporting period, they are reclassified as current or temporary investments,Measurement of cash Cash is measured at face value. Cash in foreign currency is measured at the current exchange Ifa Bank or financial institution holding the funds of an entity is in bankruptcy or financial difficulty, cash should be written down to estimated realizable value if the amount recoverable is estimated to be lower than the face value. Financial statement presentation The caption cash and cash equivalents should be shown as the first line item under current assets. ‘This caption includes all cash items, such as cash on hand, cash in bank, petty cash fund and cash equivalents which are unrestricted in use for current operations. However, the details comprising the cash and cash equivalents should be disclosed in the notes to financial statements. Foreign currency Cash in foreign currency should be translated to Philippine pesos using the current exchange rate. Deposits in foreign countries which are not subject to eny foreign exchange restriction are included in “cash”. Deposits in foreign bank which are subject to foreign exchange restriction should be classified separately among noncurrent assets and the restriction clearly indicated. Cash fund for a certain purpose If the cash fund is set aside for use in current operations or for the payment of current obligation, it is a current asset. The cash fund is included as part of cash and cash equivalents. Examples of this fund are petty cash fund, payroll fund, travel fund: interest fund, dividend fund and tax fund. On the other hand, if the cash fund is set aside for noncurrent purpose or payment of noncurrent obligation, it is shown as long-term investment. Examples of this fund are sinking fund, preference share redemption fund, contingent fund, insurance fund and fund for acquisition or construction of property, plant and equipment. "6Classification of cash fund eh fund The classification of a cash ed should parallel the classifica’ fund that as current asset one year af as current OF Noncurren; of the related 1 For example, a sinking payable shall be classified as ¢ payable is already due within reporting period. the end of de for the acq vev set asi However, a cash fund ot arent regenlice noncurrent asset should be classified of the year of disbursement Bank overdraft When the cash in bank account has 2 credit balance, itis s to be an overdraft. The credit balance in the cash in bank account results from the issuance of checks in excess of the deposits. A bank overdraft is classified as a current liability and should not be offset against other bank accounts with debit balances. For example, an entity maintains two bank accounts: a. Cashin bank — First Bank, which is overdrawn by P10,000. b. Cash in bank ~ Second Bank, with a debit balance of P100,000. The net cash balance is P90,000. The proper statement classification of the two accounts is as follows: a Current asset: Cash in bank - Second Bank 100,000 Current liability: Bank overdraft - First Bank 10,000 Note that it is not necessary overdraft account in the ledger, “'St 2nd open a bank In other words, the Cash in Bank — Fy, $ maintained in the ledger with omedir Balance Sout It is to be stated that , itted in the Philippines. | &°"°TSLy overdrafts are not permitted 6Exception to the rule on overdraft When an entity maintains two or more accounts in one bank and one account results in an overdraft, such overdraft can be offset against the other bank account with a debit balance in order to show cash, net of bank overdraft or bank overdraft, net of other bank account. An overdraft can also be offset against the other bank account if the amount is not material. Under IFRS, bank overdraft can be offset against other bank account when payable on demand and often fluctuates from positive to negative as an integral part of cash management, Compensating balance 3 the form of minimum balance that must be arrangement with a ‘A compensating balance generally take checking or demand deposit account maintained in connection with a borrowing bank. 's P5,000,000 from a bank and For example, an entity borrow: a m compensating agrees to maintain a 10% or P500,000 minimu balance in a demand deposit account. In effect, this arrangement results in the reduction of the amount balance provides a source of borrowed because the compensating fund to the bank as partial compensation for the loan extended. Classification of compensating balance 1 legally restricted as to withdrawal by the If the deposit is noi ensating balance borrower because of an informal comp agreement, the compensating balance is part of cash. If the deposit is legally restricted because of a formal compensating balance agreement, the compensating balance is classified separately as: “cash held as compensating balance” under current assets if the related loan is short-term. If the related loan is long-term, the compensating balance is classified as noncurrent investment. 7+ unreleased check ii that is m d check is one erely ven to the payee before the Undelivered o: An undelivered or w drawn and recorded but not end of reporting period. ‘There is no payment when the ae is payee at the end of reporting perio’. . i till subject to the entity's ‘The reason is that undelivered check is s' control and may thus be canceled anytime before delivery at the discretion of the entity. Accordingly, an adjusting entry 18 required to restore the cash balance and set up the liability. Cash ; xx ‘Accounts payable or appropriate account mi pending delivery to the In practice, the foregoing adjustment is sometimes ignored because the amount is not very substantial and there is no evidence of actual cancelation of the check in the subsequent period. Postdated check delivered A postdated check delivered is a check drawn, recorded and already given to the payee but it bears a date subsequent to the end of reporting period. The original entry recording a delivered postdated check shall also be reversed and therefore restored to the cash balance. Cash Accounts payable or appropriate account xx ‘The reason is that there is no payment until the in be presented to the bank for encashment or open reStale check or check long outstanding A stale check is a check not encashed by the payee within a relatively long period of time The question is how long a time must the check remain outstanding? The Negotiable Instruments Law provides that where the instrument is payable on demand, presentment must be made within a reasonable time after issue. In determining what is a reasonable time, consideration should be made regarding the nature of the instrument, the usage of trade or business, if any, with respect to such instrument and the facts of the particular case. Clearly, the law does not specify a definite period within which checks must be presented for encashment. Reference is made to usage of trade or business practice. In banking practice, a check becomes stale if not encashed within six months from the time of issuance. Of course, this is a matter of entity policy. Thus, even after three months only, the entity may issue a stop payment order to the bank for the cancelation of a previously issued check. If the amount of stale check is immaterial, it is simply accounted for as miscellaneous income. Cash” x Miscellaneous income i However, if the amount is material and liability is expected to continue, the cash is restored and the liability is again set up. Cash Accounts payable or appropriate accounte Accounting for cash shortag sh which is less than unt shows cash the xx Cash short or over Cash x The cash short or over account is only a temporary or g ‘Uspense iount. When financial statements are prepared the same shut be adjusted, Hence, if the cashier or eash custodian is held res Ponsible for hy cash shortage, the adjustment should be: Due from cashier = Cash short or over x However, if reasonable efforts fail to disclose the cause of the shortage, the adjustment is Loss from cash shortage xx Cash short or over mx Accounting for cash overage Where the cash cou balance per book, a Cash xx Cash short or over x Note that whether it is a cash short; offsetting account is cash should be adjusted int shows cash which is more than the cash overage is to be recorded. ‘age or cash overage, the short or over account. Such account when statements are made, The cash Overage 7 1 is treated as miscellaneous income if there 4s no claim on the same, Cash short or over Miscellaneous income XX xx But where the cash overage is properly found t the money . of the cashier, the journal entry jae ound to be the m Cash short or over Payable to cashier x 10Imprest system sh which The imprest system is a system of control of c requires that all cash receipts should be deposited intact and all cash disbursements should be made by means of check While internal control ideally requires that all payments should be made by means of check, this is sometimes impossible ‘There are occasions when the issuance of checks becomes impractical or inconvenient such as when small amounts are paid or things are hurriedly bought or customers are entertained. Consequently, in such instances, it may be more economical and convenient to pay in cash rather than issue checks. Petty cash fund The petty cash fund is money set aside to pay small expenses which cannot be paid conveniently by means of check. There are two methods of handling the petty cash, namely: a. Imprest fund system b. Fluctuating fund system Imprest fund system ‘The imprest fund system is the one usually followed in handling petty cash transactions. Accounting procedures a. Acheck is drawn to establish the fund. Petty cash fund Cash in bank b. Payment of expenses out of the fund. No formal journal entries are made. The petty cashier generally requires a signed petty cash voucher for such payments and simply prepares memorandum entries in the petty cash journal. ilreplenishment proced ¥ b iting expenses and crediting cash in bank distinguishing whether the expen current period or prior period. e. Am increase in the fund is recorded as: Petty cash fund Bas Cash inbank = £ A decrease in the fund is recorded as: Cash in bank x Petty cash fund 12Illustration 2020 Nov. 10 29 Nov. 29 Dec. 31 2021 Jan. 1 ‘The entity established an imprest fund of P 10,000. Petty cash fund 10,000 Cash in bank 10,000 Replenished the fund. The petty cash items include the following: Currency and coin 2,000 Supplies 5,000 Telephone 1,800 Postage 1,200 The journal entry to record the replenishment is: Supplies 5,000 ‘Telephone 1,800 Postage 1,200 Cash in bank 8,000 The fund was not replenished. The fund is composed of the following: currency and coin P7,000, supplies P1,500, postage P500. miscellaneous expense P1,000. Supplies 1,500 Postage 500 Miscellaneous expense 1,000 Petty cash fund 3,000 The adjustment made on December 31, 2020 is reversed. Petty cash fund 3,000 Supplies 1,500 Postage 500 Miscellaneous expense 1,000 132021 Feb. 1 The fund is replenished and increased to P15,000, The composition of the fund Currency and coin 1,000 Supplies 4,500 Postage 3,000 Miscellaneous expense —1500 ‘Total 10,000 Journal entry Petty cash fund 5,000 Supplies 4,500 Postage 3,000 Miscellaneous expense 1,500 Cash in bank 14,000 The total amount of the check drawn is P14,009 representing the petty cash disbursements of P9,000 and the fund increase of P5,000. 14Fluctuating fund system The system is called “fluctuating fund system” because the checks drawn to replenish the fund do not necessarily equal the petty cash disbursements. The replenishment checks are simply drawn upon the request of the petty cashier. Moreover, petty cash disbursements are immediately recorded thus resulting in a fluctuating petty cash balance per book from time to time: a. Establishment of the fund: Petty cash fund xx Cash in bank xx b. Payment of expenses out of the petty cash fund: xx xx nses _ Petty cash fund Under this system, the disbursements from the petty cash fund are immediately recorded in contradistinction with the imprest fund system where the disbursements are recorded upon the replenishment of the fund. c. Replenishment or increase of the fund: Petty cash fund Cash in bank XX The replenishment check may or may not be the same as the petty cash disbursements. d. At the end of the reporting period, no adjustment is necessary because the petty cash expenses are recorded outright. Decrease of the fund is reverted to the general cash. Cash in bank xx Petty cash fund 15Illustration Nov. 10 The entity agtablished 4 petty cash fund of P10,000. 10,000 Petty cash fund 10,000 Cash in bank Nov. 11-28 Petty cash disbursements amcunted to P8,000, z 8,000 sxpenses Petty cash fund 8,000 Nov. 29 Issued a check for P10,000 to replenish the fund, Petty cash fund 10,000 Cash in bank 10,000 At this point, the petty cash balance per book is P12,000. Dec. 1-30 Petty cash expenses amounted to P9,000. enses 9,000 Petty cash fund 9,000 31 Issued a check for P15,000 to replenish the fund. Petty cash fund 15,000 Cash in bank 15,000 At this point, the petty cash balance is P18,000. 16QUESTIONS 1.Define cash 2.Explain the meaning of unrestricted cash 3.Define cash equivalents. 4.Explain the measurement of cash 5. Explain the financial statement presentation of cash and cash equivalents. 6.Explain the classification of investments of excess cash in time deposits, money market instruments and treasury bills 7.Explain the treatment of foreign currency. 8.Explain the classification of a cash fund. 9.Explain a bank overdraft. 10.Explain a compensating balance. 1L.Zxplain undelivered check, postdated check delivered and stale check. 12 Explain the accounting for cash shortage or cash overage. 18 3xplain the imprest system of internal control. 14. What is a petty cash fund? 15. 3xplain the two methods of accounting for petty cash ‘und. 17PROBLEMS Problem 1-1 (IAA) On December 31, 2020, Albania Company provided the following data hin bank 3,000,000 ime deposit ~ 30 days 1,000,000 Money market placement due on dune 30, 2021 2,000,000 Saving deposit in closed bank 100, CQ Sinking fund for bond payable due June 30, 2022 1,500, x 0 20.000 Petty cash fund * ‘The cash in bank included customer check of P200,0 00 outstanding for 18 months * Check of P250,000 in payment of accounts payable w as dated and recorded on December 31, 2020 but mailed to creditors on January 15, 2021. * Check of P100,000 dated January 31, 2021 in payment of accounts payable was recorded and mailed December £11, 2020. * The reporting period is the calendar year. ‘The cash receipts journal was held open until Janu. 15, 2021 during which time an amount of P450,000 was collected and recorded on December 31, 2020. Required: 1. Prepare adjusting entries on December 31, 2020. 2, Compute the total amount of cash and cash equivalents that should be reported on December 31, 2020. 3. Explain the presentation of the items excluded from c:ash and cash equivalents. 18