CHAPTER 3 

NOTES TO FINANCIAL STATEMENTS

Events after reporting period 

Problem 3-1 (AICPA Adapted)

Dean Company acquired 100% of Morey Company in the prior year. During the current year, the
individual entities included in their financial statements the following: 
Dean Morey
Key officers' salaries  750,000 500,000
Officers' expenses  200,000 100,000
Loans to officers  1,250,000 1,500,000
Intercompany sales  1,500,000

What total amount should be reported as related party disclosures in the notes to Dean
Company's consolidated financial statements for the current year?
a. 1,500,000
b. 1,550,000
c. 1,750,000
d. 3,000,000 

Solution 3-1 Answer d

Loans to officers: 
Dean  1,250,000
Morey
500,000 
Key officers' salaries: 
Dean  750,000
Morey 500,000
Total 
3,000,000 

Intercompany sales are no longer disclosed when consolidated financial statements are
prepared. 

Problem 3-2 (AICPA Adapted)

During the current year, Jane Company engaged in the following transactions:

Key management personnel compensation  2,000,000

Sales to affiliated entities 
3,000,000 
What total amount should be included as related party disclosures in Jane Company's separate
financial statements for the current year?
a. 5,000,000
b. 3,000,000
c. 2,000,000 
d. 0

Solution 3-2 Answer a  5,000,000

PAS 24, paragraph 16, requires disclosure of key management personnel compensation. 
The sales to affiliated entities shall be disclosed in Jane Company's separate financial statements
but eliminated in consolidated financial statements. 

Probem 3-3 (IFRS)

Gibson Company reported that remuneration and other payments made to the entity's chief
executive officer during the current year were:

Annual salary 
2,000,000
Share options and other share-based payments 
1,000,000
Contributions to retirement benefit plan  500,000
Reimbursement of travel expenses for business trips
1,200,000 

What total amount should be disclosed as “compensation" to key management personnel?

a. 3,500.000
b. 4,700,000
c. 3,000,000
d. 2,500,000

Solution 3-3 Answer a 

All, except reimbursement of travel expenses. 

Problem 3-4 (IFRS)

The audit of Anne Company for the year ended December 31, 2018 W3S completed on March 1,
2019. 
The financial statements were signed by the managing director on March 15, 2019 and approved
by the shareholders on March 31, 2019, 
  On January 15, 2019, a customer owing P900,000 to Anne Company filed for
bankruptcy.
The financial statements included an allowance for doubtful accounts pertaining to this
customer of P100,000.
 Anne Company's issued share capital comprised 100,000 ordinary shares with P100 par
value. 

 The entity issued additional 25,000 shares on March 1, 2019 at par value. Equipment
with carrying amount of P525,000 was destroyed by fire on December 15, 2018.
Anne Company has booked a receivable of P400,000 from the insurance entity on
December 31, 2018.
After the insurance entity completed an investigation on February 1, 2019, it was
discovered that the fire took place due to negligence of the machine operator. As a
result, the insurer's liability was zero on this claim

What total amount should be reported as “adjusting events” on December 31, 2018?
a. 1,300.000
b. 1,200,000
c. 3,800,000
d. 3,700,000 

Solution 3-4 Answer b

Doubtful accounts (900,000 minus allowance 100,000) 800,000
Loss on claim receivable 400,000
Total adjusting events 
1,200,000 

Problem 3-5 (IFRS)

The end of reporting period of Norway Company is December 31, 2018 and the financial
statements for 2018 are authorized for issue on March 15, 2019. 
 On December 31, 2018, Norway Company bad a receivable of P400,000 from a
customer that is due 60 days after the end of reporting period. On January 15, 2019, a
receiver was appointed for the said customer. The receiver informed Norway that the
P400,000 would be paid in full by June 30, 2019.
 Norway Company had equity investments held for trading. On December 31, 2018,
these investments were recorded at the fair value of P5,000,000. During the period up
to February 15,2019, there was a steady decline in the fair value of all the shares in the
portfolio, and on February 15, 2019, the fair value had fallen to P2,000,000,
 Norway Company had reported a contingent liability on December 31, 2018 related to a
court case in which Norway Company was the defendant. The case was not heard until
 the first week of February 2019. On February 11, 2019, the judge handed down a
decision against Norway Company. The judge determined that Norway Company was
liable to pay damages and costs totalling P3,000,000.
 On December 31, 2018, Norway Company had a receivable from a large customer in the
amount of P3,500,000. On January 31, 2019, Norway Company was advised in writing by
the liquidator of the said customer that the customer was insolvent and that only  10%
of the receivable will be paid on April 30,2019.

What total amount should be reported as "adjusting events" on December 31, 2018?
a. 6,150,000
b. 9.150,000
c. 9,550,000
d. 6,500,000

Solution 3-5 Answer a

Litigation loss  3,000,000

Bad debt expense (3,500,000 x 90%)  3,150,000
Total amount of adjusting events 
6,150,000 

The financial assets held for trading are measured at fair value which must be determined at the
end of each reporting period. 

Problem 3-6 (IFRS) 

Ginger Company is completing the preparation of the financial statements for the year ended
December 31, 2018. The financial statements are authorized for issue on March 31, 2019. 
 On March 15, 2019, a dividend of P1,750,000 was declared and a contractual profit
share payment of P350,000 was made, both based on the profit for the year ended
December 31, 2018. 
 On February 1, 2019, a customer went into liquidation having owed the entity P340,000
for the past 5 months.
 No allowance had been made against this debt in the financial statements. 
 On March 20,2019, a manufacturing plant was destroyed by fire resulting in a financial
loss of P2,600,000.

What total amount should be recognized in profit or loss for the year ended December 31, 2018
to reflect adjusting events after the end of reporting period?
a. 1,750,000
b. 3,290,000
c. 2,600,000
d. 690,000 

Solution 3-6 Answer d 

Contractual profit share payment 350,000
Bad debt loss 340,000
Total adjusting events  690,000 

The dividend declaration is not recognized in profit or loss but a deduction from retained
earnings on March 15, 2019. 

The manufacturing plant destroyed by fire on March 20, 2019 is a non-adjusting event requiring
disclosure only, 

Problem 3-7 (IFRS)

During 2018, Marian Company was sued by a competitor for P5,000,000 for infringement of a
patent.
Based on the advice of the legal counsel, the entity accrued the sum of P3,000,000 as a provision
on December 31, 2018.
Subsequently, on March 15, 2019, the Supreme Court decided in favour of the party alleging
infringement of the patent and ordered the defendant to pay the aggrieved party a sum of
P3,500,000.
The financial statements were prepared by management on February 15, 2019 and approved by
the board of directors on March 31,2019.

1. What amount should be recognized as accrued liability on December 31, 2018?

a. 5,000,000
b. 3,500,000
c. 3,000,000 
d. 1,500,000

2. What amount should be adjusted on December 31, 2018 in relation to this event?
a. 1,500,000
b. 3,000,000
c. 500,000 
d. 0

Solution 3-7 Question 1 Answer b

Accrued liability - December 31, 2018 

3,500,000 
The actual amount of P3,500,000 should be accrued as liability because the suit was decided on
March 15, 2019 which is prior to the issuance of the financial statements on March 31, 2019.

Question 2 Answer c.
Accrued liability -- December 31, 2018  3,500,000
Provision already recognized  3,000,000
Increase in provision  500,000 

Problem 3-8 (IFRS) 

Caroline Company provided the following events that occurred after December 31, 2018: 

Jan 15, 2019 P3,000,000 of accounts receivable was written off due to the bankruptcy of a
major customer.
Feb. 15, 2019 A shipping vessel of the entity with carrying amount of P5,000,000 was
completely lost at sea because of a hurricane.
Mar. 10, 2019 A court case involving the entity as the defendant was settled and the entity
was obligated to pay the plaintiff P1,500,000. The entity previously has not
recognized a liability for the suit because management deemed it possible that
the entity would lose the case.
Mar. 15, 2019 A factory with a carrying amount of P4,000,000 was completely razed by forest
fire that erupted in the vicinity. 

The management completed the draft of the financial statements for 2018 on February 10, 2019.
On March 31, 2019, the board of directors authorized the financial statements for issue.

The entity announced the profit and other selected information on March 22, 2019.

The financial statements were approved by shareholders on April 2, 2019 and filed with the
regulatory agency the very next day. 

What total amount should be reported as adjusting events on December 31, 2018?
a. 9,500,000
b. 8,500,000
c. 9.000.000
d. 4,500,000 

Solution 3-8 Answer d 

Accounts written off 3,000,000
Provision for lawsuit 1,500,000
Total adjusting events  4,500,000