a Napruy yy Chapter 11 Intangible Assets Learning Objectives 1. Define intangible assets 1 a 2. State the Fecognition, and account for the initial ang subsequent m ents, of intangible assets. Introduction Intangible Assets are identifiable non-monetary assets withou Physical substance. Essential elements of an intangible asset 1. Identifiability ~ an intangible asset is identifiable when it: a. is separable, ie, capable of being separated and divided from the entity and sold, transferred, licensed, rented, of exchanged, either individually or together with a related contract, identifiable asset or liability, regardless of whether the entity intends to do so; or arises from binding arrangements including, contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations. 2. Control ~ the entity has the ability to benefit from the intangible asset or prevent others from benefitting from it. Control of an intangible asset normally arises from legal rights that are enforceable in a court of law. However, legal enforceability of a right is not a necessary condition for control because an entity may be able to control the future economic benefits or service potential in some other way.ible Assets uta! : 5 ee 7e use of the asset by the enti v . ity, For exam intellectual property in a Production or a rete . reduce future production or Service costs or iniprove orice : service ase future revenues (eg., an on-line ; ; t ‘0 apply or renew licenses more quickly oman resulting in a reduction in office staff resulted to perform this function while j i creaing) increasing the speed’ of system that allows citiz Common examples of intangible assets. are computer software, patents, copyrights, franchise, motion. picture films, trademarks or brand names, licenses, acquired import quotas, lists of users of a service, and relationships with users of a service. Recognition An intangible asset is recognized if it meets the definition of an intangible asset and the recognition criteria for assets. Initial Measurement An intangible asset is initially measured at cost. The measurement of cost depends on the mode of ' acquisition, which is similar to those of PPE and investment | Property. A summary is provided below: | Mode of Acquisition Measurement of Initial Cost | |* Purchase > Purchase price plus Direct costs (including non-refundable taxes but excluding trade discounts and rebates). > If payment is deferred, ig the cash price equivalent. the costBs __ Chapter |) [b.Non-exchange transaction [3 5 _fair onlue at the acquisition date © Exchange > With commercial substance | (order of priority): a. FV of asset given up (plus cash paid/minus cash received). b. FV of asset received. cc. CA of asset given up (plus cash paid/minus cash received). > Without commercial substance: CA of asset given up (plus cash paid/minus cash received). d.__ Entity Combination > _ fair value at the acquisition date Peculiar measurement is made when the intangible asset is internally generated (self-generated). e. Internal Generation - to assess whether an internally generated intangible asset meets the criteria for recognition, an entity classifies the generation of the asset into: (a) research phase; and (b) development phase. 1. Research — is original and planned investigation undertaken with the prospect of gaining new scientific and technical knowledge and understanding. Expenditures during the research phase are recognized as expense. Examples of research activities: i. Activities aimed at obtaining new knowledge; ii, The search for, evaluation and final selection of applications of research findings or other knowledge; iii, The search for alternatives for materials, devices, products: processes, systems or services; and| | mine oes —_____™ v by v 293 jv. The formulation, design, evaluation, and final selection of possible alternatives for new or improved materials, devices, products, processes, systems, or services. Development — is the application of-research findings or other ,nowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems, or services before the start of commercial production or use. Expenditures during the development phase are capitalized if the entity can demonstrate all of the following: a. Technical feasibility of completing the intangible asset; Intention to complete the intangible asset; Ability to use or sell the intangible asset; Probable future economic benefits or service potential; Availability of adequate resources needed to complete the development and to use or sell the intangible asset; and f, Reliable measurement of the cost of the intangible asset. eno se If it is not clear whether an expenditure is a research or a development cost, it shall be treated as research cost. Expenditures already charged as expenses cannot be subsequently capitalized, ie. reinstatement of expenditure previously recognized as an expense is prohibited. Internally generated brands, mastheads, publishing titles, customer lists, and similar items shall not be recognized as intangible assets. Selling, administrative and other general overhead, costs of inefficiencies, initial operating losses, and training costs are expensed and shall not form part of the cost of an intangible asset.294 os Chapter 1 TTT Subsequent expenditures on recognized intangible assets arg generally expensed, unless they meet the definition of 3, intangible asset and the asset recognition criteria. The accounting for replacement of a part of an intangible asset | is the same as those of PPE and investment property. ] j Subsequent Measurement An intangible asset is subsequently measured at cost less any | accumulated amortization and any accumulated impairment | losses. | | Amortization Amortization is the systematic allocation of the depreciable amount of an intangible asset over its useful life. classified according to their assessed useful life as follows: a. For purposes of amortization, intangible assets are Indefinite life — an intangible asset is considered to have an indefinite life if there is no foreseeable limit to the period over which it is expected to provide economic benefits or service potential to the entity. Intangible assets with indefinite life are not amortized but tested for impairment at least annually. Finite life - an intangible asset is considered to have a finite life if it has a limited period of benefit to the entity. Intangible assets with finite useful life are amortized using the straight line method over a period of 2 to 10 years. Amortization starts when the intangible asset is available for use and ceases when the asset is derecognized or classified # held for sale, whichever comes earlier. Amortization does not cease when the asset is no longer used, except when it is fully depreciated or classified as held for sale. The residual value is assumed to be zero except wher there is a third party commitment to purchase the asset at the end of its useful life or there is an active market where entity expects to sell the asset at the end of its useful life. all- ntangible Assets 295 The amortization period and amortization method shall be reviewed at each reporting date. Changes in useful life or amortization method shall be accounted for as changes in | accounting estimates, Impairment An entity is required to test for impairment an intangible asset with indefinite useful life or an intangible asset not yet available for use at Jeast annually or whenever there is an indication of impairment. An entity shall test for impairment an intangible asset with definite useful life only when an indication of impairment exists. Indications of impairment shall be assessed at each reporting date. The accounting for impairment of intangible assets, and reversal thereof, is the same as those of investment property and PPE (see discussions in Chapters 9 and 10, respectively). Derecognition An intangible asset is derecognized when it is disposed or when no future economic benefits or service potential is expected from the asset. On derecognition, the difference between the carrying amount and the net disposal proceeds, if any, is recognized as gain or loss in surplus or deficit. Illustration: Journal entries Initial and Subsequent Measurement: On January 1, 20x1, Entity A acquires a computer software for 1,000,000. The software's useful life is 5 years. M1] Computer Software 1,000,000 Cash-Modified Disbursement _System (MDS), Regular 1,000,000 Amortization-Intangible Assets 200,000 Accumulated Amortization- Computer Software (1M +5 yrs.) 200,000 RBiiedChapter, | 296 8S tery Impairment On December 31, 20x1, Entity A as impairment and estimates a recoverable a! sesses an indication of mount of 700,000, 12/311 Impairment Loss-Intangible Assets Accumulated Impairment Losses - 100,000 100,009 Computer Software (700K RA — 800K CA) Derecognition On January 1, 20x2, Entity A sells the computer software fo, ®720,000. W1lx2 Cash-Collecting Officers Accumulated Amortization — Computer Software Accumulated Impairment Losses - Computer Software Computer Software Gain on Sale of Intangible Assets 720,000 200,000 100,000 1,000,000 20,000gible Assets chapter 11 Summary: Intangible Assets are identifiable ni [ 'on-monetary as: i |" nysical substance. ry assets without Essential elements: (1) Identifiability (separable or arises from binding arrangements); (2) Control; and (3) Future economic | penefits or service potential, Intangible assets are initially measured at cost. The measurement of cost depends on the mode of acquisition, which is similar to those of PPE and investment property. Internal generation: 1. Research cost — recognized as expense. | 2. Development cost - capitalized only if all of the conditions listed in the GAM for NGAs are met. « If it is not clear whether an expenditure is a research or a development cost, it is treated as research cost. | Reinstatement of costs already expensed is prohibited. + Internally generated brands, mastheads, publishing titles, customer lists, and similar items are not recognized as intangible assets. «Subsequent expenditures on recognized intangible assets are generally expensed, unless they meet the definition of an intangible asset and the asset recognition criteria. * Subsequent measurement: 1. Indefinite life — not amortized but tested for impairment at least annually. 2. Finite life — amortized using the straight line method over a | period of 2 to 10 years. The residual value is assumed to be | zero except when the entity has the ability to sell the asset at the end of its useful life.29% ei inn PROBLEMS PROBLEM 11-1: TRUE OR FALSE 1, 10. i i re If it is not clear whether an expenditure ce “a development cost, it is treated as developmen The development costs of an internally generate intangibl, asset may be capitalized if certain conditions are met, A government entity does not amortize intangible assets, Government entities amortize all of their intangible assets over a period of 2 to 10 years, unless a more appropriate estimate of useful life is available. For subsequent measurement, government entities classify intangible assets into those with finite and indefinite useful lives, similar to business entities. Government entities normally assign their intangible assets a residual value of 5% of cost. Subsequent expenditures on recognized intangible assets are generally expensed unless it is clear that the expenditures meet the recognition criteria for intangible assets. A government entity acquires an intangible asset with indefinite useful life for 100. Assuming the entity uses the maximum amortization period for intangible assets under the GAM for NGAs, the appropriate annual amortization expense on the intangible asset is 10, The amortization of an intangible asset is credited directly to the intangible asset account, according to the GAM for NGAS. An entity determines an indication of impairment for its intangible asset with carrying amount of 100. The entilY 4r- ible Assets calculates a fair value less costs to sell of #90 and a value in use of 9105. The impairment loss is ®5. pROBLEM 11-2: MULTIPLE CHOICE 4, In which of the following instances is an asset not considered to be identifiable? a. The asset can be sold separately regardless of whether the entity intends to do so. b. The asset arises from a contractual right. The asset can be leased out separately on its own or licensed to be used separately by other entities in exchange for cash payments. d. The asset can only be transferred if the entity is liquidated. 2. Which of the following is most likely to be recognized as intangible asset by a government entity? a. Internally generated brand b. Subsequent expenditure on a copyright c. Development costs incurred in internally generating a patent d. Publishing title acquired as a donation 3. Subsequent expenditures on recognized intangible assets are a. generally capitalized and amortized over the remaining useful life or the extended useful life. b. generally expensed, unless they meet the definition of an intangible asset and the asset recognition criteria. ©. generally capitalized if they meet the conditions of technical feasibility, probable future economic benefits, and reliable measurement. d. not accounted for. 4. According to the GAM for NGAs, government entities shall Use this measurement model in subsequently measuring intangible assets. bhon Chapter 1 c. Fair value model | d.aorb a. Cost model b. Revaluation model 5. Intangible assets held by government entities are measured a, follows: Initial Subsequent a. cost cost less accumulated ami impairment losses ortization and b. cost fair value less accumulated amortization and impairment losses c. cost fair value through surplus or deficit d. aorb 6. The default amortization method for intangible assets with . finite useful life is a. straight line method b. sum-of-the-years digits c. double declining d.none of these 7. Which of the following statements is incorrect regarding the accounting for impairment of intangible assets under the GAM for NGAs? a. Anentity is required to test for impairment an intangible asset with indefinite useful life or an intangible asset not yet available for use at least annually or whenever there is an indication of impairment. b, Anentity shall test for impairment an intangible asset with definite useful life only when an indication of impairment exists. c. The accounting for impairment of intangible assets, and reversal thereof, is the same as those of investment property and PPE. d. Intangible assets are subject to amortization using the straight line method over a period of 2 to 10 years but are not subject to impairment.y ansible Assets 301 poppet the following information for the next three questions: Use jecember 1, 20x1, Entity A acquired a computer software for 1,000) boa 00 and incurred the following costs: Non-refundable purchase taxes of ®30,000, not included in the purchase price above. Professional fees incurred in the installation of the software, #100,000. Modifications to the software before it was brought to the condition intended by management for use, 60,000. Costs of testing the software, ®10,000. Training costs of staff who will be using the software, 200,000. Costs of updating the software after it was available for use in the condition originally intended by management, 5,000. Administrative and other general overhead costs incurred on the acquisition and installation of the software, 15,000. The software’s useful life is 5 years. 8 The entry to initially recognize the software is Computer Software 1,200,000 Cash-Modified Disbursement System (MDS), Regular 1,200,000 Computer Software 1,140,000 Cash-Modified Disbursement System (MDS), Regular . Computer Software 1,400,000 Cash-Modified Disbursement System (MDS), Regular Computer Software 1,190,000 Cash-Modified Disbursement System (MDS), Regular 1,140,000 1,400,000 1,190,000 9. a ' The entry to recognize the amortization expense for the Current year is a302 Chapter 1} a Amortization-Intangible Assets 240,000 Computer Software 240,009 b. —_ Amortization-Intangible Assets 240,000 Accumulated Amortization- Computer Software 240,000 iS Amortization-Intangible Assets 20,000 Accumulated Amortization- Computer Software 20,000 a. Amortization-Intangible Assets 20,000 Computer Software 20,000 10. On December 31, 20x2, Entity A assesses an indication of impairment and makes the following estimates: Fair value less costs to sell 700,000 Value in use 800,000 The entry to recognize the event is a. Impairment Loss-Intangible Assets. 140,000 ‘Accumulated Impairment Losses - Computer Software 140,000 b. Impairment Loss-Intangible Assets 140,000 Computer Software 140,000 c. None, the intangible asset is not impaired. None, intangible assets held by government entities are not subject to impairment. PROBLEM 11-3: FOR CLASSROOM DISCUSSION 1. Which of the following is not one of the essential elements of an intangible asset? Separability b. Arising from binding arrangement c. Control d. Held for use in the production or supply of goods » } 2nn oe p 303 an intangible asset is identifiable if it a is separable p. arises from binding arrangements ¢. isanon-monetary asset wi . 4. aorb without physical substance. which of the following is an indicator of control? a. the ability of an entity to benefit from an asset p. the ability of an entity to deny or re t ulate th others to the benefit of an asset. ’ ae c. an entity can, depending on the nature of the asset, exchange it, use it to provide goods or services, exact a price for others’ use of it, use it to settle liabilities, hold it, or perhaps even distribute it to owners. d. all of these. |, Which of the following is most likely not an intangible asset? a. Computer c. Acquired import quota b. Trademark d. Customer list 3, Apurchased intangible asset is initially measured at a. cost c. the sum of research and development costs b. fair value d. the total of development costs t costs of an internally generated intangible 6 The development re met. Which of asset can be capitalized if certain conditions a ne of those conditions? the following is not 01 intangible asset. a. Technical feasibility of completing the b. Intention to complete the intangible asset. © Ability to measure reliably the expenditure attributable to g its development. the intangible asset durin; vite d. Existence of similar assets in the market or econ environment where the entity operates.Chapter 4) 10. eads, publishing titles, tig, Internally generated brands, masth ilar in substance are not of users of a service, and items sim! recognized as intangible assets because a. it is illegal to recognize these items as assets, according tg international intellectual property Jaws and other business laws, b. it is often difficult to measure separately the costs of these items. c. these cannot be distinguished from the cost of developing the entity’s operations as a whole. d._ the entity normally cannot demonstrate its ability to use these, when completed, during their development phase. Government entities normally assign their intangible assets a residual value of a. 5% of cost c. 25% of cost b. 10% of cost d. zero Which of the following intangible assets is not amortized? a. Intangible asset with infinite useful life b. Intangible asset with finite useful life c. Allintangible assets held by a government entity d. Intangible asset not yet available for use ‘An entity shall test for impairment an intangible asset with finite useful life a. only when an indication of impairment exists. b. at least annually or whenever there is an indication of impairment. c. at each reporting date, including interim periods, if the entity prepares interim financial statements. d. Never, because intangible assets held by a government entity is not subject to impairment; only amortization.vy pilities Bo 805, Chapter 12 Liabilities earning Objectives 4, State the recognition criteria for liabilities, 2. State the initial and subsequent measurements of financial liabilities. 3, State the measurement of provisions, contingent liabilities and contingent assets. Introduction Liability — is a present obligation arising from past event, the settlement of which is expected to result in an outflow of resources embodying economic benefits or service potential. Present obligation means that as of the reporting date, an obligating event must have already occurred. An obligating event is an event that creates either (a) a legal obligation or (b) a constructive obligation. > Legal Obligation - is an obligation that results from a contract, legislation, or other operation of law. > Constructive Obligation — is an obligation that results from an entity’s actions (e.g., past practice, published policies) that create a valid expectation from others that the entity will accept and discharge certain responsibilities. liability Recognition Criteria A liability is recognized only when all of the following are met: a The item meets the definition of a liability (.e., present obligation); b. Itis probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and © The obligation has a cost or value (e.g, fair value) that can be | measured reliably.306 Chapter Scope of this Chapter The following are discussed in this Chapter: a. Financial liabilities; and Provisions, Contingent liabilities and Contingent assets Financial Liabilities A financial liability is any liability that is: a. A contractual obligation to deliver cash or another financiaj asset to another entity; b. A contractual obligation to exchange financial. assets op financial liabilities with another entity under conditions that are potentially unfavorable to the entity; or © A contract that will or may be settled in the entity's own equity instruments. Examples of financial liabilities: Accounts Payable, Notes Payable, Interest Payable, Loans Payable, Bonds Payable, and Bail Bonds Payable. Initial Recognition A financial liability is recognized when an entity becomes a party to the contractual provisions of the instrument. (PPSAS29.16) Initial Measurement Financial liabilities are initially measured at fair value minus transaction costs, except for financial liabilities at fair value through surplus or deficit (e.g., designated financial liabilities and derivative liabilities) whose transaction costs are expensed. (PPSAS 29.45) Transaction costs are incremental costs that are directly attributable to the acquisition, issue, or disposal of a financial instrument.ubsequent Measurement financial liabilities are subsequent) except for financial liabilities at deficit which are subsequently me fair value through surplus or ‘asuted at fair value. filustration: On January 1, 20x1, the BTr issues a 5-year, 5%, 61,000 000 bonds for 970,000. Transaction costs on the issuance (bond issue costs) amount to 12,124. The effective interest rate adjusted for both the pond discount and bond issue costs ig 6%. The initial measurement of the bonds ble ji determined as follows: payable is Face amount 1,000,000 Bond discount (1M ~ 970K) (30,000) Bond issue costs —_ (12,124) Carrying amount — 1/1/x1 957,876 =e Or Net issuance proceeds 970,000 Bond issue costs (12,124) Carrying amount — 1/1/x1 957,876 Bond issue costs are not expensed outright, but rather a deduction when determining the carrying amount of the bonds (similar to the bond discount). Bond issue costs are amortized to interest expense over the term of the bonds (together with any bond discount or premium). The amortization of bond issue costs Increases interest expense. M1 T Cash in Bank-Local Currency, Bangko Sentral ng Pilipinas 970,000 Discount on Bonds Payable-Domestic 30,000 Bond Payable-Domestic 1,000,000 To recognize the issuance of bonds able by the BTr308 Cape U; 71 | Bond Issue Cost Domestic 12,124 Cash in Bank-Local Currency, Bangko Sentral ng Pilipinas 1214 . To recognize the incurrence of bond issue cost by the BTr Amortization Table: Interest Interest Date ayments expense _ Amortization Present valyp Vx 957,876 12/31/x1 50,000 57,473, 7,473 965,349 12/31/x2 50,000 57,921 7,921 973,270 1281/x3 50,000 58,396 8,396 981,666 12/81/x4 50,000 58,900 8,900 990,566, 12/31/x5 50,000 59,434 9,434 1,000,000 12/3131 | Interest Expense 57,473 Discount on Bonds Payable- Domestic ® 5322 Bond Issue Cost-Domestic ® 2,151 Cash in Bank-Local Currency, Bangko Sentral ng Pilipinas 50,000} To recognize interest expense on the | bonds payable | | Carrying Allocation of amounts ___amortization Allocations ® Bond discount 30,000 (7,473 x 30,000/42,124) 5,322 (») Bond issue costs 12,124 (12,124 x 30,000/42,124) 2151 Totals 2, 7,473 Subsequent journal entries follow the same pattern. To simplify the illustration, withholding taxes on interest payments are omitted.perecognition of Financial Lia lity A gnancial liability is derecognized when it is extingui jg when it is discharged, waived is extinguished, such cancelled, or it expires. provisions, Contingent liabilities and Contingent assets provision ~ is a liability of uncertain timing or amount. A provision is recognized if all the recognition criteria for aliability are met (ie., present obligation, probable outflow, and reliable measurement). If one or more of the criteria are not met, the item is a contingent liability, not a provision, and therefore not recognized as liability. Contingent Liability is: 1. A possible obligation that arises from past events, and whose existence will be confirmed only by the occurrence or non- occurrence of one or more uncertain future events not wholly within the control of the entity; or 2. A present obligation that arises from past events, but is not recognized because: i, It is not probable that an outflow of resources embodying economic benefits or service potential will be required to settle the obligation; or ji, The amount of the obligation cannot be measured with _ sufficient reliability. (PPSAS 19.18) Contingent Asset — is a possible asset that arises from past events, and whose existence will be confirmed only by the occurrence or Non-occurrence of one or more uncertain future events not wholly ‘within the control of the entity. (PPSAS 19.18)Measurement A provision is measured at the entity's best estimate of the amount needed to settle the liability at the reporting date. Risks and uncertainties shall be taken into account in reaching this best estimate. If the effect of time value of money is material, the Provision is measured at the present value of the settlement amount cliscounted at a pre-tax rate. Gains from the expected disposal of assets shall not be taken into account in measuring a provision. (PPSAS 19.61) Provisions shall be reviewed at each reporting date, and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying economic benefits or service potential will be required to settle the obligation, the provision shall be reversed. (PPSAS 19.69) A provision shall be used only for expenditures for which the provision was originally recognized. (ppsas 1971) Reimbursements - If another party is expected to reimburse the settlement amount of a provision, a reimbursement asset is recognized and presented in the statement of financial position separately from the provision. However, in the statement of financial performance, the expense related to the provision may be presented net of the reimbursement. | The amount recognized for the reimbursement shall not exceed the amount of the provision. |re ilities | ue 311 plication of the Recognition and Measurement Rules g. Future Operating Net Deficits - No provision shal ized for expected ici fa Witare Gpemiine recogriz ‘pected net deficits from future operatin; | activities. Such expectation ind icates that certain assets used fe these activities may be impaired. These assets shall be tested | for impairment. p. Onerous Contracts ~ A contract is deemed onerous (ie. burdensome) if the unavoidable costs of settling the obligations under the contract exceed the economic benefits expected to be received from it. The obligation under ‘an onerous contract is recognized as a provision. c. Restructuring - is a program that is planned and controlled by management, and materially changes either: a. The scope of an entity’s activities; or b. The manner in which those activities are carried out. (PPSAS 19.18) A legal obligation to restructure exists if, at the reporting date, the entity has entered into a binding agreement to sell or transfer an operation. A constructive obligation to restructure exists if, at the reporting date, both the following are present: a. Detailed formal plan for the restructuring; and b. The plan is announced to those affected by it. A restructuring provision includes only the direct ring. It does not include costs resulting from the restructul . costs associated with the ongoing activities of the entity, | Tetraining or relocating continuing staff, marketing, or | investment in ‘new systems and distribution networks.312 See Chapter jy Chapter 12 Summary: A liability is recognized only when all of the following 47>) Met: a. The item meets the definition of a liability; b. It is probable that an outflow of resources embodyin, economic benefits will be required to settle the obligation; and ¢. The obligation has a cost or value (e.g, fair value) that can be measured reliably. Financial liabilities are initially measured at fair value minus transaction costs and subsequently measured at amortizeq cost , except for financial liabilities at fair value through surplus or deficit which are initially and subsequently measured at fair value. : Provision is a liability of uncertain timing or amount. Contingent liability is one that meets some but not all of the liability recognition criteria. A contingent liability is not recognized but disclosed only, if its occurrence or settlement is | reasonably possible; otherwise, it is ignored. | Contingent asset is not recognized but disclosed only, if its occurrence or realization is probable; otherwise it is ignored. A provision is measured at the entity's best estimate of the | amount needed to settle the liability at the reporting date. If the effect of time value of money is material, the provision is measured at present value.313 pro8 LEMS ROBLEM 12-1: TRUE OR FALSE rR gal obligations arise only from law. ‘A financial liability cannot arise from constructive obligation. Financial liabilities, except financial liabilities classified to be subsequently measured at fair value through surplus or deficit, are initially measured at fair value plus transaction costs. Use the following in iformation for the next three questions: Entity A issues 10-year, term bonds with face amount of #20 for 912 and incurs transaction costs of P1 on the issuance. .- Provisions are never discounted to their presen\ . The obligation under an onerous contract is ‘The initial carrying amount of the bonds is P13. The nominal rate of the bonds is higher than the effective interest rate. If in Year 1, the interest payment is 1.50 while the interest expense is ®2, the carrying amount of the bonds at the end of the period must be ®11.50. If one or more of the liability recognition criteria are not met, the item is a contingent liability. . A provision is a liability of uncertain timing or amount. t value. recognized as a Provision.ol Chapter 19 PROBLEM 12-2: MULTIPLE CHOICE 1.. Financial liabilities, other than those that are classified to be subsequently measured at fair value through surplus o- deficit, are measured as follows: Initial Subsequent a. fair value amortized cost b. fair value plus transaction costs amortized cost c. fair value minus transaction costs amortized cost d. fair value plus transaction costs fair value less costs to sell 2. Which of the following is not a financial liability? a. Accounts Payable c. Electricity bill payable b. Notes Payable d. Due to BIR 3. Transaction costs on issuing bonds are a. expensed outright b. added to the initial carrying amount of the bonds ¢. deducted from the initial carrying amount of the bonds d. subsequently amortized as expense using the straight line method 4, An entity issues term bonds at a discount. If the bonds are subsequently measured at amortized cost, which of the following statements is not correct? ! a. Interest expense each period exceeds interest payment. b. Total interest expense over the term of the bonds equals total interest payments plus the amount of discount on initial recognition. The carrying amount of the bonds decreases each period d. The carrying amount of the bonds increases each period. 2abilities PSE 5, The carrying amount of bonds financial statements. is Payable in the prior year’s PL i following assumptions is least likely to be valid? eee a. The face amount of the bonds is 120,000, : pb. The bonds were issued at a discount of 920, 000. c. The interest expense during the period is Pl 0,000 while the interest payment is P12,000. d. Total interest expense over the term of the bonds will “exceed total interest payments by 20,000. e. All of these are equally acceptable. 6, Entity A issues 5-year bonds at a discount. At the beginning of the 3*4 year, Entity A retires the bonds at a premium. Which of the following statements is correct? a. Entity A recognizes gain on the retirement. b. Entity A recognizes loss on the retirement. c. Entity A recognizes’ neither gain nor loss on the retirement. d.. Answer cannot be determined due to insufficient data. Use the following information for the next three questions: On January 1, 20x1, the BTr issues a 5-year, 5%, P3,000,000 bonds for ® 2,640,656. Interest payments are due every December 31 but the principal is due only at maturity date. The effective interest Tate is 8%. 7. The entry on December 31, 20x1 to recognize interest expense is a. Interest Expense 211,252 Discount on Bonds Payable- 1282 Domestic ; i Cash in Bank-Local Currency, a Bangko Sentral ng Pilipinasd, 10. Interest Expense 211,252 Discount on Bonds Payable- Domestic Cash ~ Modified Disbursement System (MDS), Regular 1 Interest Expense 211,252 Discount on Bonds Payable- Domestic Interest payable 1 Interest Expense 150,000 Discount on Bonds Payable-Domestic 61,252 Cash ~ Modified Disbursement System (MDS), Regular 2 The carrying amount of the bonds on December 31, 20x1 a. 2,579,404 c. 2,768,061 b. 2,701,909 d. 2,786,061 The unamortized bond discount on December 31, 20x2 is a. 359,344 ¢. 231,939 b. 298,092 d. 213,939 A provision is measured at a. cost b. fair value c. lower of cost and fair value d. the entity's best estimate of the settlement amount 61,25) 50,009 61,252 50,000 11,252 isproBLEM 12-3: FOR CLAssrooy DISCUSSION 1. Which of the followin liability in Entity A’s py position? 8 May result to the recognition of a ‘ecember 31, 20x1 statement of financial a. Entity A enters into an entity combination combination) With Entity B on January 12, 20%2, b. Entity A's building is razed by fire on January 1, 20x2 and an adjacent building is affected, Investigation shows that Entity A was negligent. It is Probable that Entity A will be held liable for damages, The owner of the adjacent building is seeking compensation for damages amounting to P1M; however, Entity A’s legal counsel believes that Entity A will probably settle the case for 800,000. c. A lawsuit is filed against Entity A on January 3, 20x2. Apparently, Entity A’s geodetic engineer miscalculated the area of the lot where Entity A has started constructing an office building in December 20x1. This resulted to the encroachment of an adjacent lot owned by a private individual. Entity A has offered to settle the case out-of- court for 1M; however, the defendant wants payment of ?1.2M. Both parties agreed to a settlement of 1.050M on January 31, 20x1.. . d. Entity A enters into a purchase contract involving the acquisition of construction materials worth ®2M on December 26, 20x1. The materials are to be delivered in the second week of January 20x2. (business 2. Entity A purchases. office supplies and receives delivery thereof. Entity A recognizes a liability from this transaction because of which of the following obligating events? _ a. Payable event c. Constructive obligation b. External event d. Legal obligationom BB hater 3. Entity A obtains a 6%, 5-year, P10M face amount loan. Entj A pays transaction cost (service charge) of 3%. How much ig the carrying amount of the loan payable on initial recognition a. 10M c. 10.3M b. 97M d. 9,633,314 Use the following information for the next three questions: On January 1, 20x1, the BTr issues a 5-year, 6%, 2,000,000 bonds for 1,900,000. Transaction costs on the issuance (bond issue Costs) amount to 59,708, Interest payments are due every December 3] but the principal is due only at maturity date. The effective interest rate adjusted for both the bond discount and bond issue costs is 8%, 4. How much is the carrying amount of the bonds on initial recognition? a. 2,000,000 c. 1,959,709 b. 1,900,000 d. 1,840,292 5, ‘How much is the interest expense for 20x1? a. 160,000 ©. 156,777 b. 152,000 4,147,223 | 6, How much is the carrying amount of the bonds on December 31, 20x1? a. 1,867,515 c. 1,932,000 b. 1,813,069 d. 1,99,649 | 7. Which of the following distinguishes a provision from other types of liabilities? a. A provision requires disclosure in the notes. | b. A provision is supported by an internally generated | document (eg, DVs) rather than externally generated document (e.g., OR or delivery receipt). . c. A provision necessarily needs to be estimated because it ® a liability of uncertain timing or amount.ities d. 8. a. b. A present obligation whose cost with improbable outflow of res, benefits or service potential is most like A provision need not meet all iti ni Sed for a liability before it is es Of the recognition criteria gnized. can be measured reliably but ‘ources embodying economic ea ely to be mecogne ©. recognized and disclosed disclosed only d. ignored 9, Which of the following is correct Tegarding contingent assets? a b. ao Contingent assets are Tecognized if probable. Contingent assets are recognized and disclosed if probable. Contingent assets are only disclosed if Probable. Contingent assets are always ignored. 10. Which of the following statements is correct regarding reimbursements of provisions? a. A reimbursement asset is recognized and presented net of the provision in the statement of financial position. The provision is presented net of the related reimbursement asset in the statement of financial position. The expense related to the provision may be presented in the statement of financial performance net of the reimbursement. The amount recognized for the reimbursement may be in excess of the amount of the provision.