Professional Documents
Culture Documents
OUTLINE
COMBINED NOTES AND ANNOTATIONS FROM ROBLES, EMPLEO, VALIX, & The Students
INTRODUCTION
INTERMEDIATE ACCOUNTING 1 is all about ASSETS
- ASSETS: economic resources controlled by the entity as a result of a past event
- ECONOMIC RESOURCE: a right that has the potential to produce economic benefits.
(a) used singly or with other assets in the production of revenues
(b) - used to acquire other assets
- settle liability
- distribute to the enterprise owners
- The nature of Financial Assets are Financial Instruments
- The NATURE is a factor to determine which accounting standards are applicable to its measurement
and recognition
- CASH - INVENTORIES
- CASH EQUIVALENTS - UNUSED SUPPLIES
- ACCOUNTS RECEIVABLE - PROPERTY PLANT AND EQUIPMENT
- DEBT INVESTMENTS AT FAIR VALUE - FRANCHISE
- DEBT INVESTMENTS AT AMORTIZED COST - INVESTMENT PROPERTY
- EQUITY INVESTMENTS AT FAIR VALUE - PATENTS
- INVESTMENT IN ASSOCIATE - GOODWILL
- INVESTMENT IN SUBSIDIARY COMPANY - DEFERRED TAX ASSET
- ADVANCES TO EMPLOYERS AND
EMPLOYEES
- DEPOSITS ON UTILITY CONTRACTS
- CASH SURRENDER VALUE OF LIFE
INSURANCE POLICY
- CLAIMS FOR INCOME TAX REFUND
CASH / MONEY
Has the ability to settle Acquire another Pay operating costs Provide returns to
an obligation asset enterprise owners
UNRESTRICTED CASH
- “Walang Pinaglalaanan”
- It must be readily available in payment of current obligations
- It must not be subjected to any restrictions. contractual or otherwise
COMPOSITIONS OF CASH
(1) CASH IN HAND
(A) UNDEPOSITED CASH COLLECTION (B) WORKING/(2) CASH FUNDS- For current use
- Currencies: Bills and coins - EX: Petty cash fund, Change fund, Payroll fund.
- Bank drafts Dividend fund, Tax fund, Interest fund
- Money orders - Cash segregated for a specific use or purpose
- Dividend into category: (1) cash fund for current
CHECKS: operation; (2) cash fund not for the current
CASH LIABILITY
If the net amount - If the net amount represents an excess of overdrawn account over
represents an the cash balance
- According to VALIX (2020), overdrafts are generally not permitted in the Philippines.
- EXCEPTION: When an entity maintains 2 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 accounts.
- An overdraft can be offset against the other bank account if the amount is not material.
- OFFSET: With offsetting, you show your company's assets and liabilities on the balance sheet
on a net basis (netting). In offset accounting, you decrease the total, or net, of a different
account balance to create a net balance. Offsetting is purely a presentation method, not a type
of accounting.
- IFRS: You can offset overdrafts against other banks when PAYABLE ON DEMAND and OFTEN
FLUCTUATES from positive to negative as integral parts of CASH MANAGEMENT.
- A bank overdraft may be offset against a positive balance in another bank account with the same bank if
a right of offset exists between the bank and the depositor. In such a case, the depositor reports the
net positive amount as “Cash”.
(6.) UNDELIVERED OR UNRELEASED CHECKS
- These are the company’s checks drawn and recorded as disbursed but are not actually issued or delivered to
the payees as of the reporting date.
- Check na ginawa ng company pero di pa naman ibinibigay sa payee.
- Technically, checks drawn by a company should not be deducted from the company’s cash balance until they
have been mailed or otherwise delivered.
- Don’t deduct sa cash balance kase hindi pa naman ito na rerelease pa. Kaya JUST REPORT IT AS
Current payable.
- Therefore these checks should be reverted to the cash balance. As a result, liabilities that the checks are
intended to liquidate still exist and should be reported as current payables.
(7.) COMPANY’S POSTDATED CHECK
- A POST DATED CHECK DELIVERED is a check drawn, recorded, and already given to the payee but it bears
a date subsequent to the end of the reporting period.
- The company’s postdated check, which has been recorded and delivered to the payee before or at the end of
the reporting period- should be reverted to cash, and the corresponding liability shall continue to be recognized
because there is no actual payment yet, as of that date.
- The reason is that there is no payment until the check can be presented to the bank for
encashment or deposit.
- Ex: You end the reporting period on Dec 31, 2020 but the check that you drew is post
dated to Jan 15, 2021. Therefore, SAYO PA YUNG CASH NA YON -> Balik/Revert it
back as cash in bank @ the end of the reporting period. As far as 2020 is concerned,
sayo pa rin yung cash.
- SAME GOES IF THE COMPANY WILL RECEIVE A POST DATED CHECK. Hindi pa
sayo yun so it is not yet a part of your cash.
(8.) COMPENSATING BALANCES
- The minimum accounts that the company agrees to maintain in a bank checking account as support to collateral
for a loan by the depositor.
- UNRESTRICTED COMPENSATING BALANCES: Maintain it in the account and include it in cash
Effects of compensating balances:
a. Reduces the amount of cash available to the borrower
b. Increases the effective interest rate to the borrower
c. They must not be disclosed in the financial statement footnotes
Compensating Balances IF RESTRICTED May Be:
NOT LEGALLY RESTRICTED (INFORMAL)
- short-term loan
- part of cash
- informal compensating balance agreement
LEGALLY RESTRICTED (depending on nature of loan) (FORMAL)
- Classify separately as SHORT-TERM INVESTMENT under the current asset section if
the loan is related to short-term. “Cash held for compensating balances”
- classify separately as LONG-TERM INVESTMENT under the non current asset section
if the loan is related to long-term.
- Basta kapag legally restricted, ibawas mo sya!!!
- If the loan is related to long-term, it is classified as NON-CURRENT INVESTMENT.
- Example: An entity borrows P5,000,000 from a bank and agrees to maintain a 10% or P500,000 minimum
compensating balance in a demand deposit account.
- In effect, this arrangement results in a reduction of the amount borrowed
because the compensating balance provides a source of funds to the bank as
partial compensation for the loan extended.
- DEMAND DEPOSIT ACCOUNT: is just a different term for a checking account.
... Most demand deposit accounts (DDAs) let you withdraw your money without
advance notice, but the term also includes accounts that require six days or less
of advance notice.
(9.) CASH SET ASIDE FOR LONG-TERM SPECIFIC PURPOSE/ACQUISITION OF A NON-CURRENT ASSET
- ex: Sinking fund, plant expansion fund
- reported as Non-Current Financial Asset
(10.) STALE CHECK
- STALE CHECK or Check Long Outstanding: is a check not encashed by the payee within a relatively long
period of time.
- How long must the check remain outstanding?
ENTRY TO ESTABLISH:
Dr. Petty Cash Fund XXX
Cr. Cash in Bank XXX
- It is to be pointed out that petty cash disbursements should be replenished by only means of check and not from
undeposited collections.
Where the cash count shows cash which is less than the balance per
book, a cash shortage is to be recorded. (Entry to record cash
shortage if detected at replenishment)
Dr. Cash short or over XXX
Cr. Cash in bank XXX
Where the cash count shows cash which is more than the balance
per book, a cash overage is to be recorded. Entry to record cash
overage if detected at replenishment:
Dr. Cash in bank XXX
Cr. Cash Short or over XXX
From December 1 through December 20, payments were made from petty cash fund for the following items:
Transportation P2,300
Representation expenses 3,400
Office Supplies 4,200
No entry is taken up to record the above payments.
On December 21, petty cash vouchers were submitted to request reimbursement for the above expenditures. A check
for P9,900 was issued to replenish the petty cash fund. The entry for replenishment is
Case 1: On December 31, no replenishment of the petty cash was made. A count and review of the fund revealed
the following composition:
The total of Bills and coins counted and paid vouchers above, which is P9,920 is less than the amount of the imprest
petty cash balance of P10,000. Thus, the difference of P80 is missing cash, which is reported as cash shortage. The
adjusting entry on December 31 to remove the non-cash items from the petty cash fund and to show the correct
amount of the petty cash fund in the statement of financial position is
Case 2: Assume that instead of the following was the composition was the fund on December 31.
The total of Bills and coins counted and paid petty cash vouchers of P10,120 exceeds the amount of the imprest petty
cash balance of P10,000. This excess of the items counted over the petty cash fund balance is to be recorded as
Proper internal control suggests that the amount of cash representing the overage of P120 be taken out of fund, for
deposit to the general cash account of the company. This will bring the remaining balance of Bills and Coins equal to
P2280 (P2,400 - P120 cash overage). The ENTRY FOR THE DEPOSIT OF CASH OVERAGE is:
After the deposit of the cash overage, the total composition of the fund would be P10,000 (P2,280 bills and coins and
petty cash vouchers of P7,720), which is the amount at which the petty cash fund is originally established.
Nov 29 Replenished the fund. The petty cash items include the following:
Supplies 1,500
Postage 1,200
Miscellaneous Expense 1,000
Petty cash fund 3,000
2021
Jan 1 The adjustment made on December 31 is reversed.
Supplies 4,500
Postage 3,000
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 P14,000 representing the petty cash disbursements of P9,000 and the fund
increase of P5,000.
At the end of the reporting period, NO ADJUSTMENTS is necessary because the petty cash expenses are
recorded outright.
Expenses 8,000
Petty cash fund 8,000
Expenses 9,000
Petty cash fund 9,000
Total xx xx xx shortage
NOTES:
(a) – will only be included in the accounted if the envelope still contains the cash contribution.
(b) – will only include withdrawable checks, (exclude stale, nsf, postdated)
(c) – clue, addressed to the custodian
(d) – include all accommodation check whether withdrawal or not
(e) – checks issued by the company should be ignored and not be included in the computation
Total xxxx
plus: petty cash fund not in the form of currencies and coins
NOTES: (a) – will only include withdrawable checks, (exclude stale, nsf, postdated)
BANK RECONCILIATION
- A schedule prepared to bring the depositor’s cash and the related bank’s cash balance into agreement. It shows
the items causing discrepancies between the balance per bank and the balance per book. (Ong & Gomendoza,
2017)
- Is a monthly prepared statement that balances books and bank Record
- It shows the following information
(a) Beginning of month cash balance
(b) Total deposits made by the depositor and other bank credits during the month
(c) Total checks paid by the bank and other bank charges during the month
(d) End of month cash balance
- to determine causes of difference between the bank balance and book balance as a form of internal control.
- to compute the adjusted bank balance to be presented in the year-end statement of financial position.
- to serve as a basis of adjusting journal entry.
- “PUT IT WHERE IT ISN’T”- Mam Dani
Outstanding - Outstanding checks (-) are checks that have book (-) In bank
checks already been recorded by the depositor but not yet
reflected in their bank statement.
- Checks issued by the business during the period
that have not been presented to the bank for
payment before the statement is prepared.
- Checks written by the company, issued to the
payees, and deducted from the company’s cash
balance but they have not been reflected in the
bank statement since they have not been
presented yet to the bank for payment.
- The amount of the outstanding checks is
determined by comparing the checks written
during the month as reflected in the company’s
check register or cash disbursements journal with
the cancelled checks included in the bank
statement.
- The amounts of the checks issued (as reflected in
the check register or cash disbursements journal)
but have not been presented for payment (as
reported in the bank statement) are then totaled
and referred to as outstanding checks.
- Outstanding checks at month-end result in an
overstatement of the bank balance.
- CORRECTION OF OVERSTATEMENT: The
amount of the outstanding checks should be
deducted from the bank balance.
Deposits in - Deposit in Transit (+) are collections that have book (+) in bank
transit yet to be reflected in the bank statement but
already is recorded in the books of the depositor
(undeposited - Deposits made by the business that have not
collection) reached or recorded by the bank before the
statement is prepared.
- Because it is not yet received by the
bank as of the cut-off time (Deposit in
transit) or it has not been deposited
as of the end of the month
(undeposited collection)
- The amount of the deposit in transit or the
undeposited collection can be determined
by comparing the receipts as reflected in the
company’s accounting records with the
deposits as reflected in the bank statement
- The amounts reflected in the accounting
records but not in the bank statement are
totaled as either deposits in transit or
undeposited collections.
- The deposits in transit or undeposited
collections understate the bank balance.
- CORRECTION OF UNDERSTATEMENT: the
collections awaiting deposit or are in transit
DEBIT - An item that was originally deposited into the book (-) in book
MEMOS company’s account (usually a customer check)
and later bounced because the drawer did not
(b) NSF (Not have sufficient funds. (Kristin, 2019)
sufficient - Customer’s check that has been deposited in the
fund) company’s bank account but has not been paid by
Checks | the customer’s bank because there is insufficient
DAIF | DAUD funds in the customer’s bank account.
- Ideally, the bank should immediately inform the
company of each NSF check to enable the latter to
update its accounting records.
- In such a situation, the balances per books and
per bank statement are in agreement, thereby
requiring no adjustment.
- However, there may be some NSF checks
included in the bank statement that have not been
recorded by the company.
- Thus, the balance per books is apparently
overstated.
- DEPOSIT IN TRANSIT OR DEPOSIT OF
CUSTOMER
- Pwedeng NSF if walang laman
- “Checks cleared” if received ng bank
CREDIT - These are deposits made directly by the bank to Bank (+) in book
MEMOS the company’s account.
- EXAMPLES:
- Notes or drafts collected by the bank
in order to favor the depositor
- Proceeds of bank loan credited
directly to the account of the
depositor
- Interest earned on the company’s
checking account
- A bank often acts as a collecting agent for its
depositors on items such as notes receivable.
When a note is collected, the bank records the
principal and interest as an increase in the
depositor’s bank account. Generally, the bank
immediately informs the company of the deposit to
OTHER ITEMS/NOTES:
PROOF OF CASH
- Proof of Cash is a two-date bank reconciliation which is used to find and fix the ending balance of the book and
bank statement.
- It balances the book and bank statement’s beginning, receipts, disbursements and ending balance of the period.
- It is also an expanded reconciliation in that it includes proof of receipts and disbursements.
Add cash receipts reflected in the company’s records during the month
(Excluding credit memos issued by the bank in previous month but recorded by
the depositor only this month) xx
Total Pxx
Total: Pxx
To compute for the Adjusted Per Book To compute for the Adjusted Per Bank
Balance Balance
Company X
PROOF OF CASH
For the month of February
Note collected:
January xxx (xxx)
February xxx xxx
NSF check:
January (xxx) (xxx)
February xxx (xxx)
Service charge:
Deposits in transit:
January xxx (xxx)
February xxx xxx
Outstanding checks:
January (xxx) (xxx)
February xxx (xxx)
Company X
PROOF OF CASH
For the month of February
Note collected:
January xxx (xxx)
February xxx xxx
NSF check:
January (xxx) (xxx)
February xxx (xxx)
Service charge:
January (xxx) (xxx)
Deposits in transit:
January (xxx) xxx
February (xxx) (xxx)
Outstanding checks:
January (xxx) xxx
February (xxx) xxx
Company X
PROOF OF CASH
Deposits in transit:
January xxx (xxx)
February xxx xxx
Outstanding checks:
January (xxx) (xxx)
February xxx (xxx)
Note collected:
January xxx (xxx)
February xxx (xxx)
NSF check:
January xxx xxx
February (xxx) xxx
Service charge:
January xxx xxx
CASH EQUIVALENTS
- Equity securities (temporary investments in equity shares) cannot qualify as cash equivalents because shares
don’t have a maturity date.
- They are appropriately classified as either equity investments at FVPL or equity investments at FVOCI,
subject to the entity’s intention for holding the shares and on the guidelines provided by the IFRS 9.
- However, redeemable preference shares with specified redemption date and acquired three
months before the 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 the maturity
date.
- REGARDLESS of management’s policy, the determination of the maturity date starts from the date of
acquisition of the instrument and not from the date indicated in the face of the instrument.
- Thus a BSP Treasury bill that was purchased one year ago cannot qualify as a cash equivalent
even if the remaining maturity is three months or less.
Classify the Classify investments here if - Classify investments here if the term is
instrument as cash the term is more than three more than one year
and cash equivalents months but within one - However, if such investments
if the term is three year. become due within one year
months or less from the end of the reporting
period, they are reclassified as ↓
- IAS 1 Presentation of Financial Statements requires “Cash and Cash Equivalents” (either combined or
separate account titles) as a separate line presentation on the face of the statement of financial position.
Furthermore, the entity shall disclose its policy in determining which financial instruments shall qualify to be
reported as cash equivalents.
- An example of such disclosure is as follows:
2020 2019
Cash equivalents:
xxx xxx
CASH FRAUD
II. RECEIVABLES
- Receivables are financial assets because they represent a contractual right to receive cash or another financial asset
from another entity.
Trade Receivables
- Refer to claims arising from sale of merchandise or services in the ordinary course of business. Trade
receivables include accounts receivable and notes receivable.
- Those that are expected to be realized in cash within the normal operating cycle or one year, whichever is
longer, are classified as current assets.
Non-trade Receivables
- represent claims arising from sources other than the sale of merchandise or services in the ordinary course
of business.
- Those that are expected to be realized in cash within one year, the length of the operating cycle
notwithstanding, are classified as current assets.
- IF collectible beyond one year, non-trade receivables are classified as non-current assets.
1. Advances to or receivables from shareholders, directors, officers or employees. If collectible in one year such
advances or receivables should be classified as current assets. Otherwise, they are classified as non-current
assets.
2. Advances to affiliates are usually treated as long-term investments.
3. Advances to Supplier for the acquisition of merchandise are current assets
4. Subscriptions Receivable are current assets if collectible within one year. Otherwise, they are shown preferably
as a deduction from subscribed share capital.
5. Creditors’ accounts may have debit balances as a result of overpayment or returns and allowances. These are
classified as current assets.
6. Special deposits on contract bids normally are classified as other non-current assets because they are likely to
remain outstanding for a considerable, long period of time.
7. Accrued income such as dividends receivable, accrued rent income, accrued royalties income and accrued
interest on bond investment are usual current items.
8. Claims receivable such as claims against common carriers for losses or damages, claim for rebates and tax
refunds, claims from insurance companies, are normally classified as current assets.
- Transaction price - Amount to which an entity expects to be entitled in exchange for transfer of
goods and services.
Trade Discounts
- Trade discounts (volume or quantity discounts) are means of converting a catalog list price to the prices
actually charged to the buyer.
- Deducted from list price prior to recording the accounts receivable arising from a credit sales transaction.
- Both accounts receivable and the related revenue are always recorded net of trade discounts.
- For example:
Example #1
P90,000
Less 10% x 90,000
Invoice price
P81,000
P76,950
P76,950
Cash Discounts
- Reductions from the sales price as an inducement for prompt payment of an account.
- 2/10, n/30 (2% discount is granted if account is paid within 10 days from the invoice date, gross
amount due in 30 days)
- 3/15, n/60 (3% discount is granted if account is paid within 15 days from the invoice date, gross
amount due in 60 days).
- The timing of the recognition of cash discounts is based on the method of accounting adopted by the
company for sales and the related accounts receivable:
- Assume that on July 16, 2020, ABC Manufacturing sells merchandise on account with a list price of
P100,000 less trade discounts of 10%, 10% and 5%. The invoice price of the merchandise is computed earlier
as P76,950. Assume further that the credit terms were 2/10; n/30, FOB shipping point and freight paid to the
shipper by ABC Manufacturing amounted to P2,000. The sale on July 16, 2020 is recorded as follows under the
gross method:
77,411
Cash
1,539
Sales Discount
78,950
Accounts receivable
78,950
Cash
78,950
Accounts receivable
Sales discount
xx
Sales 75,411
Cash
77,411
Accounts receivable
77,411
Cash
78,950
Sales Discount Forfeited
1,539
Accounts receivable
77,411
xx
Accounts receivable
xx
Sales Discount Forfeited
ALLOWANCE METHOD
Sales 75,411
Cash 2,000
Cash
77,411
Allowance for Sales Discounts
1,539
Accounts receivable
78,950
Cash
78,950
Allowance for Sales Discounts
1,539
Sales Discount Forfeited
1,539
Accounts receivable
78,950
xx
Allowance for Sales Discounts
xx
Sales Discount Forfeited
- Involving a national credit card company results in accounts receivable in the name of the card-issuing company.
- Credit card fees range from 1% to 5% of net credit card sales, reducing the value of the accounts receivable.
- Credit Card Service Charge would be reported as an operating expense in profit or loss.
- Assume that MS Department Store has Citibank Visa drafts/receipts that total P1,200,000 on December 20. The
entry to record the Citibank Visa sales would be:
Sales 1,200,000
Cash
1,176,000
Credit Card Service Charge
24,000
Accounts Receivable – Citibank Visa
1,200,000
Cash
1,176,000
Sales
1,200,000
These are claims supported by formal promises to pay usually in the form of notes.
- The basic issues in accounting for notes receivable are the same as those for accounts receivable: recognition,
valuation, and disposition.
- Is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on
demand or at fixed or determinable future time a sum certain in money to order or to bearer.
– It is a written contract in which one person, known as the maker, promises to pay another person, known as the
payee, a definite sum of money.
- The initial measurement of long-term notes will depend on whether the notes are interest-bearing or noninterest
bearing.
- Interest-bearing long-term notes are measured at face value which is actually the present value upon issuance.
- Noninterest-bearing long-term notes are measured at present value which is the discounted value of the future cash
flows using the effective interest rate.
- Actually, the term "noninterest-bearing" is a misnomer because all notes implicitly contain interest.
- It is simply a case of the "interest being included in the face amount" rather than being stated as a separate rate.
*Standing alone, the term “notes receivable” represents only claims arising from sale of merchandise or service in the
ordinary course of business.
Initial Measurement
However, short-term notes receivable are measured at face value. While the initial measure of long-term notes will
depend on whether the notes are interest-bearing or non-interest bearing.
Interest bearing long-term notes are measured at face value which is actually the present value upon issuance.
Non Interest bearing long-term notes are measured at present value which is the discounted value of the future cash
flows using the effective interest rate.
Subsequent Measurement
• Subsequent to initial recognition, long term notes receivable shall be measured at amortized cost using
effective interest method.
- The "amortized cost" is the amount at which the note receivable is measured initially:
- a. Minus principal repayment
- b. Plus or minus cumulative amortization of any difference between the initial carrying amount and
the principal maturity amount.
- c. Minus reduction for impairment or uncollectibility.
- For long-term non-interest-bearing notes receivable, the amortized cost is the present value plus amortization of the
discount, or the face value minus the unamortized unearned interest income.
- Accordingly, only long-term notes receivable will be discussed in conjunction with the present value concept under
the following situations:
- a. Interest bearing note
- b. Noninterest bearing note
Dishonored Notes
An entity owned a tract of land costing P800,000 and sold the land for P1,000,000.
The entity received a 3-year note for P1,000,000 plus interest of 12% compounded annually.
When interest is "compounded", in the mathematical parlance, this means that any accrued
interest receivable also earns interest.
The selling price of P1,000,000 is reasonably assumed to be the present value of the note
because the note is interest bearing.
First year
Land 800,000
(12% x 1,000,000)
Second year
Total 1,120,000
Cash 1,404,928
Second year
Total 1,254,400
An entity manufactures and sells machinery. On January 1, 2017, the entity sold machinery costing P280,000 for
P400,000.
The buyer signed a non interest bearing note for P400,000, payable in four equal installments every December 31.
The cash sale price of the machinery is P350,000.
Sales 350,000
Cash 100,000
receivable income
1,000,000 50,000
- The fractions are developed from the note receivable balance every year.
- The fractions developed are multiplied by the total unearned interest of P50,000 to get the yearly interest
income.
- Thus, for 2017, 4/10 x P50,000 equals P20,000 and so on.
Total 30,000
(15,000)
On January 1, 2017, an entity sold equipment with a cost of P250,000 for P400,000.
The buyer paid a down of P100,000 and signed a non-interest bearing note for P300,000 payable in equal annual
installment of P100,000 every December 31.
The prevailing interest rate for a note of this type is 10%. The present value of an ordinary annuity of 1 for three
periods at 10% is 2.4869.
The present value of the note is computed by multiplying the annual installment of P100,000 by the present value
factor of 2.4869 or P248,690.
Computation
Sale price
348,690
Cost of equipment
250,000
Cash 100,000
Equipment 250,000
Cash 100,000
In this case, the computation of the interest income is made using the effective interest method.
- The present value is equal to the preceding balance minus the annual principal payment.
- Thus, on December 31, 2017, P248,690 minus P75,131 equals P173,559.
- Initial amount > principal amount = amortization of difference deducted to carrying amount
Origination fees
- Lending activities likely precede actual disbursement of funds and generally include efforts to identify and attract
potential borrowers and to originate a loan.
- Fees charged by the bank against the borrower for the creation of the loan are known as “origination fees”.
- If origination fees are not chargeable against the borrower, fees are known as “direct origination costs”.
- Direct origination costs are deferred and amortized over the term of the loan.
- Preferably, they are offset directly against any unearned origination fees received.
- If origination fees received exceed the direct origination costs = difference is charged to unearned interest income
and amortization will increase interest income.
- If direct origination costs exceed the origination fees received = difference is charged to direct origination costs and
amortization will decrease interest income.
- Origination fees received and direct origination costs are included in the measurement of the loan receivable.
Illustration: Global Bank granted a loan to a borrower on January 1, 2017. The interest on the loan is 12%
payable annually starting December 31, 2017. The loan matures in three years on December 31, 2019.
To record loan:
Cash 5,000,000
Cash 331,800
Cash 100,000
Unearned interest income (credit balance) of P231,800 to be amortized over term of the loan using effective interest
method.
- A new effective rate must be computed because of the origination fees received and direct origination costs.
- Initial carrying amount of loan receivable of P4,768,200 is lower than principal amount.
- Meaning there is a discount and effective rate must be higher than nominal rate of 12%
- Effective rate is the rate that would equate the present value of the future cash flows of the loan to the initial carrying
amount of loan receivable.
- Using an effective rate of 13%, the present value of 1 for 3 periods is 0.693, and present value of
ordinary annuity of 1 for 3 periods is 2.361.
ILLUSTRATION
3,375,000
PV of interest (600,000 x 2.322)
1,393,200
- Initial carrying amount of P4,768,200 is now the same as the present value of the cash flows. Thus, the effective
rate is 14%.
ILLUSTRATION
Amortization 65,548
Amortization 77,005
Amortization 87,247
Cash 600,000
Cash 600,000
Cash 600,000
Cash 5,000,000
Impairment of Loan
- PFRS 9, paragraph 5.5.1, provides that an entity shall recognize a loss allowance for expected credit losses on
financial assets measured at amortized cost.
- Paragraph 5.5.3 provides that an entity shall measure loss allowance for a financial instrument at an amount equal
to the lifetime expected credit losses if the credit risk on that financial instrument has increased significantly since initial
recognition.
- Expected credit losses are an estimate of credit losses over the life of the financial instrument.
Measurement of Impairment
- The estimate should reflect the possibility that a credit loss occurs and the possibility that
no credit loss occurs.
- Reasonable and supportable information that is available without undue cost or effort.
- PFRS 9 does not prescribe a particular method of measuring expected credit losses.
- The amount of impairment loss can be measured as the difference between the carrying amount
and the present value of estimated future cash flows discounted at the original effective rate.
- The carrying amount of the loan receivable shall be reduced either directly or through the use of an
allowance account.
- Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to
discharge a particular obligation.
- The risk contemplated is the risk that the issuer will fail to perform a particular obligation.
- The risk does not necessarily relate to the credit worthiness of the issuer.
Illustration: International Bank loaned P5,000,000 to Bankard Company on January 1, 2015. The term of the loan
require principal payment of P1,000,000 each year for 5 years plus interest at 10%. The first principal and interest
payment is due on December 31, 2015. Bankard Company made the required payments on December 31, 2015
and December 31, 2016. However during 2017, Bankard Company began to experience financial difficulties and
was unable to make the required principal and interest payment on December 31, 2017.
On December 31, 2017, International Bank assessed the collectability of the loan and has determined that the
remaining principal payments will be collected but the collection of the interest is unlikely. The loan receivable has
carrying amount of 3,300,000 including the accrued interest of P300,000 on December 31, 2017. International
Bank projected the cash flows from the loan on December 31, 2017.
Using the original effective rate of 10%, the present value of 1 is .9091 for 1 period, .8264 for 2 periods and .7513
for 3 periods.
Impairment loss
892,100
Cash 500,000
Cash 1,000,000
Cash 1,500,000
880,000
Cash
120,000
Discount on note payable
1,000,000
Note payable – bank
1,000,000
Face value of loan
(120,000)
Less: Interest deducted in advance
(1,000,000 x 12%)
880,000
Net proceeds
Statement presentation
20,000
Interest expense (120,000 x 2/12)
20,000
Discount on note payable
Current liabilities:
Note payable-bank
1,000,000
Cash
1,000,000
100,000
Interest expense
100,000
Discount on note payable
- Assignment of accounts receivable means that a borrower called the assignor transfers rights in some accounts
receivable to a lender called the assignee in consideration for a loan,
- Assignment is a more formal type of pledging of accounts receivable. Assignment is secured
borrowing evidenced by a financing agreement and a promissory note both of which the assignor signs.
- However, pledging is general because all accounts receivable serve as collateral security for the
loan. On the other hand, assignment is specific because specific accounts receivable serve as
collateral security for the loan.
April
700,000
Accounts receivable-assigned
700,000
Accounts receivable
555,000
Cash (560,000 - 5,000)
5,000
Service charge
560,000
Note payable – bank
20,000
Sales return
20,000
Accounts receivable-assigned
10 Collected P300,000 of
the assigned accounts less
2% discount.
294,000
Cash
6,000
Sales discount (2% x
300,000)
Accounts
300,000
receivable-assigned
294,000
Note payable – bank
5,600
Interest expense (1% x
560,000)
Cash
May
7 Assigned accounts of
P15,000 proved worthless.
15,000
Allowance for doubtful
15,000
accounts
Accounts
receivable-assigned
20 Collected P300,000 of
the assigned accounts.
300,000
Cash
Accounts
300,000
receivable-assigned
Cash 268,660
Accounts 65,000
receivable-assigned
Total accounts
700,000
receivable-assigned
594,000
Less: Collections (294,000 +
300,000) 6,000
July
The entity signed a promissory note that provides for 1% interest per month
on the unpaid loan balance.
Cash
8,000
August
100,000
Accounts receivable
100,000
Accounts receivable – assigned
Statement presentation
Accounts receivable-unassigned
4,000,000
Accounts receivable-assigned
1,000,000
Allowance for doubtful accounts
100,000
Note payable – bank (related to assignment)
400,000
Total 5,000,000
Factoring
- Factoring differs from an assignment in that an entity actually transfers ownership of the accounts receivable to
the factor.
- Thus, the factor assumes responsibility for uncollectible factored accounts.
- In assignment, the assignor retains ownership of the accounts assigned.
- Because of the nature of the transaction, the customers whose accounts are factored are notified
and required to pay directly to the factor.
- The factor has then the responsibility of keeping the receivable records and collecting the accounts.
- Factoring may take the form of the following:
- Casual factoring
- Factoring as a continuing agreement
Casual factoring
- If an entity finds itself in a critical cash position, it may be forced to factor some or all of its accounts receivable at a
substantial discount to a bank or a finance entity to obtain the much-needed cash.
Cash 80,000
- Factoring may involve a continuing arrangement where a finance entity purchases all of the accounts
receivable of a certain entity.
- In this setup, before a merchandise is shipped to a customer, the selling entity requests
the factor's credit approval.
- If it is approved, the account is sold immediately to the factor after shipment of the goods.
- The factor then assumes the credit function as well as the collection function.
- For compensation, typically the factor charges a commission or factoring fee of 5% to 20%
for its services of credit approval, billing, collecting, and assuming uncollectible factored
accounts.
Illustration
In addition, the factor withheld 20% of the amount of the receivables factored to
cover sales return and allowances.
Cash 365,000
Commission 25,000
50,000
Sales return and allowance
1,000
Sales discount (2% x 50,000)
49,000
Receivable from factor
Credit card
- A credit card is a plastic card which enables the holder to obtain credit up to a predetermined limit from the issuer of
the card for the purchase of goods and services.
- The credit card has enabled retailers and other businesses to continue to sell goods and services where the
customers obtain possession of the goods immediately but do not have to pay for the goods for about one month.
- The major credit cards in the Philippines are Diners Club, American Express, VISA and MasterCard.
- These entities are generally responsible for approving the credit of customers and collecting the receivables for a
service fee from 1% to 5% of the credit card sales.
- Generally, if a customer buys goods and uses a credit card, the credit card receipt must be forwarded by the retailer
to the card issuer who will then pay the retailer the appropriate amount minus the credit service charge.
- Two entries are necessary, one entry at the time of sale and another entry when payment is received from the card
issuer.
Illustration #1
Credit card sales to customers using Diners Club amount to P200,000 for a
certain period.
The credit card receipts are forwarded to Diners Club and payment is
subsequently received from Diners Club minus a 3% service charge.
Sales 200,000
Cash 194,000
Illustration #2
There are some credit cards that allow the retailer business to deposit the credit
card receipts directly to a current account.
The bank accepts the credit card receipts and immediately increases the current
account of the retailer for the amount of credit card sales minus the credit card
service charge.
For example, credit card sales amount to P200,000 with 5% service charge or
P10,000.
Cash
190,000
Credit card service charge
10,000
Concept of discounting
- In a promissory note, the original parties are the maker and payee.
- The maker is the one liable and the payee is the one entitled to payment on the date of maturity.
- When a note is negotiable, the payee may obtain cash before maturity date by discounting the note at a bank or
other financing company.
- To discount the note, the payee must endorse it.
- Thus, legally the payee becomes an endorser, and the bank becomes an endorsee.
Endorsement
- the transfer of right to a negotiable instrument by simply signing at the back of the instrument.
- Endorsement may be with recourse which means that the endorser shall pay the endorsee if the maker dishonors
the note.
- In the legal parlance, this is the secondary liability of the endorser.
- In the accounting parlance, this is the contingent liability of the endorser.
- Endorsement may be without recourse which means that the endorser avoids future liability even if the maker
refuses to pay the endorsee on the date of maturity.
- In the absence of any evidence to the contrary, endorsement is assumed to be with recourse.
1. Net proceeds refer to the discounted value of the note received by the endorser from the endorsee.
a. Net proceeds = Maturity value - Discount
2. Maturity value is the amount due on the note at the date of maturity.
a. Maturity value = Principal + interest
4. Principal is the amount appearing on the face of the note. It is also referred to as face value.
5. Interest is the amount of interest for the full term of the note.
a. Interest is computed as Principal x rate x time.
9. Discount rate is the rate used by the bank in computing the discount. The discount rate should not be confused
with the nterest rate. The discount rate and interest rate are diterent rom each other.
a. If no discount rate is given, the interest rate is safely assumed as the discount rate.
10. Discount period is the period of time from date of discounting to maturity date.
a. Discount period = term of the note – expired portion up to the date of discounting
b. Discount period is the unexpired term of note.
A P1,000,000, 180-day, 12% note dated July 1 was received from a customer and
discounted without recourse on August 30 at 15% discount rate.
Computation
Principal
1,000,000
Maturity value
1,060,000
Term of note
180 days
Less: Days expired from July 1 to
August 30 60 days
Discount (53,000)
1,000,000
Principal
20,000
Accrued interest receivable (1,000,000 x
12% x 60 /360)
1,020,000
Carrying amount of note receivable
Net proceeds
1,007,0000
Carrying amount of note receivable
1,020,000
Loss on note discounting
(13,000)
Journal entry
Cash
20,000
Principal 2,400,000
1)
5 months
Discount period
2,400,000
Principal
24,000
2,424,000
2,385,000
Net proceeds
2,424,000
Carrying amount of note receivable
(39,000)
Loss on note receivable discounting
b) Secured borrowing
Cash 2,385,0000
Journal entries
Cash 2,550,000
Journal entry
Cash 2,385,000
Note receivable
2,400,000
Journal entries
Accounts receivable
2,550,000
Cash
2,550,000
- IFRS 9, paragraph 3.2.3, provides that an entity shall derecognize a financial asset when either one of the following
criteria is met:
a) The contractual rights to the cash flows of the financial asset have expired.
b) The financial asset has been transferred and the transfer qualifies for derecognition based on
the extent of transfer of risks and rewards of ownership.
- The contractual rights to the cash flows may expire, for example, when a note receivable from a customer is fully
collected.’
- It relies on the assessment of the extent of the transfer of risks and rewards of ownership.
- IFRS 9, paragraph 3.2.6, provides the following guidelines for derecognition based on transfer of risks and rewards:
1. If the entity has transferred substantially all risks ana rewards, the financial asset shall be derecognized.
2. If the entity has retained substantially all risks and rewards, the financial asset shall not be derecognized.
3. If the entity has neither transferred nor retained substantially all risks and rewards, derecognition depends on
whether the entity has retained control of the asset.
a. If the entity has lost control of the asset, the financial asset is derecognized in its entirety.
b. If the entity has retained control over the asset, the financial asset is not derecognized.
- In other words, the party discounting is the payee and a mere endorser and therefore only a person secondarily
liable. There is then a contingent liability on the note discounted.
- Where the note discounted is made by the party discounting, a primary liability, not a contingent liability, exists.
- In effect, the party discounting is entering into a contract of loan with the endorsee.
Illustration #2
For example, an entity discounted at the bank its own note of P500,000 at
126 for one year on September 1, 2017.
Cash 440,000
Principal 500,000
Carrying amount
460,000
Inventories
➢ are assets held for sale in the ordinary course of business, in the process of production for such sale in the form
of materials or supplies to be consumed in the production process or in the rendering of services
➢ It encompasses goods purchased and held for resale, for example:
- Merchandise purchases by a retailer in a merchandising business held for resale
- Land and other property held for resale by a subdivision entity and real estate developer
➢ In a manufacturing business, inventories also encompass finished goods produced, goods in process, and
materials and supplies awaiting use in the production process
Classes of Inventories
I. Inventories of a trading concern
- A trading concern is one that buys and sells goods in the same form purchased
- ‘Merchandise inventory’ is used
II. Inventories of a manufacturing concern
- A manufacturing concern is one that buys goods which are altered or converted into another form before
they are made available for sale
- A manufacturing concern maintains 4 types of inventory, namely:
(1) Finished Goods - Completed products which are ready for sale
(2) Goods in process- Also known as ‘work-in-process’, these are partially completed products
which require further process or work before they can be sold
(3) Raw Materials - goods that are to be used in the production process and can be directly
attributed to the end product
(4) Factory or Manufacturing Supplies- also referred to as ‘indirect materials’. These are
materials which are used in the manufacturing process but cannot be directly attributed to each
product practically.
Cost of Inventories
- The cost of inventories shall comprise:
a.Cost of purchase - comprises the purchase price, import duties and irrecoverable taxes, freigh,
handling and other costs directly attributable to the acquisiont of finished
goods, materials and services .
- Trade discounts, rebates and other items of similar nature are deducted.
Consigned Goods
- Consigned goods shall be included in the consignor’s inventory and excluded from the consignee’s
inventory .
- Consignment is a method of marketing goods in which the owner (consignor) transfers PHYSICAL
POSSESSION to an agent (consignee)
- Freight and other handling costs are part of cost of goods consigned (costs must be attributable to goods
consigned)
Cost Formulas
(1) First-in, First -out (FIFO)
- Goods first purchased are first sold
- Goods subsisting are assumed to be most recently purchased
- Note that cost application is the main concern not distribution per se
- Cost of goods issued is based on cost of goods first purchased
- The OBJECTION TO THE METHOD is that there is an improper matching of cost against revenue because the
goods sold are stated at earlier or old prices resulting in an understatement of the cost of goods sold
- In a period with rising prices or inflation, FIFO results in Highest Income, Highest Tax and highest cost of ending
inventory.
Illustration II: (Problem based on Practical Financial Accounting- Valix 2019 edition Vol. 1)
What is the cost of inventory sold on Feb. 5, April 10 and Sales Return on April 30?
Illustration II: (Problem based on Practical Financial Accounting- Valix 2019 edition Vol. 1)
Purchase
Illustration:
Purchases 257,000
Inventory-January 31 (140,000)
Products A, B and C are purchased at a “Basket Price “ of P3,000,000. Assume that the said products have the
following sales price: A P500,000, B P1,500,000, and C P3,000,000
Inventory Writedown
- Writedown occurs when the net realizable value is lower than cost.
- Is applied on an item by item basis
- There are two (2) methods of writedown:
a. Direct method or cost of goods sold method
b. Allowance method or loss method
Allowance Method
- Inventory is recorded at cost and any loss on inventory writedown is accounted for separately.
- Also known as “loss method”
- Loss account is debited and valuation account “allowance for inventory writedown” is credited
- Allowance method is used in order that the effects of writedown and reversal of writedown can be clearly
identified
- In subsequent years, allowance for writedown is adjusted upwards or downward depending on the difference
between the cost and net realizable value of the inventory at year-end.
Illustration:
Using the preceding problem, the entries under allowance method are as follows:
If at the end of the next year, the inventory is valued at a total cost of 8,020,000 and has a net
realizable value of 8,000,000. The following entries are required:
Dec 31, 2021 inventory 8,000,000
Income summary 8,000,000
There are two (2) methods for approximating the value of inventory:
(1) Gross Profit Method
(2) Retail Inventory Method
ILLUSTRATION:
Important Terms
Normal shortage, shrinkage, Deducted from Goods available for Sale at retail
spoilage, breakage
Abnormal shortage, shrinkage, Deducted from goods available for sale at both cost and retail
spoilage, breakage
Cost Ratio Goods available for sale at cost divided by Goods available for sale
at selling price
Original Retail The sales price at which the goods are first offered for sale
Additional Mark-up Increase in sales price above the original sales price
Mark-up Cancellation Decrease in sales price that does not decrease the sales price below
the original sales price
Markdown cancellation Increase in sales price that does not increase the sales price above
the original sales prie
MAintained mark-up Different between cost and sales price after adjustment for all the
above items. Sometimes called “markon”
Cost Retail
Financial Asset
- These assets are considered as investments.
- Investments of the company or entity provides benefits such as:
a. It increases their assets by collecting income or dividends
b. It provides them control over another entity (equity securities)
c. It opens a funding for future use or acquisition of other assets
Does not have significant Has Significant Influence Has control over the investee
influence
Illustration:
2019 – TVN Company bought 248 000 ordinary shares of S Company for P10 per share as an equity security
held for sale for P2 530 000 including transaction cost.
2020 – At this year the fair market value of the shares was P11 per share.
2021 – The current value of the ordinary shares this year is P2 627 000. TVN Company sold the following
shares for P2 550 000 to KBS Company.
Journal Entries:
Cash 2,550,000
Loss on Sale of Financial Asset -FVPL 77,000
Financial Assets - FVPL 2,627,000
Characteristics of FVPL
- These assets are not held for sale
- The entity clearly decided its nature as a FVOCI
- Account titles involve are: ‘Financial Asset-FVOCI’ and ‘Retained Earnings’
- Gains or losses per year are part of other comprehensive income
Illustration:
2019 – SBU Company bought 425 000 ordinary shares of CEU Corp. worth P10 per share to be measured
as FVOCI; while acquiring the said asset, SBU Company incurred P22 000 as commission for the sale.
2020 – At this year the fair market value of the shares was P8.5 per share.
2021 – The current value of the ordinary shares this year is P13. A Company sold the following shares for
P5 850 000 to C Company.
Journal Entry
2020: Unrealized Loss -FVOCI [(425 000x8.5)-4 272 000] 659 500
Financial Asset-FVOCI 659 500
B. BONUS/SHARE DIVIDEND
- Investee company distributes as dividends shares in the same class held by the shareholders.
- Distribution of bonus issue in the same class of share capital increases the number of shares,
held by each shareholder, without any charge in the total shareholder’s equity balance or net
assets of the distributing corporation.
- The equity of each shareholder after the receipt of the bonus is also unchanged
- Thus, an investor receiving a bonus issue record the transaction by a MEMO entry.
- The transaction merely adjusts the carrying amount per share held by the investor.
SPECIAL BONUS ISSUE
- Treated similarly with property dividends
- Shares received as bonus issue is recognized at fair value with a credit to dividend revenue.
C. PROPERTY DIVIDEND
- The investee distributes dividends in the form of non-cash assets
- The investor records the asset received as dividend revenue at the asset’s fair value.
A company owns 2400 Ordinary shares Of the corporation acquired at 100 peso per share. The
shares represent less than 5% of ownership in B corporation.
b. Received a bonus issue of one ordinary share for every four shares held
Memo entry. Received additional 600 shares of B Corp. ordinary shares as bonus
issue on 2,400 shares previously held.
c. Received a preference share dividend of one share for every four ordinary shares held. Ordinary
share is selling ex-dividend at P125 one preference share is selling at P250
Equity Investments - A Preference 150,000
Dividend Revenue 150,000
600 x 250=150,000
e. Receive a property dividend of one ordinary share of C for every six shares of B held. Market
price of C’s ordinary share is P50 per share.
Equity Investments - C Ordinary. 20,000
Dividend Revenue 20,000
2,400/6 = 400 shares x 50
V. INVESTMENT IN ASSOCIATES
ASSOCIATE
- Measured using the equity method of accounting- based on the economic relationship between the investor
and investee.
- Equity method is a method of accounting whereby the investment is initially recognized at cost and the
carrying amount is increased or decreased to recognize the investor’s share of the profit or loss of the
investee after the date of acquisition.
- The investor’s profit or loss includes its share of the investee’s profit or loss and the investor’s other
comprehensive income includes its share of the investee’s other comprehensive income.
- Distributions received from an investee reduce the carrying amount of the investment.
- The investor and investee are viewed as a single economic unit- they are one on the same
- The equity method is applicable when the investor has a significant influence over the investee.
Cash 4,000,000
Cash 500,000
- PAS 28, paragraph 32- any excess of the investor’s share of the net fair value of the associate’s identifiable
assets and liabilities over the cost of the investment is included as income in the determination of the investor’s
share of associate’s profit or loss in the period in which the investment is acquired.
ILLUSTRATION
At the beginning of the current year, an investor purchases 40% of the ordinary shares
outstanding of an investee for P10,000,000 when the net assets of the investee
amounted to P30,000,000. At the acquisition date, the carrying amounts of the
identifiable assets and liabilities of the investee were equal to fair value.
IMPAIRMENT LOSS
- If there is an indication that an investment in associate may be impaired, an impairment loss shall be recognized
whenever the carrying amount of the investment in associate exceeds the recoverable amount.
- The recoverable amount is measured as higher between fair value less cost of disposal and value in
use.
- Fair value is the price that would be received to sell an asset in an orderly transaction between market
participants at the measurement date.
- Value in use is the present value of the estimated future cash flows expected to arise from the continuing use of
an asset and from the ultimate disposal.
- Since goodwill is not separately recognized from the investment amount, the impairment loss recognized is
applied to the investment as a whole.
- The recoverable amount of an investment in an associate is assessed for each individual associate.
- When an associate has outstanding cumulative preference shares, the investor shall compute its shares of
earnings or losses after deducting the preference dividends, whether or not such dividends are declared.
- When an associate has outstanding non-cumulative preference shares, the investor shall compute its share of
earnings after deducting the preference dividends when declared.
PAS 28, paragraph 22- an investor shall discontinue the use of it from the date that it ceases to have significant
influence over an associate. Consequently, the investor shall account for the investment as follows:
a. Financial assets at fair value through profit or loss.
b. Financial asset at fair value through other comprehensive income
c. Non Marketable investment at cost or investment in an unquoted equity instrument
PAS 28, Basis of Conclusion 18- requires an investor that continues to have significant influence over an associate to
apply the equity method even if the associate is operating under severe long-term restrictions that significantly impair the
ability to transfer funds to the investor. Significant influence must be lost before the equity method ceases to be
applicable.
- PAS 28, paragraph 22- on the date that the significant influence is lost, the investor shall measure any retained
investment in the associate at fair value.
PAS 28, paragraph 17- an investment in associate shall not be accounted for using the equity method if the investor is a
parent that is exempt from participating consolidated financial statements or if all of the following apply:
a. The investor is a wholly-owned subsidiary or a partially-owned subsidiary of another entity and the
owners do not object to the investor not applying the equity method.
b. The investor’s debt and equity instruments are not traded in a public market or “over the counter”
market.
c. The investor did not file or it is not the process of filing financial statements with the SEC for the purpose
of issuing any class of instruments in a public market.
d. The ultimate or any intermediate parent of the investor produces consolidated financial statements
available for public use that comply with PFRS.
In these circumstances, the investment is accounted for as long as follows:
a. Financial asset at fair value through profit or loss
b. Financial assets at fair value through other comprehensive income.
c. Non Marketable investment at cost of investment in an unquoted equity instrument.
- The most recently available financial statements of the associate or joint venture are used.
- The share of the investor in profit or loss of the associate or joint venture shall be based on the date of the
financial statements of the investor.
- Adjustments shall be made for any significant transactions that occurred between the date of the associate’s
financial statements and the date of the investor’s financial statements.
- The difference between the reporting dates should not be more than 3 months.
- The associate’s financial statements should be adjusted for any discrepancy in accounting policies.
OTHER ISSUES
- When the investor’s interest in an associate or joint venture is reduced to zero (continuous loss recognized from
investment), additional losses are provided for and a liability is recognized only to the extent that the investor has
incurred obligations or made payments on behalf of the associate or joint venture.
- If the associate or joint venture subsequently reports profits, the investor resumes recognizing its share of those
profits only after its share of the profits equals the share of losses recognized.
- After the application of the equity method, the investor determines whether it is necessary to recognize
impairment loss. The entire carrying amount of the investment is tested for impairment by comparing its
recoverable amount with its carrying amount.
An entity shall disclose for each joint arrangement and associate that is material to the reporting entity:
- the name of the joint arrangement or associate
- the nature of the entity’s relationship with the joint arrangement or associate.
- the principal place of business of the joint arrangement or associate.
- the proportion of ownership interest held or proportion of voting rights, if different.
- fair value of investment in joint venture or associates for which there are published price quotations
- summarized financial information about the joint venture or associates, including aggregated assets, liabilities,
revenues and expenses.
- nature and extent of restrictions on the ability of the associate to distribute dividends to investor and to repay
loans to investors.
- unrecognized share of losses of an associate, cumulatively and for the period.
Debt Securities or Investments represents the creditor’s relationship with an entity. It also possesses three main
characteristics which are maturity value, maturity date, and percentage of rate. Certain measurement of debt
investments are:
a. at Amortized cost
b. Fair Value through Other Comprehensive Income
c. Fair Value through Profit or Loss
Illustration (Discount):
On January 1, 2020 Ceasar Corporation bought 14% bonds investment worth P2 022 500 from
Bellaman Company for P1 900 500 including commission expense of P85 000. The investment yields
for 16% interest rate and was classified to be at Amortized Cost. The bonds will mature on December
31, 2023 and payable of its interest is annually. On June 30, 2021, the bonds were quoted at 108 and
were sold.
Amortization Table:
Journal Entry:
Key Takeaways:
✔Premium deducts its amortization on the investment while discounts adds its amortization
to the investment until it reached the face value amount at the maturity date.
✔When on sale of investment before maturity date, interest income and investment must be
adjusted.
Illustration:
On January 1, 2020 A Company bought 10% bonds investment worth P4 000 000 from B
Company for P4 206 000 including commission expense of P85 000 that yields 8% interest rate
which was classified as FVOCI. The bonds will mature on December 31, 2022 and payable of its
interest is annually. On Dec. 31, 2020 the fair market value of the bonds was quoted at 106. On
January 2021, the bonds were quoted at 98 and were sold.
Amortization Table (Premium):
Dec. 2020 400 000 336 480 (63 520) 4 142 480
Dec. 2021 400 000 331 398 (68 602) 4 073 878
Dec. 2022 400 000 325 910 (74 090) 3 999 788/
4 000 000
Key Takeaways:
✔Fair Value through OCI uses the effective rate for its interest income.
✔When realizing gains or losses, it is deemed to be compared to the current carrying
value of the investment based on the amortization table
✔When another adjustment arises, get the difference of the cumulative gains or losses
from the previous adjustment then subtract it to the current adjustment amount.
✔Unrealized gains or losses after sale should be closed.
Illustration:
On January 1, 2020 A Company bought 10% bonds investment worth P2 500 000 from B Company for P2
400 000 including commission expense of P100 000 that yields 8% interest rate which was classified as
FVPL. The bonds will mature on December 31, 2022 and payable of its interest is semiannually every June
and December 31. On Dec. 31, 2020 the fair market value of the bonds was quoted at 116. On January
2021, the bonds were sold for P2 450 000.
Journal Entry:
Cash P2 400 00
Financial Asset-FVPL
Key Takeaways:
✔Fair Value through PL only recognizes nominal interest for its interest income.
✔If the payment method is said to be semi-annually, interest rate may be split into half.
✔Interest income may be solved by PRT; P = as value of the bonds, R = nominal rate, T = length of
time of the interest divided by 12.
✔When realizing gains or losses, get the difference of the quoted price and cost.