CHAPTER 3 NOTES TO FINAN CIALSTATEMENTS Events after reporting period Problem 3-1 (AICPA Adapted) Dean Company acquired 100% of Morey Company in the prior year. During the current year, the individual entities included in their : financial statements the following: ‘Dean Morey Key officers’ salaries 750,000 500,000 Officers’ expenses 200,000 100,000 Loans to officers 1,250,000 500,000 Intercompany sales 1,500,000 A What total amount should be reported as related party disclosures in the notes to Dean Company’s consolidated financial statements for the current year? a. 1,500,000 b.- 1,550,000 c. 1,750,000 d. 3,000,000 te Solution 3-1 Answer d Loans to officers: Dean : 1,250,000 Morey i 500,000 Key officers’ salaries: é : - Dean _ 730,000 Morey _ $00,000 ‘Total - 3,000,000 Intercompany sales are no longer disclosed when consolidated financial statements are prepared. 43 Scanned with CamScannerProblem 3-2 (AICPA Adapted) During the current year, Jane Company engaged in the following transactions: Key management personnel compensation 2,000,000 Sales to affiliated entities 3,000,000 What total amount should be included as related party disclosures in Jane Company’s separate financial statements for the current year? a. 5,000,000 b. 3,000,000 c. 2,000,000 di 7p 0, Solution 3-2 Answer a 5,000,000 PAS 24, paragraph 16, requires disclosure of key management personnel compensation. . The sales to affiliated entities shall be disclosed in Jane Company’s separate financial statements but eliminated in consolidated financial statements. Problem 3-3 (IFRS) Gibson Company reported that remuneration and other payments made to the entity’s chief executive officer during the current year were: Annual salary é 2,000,000 Share options and other share-based payments 1,000,000 Contributions to retirement benefit plan 500,000 Reimbursement of travel expenses for business trips 1,200,000 What total amount should be disclosed as “compensation” to key management personnel? a. 3,500,000 . ‘ b: 4,700,000 c. 3,000,000 ' d. 2,500,000 Solution 3-3 Answer a All, except reimbursement of travel expenses. 44 Scanned with CamScannerProblem 3-4 (IFRS) The audit of Anne Company for the year ended December 31, 2019 was completed on March 1, 2020. The financial statements were signed by the managing director Ha Marek 15, 2020 and approved by the shareholders on March * On January 15, 2020, a customer owing P900,000 to Anne Company filed for bankruptcy. The financial statements included an allowance for doubtful accounts pertaining to this customer of P100,000. * Anne Company’sissued share capital comprised 100,000 ordinary shares with P100 par value. The entity issued additional 25,000 shares on March 1, 2020 at par value. Equipment with carrying amount of P525,000 was destroyed by fire on December 15, 2019. Anne Company had booked a receivable of P400,000 from the insurance entity on December 31, 2019. After the insurance entity completed an investigation on February 1, 2020, it was discovered that the fire took place due to negligence of the machine operator. As a result, the insurer’s liability ‘was zero on this claim. What total amount should be reported as “adjustiog events” December 31, 2019? a. 1,300,000 - — b. 1,200,000 c. 3,800,000 d. 3,700,000 Solution 3-4 Answer b Doubtful accounts (900,000 minus allowance 100,000) 800,000 Loss on claim receivable 400,000 Total adjusting events 1,200,000 45 Scanned with CamScannerProblem 3-5 (IFRS) The end of reporting period of Norway Company is December 31, 2019 and the bnancial statements for 2019 are authorized for issue on March 15, 2020. * On December 31, 2019, Norway Company had a receivable of P400,000 from a customer that is due 60 days after the end of reporting period. On January 15, 2020, a receiver was - appointed for the said customer. The receiver informed Norway that the P400,000 would be paid in full by June 30, 2020. . * Norway Company had equity investments held for trading. On December 31, 2019, these investments were recorded at the fair value of P5,000,000. During the period up to February 15,2020, there Was a steady decline in the fair value of all the shares in the portfolio; and on February 15, 2020, the fair value had fallen to P2,000,000. \ * Norway Company had reported a contingent liability on December 31, 2019 related to a court case in which Norway Company was the defendant. The case was not heard until the first week of February 2020. On February 15,2020, the judge handed down a decision against Norway Company. The judge determined that Norway Company was liable to pay damages totaling P3,000,000. * On December 31,2019, Norway Company had a receivable from a large customer in the amount of P3,500,000. On Ji january 31, 2020, Norway Company was advised in writing by the liquidator of the said customer that the customer was insolvent and that only 10% of the receivable will be paid on April 30, 2020. What total amount should be reported as “adjusting events” on December 31,2019? 6,150,000 9,150,000 9,550,000 6,500,000 Solution 3-5 Answer a ot Litigation loss : 3,000,000 - Doubtful accounts expense (3,500,000 x 90%) 3,150,000 Total amount of adjusting events 6,150,000 ‘The financial assets held for trading are measured at fair value which must be determined at the end of each reporting period. poop 46 Scanned with CamScannerProblem 3-6 (IFRS) Ginger Company is completing the preparation of the financial statements for the year ended December 31, 2019. The financial statements are authorized for issue on March 31, 2020. * On March 15,2020, a dividend of P3,000,000 was declared and acontractual profit share payment of P1,000,000 was made, based on the profit for the year ended December 31, 2019. * OnFebruary 1,2020, acustomer went into liquidation having owed the entity P500,000 for the past 5 months. No allowance had been made against this account in the financial statements. * On March 20,2020, a manufacturing plant was destroyed by fire resulting in a financial loss of P2,500,000. What total amount should be recognized in profit or loss for 2019 to reflect adjusting events after the end of reporting period? 4,000,000 3,000,000 2,500,000 1,500,000 pegs Solution 3-6 Answer d Contractual profit share payment 1,000,000 Doubtful accounts expense 500,000 Total adjusting events 1,500,000 The dividend declaration isnot recognized in profit or loss buta deduction from retained earnings on March 15, 2020. The manufacturing plant destroyed by fire on March 20, 2020isa nonadjusting event requiring disclosure only in the financial statements for 2019. The fire loss should be recognized in 2020.. 47 Scanned with CamScannerProblem 3-7 (IFRS) During 2019, Marian Company was sued by a competitor for P5,000,000 for infringement of a patent. Based on the advice of the legal counsel, the entity accrued the sum of P3,000,000 as a provision on December 31, 2019. Subsequently, on March 15, 2020, the Supreme Court decided in favor of the party alleging infringement of the patent and ordered the defendant to pay the aggrieved party a sum of P3,500,000. ‘The financial statements were prepared by management on February 15, 2020 and approved by the board of directors on March 31, 2020. 1. What amount should be recognized as accrued liability on December 31, 2019? 5,000,000 3,500,000 c. 3,000,000 d. 1,500,000 2. Whatamount should be adjusted on December 31,2019 in relation tothis event? a. 1,500,000 s b. 3,000,000 c. 500,000 d. 0 Solution 3-7 é eop Question 1 Answer b Accrued liability — December 31, 2019 3,500,000 The actual amount of P3,500,000 should be accrued as liability because the suit was decided on March 15, 2020 which is pri issuanc of the financial statements on March 31, "2026, ee ° -Question 2 Answer c Accrued liability — December 31, 2019 3,500,000 Provision already accrued 3,000,000 Increase in accrued liability” 500,000 48 Scanned with CamScannerProblem 3-8 (IFRS) Caroline Company provided the following events that occurred after December 31, 2019: - Jan. 15, 2020 P3,000,000 of accounts receivable was written off due to the bankruptcy of a major customer: Feb. 15,2020 _A shipping vessel of the entity with carrying amount of P5,000,000 was completely lost at séa because of ahurricane. Mar. 10, 2020 A court case involving the entity as the defendant was settled and the entity was obligated to pay the plaintiff P1,500,000. The entity previously has not recogni aliability for the suit because management deemed it possible that the entity would lose the case. Mar. 15, 2020 A factory with a carrying amount of P4,000,000 was completely razed by forest fire that erupted in the vicinity. The management completed the draft of the firiancial statements for 2019 on Fabruary 10, 2020. On March 31, 2026, the board of directors authorized the financial statements for issue. The entity announced the profit and other selected information on March 22, 2020. The financial statements were approved by shareholders on April 2, 2020 and filed with the regulatory agency the very next day. What total: amount should be reported as adjusting events on December 31,2019? Tee 3 a. 9,500,000 b. 8,500,000 c. 9,000,000 d. 4,500,000 Solution 3-8 Answer d Accounts written off. . 3,000,000 Loss from lawsuit 1,500,000. Total adjusting events 4,500,000. The loss.on the shipping vessel and the fire loss should be recognized :in 2020 and not in 2019. 49 Scanned with CamScanner