Statement of Financial Position 1 Chapter 1 Statement of Financial Position Related standard: PAS 1 Presentation of Financial Statements Learning Objectives 1. Enumerate and describe the components of a complete set of financial statements. 2. Classify assets and liabilities into current and noncurrent. 3._ Prepare a statement of financial position. Financial Statements Financial statements are the “structured representation of an entity’s financial position and results of its operations.” (PAS 19) Financial statements are the end product of the financial reporting process and the means by which the information gathered and processed is periodically communicated to users. The financial statements of an entity pertain only to that entity and not to the industry where the entity belongs or the economy as a whole. General purpose financial statements (‘financial statements’) are “those intended to meet the needs of users who are not in a position to require an entity to prepare reports tailored to their particular information needs.” (PAs 1.7) General purpose financial statements cater to most of the common needs of a wide range of external users. General purpose financial statements are the subject matter of the Copeeptual Framework and the PFRSs. Purpose of financial statements 1. Primary objective: To provide information about the financial position, financial performance, and cash flows of an entity that is useful to a wide range of users in making economic decisions. 2. Secondary objective: To show the results of management's stewardship over the entity's resources. Scanned with CamScanner2 Chapter 1 To meet the objective, financial statements provide information about an entity's: Assets (economic resources); Liabilities (economic obligations); Equity; Income; Expenses; Contributions by, and distributions to, owners; and Cash flows. amp aos This information, along with other information in the notes, helps users assess the entity’s prospects for future net cash inflows. Complete set of financial statements A complete set of financial statements consist of: Statement of financial position; Statement of profit or loss and other comprehensive income; Statement of changes in equity; Statement of cash flows; Notes; (5a) Comparative information; and 6. Additional statement of financial position (required only when certain instances occur). FR eye An entity may use other titles for the statements. For example, an entity may use the title “balance sheet” in lieu of “statement of financial position” or “statement of comprehensive income” instead of “statement of profit or loss and other comprehensive income.” However, an “income statement” is different from a “statement of profit or loss and other comprehensive income” or a “statement of comprehensive income.” We will elaborate. on this later. Scanned with CamScannerStatement of Financial Position 3 Reports that are presented outside of the financial statements, such as financial reviews by management, environmental reports and value added statements, are outside the scope of PERSs. General Features of financial statements 1. Fair Presentation and Compliance with PERSs Fair presentation is faithfully representing, in the financial statements, the effects of transactions and other events in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Conceptual Framework. Compliance with the PFRSs is presumed to result in fairly presented financial statements. Fair presentation also requires the proper selection and application of accounting policies, proper presentation of information, and provision of additional disclosures whenever relevant to the understanding of the financial statements. Inappropriate accounting policies cannot be rectified by mere disclosure. PAS 1 requires an entity whose financial statements comply with PFRSs to make an explicit and unreserved statement of such compliance in the notes. However, an entity shall not make such statement unless it complies with all the requirements of PFRSs. There may be cases wherein an entity’s management concludes that compliance with a PERS requirement is misleading. In such cases, PAS 1 permits a departure from a PERS requirement if the relevant regulatory framework requires or allows such a departure. When an entity departs from a PFRS requirement, it shall disclose the management's conclusion as to. the fair presentation of the financial statements; that all other requirements of the PFRSs are complied with; the title of the Scanned with CamScannerChapter 1 PERS from which the entity has departed; and the financial effect of the departure. Going Concern Financial statements are normally prepared on a going concern basis unless the entity has an intention to liquidate or has no other alternative but to do so. When preparing financial statements, management shall assess the entity’s ability to continue as a going concern, taking into account all available information about the future, which is at least, but not limited to, 12 months from the reporting date. If the entity has a history of profitable operations and ready access to financial resources, management may conclude that the entity is a going concern without detailed analysis. If there are material uncertainties on the entity’s ability to continue as a going concern, those uncertainties shall be disclosed. » If the entity is not a going concern, its financial statements shall be prepared using another basis. This fact shall be disclosed, including the basis used, and the reason why the entity is not regarded as a going concem. Accrual Basis of Accounting, All financial statements shall be prepared using the accrual basis of accounting except for the statement‘of cash flows, which is prepared using cash basis. Materiality and Aggregation Each material class of similar items is presented separately. A class of similar items is called a “line item.” Dissimilar items are presented separately unless they are immaterial. Individually immaterial items are aggregated with other items. Scanned with CamScannerStatement of Financial Position 5 Offsetting Assets and liabilities or income.and expenses are presented separately and are not offset, unless offsetting is required or permitted by a PFRS. Offsetting is permitted when it reflects the substance of the transaction. Examples of offsetting: a. Presenting gains or losses from sales of assets net of the related selling expenses. b. Presenting at net amount the unrealized gains and losses arising from trading securities and from translation of foreign currency denominated assets and liabilities, except if they are material. c. Presenting a loss from a provision net of a reimbursement from a third party. Measuring assets net of valuation allowances is not offsetting. For example, deducting allowance for doubtful accounts from accounts receivables or deducting accumulated depreciation from a building account is not offsetting. 6. Frequency of reporting Financial statements are prepared at least annually. If an entity changes its reporting period to a period longer or shorter than one year, it shall disclose the following: a. The period covered by the financial statements: b. The reason for using a longer or shorter period, and c. The fact that amounts presented in the financial statements are not entirely comparable. 7. Comparative Information PAS 1 requires an entity to present comparative information in respect of the preceding period for all amounts reported in the current period’s financial statements, unless another PFRS requires otherwise. ‘As a minimum, an entity presents two of each of the statements and related notes. For example, when an entity Scanned with CamScanner6 Chapter 1 presents its 20x2 current year financial statements, the 20x1 preceding year financial statements shall also be presented as comparative information. PAS 1 permits entities to provide comparative information in addition to the minimum requirement. For example, an entity may provide a third statement of comprehensive income. In this case, however, the entity need not provide a third statement for the other financial statements, but must to provide the related notes for that additional statement of comprehensive income. Additional Statement of financial position As mentioned earlier, a complete set of financial statements includes an additional statement of financial position when certain instances occur. Those instances are as follows: a. The entity applies an accounting policy retrospectively, makes jj a retrospective restatement of items in its financial statements, A or reclassifies items in its financial statements; and b. The instance in (a) has a material effect on the information in the statement of financial position at the beginning of the preceding period. For example, if any of the instances above occur, the entity shall present three statements of financial position as follows: Statement of financial position Date 1._ Current year >_ As at December 31, 20x2 2. Preceding year > As at December 31, 20x1 (comparative information) Sipe 2 3._ Additional [> As at January 1, 20x1 The opening (additional) statement of financial position is, dated as at the beginning of the preceding period even if the entity presents comparative information for earlier periods. The entity need not present the related notes to the opening statement of financial position. Scanned with CamScannerStatement of Financial Position 7 8. Consistency of presentation The presentation and classification of items in the financial statements is retained from one period to the next unless a change in presentation: a. is required by a PERS; or b. results in information that is reliable and more relevant. A change in presentation requires the reclassification of items in the comparative information. If the effect of a reclassification is material, the entity shall provide the “additional statement of financial position” discussed earlier. 2) Summary: General Features (1. Fair presentation & Compliance | with PERS 5. Offsetting | 2. Going Concern 6. Frequency of reporting period, | 3. Accrual Basis 7. Comparative information | | 4. Matetiality & aggregation __8._ Consistency of presentation | Structure and content of financial statements Fach of the financial statements shall be presented with equal prominence and shall be clearly identified and distinguished from other information in the same published document. For example, financial statements are usually included in an annual report, which also contains other information. The PFRSs apply only to the financial statements and not necessarily to the other information. } The following information shall be displayed prominently and repeatedly ‘whenever relevant to the understanding of the information presented: a. The name of the reporting entity b. Whether the statements are for the individual entity or for a group of entities ¢. The date of the end of the reporting period or the périod covered by the financial statements d. The presentation currency e. The level of rounding used (e.g,, thousands, millions, etc.) Scanned with CamScanner8 Chapter 1 Illustration: A heading for a financial statement is shown below: Name of the reporting entity indicating that the financial statement ‘ABC Group Statement of financial position As of December 31, 20x2 portale b 8 arenas (in thousands of Philippine Pesos) - Date of the end of the repoiting period Level of rounding-off and a presentation currency The statement of financial position is dated as at. the end of the reporting period while the other financial statements are dated for the period that they cover. PAS 1 requires particular disclosures to be presented either in the notes or on the face of the other financial statements (eg., footnote disclosures). Other disclosures are addressed by other PFRSs. Management’s Responsibility over Financial Statements The management is responsible for an entity's financial statements. The responsibility encompasses: a._the preparation and fair presentation of financial statements in accordance with PFRSs.; internal control over financial reporting; going concern assessment; . oversight over the financial reporting process; and review and approval of financial statements. eaos The responsibilities are expressly stated in a document called “Statement of Management's Responsibility for Financial Statements,” which is attached to the financial statements as a cover letter. This document is signed by the entity’s a. Chairman of the Board (or equivalent), b. Chief Executive Officer (or equivalent), and c. Chief Financial Officer (or equivalent) Scanned with CamScannerStatement of Financial Position 9 Statement of Financial Position The statement of financial position shows the entity’s financial condition (i.e., status of assets, liabilities and equity) as at a certain date. It includes line items “ that present the following amounts: Property, plant and equipment; Investment property; Intangible assets; Financial assets (excluding (e), (h) and (i)); Investments accounted for using the equity method; Biological assets; Inventories; . Trade and other receivables; Cash and cash equivalents; Assets held for sale, including disposal groups; Trade and other payables; Provisions; . Financial liabilities (excluding (k) and (I)); . Current tax liabilities and current tax assets; Deferred tax liabilities and deferred tax assets; . Liabilities included in disposal groups; Non-controlling interests; and Issued capital and reserves attributable to owners of the parent. (PAS 1.54) POVPOBS SSE RET Tra meno oe \) A line item is a caption used to describe a group of accounts with similar nature. PAS 1 does not prescribe the order or format of presenting items in the statement of financial position. The foregoing is simply a list of items that are sufficiently different in nature or function to warrant separate presentation. Accordingly, an entity may modify the descriptions used and the sequence of their presentation to suit the nature of the entity and its transactions. Moreover, additional line items may be presented whenever relevant to the understanding of the entity’s financial position. Scanned with CamScanner10 Chapter 1 Presentation A statement of financial position may be presented in a “classified” or an “unclassified” manner. a. A classified presentation shows distinctions between current and noncurrent assets and current and noncurrent liabilities. b. An unclassified presentation (also called ‘based on liquidity’) shows no distinction between current and noncurrent items. CLASSIFIED. UNCLASSIFIED Investments in equity instruments Property, plant and equipment RRR RR RE = x = a ae x x ss x = A classified presentation shall be used except when an unclassified presentation provides information that is reliable and more relevant. When that exception applies; assets and liabilities are presented in order of liquidity (this is normally the case for banks and other financial institutions). PAS 1 also permits a mixed presentation, i.e., presenting some assets and liabilities using a current/non-current classification and others in order of liquidity. This may be appropriate when the entity has diverse operations. Whichever method is used, PAS 1 requires the disclosure of items that are expected to be recovered or settled (a) within 12 months and (b) beyond 12 months, after the reporting period. A classified presentation highlights an entity’s working capital and facilitates the computation of liquidity and solvency ratios. Scanned with CamScannerStatement of Financial Position u > Working capital = Current Assets - Current Liabilities Current assets and Current liabilities Current Assets Current Liabilities - are assets that are: - are liabilities that are: Sal a. Expected to be realized, sold, | a. Expected to be settled in the or consumed in the entity's entity's normal operating normal operating cycle; cycle; b. Held primarily for trading; | b. Held primarily for trading; c. Expected to be realized within | c. Due to be seffled within 12 12 months after the reporting months after the reporting period; or period; or d. Cash or cash equivalent, | d. The entity does not have the unless restricted from being right at the end of the exchanged or used to settle a reporting period to defer liability for at least twelve settlement of the liability for months after the reporting at least twelve months after period. the reporting period. All other assets and liabilities are classified as noncurrent. “The operating cycle of an entity is the time between the acquisition of assets for processing and their realization in cash or cash equivalents. When the entity’s normal operating cycle is not clearly identifiable, it is assumed to be 12 months.” (PAS 1.68) Assets and liabilities that are realized or settled as part of the entity's normal operating cycle (eg, trade receivables, inventory, trade payables, and some accruals for employee and other operating costs) are presented as current, even if they are expected to be realized or settled beyond 12 months after the reporting period. Assets and ‘liabilities that do not form part of the entity's normal operating cycle (e.g., non-operating assets and liabilities) are presented as current only when they are expected to be realized or settled within 12 months aftér the reporting period. Scanned with CamScanner12 Chapter 1 Deferred tax assets and liabilities are always presented as noncurrent items in a classified statement of financial position, regardless of their expected dates of reversal. Examples: Current assets Current liabilities * Cash and cash equivalents |e Accounts payable ¢ Accounts receivable ¢ Salaries payable © Non-trade receivable * Dividends payable Income (Current) tax payable Unearned revenue collectible within 12 months e Held for trading securities «Inventory ¢ Portion of notes /loans/ Prepaid assets bonds payable due within L 12 months Noncurrent assets Noncurrent liabilities * Property, plant & Equipment |e Portion of notes/loans/ © Non-trade receivable bonds payable due beyond collectible beyond 12 12 months months © Deferred tax liability Investment in associate «Investment property ¢ Intangible assets ¢ Deferred tax asset Refinancing agreement A long-term obligation that is maturing within 12 months after the reporting period is classified as current, even if a refinancing agreement to reschedule payments on a long-term basis is completed after the reporting period and before the financial statements are authorized for issue. However, the obligation is classified as noncurrent if the entity has the right, at the end of the reporting period, to roll over the obligation. for at least twelve months after the reporting period under an existing loan facility. Without such right, the entity does Scanned with CamScanner‘Statement of Financial Position 13 not consider the potential to refinance the obligation and classifies the obligation as current. > Refinancing refers to the replacement of an existing debt with a new one but with different terms, e.g., an extended maturity date or a revised payment schedule. Refinancing normally entails a fee or penalty. A refinancing where the debtor is under financial distress is called “troubled debt restructuring.” > Loan facility refers to a credit line. Illustration: Fact pattern: Entity A’s current reporting date is December 31, 20x1. A bank Analysis: A currently maturing obligation (ie, due within 12 months after the reporting date) is classified as current even if that obligation used to be noncurrent. Therefore, the loan is presented as a current liability in Entity A’s December 31, 20x1 statement of financial position. [case 1: No right to defer settlement | On January 15, 20x2, Entity A enters into a refinancing agreement | | to extend the maturity date of the loan td October 31, 20x7. Entity A’s financial statements are authorized for issue on March 31, 20x2, crea S| Analysis; Continuing with the general rule, a currently maturing obligation is classified as current even if a refinancing agreement, on a long-term’ basis, is completed after the reporting period and before» the financial statements are authorized for issue. Accordingly, the loan is nevertheless presented as a current liability. Scanned with CamScanner14 Chapter 1 Case 2: With right to defer settlement On January 15, 20x2, Entity A enters into a refinancing agreement with the bank to roll over the loan for another four years. Entity A _ has the option to roll over the loan under the existing loan contract and, as of December 31, 20x1, Entity A has complied with all the conditions for the rollover. Analysis: The loan is presented as a noncurrent liability in Entity A’s Dec. 31, 20x] statement of financial position because Entity A has the right, as of Dec. 31, 20x1, to roll over the obligation for at least twelve months after the reporting period under the existing loan agreement. Liabilities payable on demand Liabilities that are payable upon the demand of the lender are classified as current. A long-term obligation may become payable on demand as a result of a breach of a loan provision, Such an obligation is classified as current even if the lender agreed, after the reporting period and before the authorization of the financial-statements for | issue, not to demand payment. This is because the entity does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting period. However the liability is noncurrent if the lender provides the entity by the end of the reporting period (e.g, on or before December 31) a grace period ending at least twelve months after the reporting period, within which the entity can rectify the breach and during which the lender cannot demand immediate repayment. Tllustration: In 20x1, Entity A took a long-term loan from a bank. The loan agreement requires Entity A to maintain a current ratio of 2:1. If the current ratio falls below 2:1, the loan becomes payable on demand. On December 31, 20x1 (reporting date), Entity A’s Scanned with CamScanner| Statement of Financial Position 15 current ratio was 1.8:1, below the agreed level. Entity A’s financial statements were authorized for issue on March 31, 20x2: Case 1: On January 5, 20x2, the bank gives Entity A a chance to rectify the breach of loan agreement within the next 12 months and promises not to demand immediate repayment within this period. Analysis: The loan is classified as current liability because the grace period is received after the reporting date. Case 2: On December 31, 20x1, the bank gives Entity A a chance to rectify the breach of loan agreement within the next 12 months and promises not to demand immediate repayment within this period. Analysis: The loan is classified as noncurrent liability because the grace period is received by the reporting date. Illustration 1: Current assets The ledger of ABC Co, as of December 31, 20x1 includes the _following: Assets f Cash 5,000: Trade accounts receivable (net of ?5,000 credit balance in accts.) 20,000 Held for trading securities 40,000 Financial assets designated at FVPL 15,000 Investment in equity securities at FVOCL 35,000 Investment in bonds measured at amortized cost (due in3 yrs) 30,000 Prepaid assets 5,000 Deferred tax asset (expected to reverse in 20x2) 6,000 Investment in Associate 18,000 Investment property 23,000 Sinking fund 19,000 Property, plant, and equipment 50,000 Goodwill 14,000 Totals 280,000 Scanned with CamScanner16 Chapter; Requirement: Compute for the total current assets. Solution: Current assets Cash 5,000 Trade accounts receivable (20,000 + 5,000) 25,000 Held for trading securities 40,000 Financial assets designated at FVPL 15,000 Prepaid assets 5,000 Total current assets 90,000 % Notes: @ Accounts receivables should not have abnormal balances, Therefore, the credit balance is added back to accounts receivable and presented as liability. @ Assets which are held primarily for trading (e.g,, financial assets measured at fair value through prfofit or loss ‘FVPL’ - Held for trading securities and Designated financial assets) are presented as current assets. © Investments in equity securities measured at fair value through other comprehensive income (FVOCI) are classified as noncurrent in the absence of evidence to the contrary. However, if the investment in FVOCI is expected to be realized within 12 months from the end of reporting period, the investment is classified as current. ‘ © Deferred tax assets are presented as noncurrent irrespective of their expected reversal dates. * Sinking fund parallels the classification. of the related liability on which the fund is set up. In the absence of evidence to the contrary, sinking fund is classified as noncurrent. <7" Investment in Associate, Investment property, Property, plant and equipment, and Goodwill are noncurrent items, Scanned with CamScannerStatement of Financial Position 7 Illustration 2: Current liabilities The ledger of ABC Co. as of December 31, 20x1 includes the following: Liabilities Bank overdraft 5,000 Trade accounts payable (net of P5,000 debit balance in accounts) 20,000 Notes payable (due in 20 semi-annual payments of P2,000) 40,000 Interest payable 15,000 Bonds payable (due on March 31, 20x2) 35,000 Discount on bonds payable (15,000) Dividends payable 5,000 Share dividends payable 6,000 Deferred tax liability (expected to reverse in 20:2) 18,000 Income tax payable 22,000 Contingent liability 50,000 Reserve for contingencies 14,000 Totals 215,000 Requirement: Compute for total current liabilities. Solution: Current liabilities Bank overdraft 5,000 Trade accounts payable (20,000 + P5,000) 25,000 Notes payable (P2,000 semi-annual instalment x 2) 4,000 Interest payable 15,000 Bonds payable (due on March 31, 20x2) 35,000 Discount on bonds payable : (15,000) Dividends payable 5,000 Income tax payable 22,000 Total current liabilities 96,000 § Notes: @ Bank overdrafts are repayable on demand, thus, they are classified as current liability. Scanned with CamScanner18 Chapter 1 @ Accounts payables should not have abnormal balances. Therefore, the debit balance is added back to accounts payable and presented as asset. * Only the currently maturing portion of the notes payable is classified as current liability. © Unless stated otherwise, interest payable, cash dividends payable, and income taxes payable are presumed to be due currently. @ The bonds payable (and the related discount) are classified as current because they mature within 12 months from end of reporting period. si @ Share dividends payable is not a liability but rather a contra- equity item. © Deferred tax liabilities are presented as noncurrent irrespective » of their expected reversal dates. @ Contingent liability is not recognized as liability but rather disclosed only in the notes if they are reasonably possible. @ Appropriated reserves for contingencies are components of equity: Illustration 3.1: Current and noncurrent liabilities ‘ The ledger of ABC Co. as of December 31, 20x1 includes the | following: + 10% Note payable 40,000 12% Note payable 60,000 14% Mortgage note payable 30,000 | Interest payable é Additional information: e ABC Cos financial statements were authorized for issue on April 15, 20x2. +The 10% note payable is due on July 1, 20x2 and'pays semi- annual interest every July 1 and December 31. On January 28, 20x2, ABC Co. entered into a refinancing agreement with a bank to refinance the entire note by issuing a long-term obligation. ABC Co. does not have the right, as of December Scanned with CamScanner‘Statement of Financial Position 19 31, 20x1, to roll over the existing obligation on a long-term basis. ¢ The 12% note payable is due on March 31, 20x2 and pays annual interest every March 31. On January 31, 20x2, ABC Co. extended the matutity of the note to March 31, 20x3. ABC Co. has the right to roll over the loan under the existing agreement. ‘ © The 14% mortgage note is due on December 31, 20x9. Per agreement with the creditor, ABC Co. is to pay quarterly interests on the note, failure to do so will render the note payable on demand. ABC Co. failed to pay the 3¢ and 4% quarterly interests on the note during 20x1. Requirement: Compute for the current liabilities. Solution: 10% Note payable 40,000 Interest payable on the 12% note (60,000 x 12% x 9/12) 5,400 14% Mortgage note payable 30,000 Interest payable on the 14% note (30,000 x 14% x 6/12) 2,100 Current liabilities 77,500 & Notes: © The 10% note is presented as current liability because, as of Dee. 31, 20x1, ABC Co. does not have a right to defer/postpone the settlement under the existing loan agreement. © The 12% note is noncurrent because ABC Co. has a right to defer settlement. However, since the 12% note pays annual interest every March 31 and there is no balance in the “Interest payable” account, the interest for the months of April to December 31, 20x1 must not have been recorded yet. The accrued interest is presented as current liability. © The 14% mortgage note is current because it is due on demand, Again, since the “interest payable” account has no balance, the unpaid interest for the 3 and 4% quarters must hot have been recorded yet. The accrued interest is computed and included in current liabilities. Scanned with CamScanner20 Chapter @ tis presumed that there are no unpaid interests on the 10% note because the scheduled interest payment dates are on July and December 31, which coincide with the reporting period. Illustration 3.2: Current and noncurrent liabilities The ledger of ABC Co. as of December 31, 20x1 includes the following: 15% Note payable 25,000 16% Bonds payable 50,000 18% Serial bonds payable 100,000 Interest payable : ‘Additional information: ABC Co.'s financial statements were authorized for issue on April 15, 20x2. The 15% note payable was issued on January 1, 20x1 and is due on January 1, 20x5. The note pays annual interest every year-end, The agreement with the lender provides that ABC Co. shall maintain an average current ratio of 2:1. If at any time the current ratio falls below the agreement, the note payable will become due on demand, As of the 3" quarter in 20x1, ABC Co.'s average current ratio is 0.50:1. Immediately, ABC Co. informed the lender of the breach of the agreement. On December 31, 20x1, the lender gave ABC Co. a’ grace period ending on December 31, 20x2 to rectify the deficiency in the current ratio. ABC Co. promised the creditor to liquidate some of its long-term investments in 20x2 to increase its current ratio. ¢ * The 16% bonds are 10-year bonds issued on December 31, 1992. The bonds pay annual interest every year-end. ¢ The 18% serial bonds are issued at face amount and are due in semi-annual installments of P10,000 every April 1 and September 30, Interests on the bonds are also due semi- annually. The last installment on the bonds is due on September 30, 20x7. Scanned with CamScannerStatement of Financial Position 21 Requirement: Compute for the current liabilities. Solution: 16% Bonds payable 50,000 Interest payable on the serial bonds (100K x 18% x3/12) 4,500 Current liabilities 54,500 4 Notes: The 15% note is noncurrent because ABC Co. received a grace period from the lender as of the end of reporting period (ic¢., December 31, 20x1) covering a 12-month period to rectify the breach of loan agreement. & The 16% bonds are presented as current liability because they mature on December 31, 20x2. @ The 18% serial bonds are due in 10 semi-annual installments (P100,000 face amount + P10,000 semi-annual installments) to be paid over 5 years (10 semi-annual installments + 2 installments per year). Since the last installment payment is due on September 20x7, the first installment will be paid on April 1, 20x3 (Le, two installments in each of years 20x3 through September 30, 20x7). Therefore, none of the serial bonds is currently maturing in 20x2, However, since interests are due semi-annually, the accrued interest on the serial bonds for 3 months (September 30 to December 31, 20x1) is computed and presented as current liability. @ It is presumed that there ate no unpaid interests on the 15% and 16% notes because their scheduled interest payment date is every year-end, which coincides with the reporting period. Scanned with CamScanner7 22 Chapter} Illustration 4: Working capital Below are the account balances prepared by the bookkeeper for ABC Co. as of December 31, 20x1: Assets Liabilities Cas 15,000 Accounts payable 20,000 Accounts receivable, net 44,000 Notes payable 100,000 Inventory 40,000 Prepaid income tax 8,000 Prepaid assets 5,000 Investment in subsidiary 10,000 Land held for sale 28,000 Property, plant, and equipment 50,000 Totals 200,000 120,000 Additional information: * Cash consists of the following: Petty cash fund (unreplenished petty cash expenses, P1,500) 2,000, Cash in bank (10,000) Payroll fund 14,000 Tax fund = 7,000, Cash to be contributed to a sinking fund established for | the retirement of bonds maturing on December 31, 20x3 2,000 Total Cash 15,000 * Checks amounting to P30,500 were written to suppliers and recorded on December 30, 20x1, resulting to a bank overdraft of P10,000. The checks were mailed on January 5, 20x2. Accounts receivable consists of the following: Accounts receivable 40,000 Allowance for uncollectability (8,000) Credit balance in customers’ accounts (3,000) Sale price of unsold goods sent on consignment to XYZ, Inc. at 120% of cost and excluded from ABC Co.'s inventory : 12,000 Accounts receivable, net 44,000 —— Scanned with CamScannerStatement of Financial Position 23 © The inventory includes cost of goods amounting to P10,000 that are expected to be sold beyond 12 months but within the ordinary course of business. Also, the inventory includes cost of consigned goods received on consignment from Alpha- Numerix Co. amounting to P5,000. © Prepaid income tax represents excess of payments for quarterly corporate income taxes during 20x1 over the actual annual corporate income tax as of December 31, 20x1. © Prepaid assets include a P2,000 security deposit on an operating lease which is expected to expire on March 31, 20x3. The security deposit will be received on lease expiration. e The land qualified for classification as “asset held for sale” under PFRS 5 Non-current Assets Held for Sale and Discontinued Operations as of December 31, 20x1. Accounts payable is net of P6,000 debit balance in’ suppliers’ accounts. Accounts payable includes the cost of goods held on consignment from Alpha-Numerix Co. which were included in inventory. «The notes payable are dated July 1, 20x1 and are due on July 1, 20x4. The notes payable bears an annual interést rate of 10%. Interest is payable annually. Requirement: Compute for the adjusted working capital. Solution: ; > The adjusted cash is computed as follows: Cash - unadjusted 15,000 Unreplenished petty cash expenses (1,500) ‘Unreleased checks recorded as disbursement resulting to overdraft 30,500 Contribution to sinking fund (2,000) Adjusted cash balance 42,000 Scanned with CamScanner