SOLUTIONS AND NOTES (FAR REVIEW)  Deferred revenue – settled by provision of goods or services

 Provision for est. litigation loss – separate category (est. liab or provision)
PROBLEM 3

1. Financial Assets
CD in banks 600,000.00 PROBLEM 4
Trade AR 2,800,000.00
Current Current
Inv. In debt instruments 6,000,000.00
Assets Liabilities
Inv. In equity instruments 3,200,000.00
Cash 6,000,000.00
Total FA 12,600,000.00
AR 14,000,000.00
Inventory 9,200,000.00
2. Financial Liabilities AP 8,200,000.00
Trade Payables 1,300,000.00 IT Payable 1,000,000.00
Issued debt instruments 3,600,000.00 Mandatory redeem PS 3,000,000.00
Total FL 4,900,000.00 29,200,000.00 12,200,000.00
No. 3 No. 4
NOTES:
Perpetual System
 Financial Asset
 Cash Purchase in Transit, FOB Dest.
 Convertible to cash Purchases 500,000
 Almost cash AP 500,000
 Equity instrument of another entity
 Contractual right to either: Inventory 500,000
i. Receive cash or another FA COGS 500,000
ii. Exchange FA or FL
 May be settled in the entity’s own equity instruments and is either Effect: Overstatement in Purchases and EI
i. Derivative – receive a variable number of the entity’s own equity Held on Consignment
instruments Purchases 300,000
ii. Non-derivative – fixed number
AP 300,000

Common Examples: Inventory 300,000

COGS 300,000
 Bank Deposits
 Shares Effect: Overstatement in Purchases and EI
 Trade Receivables
 Loan Receivables
ADJUSTMENTS: INVENTORY | AP | COGS
 Financial Liability
- Contractual obligation to either: Inventory AP
i. Deliver cash or another FA Unadjusted 10,000,000.00 9,000,000.00
ii. Exchange FA or FL In transit purch, FOB Dest (500,000.00) (500,000.00) not a purchase yet
- May be settled in the entity’s own equity instruments Held on consignment (300,000.00) (300,000.00) not a purchase
Adjusted balance 9,200,000.00 8,200,000.00
 Gold bullion – no contractual right to receive cash or another FA, therefore not a FA
 Inv. in equity instruments – if SILENT, classified as FVPL. FVPL is current investment.
 Inv. in equity instruments, with significant influence – non-current investment
 Financial lease obligations – long-term obligation
Cost of goods sold Preference Share
Unadjusted 48,000,000.00
Overstated purch GR: classified as Equity
Purch in transit FOB Dest (500,000.00)
Held on consignment (300,000.00) XPN: classified as Current Liability, if redemption is MANDATORY within 12 months
Overstated EI (add back to CGS) from the BS date
Purch in transit FOB Dest 500,000.00
Held on consignment 300,000.00 In this case, pasok siya (Dec. 31, 2022 – Dec. 31, 2023)
Adjusted 48,000,000.00
The errors have no effect on cost of goods sold. Shareholder’s Equity
Total Shareholders' Equity
Ordinary shares 15,000,000.00
Share premium 4,000,000.00
Net Income RE (end) 23,000,000.00
Net sales and other revenue 80,000,000.00 Total SHE 42,000,000.00 No. 6
CGS (as corrected) (48,000,000.00)
Gross Profit 32,000,000.00 ADJUSTMENT: RE
Expenses (12,000,000.00) RE, beginning 9,000,000.00
Add: adjusted income 14,000,000.00
Profit before tax 20,000,000.00
Total 23,000,000.00
Income tax expense (30%) (6,000,000.00)
Less: Dividends -
Profit 14,000,000.00
RE, end 23,000,000.00
No. 5

Note: upon computation of IT Expense, we noted that per client ITE is overstated.
PROBLEM 5

1)
ADJUSTMENTS: IT PAYABLE
Cash
Analysis of IT Expense: 80,000.00
Per audit 6,000,000.00 9,400.00
Per client (11,000,000.00) 2,500.00
Analysis of
Analysis of IT
IT Expense:
Expense:
Overstatement of IT Expense (5,000,000.00) 73,100.00
Per audit
Per audit 6,000,000.00
6,000,000.00
PER CLIENT Per client PER AUDIT
(11,000,000.00)
AJEexpense Per
IT client
IT Payable
11,000,000.00 (11,000,000.00)
IT 5,000,000.00 6,000,000.00
expense Note:
Overstatement of IT Expense (5,000,000.00)
IT payableOverstatement
IT Expense of IT 11,000,000.00
Expense (5,000,000.00)
IT payable 5,000,000.006,000,000.00
 CSV – long term investment (NCA)
AJE
AJE IT Payable
IT Payable 5,000,000.00
5,000,000.00  CSV of life insurance– amount of money receives when
After correcting ITE,
IT Expense
Expense 5,000,000.00 policymaker terminate permanent life insurance policy before it
ITEITis now at P6,000,000. 5,000,000.00
mature or they die.
IT Payable is now at P1,000,000.
After correcting
After correcting ITE,
ITE,
ITE is
ITE is now
now at
at P6,000,000.
P6,000,000.  Bank OD – liability should not be offset to asset
IT Payable is now
IT Payable is now at
at P1,000,000.
P1,000,000. CSV Bank OD
9,400.00 2,500.00
9,400.00 2,500.00
2)
AR 4)
60,000.00
FVPL (Current investment)
4,000.00 x offset
76,300.00
3,800.00
48,300.00 FVOCI
52,200.00 9,000.00 Franchises
4,000.00 19,000.00
3,800.00
60,000.00 NOTE:
3,000.00
57,000.00  Investments held for trading (FVPL) – CA
 Investments available-for-sale (FVOCI) - NCA
Note:  Franchises – NCA (intangible asset)

 AR – debit balances – true AR FVOCI Franchises

 Known as customer’s debit balances 48,300.00 9,000.00
 AR – credit balances – liability to customer (sobrang bayad ni customer) 48,300.00 9,000.00
 Known as customer’s 3,800.00
credit balances
3,800.00

ADA Cust. Cr. Bal (liability) 5)

3,800.00 4,000.00
Equipment
3,800.00 4,000.00
96,000.00
40,000.00
4,000.00 1,000.00 (5k-4k)
3) 4,000.00 135,000.00
Inventories
AD Equipment held-for-sale
57,000.00
3,000.00 40,000.00 1,000.00
60,000.00 40,000.00 1,000.00

NOTE:

 Goods shipped out in consignment – included in inventories

SHE
218,500.00
3,000.00
215,500.00

NOTE:
Analysis:
PER CLIENT PER AUDIT
AR 3,000.00 No entry. Not yet sold
Sales 3,000.00

Effect: since net income was already closed to RE, we will adjust the SHE
SUMMARY: Note:
Current Assets  NSF – still an AR
Cash 73,100.00  IOUs from employees
FVPL 19,000.00 - Separate account
AR, gross 57,000.00 - CA
Allowance for bad debts (3,800.00) 53,200.00 - Acc. Name: receivable from emp.
Inventories 60,000.00  Deposit-court – other asset (NCA)
Equipment held for disp 1,000.00  Outstanding checks – decrease in CIB
Total current assets 206,300.00
AR
Non-Current Assets 3,000,000.00
Property, plant and equipment 100,000.00 NSF
Equipment, gross 135,000.00 400,000.00 NCA
AD-Equipment (40,000.00) 95,000.00 200,000.00 NCA
LT Investment 300,000.00 NCA
FV-OCI 48,300.00 100,000.00 ADA ADA
Cash surrender value 9,400.00 57,700.00 600,000.00 Not a sale yet 100,000.00
Intangible Assets 1,700,000.00 100,000.00
Franchise 9,000.00
Patents 32,000.00 41,000.00 Note:
Total non-current assets 193,700.00
TOTAL ASSETS 400,000.00  Advances to subsidiary – long term investment (NCA)
 Advances to supplier
Current Liabilities - separate account
AP 75,000.00 - CA
Bank OD 2,500.00 - arise from AP – debit balances
Cust Credit Bal 4,000.00 - Acc. Name: Rec. from supplier
Total current liabilities 81,500.00  Receivable from Officers
- NCA
Non-Current Liabilities - Has right to defer settlement
Various Non-Current Liab 100,000.00  Receivable from employees and officers – CA
Total liabilities 181,500.00
Rec. from employee/s Advances to subsidiary
Shareholders' Equity 50,000.00 400,000.00
Various SHE accounts 218,500.00 50,000.00 400,000.00
Total LIABILITIES AND SHAREHOLDERS' EQUITY 400,000.00
Rec. from suppliers
200,000.00 Receivable from Officers
50,000.00 300,000.00
PROBLEM 6 250,000.00 300,000.00
Cash in Bank
Inventory
2,000,000.00 1,900,000.00
100,000.00 500,000.00 not recorded
50,000.00 2,400,000.00
Unrecorded unsold inventory = 600,000/120% = 500,000
200,000.00 Other Asset - Deposit
250,000.00 OC 200,000.00
1,400,000.00 200,000.00
 Mortage payable - NCL PROBLEM 7
2,000,000.00 Mortgage payable - CL
500,000.00 current portion/due within 12 months 500,000.00
CA NCA CL NCL
500,000.00 Wages Payable 500,000.00
1,500,000.00
Cash 350,000.00
AP Bonds Payable 1,200,000.00
2,450,000.00 Dividends Payable 280,000.00
50,000.00 rec. to supplier Prepaid Rent 272,000.00
2,500,000.00 Inventory 1,640,000.00
Invest-SFA 1,050,000.00
NOTE: FVPL 306,000.00
 Money claim from the union – disclosed in the notes to FS Premium on BP 96,000.00
Invest in Subsidiary 2,040,000.00
Taxes Payable 456,000.00
CURRENT ASSETS: AP 496,000.00
Cash in Bank 1,400,000.00 AR 732,000.00
AR 1,700,000.00 PPE 2,400,000.00
ADA (100,000.00) Patents, net 300,000.00
Rec. from employee/s 50,000.00 Accum Depr PPE (800,000.00)
Rec. from suppliers 250,000.00 Land held for FBS 1,800,000.00
3,300,000.00 6,790,000.00 1,732,000.00 1,296,000.00
Inventory 2,400,000.00
Prepaid expenses 100,000.00 NOTE:
Total CA 5,800,000.00
 Sinking Fund Assets
NON-CURRENT ASSETS: o Current – if related liability is due within 12 months from BS date
o Non-Current – if related liability is due more than 12 months form BS
Other Asset - Deposit 200,000.00
date
Advances to subsidiary 400,000.00
 Premium on Bonds Payable – adjunct account
Receivable from Officers 300,000.00  Discount on Bonds Payable – contra account
Total NCA 900,000.00

CURRENT LIABILITIES: PROBLEM 8

AP 2,500,000.00 Item A Due date 3.31.2026 NCL
Mortgage payable - CP 500,000.00 Covenant Violated CL
Interest payable 150,000.00
IT payable 300,000.00 Remedy to return to NCL status
Total CL 3,450,000.00 a. Waiver of demand for payment ok
b. Obtained on or before BS date ok
NON-CURRENT LIABILITIES: c. Period for non-demand for payment should be
Mortage payable - NCP 1,500,000.00 more than 12 months from BS date not ok

WORKING CAPITAL: Final classification CL

CA 5,800,000.00
CL 3,450,000.00
WC 9,250,000.00
Note: ***4 million is ignored unless the refinancing was considered.

 Breach of Covenant
o GR: CURRENT – if breached or violated regardless if there’s demand for
payment or not Question: Would the P8 million remaining Item D liability be classified as current
or non-current?
Recheck conditions:
o XPN: NON-CURRENT – if the lender provided a grace period at least 12
a. Intention to refinance ok
months after BS date
b. Refinancing must occur on or before BS date ok (BS date is 3.1.2022)
- In this case, the lender has already demanded payment on July 2022
which is only 6 months after BS date.
Accordingly, the remaining Item D liability of P8 million would be classified as NCL
on the March 1, 2022 balance sheet.
Item B Due date 8.31.2022 CL
No further adjustments.
TOTAL CURRENT LIABILITIES:
Final classification CL
Item A 4,000,000.00
Note: Item B 18,000,000.00
Item C 30,000,000.00
 Maturity date: August 31, 2022
Item D 14,000,000.00
- Classified as Current Liability because it is due within 12 months
66,000,000.00

Item C Due 6.30.2026 NCL

Option to call bonds
on 6.30.2022 Yes
….Is it probable? Yes

Final classification CL

NOTE:

 callable - creditor has the option to demand payment at a certain date.

 puttable - debtor has the option to repay the debt earlier at a certain date.

Item D Short-Term CP CL

Remedy to reclassify the CL to NCL

a. Intention to refinance ok
b. Refinancing must occur on or before BS date not ok (BS date is 12.31.2021)
Refinancing happened March 1, 2022
Final classification CL

WHAT IF….

The Item D liability, worth P14 million is current as of December 31, 2021.
But…If a BS would be prepared for March 1, 2022:
The balance of the Item D liability would already be P8 million only, as follows:
ST-CP balance 12.31.21 14,000,000.00
Less: repaid portion 2.28.22 (6,000,000.00)
ST-CP balance, 3.1.22 8,000,000.00