Unit III Financial Reporting in Hyperinflationary Economies

Unit III – Financial Reporting in Hyperinflationary Economies
Activity 1:
Problem 1: Excellent Company
1.
EXCELLENT COMPANY
Statement of Financial Position
As of December 31, 2020
(Restated in terms of December 31, 2020, current pesos)
2020 2019
Historical Fraction Restated Historical Fraction Restated
ASSETS
Cash ₱ 450,000 N/A ₱ 450,000 ₱ 400,000 160/140 ₱ 457,143
Accounts receivable 600,000 N/A 600,000 450,000 160/140 514,286
Allowance for doubtful accounts (20,000) N/A (20,000) (30,000) 160/140 (34,286)
Inventories 300,000 160/150 320,000 350,000 160/135 414,815
Land 200,000 160/100 320,000 200,000 160/100 320,000
Building 600,000 160/100 960,000 600,000 160/100 960,000
Accumulated depreciation (240,000) 160/100 (384,000) (200,000) 160/100 (320,000)
Equipment 800,000 160/110 1,163,636 800,000 160/110 1,163,636
Accumulated depreciation (320,000) 160/110 (465,455) (240,000) 160/110 (349,091)
TOTAL ASSETS ₱ 2,370,000 ₱ 2,944,181 ₱ 2,330,000 ₱ 3,126,503
LIABILITIES AND EQUITY

Accounts payable 250,000 N/A 250,000 300,000 160/140 342,857
Bonds Payable 500,000 N/A 500,000 500,000 160/140 571,429
Total Liabilities 750,000 750,000 800,000 914,286
Share capital 1,000,000 160/100 1,600,000 1,000,000 160/100 1,600,000

Retained earnings 620,000 (squeeze 594,181 530,000 (squeeze 612,217
) )
Total equity 1,620,000 2,194,181 1,530,000 2,212,217
TOTAL LIABILITIES AND EQUITY ₱ 2,370,000 ₱ 2,944,181 ₱ 2,330,000 ₱ 3,126,503
2.
EXCELLENT COMPANY
Statement of Profit or Loss
For the year ended December 31, 2020
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(Restated in terms of December 31, 2020, current pesos)
Historical Fraction Restated

Sales ₱ 3,000,000 160/150 ₱ 3,200,000
Cost of sales:
Inventory, beg. ₱ 350,000 160/135 ₱ 414,815
Purchases 1,900,000 160/150 2,026,667
Total goods available for sale 2,250,000 2,441,482
Inventory, end 300,000 1,950,000 160/150 320,000 2,121,482
Gross Income 1,050,000 1,078,518
Less: Expenses
Distribution and administrative expenses 600,000 160/150 640,000
Depreciation expense – building 40,000 160/100 64,000
Depreciation expense – equipment 80,000 160/110 116,364
Interest expense 30,000 750,000 160/160 30,000 850,364
Income before income tax 300,000 228,154
Less: Income tax 75,000 160/150 80,000
NET INCOME ₱ 225,000 ₱ 148,154
3.
Total monetary assets, December 31, 2020, Historical cost:

Cash ₱ 450,000
Accounts receivable 600,000
Allowance for doubtful accounts (20,000 ₱ 1,030,000
)
Total monetary liabilities, December 31, 2020, Historical cost:
Accounts payable 250,000
Bonds payable 500,000 (750,000
)
Net monetary items, December 31, 2020, Historical cost 280,000
Total monetary assets, December 31, 2019, Restated:

Cash 457,143
Accounts receivable 514,286
Allowance for doubtful accounts (34,286 937,143
)
Total monetary liabilities, December 31, 2019, Restated:
Accounts payable 342,857
Bonds payable 571.429 (914,286
)
Net monetary items, December 31, 2020, Historical cost 22,857
Increases in net monetary items during 2020:

Sales, restated 3,200,000
Decreases in net monetary items during 2020:
Purchases, restated 2,026,667
Distribution and administrative expenses, restated 640,000
Interest expense, restated 30,000
Income Tax Expense 80,000
Dividends paid, restated 144,000 (2,920,667
)
Net monetary items, December 31, 2020, Restated 302,190
Loss on purchasing power for 2020 (22,190)
Problem 2: Sunflower Company

Accounts payable ₱ 1,000,000
Accrued expenses 500,000
Bonds payable 3,000,000
Finance leas liability 4,000,000
Estimated warranty liability 200,000
TOTAL MONETARY LIABILITIES ₱ 8,700,000
Problem 3: Gardenia Company

Cash in bank 2,000,000
Accounts receivable 4,000,000
Advances to employees 200,000
TOTAL MONETARY ASSETS ₱ 6,200,000
Problem 4: Sample Company
SAMPLE COMPANY
Statement of Profit or Loss
For the year ended December 31, 2020
Sales ₱ 8,000,000
Less: Cost of goods sold (at current cost) 5,200,000
Gross income 2,800,000
Add: Other Income
Realized holding gain 820,000
Unrealized holding gain 2,400,000
Total Income 6,020,000
Less: Operating expenses
Expenses 1,360,000
Depreciation Expense (based on average current cost) 260,000
Income before Income Tax 4,400,000
Less: Income Tax Expense 700,000
Net Income ₱ 3,700,00
To compute for the realized holding gain (loss):

Inventory:
Cost of goods sold at current cost ₱ 5,200,000
Less: Cost of goods sold at historical cost 4,400,000
Realized holding gain ₱ 800,000
Equipment (depreciation):
Depreciation based on average current cost:
Current Cost ₱ 2,800,000
Add: Historical cost 2,400,000
Total 5,200,000
Divide by 2
Average current cost 2,600,000
Divide by useful life 10
Depreciation based on average current cost 260,000
Less: Depreciation based on historical cost 240,000
Realized holding gain ₱ 20,000
Realized holding gain – Inventory ₱ 800,000
Realized holding gain – Equipment 20,000
Total Realized holding gain ₱ 820,000
To compute for unrealized holding gain (loss):
Ending Inventory:
Ending inventory at current cost ₱ 2,040,000
Less: Ending inventory at historical cost 1,800,000
Unrealized holding gain ₱ 240,000
Equipment (carrying amount at year-end):

Current cost – Dec. 31, 2020 ₱ 2,800,000
Less: Accumulated depreciation at current cost 280,000
Carrying amount at current cost 2,520,000
Less: Carrying amount at historical cost 2,160,000
Land (carrying amount at year end):

Carrying amount at current cost ₱ 3,200,000
Unrealized holding gain ₱ 1,800,000
Unrealized holding gain – Inventory ₱ 240,000
Unrealized holding gain – Equipment 360,000
Unrealized holding gain – Land 1,800,000
Total realized holding gain ₱ 2,400,000
To compute restated Retained Earnings:

Current cost Retained Earnings – beg. -
Add: Current cost profit or loss for the year 2,400,000
Total 3,700,000
Less: Dividends 400,000
Current cost Retained Earnings – end ₱ 3,300,000
SAMPLE COMPANY
Statement of Financial Position
As of December 31, 2020
ASSETS
Cash ₱ 900,000
Accounts receivable 1,340,000
Inventory (at current cost) 2,040,000
Land (at current cost) 3,200,000
Equipment (at current cost) 2,800,000
Accumulated depreciation (at current cost) (280,0000)
TOTAL ASSETS ₱ 10,000,000
LIABILITIES AND EQUITY

Accounts Payable ₱ 800,000
Income tax payable 700,000
Notes payable 1,000,000
Total Liabilities 2,500,000
Share capital 4,200,000

Retained Earnings (at current cost) 3,300,000
Total Equity 7,500,000
TOTAL LIABILITIES AND EQUITY ₱ 10,000,000
Problem 5: Simple Company
Q1 Q2 Q3
2020 2021 2022
Carrying amount at current cost ₱ 600,000 ₱ 750,000 ₱ 800,000
Less: Carrying amount at historical cost 500,000 500,000 500,000
Unrealized holding gain (loss) ₱ 100,000 ₱ 250,000 ₱ 300,000
Q4.
Selling price of land ₱ 1,800,000
Less: Carrying amount at current cost 800,000
Gain on sale of land ₱ 200,000
Problem 6: Kerr Company

Q1.
Cost of machine ₱ 1,150,000
Annual Depreciation based on historical cost ₱ 230,000
Q2.
Current cost of machine ₱ 1,250,000
Annual Depreciation based on current cost ₱ 250,000
Q3.
Annual Depreciation based on current cost ₱ 250,000
Less: Annual Depreciation based on historical cost 230,000
Realized holding gain – Machine ₱ 20,000
Q4.
Current cost of machine ₱ 1,250,000
Less: Accumulated depreciation at current cost 250,000
Less: Carrying amount at historical cost 920,000
Problem 7: Easy Company

Q1.
Cost of equipment ₱ 5,000,000
Annual Depreciation based on historical cost ₱ 1,000,000
Q2.
Current cost of equipment ₱ 5,000,000
Annual Depreciation based 1,000,000
Multiply by price index 225/150
Annual Depreciation based on current cost ₱ 1,500,000
Q3.
Annual Depreciation based on current cost ₱ 1,500,000
Less: Annual Depreciation based on historical cost 1,000,000
Realized holding gain – Equipment ₱ 500,000
Q4.
Current cost of equipment ₱ 7,500,000
Less: Accumulated depreciation at current cost 1,500,000
Unrealized holding gain ₱ 2,000,000
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Unit III – Financial Reporting in Hyperinflationary Economies

Problem 1: Excellent Company

LIABILITIES AND EQUITY

Share capital 1,000,000 160/100 1,600,000 1,000,000 160/100 1,600,000

Historical Fraction Restated

Total monetary assets, December 31, 2020, Historical cost:

Total monetary assets, December 31, 2019, Restated:

Increases in net monetary items during 2020:

Problem 2: Sunflower Company

Problem 3: Gardenia Company

Problem 4: Sample Company

To compute for the realized holding gain (loss):

To compute for unrealized holding gain (loss):

Equipment (carrying amount at year-end):

Land (carrying amount at year end):

To compute restated Retained Earnings:

LIABILITIES AND EQUITY

Share capital 4,200,000

Problem 5: Simple Company

Problem 6: Kerr Company

Problem 7: Easy Company

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