CHAPTER 49 FINANCIAL STATEMENTS

Problem 49- 1
SME provided the following data at year end:

Cash 25,000
Account receivable 530,000
Prepayments 60,000
Inventories 60,000
Investment in associate 110,000
Property, plant and equipment 3,250,000
Accumulated depreciation 700,000
Software- net of amortization and 10,000
impairment
Deferred tax asset 5,000
Bank overdraft 80,000
Bank loan, payable in two years and 50,000
prepayable without penalty
Trade accounts payable 430,000
Interest payable 2,000
Current tax liability 270,000
Warrnty liability 14,000
Employee benefit obligation, current 10,0000
portion 4,000
Finance lease liability, current portion 44,000
20,000
Share capital 2,000,000
Retained earnings 450,000

1. What amount should be reported as total current assets?

2. What amount should be reported as total current liabilities?
3. What amount should be reported as total shareholders’ Equity?
Answer: Refer to Problem 49-1 (page 640)
Problem 49-2
SME prepared the following statement of financial position at year end:

Cash 200,000
Cash equivalent 30,000
Noncontrolling interest's share of net 120,000
income for the year
Dividends declared by SME 100,000
Accounts receivable 1 900,00
Inventory, at cost 1,000,000
Inventory, at fair value less costs to 180,000
complete and sell
Investment property, at fair value 2,500,000
Property, plant and equipment, at cost 4,970,000
Total assets 11,000,000

Long-term debt (P500,000 due on 2 300,00

January 1 each year)

Interest accrued on long-term debt 230,00

(due in less than 12 months)

Share capital 1,500,000

Retained earnings at the beginning of 1,910,000
year

Net income for the current year 1,000,000

Noncontrolling interest 730,000

Accumulated depreciation 1,450,00

Allowance for doubtful accounts 200,000

Accounts payable 250,000

Accrued expenses 200,000

Warranty provision which expires 12 400,000

months after the date of sale
Environmental restoration provision, 280,000
restoration is expected to take place in
five years

Provision for vacation leave, unused 450,000

leave expires 12 months after the year
in which it accrues
Dividends payable 100,000
Total claims against assets 11,000,000

1. What amount should be reported as total current assets?

2. What amount should be reported as total current liabilities?
3. What amount should be reported as retained earnings ay year-end?
4. What amount should he reported as equity attributable to the parent?
What amount should he reported as total shareholders’ equity at the year end?
Answer: Refer to Problem 49-2 (page 643)
Problem 49-3
SME provided the following information at year end:
Property, plant and equipment:
Vacant land 320,000
Land and building 960,000
Plant 450,000
Equipment
830,000
Investment property - carried at fair 650,000
value
Intangible asset 1,520,000
Investment in associate carried at cost 560,000
Deferred tax assets 30,000
Inventories 1,580,000
Trade and other receivables 120,000
Prepayments 50,000
Cash and cash equivalents 130,000
Total assets 7,200,000

Share capital 2,500,000

Treasury shares (400,000)
Retained earnings 1,000,000
Other reserves 500,000
Noncontrolling interest 300,000
Interest-bearing loans and borrowings 950,000
- noncurrent
Interest-bearing loans and borrowings 500,0000
- current portion
Government grants - noncurrent 100,000
Government grants - current portion 130,000
Deferred revenue noncurrent 10,000
Deferred revenue - current portion 60,000
Other long-term liabilities 210,000
Long-term provisions 180,000
Trade and other payables 960,000
Income tax payable 25,000
Short-term provisions 125,000
Deferred tax liability 50,000
Total equity and liabilities 7,200,000

1. What total amount should be reported as current assets?

2. What total amount should be reported as current liabilities?
3. What amount should be reported as equity attributable to the parent?
Answer: Refer to Problem 49-3 (page 645)
Problem 49-4

SME provided the following information for the current year:

Revenue 5,500,000
Other income 100,000
Raw materials 1,100,000
purchased
Net decrease in 130,000
inventory
Wages, salaries and 2,260,000
benefits
Depreciation 520,000
Advertising 150,000
Other expenses 380,000
Finance cost 60,000
Income tax expense 300,000
Exchange differences 30,000
on translating foreign
operation, net of tax -
credit

Decrease in the fair 10,000

value of hedging
instruments, net of tax -
loss

1. What amount should be reported as net income for the year?

2. What net amount should be reported as component of other comprehensive income?
3. What amount should be reported as total comprehensive income for the year?
Answer: Refer to Problem 49-4 (page ⁶647)
Problem 49-5
SME provided the following information about the financial performance and changes in equity for the year
ended December 31, 2023:

Revenue 6,000,000
Other income 100,000
Net decrease in inventories of 600,000
finished goods and work in
progress

Raw materials and consumables 3,100,000

used
Employee benefit expense 800,000
Depreciation and amortization 400,000
expense
Other expenses 80,000
Finance cost 120,000
Income tax expense 300,000

SME declared and paid dividends of P150,000 in 2023 and P300,000 in 2022. SME reported retained earnings
of P1,100,000 on January 1, 2022 and net income for 2022 of P600,000.
In 2023, after the 2022 financial statements were issued, SME discovered an error in the December 31, 2021
financial statements.
The effect of the error was a P650,000 overstatement of net income for the year ended December 31, 2021 due
to underdepreciation.
1. What amount should be reported as net income for 2023?
2. What amount should be reported as unadjusted retained earnings on December 31, 2022?
3. What amount should be reported as adjusted retained earnings on December 31, 2023?
 Answer: Refer to Problem 49-5 (page 649)
Problem 49-6

An SME provided the following data for the current year:

Sales 8 700,000
Royalty revenue 400 000
Cost of goods sold 5,100,000
Dividend received from an 300,000
associate - cost model
Gain on disposal of property 700,000
Distribution expenses 350,000
Administrative expenses 800,000
(including amortization of
goodwill of P20,000)
Research and development cost 200,000
Foreign exchange loss on trade 300,000
accounts payable
Interest on bank loan 200,000
Interest on finance lease liability 150,000
Current tax expense 750,000
Deferred tax expense 150,000
Retained earnings - beginning 2,000 000
Dividends paid 1,500,000

1. What amount should be reported as total income for the current year?
2. What amount should be reported as net income for the current year?
3. What amount should be reported as retained earnings at year-end?
Answer: Refer to Problem 49-6 (page 651)
Problem 49-7
SME provided the following information in relation to the preparation of a statement of cash flows for the
current year:

Net income for the current year 3,800,000

Noncash finance cost, finance cost paid P250,000 10,000
Noncash tax expense, income tax paid P1,900,000 790,000
Depreciation of property, plant and equipment 2,700,000
Impairment loss 300,000
Amortization of intangible asset 20,000
Gain on sale of equipment 600,000
Increase in trade and other receivables 100,000
Decrease in inventory 90,000
Increase in trade accounts payable, including unrealized
foreigrn
exchange loss of P10,000 charged to other expenses 110,000
Increase in current and long term benefit payable 30,000
Proceeds from sale of equipment 1,000,000
Purchase of equipment for cash 4,850,000
Payment of finance lease liability 200,000
Repayment of borrowings 1,000,000
Dividend paid 1,500,000
Issuance of shares for cash 2,000,000
Purchase of treasury shares for cash 500,000

1. What amount should be reported as net cash provided by operating activities?

2. What amount should be reported as net cash used in investing activities?
3. What amount should be reported as net cash used in financing activities?
Answer: Refer to Problem 49-7 (page 653)
Problem 49-8

An SME provided the following assets at year-end

Cash on hand 500,000

Cash in bank 2,000,000

Accounts receivable 1,500,000

Notes receivable 1,000,000

Loan receivable from employee - fixed term 100,000

Loan receivable from associate on demand 1,800,000

Investment in nonputtable ordinary shares 400,000

Investment in convertible preference shares 600,000

Investment in bonds 1,200,000

Investment in associate 1,400,000

Inventory 1,300,000

Property, plant and equipment 4,000,000

Intangible assets 700,000

Deferred tax asset 300,000

1. What total amount should be reported as basic financial assets?

Answer: Refer to Problem 49-8 (page 654)
Problem 49-9
An SME provided the following liabilities at year end:

Accounts payable 1,500,000

Notes payable 1,000,000

Bank loan payable 2,000,000

Estimated warranty liability 200,000

Accrued rent payable 300,000

Accrued interest payable 100,000

Income tax payable 400,000

Bank overdraft 500,000

Accrued benefit cost 1,200,000

Finance lease liability 1,300,000

1. What total amount should be reported as basic financial liabilities?

Answer: Refer to Problem 49-9 (page 655)
Problem 49-10
An SME prepared the following postclosing trial balance at the current year-end:

Property, plant and equipment 2,300,000

Intangible assets 900,000

Investment in associate 1,200,000

Deferred tax asset 400,000

Inventory 500,000

Trade receivables 600,000

Cash on hand 200,000

Investment in nonputtable ordinary shares -

listed 700,000

Investment in nonconvertible and nonputtable

preference shares - unlisted 500,000

Investment in term bonds 400,000

Demand deposit in bank 1,800,000

Loan receivable from employee - fixed term 100,000

Loan receivable from associate on demand 300,000

Bank loans 1,100,000

Other long-term employee benefits 400,000

Obligations under finance leases 500,000

Trade payables 800,000

Warranty obligation 200,000

Rent payable 300,000

Interest payable 100,000

Income tax payable 300,000

Bank overdraft-on demand 200,000

Share capital 4,000,000

Retained earnings 2,000,000

1. What total amount should be reported as basic financial assets?

2. What total amount should be reported as basic financial liabilities?

Answer: Refer to Problem 49-10 (page 658)

 CHAPTER 50 RECOGNITION AND MEASUREMENT
PROPLEM 50-1
An SME sold goods with list price of P1,000,000 to a customer on normal credit terms of 30 days interest-free
credit. Ten days after the sale, the customer paid the entity P690,000 in full as final settlement of a debt that
arose from the sale of the goods.
The amount received from the customer included P50,000 value added tax collected by the entity on behalf of
the national government.
The settlement amount is net of P200,000 trade discount, P100,000 volume rebate and P10,000 prompt
settlement discount.
1. What amount should be reported as sales revenue?

Answer: Refer to Problem 50-1 (page 659)

PROPLEM 50-2
At the beginning of the current year, SME acquired 20% of the equity of entities A and B for P2,000,000 and
P6,000,000 respectively. SME incurred transaction costs of P200,000 and P500,000 for A and B respectively.
On January 15, entity A paid a dividend of P1,500,000. Entity A recognized net income of P2,500,000 for the
current year. However, entity C recognized a net loss of P2,000,000 for the current year.
At year end, SME determined the fair value of investment in A at P3,000,000 and investment in B at
P4,000,000. The cost of disposal is estimated at P300,000 for A and P400,000 for B.
Published price quotations do not exist for the shares of entities A and B.
1. Under the cost model, what is the total carrying amount of the investments in associates on December
31?
2. Under the equity method, what is the total carrying amount of the investments in associates on
December 31?
3. Under the fair value model, what is the total carrying amount of the investments in associates on
December 31?

Answer: Refer to Problem 50-2 (page 661-663)

PROPLEM 50-3
At the beginning of the current year, an SME acquired a 30% interest in the ordinary shares of an investee for
P15,000,000. On this date, the carrying amount of the net assets acquired is P13,250,000.
The carrying amount of the net assets acquired equaled fair value except for equipment whose fair value
exceeded the carrying amount by P2,500,000.
The remaining useful life of the equipment is five years.
Any implicit goodwill is amortized over the maximum allowed by SME standard.
The investee reported net income of P20,000,000 for the current year and paid a cash dividend of P7,500,000.
The fair value of the investment in associate is P21,250,000 at year-end and there is no published price
quotation.
SME elected to use the equity method.
1. What amount should be recognized as implied goodwill from the acquisition?
2. What amount should be reported as investment income for the current year?
3. What is the carrying amount of the investment in associate at year-end?

Answer: Refer to Problem 50-3 (page 665)

PROPLEM 50-4
At the beginning of the current year, an SME acquired a building to be held as investment property in a remote
location for P5,000,000.
After initial recognition, the entity measured the investment property using the cost model because the fair
value cannot be measured reliably without undue cost or effort on an ongoing basis.
At year end, management assessed the building’s useful life at 20 years from the date of acquisition and
presumed the residual value to be nil because the fair value cannot be determined reliably.
At year-end, the entity declined an unsolicited offer to purchase the building for P6,500,000. This is a one-time
offer that is unlikely to be repeated in the foreseeable future.
1. What is the carrying amount of the building at year-end?

Answer: Refer to Problem 50-4 (page 666)

PROPLEM 50-5
An SME incurred and paid the following expenditures in 2023:
January 1 20% of the price is attributable to land 50,000,000
January 1 Nonrefundable transfer taxes not included in the P50,000,000
purchase price 1,000,000
January 1 Legal cost directly attributable to the acquisition 4,000,000
January 1 Reimbursing the previous owner for prepaying the
nonrefundable government taxes for the six- month period
ending June 30, 2023. 100,000
June 30 Nonrefundable annual local government property taxes for
the year ending June 30,2024 200,000
During 2023 Day-to-day repairs and maintenance 250,000
On December 31, 2023, SME assessed the useful life of the building at 40 years with residual value of
P2,000,000.
1. What amount should be reported as the initial cost of the land?
2. What amount should be reported as the initial cost of the building?
3. What amount should be reported as depreciation of the building for current year?

Answer: Refer to Problem 50-5 (page 668)

PROPLEM 50-6
On January 1, 2023, an SME received a P5,000,000 grant from the national government as an incentive to
establish and operate a manufacturing plant in a particular development zone. Funds are remitted from the
government to SME when SME incurs the expenditure.
Grant of P3,000,000 is conditional on erecting the plant costing at least P8,000,000 in the development zone
and the plant commencing commercial production on or before December 31, 2024.
Certain conditions are attached to the type of expenditure making up the P8,000,000. If these conditions are not
met, SME shall be obliged to refund the P3,000,000 to the national government.
Grant of P2,000,000 is conditional upon maintaining commercial production at the plant for a period of four
years from the date when commercial production begins.
SME shall become unconditionally entitled to P500,000 at the end of each of the first four years of the
commercial operation of the plant.
During 2023, SME constructed the plant at a cost of P9,000,000, all of which met the type of expenditure
specified under the conditions of the grant.
During the first quarter of 2023, SME tested the plant’s manufacturing process. On April 1, 2024, SME began
commercial production at the plant.
1. What amount of income from government grant should be recognized for 2023?
2. What amount of income from government grants should be recognized?

Answer: Refer to Problem 50-6 (page 670)

PROPLEM 50-7
On January 1, 2023, SME acquired a trademark for a line of products from a competitor for P3,000,000. The
SME expected to continue marketing the line of products using the trademark indefinitely.
An analysis of market, competitive and environmental trend provides evidence that the line of trademarked
products may generate net cash inflows for the acquiring entity for an indefinite period. Management is unable
to estimate the useful life of the trademark.
In 2026, a competitor unexpectedly revealed a technological breakthrough that is expected to result in a product
that when launched by the competitor shall extinguish demand for SME’s patented product line. On December
31, 2026, SME assessed the recoverable amount of the trademark at P500,000.
Demand for SME’s patented product line is expected to remain strong until December 2028, when the
competitor is expected to launch the new product. SME intended to continue manufacturing the patented
products until December 31, 2028.
1. What amount should be recorded as amortization of the trademark for 2023?
2. What amount should be recorded as amortization of the trademark for 2026?
3. What amount of impairment loss should be recognized in 2026?

Answer: Refer to Problem 50-1 (page 672)