Secret-Notes BY Cayetano: Accountancy (University of Northern Philippines)

Secret- Notes BY Cayetano
Accountancy (University of Northern Philippines)
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Downloaded by Erika Faith Hallador (hallador.erikafaithebsa1993@gmail.com)
Topic 1: Cash and Cash Equivalents
Expected question(s):
1. What is the amount of cash and cash equivalents to be presented in the financial statements?
1) What is the amount of cash and cash equivalents?
Answer: One must know which items (trial balance accounts) are included or which are excluded as cash. To
simplify, cash and cash equivalent is dividend in two (2) groups; cash is dividend into three (3) sub-group
illustrated below.
Cash and Cash Equivalents
Cash Cash Equivalents
Cash Cash
Cash
On In
Funds
Hand Bank
Cash on Hand:
1. Currencies and coins
2. Money order
3. Bank drafts
4. Checks (some are included as cash some are excluded from cash)
a. Cashier’s check
b. Certified check
c. Customer’s check
d. Manager’s check Included as Cash
e. Personal check
f. Traveler’s check
a. Customer’s postdated check Excluded from Cash

b. Customer’s NSF / DAIF check (treated as receivable)
c. Customer’s stale check
Checks drawn by the company:

1. Company’s unreleased check
2. Company’s postdated check
3. Company’s stale check
It is assumed that the journal entry for payment is already made when the check was drawn. But because the
check (cash) is still in your control as of reporting date, the entry for payment should be reversed.
Assumed entry when drawn: Entry to reverse since the check is still in your control:
Dr. Accounts payable XX Dr. Cash XX
Cr. Cash XX Cr. Accounts payable XX
Cash in Bank − some cash in bank is included in cash, some are excluded from cash.
1. Checking
Included as Cash
Account
2. Savings
Included as Cash
Account
3. Time Excluded from cash If the question is:

Deposit (treated as cash equivalents)
How much is Cash?
Exclude
How much is Cash & CE?

Include
Legally restricted − Excluded from cash

(treated as other current asset if related loan is short term
treated as other non current asset if related loan is long term)
4. Compensating
Balance Not legally restricted − Included as Cash
Silent − Included as Cash
Legally restricted − Excluded from cash

(treated as non current asset)
5. Deposit in Not legally restricted − Included as Cash

Foreign Bank
Not legally restricted − Included as Cash
6. Deposit in Excluded from cash

Closed Bank (treated as other current asset)
Different Bank − Excluded in the computation of cash

(treated as current liability
7. Bank Same Bank − Included as Cash (included in the computation as a deduction)

Overdraft
Silent − Excluded in the computation of cash (different bank)

Cash in Fund − Sub-divided into two (2) categories: (1) cash fund for operations and (2) cash fund not for
operation:
1. Cash fund for operation:

a.
Included as
e.
Travel fund
2. Cash fund not for operation:

a. Sinking fund
Within 12 months − Included as
b. Pension fund When is the cash
c. Preference share redemption fund disbursement? Beyond 12 months – excluded from
cash
Silent– excluded from cash
d. Plant acquisition fund

e. Depreciation fund
Always excluded from Cash
f. Contingency fund
(treated as non current asset)
g. Insurance fund
Cash Equivalents (CE) − highly liquid investments.

1. Time deposit (a.k.a. certificate of deposit)
Within 3 months − Included as Cash Equivalents
2. Money order (a.k.a. commercial paper)
Beyond 3 months – Excluded as Cash Equivalents
3. Treasury bills
Silent – Included as Cash Equivalents
4. Investment in preference share with redemption date
If not classified as cash equivalents, the proper classification would be:

• Other current assets if from reporting date to maturity date is within 12 months;
• Other non current assets if from reporting date to maturity date is beyond 12 months;
Three-month rule test:
The counting of three months is from date of acquisition of CE to the date of maturity of CE.
Usual distractions (items that are NOT considered as cash)

1. I Owe You (IOUs) – treated as receivables
2. Postage stamps – treated as supplies
3. Credit memo from suppliers – treated as contra purchase account
4. Cash surrender value – treated as investment
5. Investment in shares (equity securities) – treated as investment
Topic 2: Petty Cash Fund
1. What is the correct journal entries affecting petty cash fund (PCF)?
2. What is the amount of shortage or overage of petty cash fund?
3. What is the adjusted balance of petty cash fund at the end of year?
2) What is the correct journal entries affecting petty cash fund?
Answer:
Transaction Journal Entry Amount

Dr. Petty Cash Fund XX Equal to imprest balance
1. Establishment
Cr. Cash in Bank XX Equal to imprest balance
2. Disbursement No entry
Dr. Various Expenses XX

XX
Dr. Various Expenses XX

Cr. Petty Cash Fund XX
3) What is the amount of shortage or overage of petty cash fund?
Answer:
Accountability Accounted
1 Imprest balance of petty cash fund X X Currencies and coins 1
2 Undeposited collection currencies from customer X X Undeposited collection. check from customer 2
3 Undeposited collection check from customer X X Paid vouchers (regardless of date) 3
4 Unclaimed salaries X X Replenishment check 4
5 Excess of advance of travel X X IOUs 5
6 Employee contributions (always) X X Accommodation check (all) 6
. X Employee contribution (only if closed) 7
Total X X Total
Total accountability of custodian X

Less: Total accounted by custodian X
Shortage (overage) X
4) What is the adjusted petty cash fund at the end of the year?
Answer:
Currencies and coins at the date of count X
Add: Disbursements after December 31 X
Less: Receipts after December 31 (X)
Currencies and coins at December 31 X
Less: Cash included in currencies but do not belong to PCF

1. Undeposited currencies collection X
2. Unclaimed salaries X
3. Excess of advance travel X
4. Employee contributions (only if open) X (X)
Currencies and coins belonging to PCF at December 31 X
Add: Replenishment checks X

Add: Accommodation checks (valid checks at December 31 only) X
Adjusted balance of PCF at December 31 X
Topic 3: Bank Reconciliation
1. What is the adjusted balance of cash in bank?
2. What is the unadjusted balance of cash in bank per book or per bank statement?
3. What is the amount of the missing reconciling item?
5) What is the adjusted balance of cash in bank?
Answer:
X X
X
X
X
X
Less:
X X
X X
Less: Errors Less: Errors
Adjusted balance Adjusted balance
6) What is the unadjusted balance of cash in bank per book or per bank statement?
Answer:
X
X
X
X
X
Less:
X X
X X

(1) Understated disbursements
X X
First, compute the adjust balance of either book or bank depending on which unadjusted balance is given.
Second, whatever the adjusted of one that will also be the adjusted balance of the other one.
Last, from the adjusted balance copied from one record work back the unadjusted balance.
7) What is the amount of the missing reconciling item?
Answer:
X X
X
X
X
X
Less: Outstanding checks SQUEEZE
X X
X X

(1) Understated disbursements
X X
The missing reconciling item can be squeezed from the two records as shown above (for example the missing
reconciling item is outstanding check).
Debit Credit
(1) Collections from customer X X (1) Check drawn
(2) Credit memo of prior month X X (2) Debit memo of prior month
(3) Correction of error X X (3) Correction of error
Unadjusted receipt per book X X Unadjusted disbursement per book
Debit Credit
(1) Check encashed X X (1) Deposit received
(2) Debit memo of current month X X (2) Credit memo of current month
(3) Correction of error X X (3) Correction of error
Unadjusted disbursement per bank X X Unadjusted receipt per bank

Topic 4: Proof of Cash
1. What is the adjusted or unadjusted balance of cash in the previous month?
2. What is the adjusted or unadjusted receipt?
3. What is the adjusted or unadjusted disbursement?
4. What is the adjusted or unadjusted balance of cash in the current month?
5. What is the amount of the missing reconciling item?
How to proof of cash the bank balance?

Prev. Rec. Dis. Curr.
Unadjusted
Deposit in transit, prior month + –
Deposit in transit, current month + +
Outstanding check, prior month – –
Outstanding check, current month + –
Overstated disbursement, prior month, corrected at current month + –
Overstated disbursement, prior month, not yet corrected at current month + +
Overstated receipt, prior month, corrected at current month – –
Overstated receipt, prior month, not yet corrected at current month – –
Overstated disbursement, current month, corrected at current month – –
Overstated disbursement, current month, not yet corrected at current month – +
Overstated receipt, current month, corrected at current month – –
Overstated receipt, current month, not yet corrected at current month – –
Understated disbursement, prior month, corrected at current month – –
Understated disbursement, prior month, not yet corrected at current month – –
Understated receipt, prior month, corrected at current month + –
Understated receipt, prior month, not yet corrected at current month + +
Understated disbursement, current month, corrected at current month none none none none
Understated disbursement, current month, not yet corrected at current month + –
Understated receipt, current month, corrected at current month none none none none
Understated receipt, current month, not yet corrected at current month + –
Adjusted X X X X
How to proof of cash the book balance?

Prev. Rec. Dis. Curr.
Unadjusted
Credit memo, prior month + –
Credit memo, current month + +
Debit memo, prior month – –
Debit memo, current month + –
Overstated disbursement, prior month, corrected at current month + –
Overstated disbursement, prior month, not yet corrected at current month + +
Overstated receipt, prior month, corrected at current month – –
Overstated receipt, prior month, not yet corrected at current month – –
Overstated disbursement, current month, corrected at current month – –
Overstated disbursement, current month, not yet corrected at current month – +
Overstated receipt, current month, corrected at current month – –
Overstated receipt, current month, not yet corrected at current month – –
Understated disbursement, prior month, corrected at current month – –
Understated disbursement, prior month, not yet corrected at current month – –
Understated receipt, prior month, corrected at current month + –
Understated receipt, prior month, not yet corrected at current month + +
Understated disbursement, current month, corrected at current month none none none none
Understated disbursement, current month, not yet corrected at current month + –
Understated receipt, current month, corrected at current month none none none none
Understated receipt, current month, not yet corrected at current month + –
Adjusted X X X X
Legend:
Prev. = Previous month balance
Rec. = Receipt for the current month
Dis. = Disbursement for the current month
Curr. = Current month balance
Topic 5: Trade Receivable and Allowances
1. What is the balance of accounts receivable at year end?
2. What is the balance of allowance for doubtful accounts at year end?
3. What is the amount of bad debt expense for the year?
4. What is the net realizable value of accounts receivable at year end?
8) What is the balance of accounts receivable at year end?
Answer: If what is given is the opening balance of accounts receivable.
Accounts receivable
Beginning balance X
(1) Gross sales X X (1) Collection of accounts receivable
(2) Recovery of write off X X (2) Collection of recovery
X (3) Write off of accounts receivable
X (4) Discounts taken during the
period
X (5) Sales actually returned
X (6) Other forms of payment
Ending balance X
Answer: If what is given is the unadjusted closing balance of accounts receivable.
Unadjusted balance X
Add: Reversal of customer’s postdated or NSF check; X
Add: Adding back of customer’s credit balance that was assumed “netted”; X
Less: Recorded sales without transfer of title of title (e.g., FOB destination) X
Add: Unrecorded sales with transfer of title of title (e.g., FOB shipping point) X
Adjusted balance X
9) What is the balance of allowance for doubtful accounts at year end?

10) What is the amount of bad debt expense for the year?
Answer: To answer, First – determine the method used in accounting for bad debt. Second – determine what
should be computed first (i.e., allowance for bad debt or bad debt expense).
1. Using Percentage Of Sales Method.
First, solve for the allowance for doubtful accounts as follows:
Accounts receivable ending balance (from question number 8) X

Multiply by: Percentage of uncollectiblity x%
Allowance for doubtful accounts X
Allowance for doubtful accounts

X Beginning balance
(1) Write off of receivable X X Bad debt expense SQUEEZE
X Recovery of write off
X Ending balance
2. Using Percentage Of Sales Method.
First, solve for the bad debt expense as follows:
Sales X
Multiply by: Percentage of uncollectiblity x%
X
X X
X
Ending balance
3. Using Aging Of AR Method
First, solve for the allowance for doubtful accounts as follows:
Group 1 Group 2 Group 3 Total

Accounts receivable X X X X
Multiply : Percentage of uncollectiblity x% x% x% x%
Allowance for doubtful accounts X + X + X = X
Allowance for doubtful accounts

X Beginning balance
(1) Write off of receivable X X Bad debt expense SQUEEZE
X Recovery of write off
X Ending balance
11) What is the net realizable value of accounts receivable?
Answer:
Accounts receivable balance at year end (question 07) X

Less: Allowance for doubtful accounts (question 08) (X)
Less: Allowance for sales discount (X)
Less: Allowance for sales returns (X)
Net realizable value of accounts receivable X
If the percentage of uncollectilibity is not given in the problem, it can be computed as follows:
Total amount of write off – total amount of recovery

= % of uncollectability
Total amount of credit sales
Note! Be careful with the questions.

If the question is the accounts receivable “balance”, contra accounts (allowance for doubtful accounts,
allowance for discount and returns) are not deducted to get the answer.
If the question is the NRV, amortized cost, carrying amount, carrying value, book value of accounts receivable,
contra accounts are deducted to get the answer.
Topic 6: Notes Receivable
1. What is the initial measurement of notes receivable (fair value at the date received)?
2. What is the gain or loss on sale of property, plant and equipment?
3. What is the amount of revenue or sales where the consideration received is in a form of notes?
4. What is the subsequent measurement of notes receivable (carrying amount at year end)?
5. What is the interest income for the year?
6. What is the interest receivable as of year end?
7. What is the current portion of the notes receivable?
8. What is the non current portion of the notes receivable?
12) What is the initial measurement (fair value) of the notes receivable at the date received?
Answer:
Method 1.
Fair value of the consideration given up (i.e., inventory, service or PPE) X

Less: Down payment (X)
Fair value of the notes receivable X
Method 2.
Type of note Fair value at date of recognition
1. Interest Bearing Face Amount = Fair value
Principal amount X
2. Non Interest Bearing Times: PVF X
PV of Principal = Fair value X
Principal X PVF X
3. Interest Bearing With Unrealistic Nominal Add: Nominal interest X PVF X
PV of P + Int. = Fair value X
13) What is the gain or loss on sale of property, plant and equipment?
Answer:
Fair value of the notes receivable (question 12) X

Add: Down payment, if any X
Total consideration received X
Less: Carrying amount of property, plant and equipment sold X
Gain or (loss) on sale of property, plant and equipment X
Cost of property, plant and equipment sold X

Less: Accumulated depreciation X
Carrying amount of the property, plant and equipment sold X
14) What is the revenue or sales when the consideration received is in a form of notes receivable?
Answer:
Fair value of the notes receivable (question 12) X

Add: Down payment, if any X
Revenue or sales X
15) What is the subsequent measurement of notes receivable (carrying amount at year end)?
Answer:
Type of note Carrying amount at year end
1. Interest Bearing Face Amount
Initial measurement (question 12) X

Times: 1 + Effective rate x%
2. Non Interest Bearing
Less: Principal payment, if any X
Carrying amount at year end X

3. Interest Bearing With
Less: Nominal interest (Face x NR) X
Unrealistic Nominal
16) What is the amount of interest income for the year?
Answer:
Type of note Interest Income
Face Amount X
1. Interest Bearing Times: Nominal Rate x%
Interest Income X
Carrying amount at beginning of the year X

2. Non Interest Bearing Times: Effective Rate x%
Interest Income X

Times: Effective Rate x%
Unrealistic Nominal
Interest Income X
17) What is the amount of interest receivable as of the year end?
Answer:
Type of note Interest Receivable
Face Amount X
Interest Receivable X
2. Non Interest Bearing None
Face Amount X
Times: Nominal Rate x%
Unrealistic Nominal
Interest Receivable X
18) What is the current portion of the notes receivable?
19) What is the non current portion of the note receivable?
Answer: If term note – either wholly current (principal is to be paid within 12 months) or wholly non current
(principal is to be paid beyond 12 months).
If serial note – it is partially currently and partially non current, the carrying amount (refer to question 18) should
be separated to its current and non current portion, guide in separating will be seen below:
Type Current portion Non current portion
Payment of face and interest w/ one year X Carrying amount of NR at year end X
Interest
Less: Nominal interest for one year (X) Less: Current portion of notes receivable (X)
Bearing
Current portion of notes receivable X Non current portion of NR X
Carrying amount of NR at year X

Non Carrying amount of NR at year end X
Interest Less: Non current portion of notes receivable (X)
Less: Principal payment next year (X)
Bearing Current portion of NR X
Non current portion of NR X
Interest
Carrying amount of NR at year X
Bearing
Carrying amount of NR at year end X Times: 1 + Effective rate x%
With
Less: Non current portion of notes receivable (X) Less: Nominal interest (X)
Unrealis-
Current portion of NR X Less: Principal payment next year (X)
tic
Nominal
Topic 07: Loans Receivable (LR)
1. What is the initial measurement of loans receivable (fair value at the date received)?
2. What is the subsequent measurement of loans receivable (carrying amount as of year end)?
3. What is the interest income for the year before impairment?
4. What is the impairment loss for the year?
5. What is the carrying amount of the loans receivable subsequent to the date of impairment?
6. What is the interest income for the year after impairment?
20) What is the initial measurement (fair value) of the notes receivable at the date received?
Answer:
Method 1.
Face amount of loans receivable X

Add: Origination cost (direct only) X
Less: Origination fee X
Initial measurement of LR X
Method 2.
Present value factor X Principal amount X

Add: Present value factor X Nominal interest X
Initial measurement of LR X
21) the subsequent measurement of LR (carrying amount as of year end)?
Answer:
1. Interest Bearing Face Amount

Less: Nominal interest (face x NR) (X)
Unrealistic Nominal
Less: Principal payment, if any (X)
22) What is the interest income for the year?
Answer:
Face Amount X
Interest Income X

Unrealistic Nominal
Interest Income X
23) What is the impairment loss of the notes for the year?
Answer:
Step 1: Compute the total amount of receivable (old receivable).
Carrying amount of loan receivable at impairment date (refer to question 21) X

Add: Interest receivable, if any (if the problem state “the company did not accrue”, do not add) X
Total amount of receivable subject to impairment X
Step 2: Compute the present value of expected cash flows (new receivable).
New principal amount X PVF X

Add: New nominal interest, if any X PVF X
Present value of expected cash flows (new AR) X
Step 3: Compute the present value of expected cash flows (new receivable).
Total amount of receivable (loan receivable + interest receivable) X

Less: Present value of expected cash flows X
Impairment loss X
24) What is the carrying amount of LR subsequent to impairment?
Answer:
Measurement of new receivable (question 23) X

Times: 1 + Original effective rate x%
Less: Nominal interest, if any (X)
Less: Principal payment, if any (X)
Carrying amount of LR at year end X
25) What is the interest income subsequent to impairment?
Answer:
Measurement of new receivable (question 23) X

Times: Original effective interest rate X
Interest income subsequent to impairment X
Initial Measurement Subsequent Measurement Interest Interest Non Current Current
Classification
(Fair Value) (Amortized Cost) Revenue Receivable Portion Portion
Face Amount
Face Amount
(1) x Nominal Rate Principal Payable beyond 12 Principal payable within
Face Amount Face Amount x Nominal Rate
Interest Bearing x Months unpaid / 12mo. months 12 months.
Interest Income
Interest Income
Initial Measurement
Carrying Amount, End
Multiply: 1+Effective Rate Carrying Amount, BEG Carrying Amount, End
(2) Multiply: 1+Effective Rate
PV of Principal Less: Principal Payment x Effective Rate None Less: NC Portion
Non Interest Bearing Less: Principal Payment
Amortized Cost Interest Income Current Portion
NC Portion
Initial Measurement Carrying Amount, End

(3) Face Amount
PV of Principal Multiply: 1+Effective Rate Carrying Amount, BEG Multiply: 1+Effective Rate Carrying Amount, End
Interest Bearing x Nominal Rate
Add: PV of Nominal Interest Less: Nominal Interest x Effective Rate Less: Nominal Interest Less: NC Portion
with Unrealistic x Months unpaid / 12mo.
Fair Value Less: Principal Payment Interest Income Less: Principal Payment Current Portion
Nominal Rate Interest Income
Amortized Cost NC Portion
Topic 08: Receivable Financing
Assignment
1. What is the balance of accounts receivable – assigned?
2. What is the balance of loans payable?
3. What is the equity to be disclosed in the notes to financial statement?
Factoring
4. What is the net proceeds from factoring of receivable?
5. What is the cost of factoring?
Discounting
6. What is the net proceeds from discounting of NR?
7. What is the gain or loss from discounting of NR?
8. What is the journal entry for discounting of NR?
26) What is the balance of accounts receivable – assigned?
Answer:
Accounts Receivable - Assigned

Balance X
X (1) Collection of accounts receivable
Recovery of write off X X (2) Collection of recovery
X (3) Write off of accounts receivable
X (4) Discounts taken during the period
X (5) Sales actually returned
Ending balance X
27) What is the balance of accounts receivable – assigned?
Answer:
Amount collected from accounts receivable – assigned X

Less: Remittance for payment of interest incurred, if stated it will be applied to interest first X
Remittance for payment of amount loaned X
Amount loaned from the bank X

Less: Remittance for payment of amount loaned X
Loans payable at year end X
28) What is the equity of the accounts receivable – assigned to be disclosed in the notes to FS?
Answer:
Accounts receivable – assigned at year end X

Less: Loans payable (where the accounts receivable is assigned) X
Equity to be disclose in the notes X
29) What is the net proceeds from factoring?
Answer:
Selling price of accounts receivable (equal to face amount if silent) X

Less: Assessment fee / Service fee / Commission fee X
Less: Factor’s holdback (treated as receivable X
Less: Interest charge (Interest rate x number of days x 365 days) X
Net proceeds from factoring X
30) What is the cost of factoring?
Answer:
Assessment fee / Service fee / Commission fee X

Add: Interest charge (Interest rate x number of days x 365 days) X
Add: Fair value of recourse obligation (only if with recourse) X
Total cost of factoring X
31) What is the net proceeds from discounting of NR?
Answer:
Step 1: Compute the total interest over the term of note
Face amount of the note X

Times: Nominal interest rate x%
Times: Whole term of the note / 12 months X / 12
Total interest over the term X
Step 2: Compute the maturity value

Add: Total interest over the term (step 1) X
Maturity value X
Step 3: Compute the discount charge
Maturity value (step 2) X

Times: Discount rate x%
Times: Remaining term / 12 months X / 12
Discount charge X
Step 4: Compute the net proceeds
Maturity value (step 2) X

Less: Discount charge by the bank (step 3) (X)
Net proceeds from discounting X
32) What is the net gain or loss from discounting of NR?
Answer:
Step 1: Compute the interest receivable earned

Times: Nominal interest rate x%
Times: Number of months the company held the note / 12 months X
Interest receivable sold X
Step 2: Compute the total receivable sold

Add: Interest receivable sold (step 1) X
Total receivable sold X
Step 3: Compute the gain or loss on discounting of NR
Total receivable sold (step 2) X

Less: Net proceeds (question 31) (X)
Gain or loss from discounting X
33) What is journal entry for discounting of NR?
Answer:
Type of discounting Journal Entry
Dr. Cash (net proceeds, question 31) X
Dr. Loss from discounting (question 32) X
1. Without recourse
Cr. Notes receivable (face amount) X
Cr. Interest receivable (question 31, step 1) X

2. With recourse – Dr. Loss from discounting (question 32) X
Conditional sale Cr. Notes receivable discounted (face amount) X

3. With recourse – Dr. Interest expense (loss from discounting, question 32) X
Secured Borrowing Cr. Loans payable (face amount) X
Topic 09: Inventory Composition
34) What is the total amount classified as inventory?
1. Inventories
a) Finished goods
1. Raw materials used
b) Work in process
2. Direct labor used
c) Raw materials
3. Overhead
d) Supplies
i. Factory supplies, included as inventory
ii. Marketing
iii. Office supplies
2. Inventories under consignment

3
Consignor Include (tip: sent out, shipped out, out on)
Consignee Exclude (tip: held on, received on)
3. Goods in transit
Shipping terms Owner
a. FOB shipping point

b. FOB seller Buyer
c. FOB CIF
d. FOB FAS
a. FOB destination
b. FOB buyer Seller
c. FOB ex-ship
4. Inventoriable expenditures
Expenditure Treatment
1. Freight:
a. Freight in, inventoriable
b. Freight out, not inventoriable
2. Insurance:
a. During delivery, inventoriable
b. After delivery, not inventoriable
3. Storage cost:
a. Storage of WIP, inventoriable
b. Storage of RW, FG not inventoriable
4. Waste, spoilage of resources

a. Normal inventoriable
b. Abnormal not inventoriable
5. Interest incurred
a. Non routinely manufactured inventoriable
b. Routinely manufactured (silent) not inventoriable
6. Tax
a. Non recoverable (import duties) inventoriable
b. Recoverable (vat) not inventoriable
7. Commission, advisers fee

a. Related to purchase inventoriable
b. Related to sales not inventoriable
Topic 10: Inventory System, Inventory Discounts and Inventory Errors
1. What is the correct journal entry for inventory related transactions?
2. What is the effect of the inventory error to inventory related accounts?
35) What is the correct journal entry for inventory related transactions?
Answer:
PERPETUAL INVENTORY SYSTEM
X X
Accounts payable or cash X Accounts payable or cash X
Accounts receivable or cash X Accounts receivable or cash X

Sales X Sales X
X
X
Sales return X Sales return X

X X
Inventory X
X
X
X
X
X
Gross method Net method
Purchase for P100, 2% discount. Purchase for P100, 2% discount.

Purchases 100 Purchases 98
Accounts payable 100 Accounts payable 98
Payment within discount period Payment within discount period

Cash 98 Cash 98
Purchase discount 2
Payment beyond discount period Payment beyond discount period

Cash 100 Discount lost 2
Cash 100
discount lost is presented as operating expense
and will not form part of purchases.
36) What is the correct journal entry for inventory related transactions?
Inventory AR & Sales AP & Purchases Cost of Sale Income

Erroneous beg inventory NE NE NE Direct Inverse
Erroneous net purchases NE NE Direct Direct Inverse
Erroneous net sales NE Direct NE NE Direct
Erroneous end inventory Direct NE NE Inverse Direct
Topic 11: Subsequent Measurement of Inventory and Inventory Impairment
1. What is the carrying value (LCNRV) of inventory at year end?
2. What is the amount of impairment (or reversal of impairment) for the year?
3. What is the amount of cost of goods sold during the year?
37) What is the carrying value (LCNRV) of inventory at year end?
Step 1: Compute the net realizable value (NRV) per item of inventory
For problem purposes, NRV is computed as follows:

For theory purposes, NRV is
described as:
1. NRV of finished goods:
Estimated selling price X Estimated selling prices, less

Less: Estimated cost to repair, if any (X) cost to complete and less cost
Less: Estimated cost to sell (X) to sell. (NRV of WIP)
NRV X
2. NRV of work in process:
Estimated selling price X

Less: Estimated cost to complete (X)
Less: Estimated cost to sell (X)
NRV X
3. Raw materials and factory supplies: NRV = Replacement cost
Step 2: Compare the NRV and the cost of EACH ITEM of inventory, select the lower
Item 1 Item 2 Item 3 Item 4

Cost X X X X
Vs. NRV X X X X
Lower X X X X
Step 3: Total all the “lower”.
Item 1 Item 2 Item 3 Item 4

Lower X + X + X + X = X
38) What is the amount of impairment (or reversal of impairment) for the year?
Step 1: Compute the ending balance of “allowance for inventory write down”
Cost of ending inventory X

Less: LCNRV (question 36) (X)
Ending balance of allowance
X Beginning balance
X Impairment
X Ending balance (Step 1)
Allowance method Direct method

Beginning inventory at cost X Beginning inventory at LCNRV X
Add: Net purchases X Add: Net purchases X
Less: Ending inventory at cost (X) Less: Ending inventory at LCNRV (X)
CGS, excluding impairment X CGS, including impairment X
Add: Impairment of inventory (question 37) X
Less: Reversal of inventory (question 37) (X)
CGS, including impairment X
Topic 12: Inventory Cost Flow
1. What is the value of the ending inventory using different cost flow method?
2. What is the cost of goods sold during the year using different cost flow method?
40) What is the value of the ending inventory using different cost flow method?
Answer:
1. FIRST IN, FIRST OUT (FIFO)
Step 1: Compute the ending inventory in units
Beginning inventory in units X

Add: Net purchases in units X
Less: Units sold (X)
Ending inventory in units X
Step 2: Compute the cost of ending inventory by multiplying it to the proper unit cost
Units Unit cost In Peso

Ending inventory XXX
Less: Number of units from last purchase (XXX) x XXX = XXX
Ending inventory from 2nd to last purchase XXX x XXX = XXX
Ending inventory in Peso XXX
41) What is the cost of goods sold during the year using different cost flow method?
Answer:
Beginning inventory, in peso X

Add: Net purchases, in peso X
Less: Ending inventory, in peso (question 39) (X)
Cost of goods sold X
2. WEIGHTED AVERAGE METHOD
Step 1: Compute the ending inventory in units
Beginning inventory in units X

Add: Net purchases in units X
Less: Units sold (X)
Ending inventory in units X
Step 2: Compute the “average unit cost”
Total goods available for sale, in peso

= Average unit cost
Total goods available for sale, in units
Step 3: Compute the cost of ending inventory
Ending inventory in units (step 1) X

Times: Average unit cost (step 2) X
Ending inventory in peso X
Step 4: Compute the cost of goods sold
Number of units sold X

Times: Average unit cost (step 2) X
3. MOVING AVERAGE METHOD
Step 1: Prepare a four column table.
Particulars Number of units (A) Cost per unit (B) Total cost (AxB) = C
Beginning, inventory X Given X
Purchase Add: X Given Add: X
Total, updated unit cost X (C/A) X
Every after purchase transaction, you should compute the updated average unit cost by dividing total goods
available for sale in peso by total goods available for sale in units.
Step 2: Compute the cost of goods sold based on the latest updated average unit cost.
Particulars Number of units (A) Cost per unit (B) Total cost (AxB) = C
Beginning, inventory X Given X
Purchase Add: X Given Add: X
Total, updated unit cost X (C/A) X
Sale Less: (X) Updated Unit cost (AxB)
Ending, inventory X X
Topic 13: Inventory Estimation
Gross Profit Method
1. What is the estimated cost of ending inventory (or cost of missing inventory)?
Retail Method
2. What is the estimated cost of ending inventory (or cost of missing inventory)?
3. What is the estimated cost of goods sold?
42) What is the estimated cost of ending inventory (or cost of missing inventory)?
Answer: Follow the step by step procedure.
Step 1: Form the solution for the ending inventory
Beginning inventory X Given in the problem (most of the time)

Add: Net purchases X Step No. 2
Less: Cost of goods sold (X) Step No. 4
Estimated ending inventory X
Gross purchases X
Add: Freight in X
Less: Purchase discount (X)
Less: Purc hase returns (X)
Net purchases X
In case the gross purchases is not given, solve it by squeezing in accounts payable T-account:
Accounts payable
Returns and discounts X X Beginning, AP
Payments X X Purchases, SQUEEZE
X Ending, AP
Step 3: Compute for the net sales
Gross credit sales X

Add: Cash sales X
Total sales X
Less: Sales returns (or sales return and allowances) (X)

Net sales X
In case the gross credit sales is not given, solve it by squeezing in accounts receivable T-account:
Accounts receivable
Beginning, AR X
Gross sales, SQUUEZE X X Collection of AR
Recovery of AR X X Write off
X Sales return
X Sales discounts
Ending, AR
Step 4: Convert the net sales (step 3) to cost of goods sold

Gross profit based on sale Gross profit based on cost
Net sales (step 3) X Net sales (step 3) X

Multiply: (100% - GPR) x% Divide: (100% + GPR) x%
Cost of goods sold X Cost of goods sold X
Step 5: Compute the missing inventory by completing the formula in step 1
Beginning inventory X Given in the problem (most of the time)

Add: Net purchases X Step No. 2
Less: Cost of goods sold (X) Step No. 4
Estimated ending inventory X
Less: LCNRV of actual inventory remaining (X)
Missing inventory (inventory loss)
43) What is the estimated cost of ending inventory?
Answer:
Step 1: Compute the total goods available for sale (TGAS) for cost and retail columns as follows:
Cost Retail
Beginning inventory Add Add
Purchases Add Add
Freight in Add --
Purchase returns Less Less
Purchase discounts Less --
Purchase allowance Less --
Departmental transfer in (debit) Add Add
Departmental transfer out (credit) Less Less
Abnormal losses Less Less
Mark up -- Add
Mark up cancellation -- Less
Mark down -- Less
Mark down cancellation -- Add
TGAS XX XX
Step 2: Compute the net sales:
Sales X
Less: Sales returns (Sales allowance and return is also deducted) (X)
Add: Employee discounts X
Add: Normal losses (i.e., shrinkage, shoplifting, spoilage) X
Net sales X
Step 3: Compute for the cost ratio.
TGAS at cost (Step 1) AVERAGE METHOD

= Cost ratio
TGAS at retail (Step 1)
TGAS at cost
= Cost ratio LCNRV (CONSERVATIVE) METHOD
TGAS at retail + net mark down
TGAS at cost – beginning inventory FIFO METHOD

= Cost ratio
TGAS at retail – beginning inventory
Step 4: Compute for the ending inventory.
TGAS at retail (Step 1) X

Less: Net sales (Step 2) (X)
Ending inventory at retail X
Multiply: Cost ratio (Step 3) x%
Ending inventory at cost X
Step 5: Compute for the cost of goods sold.
TGAS at cost (Step 1) X

Less: Ending inventory at cost (Step 4) (X)
Note!
1 - If the losses are silent as to normal or abnormal, consider it as normal.
2 - If what is given in the problem is “NET Sales” it is assumed that sales discount and allowances are deducted,
but is should not be deducted. Thus it should be added back.
3 – If the question is, “How much is the missing inventory?”, it can be computed by, Estimated ending inventory
(step 4) minus the actual remaining inventory (inventory per count).
Topic 14: Investment Under Fair Value Model
1. What is the initial measurement of the investment?
2. What is the subsequent measurement (carrying amount) of the investment?
3. What is the unrealized gains or loss to be presented in Statement of Profit or Loss?
4. What is the unrealized gains or loss to be presented in Statement of Other Comprehensive Income?
5. What is the unrealized gains or loss to be presented in Statement of Financial Position?
6. What is the gain or loss on sale of investment?
7. What is the dividend income for the year?
44) What is the initial measurement of the investment?
Answer:
Investment in Fair Value Through Investment in Fair Value Through Other

Profit or Loss (FVPL) Comprehensive Income (FVOCI)
Fair Value = Initial Measurement Fair Value X

Add: Transaction Cost X
Transaction is expensed Initial Measurement X
Purchase price of investment in shares
Purchase is considered as dividend-on, when the purchased happened in between date of declaration and date
of record. See illustration:
Purchase Date
45) What is the subsequent measurement (carrying amount / CA) of the investment?
Answer:
Investment in Fair Value Through Investment in Fair Value Through Other Comprehensive
Profit or Loss (FVPL) Income (FVOCI)
Fair Value (date of the question) Fair Value (date of the question)
46) What is the unrealized gains or loss to be presented in the Statement of Profit or Loss?
Answer:

Fair Value, Ending X Zero

Less: Fair Value, Beginning (X)
Unrealized gain (loss) − P/L X
47) What is the unrealized gains or loss to be presented in the Statement of Other Comprehensive Income?
Answer:

Zero Fair Value, Ending X

Less: Fair Value, Beginning (X)
Unrealized gain (loss) − OCI X
Note! If the question is, “What is the unrealized gains or loss in the Statement of Comprehensive Income?”,
combine whatever amount presented in the statement of profit or loss and the amount presented in the
statement of other comprehensive income. See illustration:
Unrealized gains or loss presented in the Statement of Profit or Loss X

Add: Unrealized gains or loss presented in the Statement of Other Comprehensive Income X
Unrealized gains or loss presented in the Statement of Comprehensive Income X
48) What is the unrealized gains or loss to be presented in the Statement of Financial Position?
Answer:

Zero Fair Value, Ending X

Less: Initial Measurement (question 43) (X)
Unrealized gain (loss) − OCI X
Alternative computation for unrealized gains or losses, (e.g., computing the unrealized gain)
Investment @ FVPL Unrealized gain or loss − P/L

Beg. Balance (FV beg) X -0- Beg. Bal. (zero)*
Acquisition X X
Unrealized gain X Unrealized gain
End Balance (FV end) X X End balance @ PL
Investment @FVOCI Unrealized gain or loss − OCI

Beg. Balance (FV beg) X X Beg. Balance*
Acquisition X X
Unrealized gain X Unreal'd gain @ OCI
End Balance (FV end) X X End balance @ BS
Notes!
Note 1 − as alternative method, unrealized gains and losses can be squeezed from the investment account.
Note 2 – unrealized gain or loss – profit or loss (PL) has a beginning balance of zero (nominal account, previous
balance was closed to income summary).
Note 3 – unrealized gain or loss – other comprehensive income (OCI) has a beginning equal to the ending
balance of the previous period (real account, carried forward). The increase or decrease of which is presented in
the statement of OCI, while the cumulative (ending) balance is presented in the balance sheet & changes in
equity.
49) What is the gain or loss on sale of investment?
Answer:

Selling price of the shares sold X Zero

Less: CA of investment at the date of sale (X)
Gain (loss) on sale X
The carrying amount (CA) of investment at

the date of sale is equal to the fair value of
the last year-end before the date of sale.
Upon sale of investment in FVOCI, three
(3) journal entries should be prepared:
If the sale of investment is dividend-on, the
selling price of the shares investment can be 1. Updated the Fair Value
computed as follow: 2. Derecognition of Investment
3. Transfer of OCI to RE.
Total selling price X
Less: Dividend receivable sold (X)
Selling price of shares sold X
(1) Updating the fair value at the date of sale. The investment sold should be updated to its fair value at the
date of sale. The fair value at the date of sale is equal to the selling price of the shares sold. Record the
unrealized gains or loss – OCI to update the fair value.
Increase in Fair Value Decrease in Fair value

DR. Investment X DR. Unrealized gain or loss – OCI X
Cr. Unrealized gain or loss – OCI X Cr. Investment X
(2) Derecognition of Investment. Record the sale transaction by: Debit the cash received equal to the selling
price, then credit the investment account which is equal to the carrying value of the shares sold. Note that the
carrying value of the investment is share is now equal to the selling price because it was updated in the first
entry.
DR. Cash (at selling price) X

CR. Investment (at selling price) X
(3) Transfer of OCI to Retained Earnings. The cumulative amount in OCI of the investment in shares sold will
transferred to the retained earnings.
The possible question here, “How much is the amounted transferred to retained earnings"?
Answer:
Selling price of investment in shares X

Less: Initial measurement (question 43) (X)
Amount transferred to retained earnings X
To transfer cumulative unrealized GAIN To transfer cumulative unrealized LOSS

DR. Unrealized gain or loss – OCI X DR. Retained earnings X
CR. Retained earnings X CR. Unrealized gain or loss – OCI X
50) What is the dividend income for the year?
Answer:
Type of Dividend Measurement of Dividend Income

1 Cash Dividend Face Value
2 Property Dividend Fair Value at the date of declaration
Priority 1: Fair Value of Shares at date of declaration

3 Share Dividend in Lieu of Cash Dividend
Priority 2: Amount of cash that should have been receive
4 Share dividend ZERO
5 Cash Dividend in Lieu of Share Dividend ZERO
6 Liquidating Dividend ZERO
Liquidating Dividend. You are receiving what you invested, not the earnings of your investment. Journal Entry:
Dr. Cash X
Cr. Investment X
Cash Dividend in Lieu of Share Dividend. It will be accounted by:
First, assuming that the shares dividend was received. By assuming this, the number of shares will increase and
the value of each shares will decrease.
Second, assuming that the shares that was assumed received will be sold at the selling price equal to the cash
dividend actually received (replacement dividend).
Third, the company will recognize gain or loss on the assumed sale as illustrated below:
Number of shares before assuming the share dividend X

Add: Assumed share dividend X
Number of shares after assuming the share dividend X
Total value of the investment in Peso X

Divide: Number of shares after assuming the share dividend X
Updated value of each share investment X
Cash Dividend in Lieu of Share dividend (assumed selling price) X

Less: Value of shares assumed sold (Share dividend x updated value of each share) (X)
Gain or loss on assumed sale X
Share Dividend. No effect on the total value of investment:

The number of shares will increase
The value of each shares will decrease
Topic 15: Investment Associates
1. What is the implied goodwill (or bargain purchase) acquired upon acquisition of investment?
2. What is the investment income for the year?
3. What is the carrying amount of the investment in associate at year-end?
4. What is the gain or loss on sale of investment in associate?
51) What is the investment income for the year?
Answer:
Profit reported by the investee (associate) X

Less: Amortization of Excess fair value of asset (X)
Add: Amortization of Excess carrying amount of asset X
Less: Inter-company gains (X)

Add: Inter-company losses X
Less: Amortization of inter-company losses (X)

Add: Amortization of inter-company gains X
Adjusted profit of the investee X
Less: Share of preference shareholder in the profit (X)
Adjusted profit for ordinary shareholders X
Times: Ratio of months as an owner over 12 months x/12
Times: Percentage of ownership X
Share of in the profit of associate X
Add: Bargain purchase (refer to question 52) X
Investment income X
Amortization of Excess & Inter Company Gains (Losses)
Continues Amortization (every year): One Time Amortization
Excess Whole Excess on the

Remaining Life = Amortization date of it was sold
Share of Preference Shareholders

in the Profit of Associate
Cumulative Non Cumulative

Preference Share Preference Share
With declaration of No declaration of

Share of preference shareholder is equal to
dividend dividend
One basic dividend
Share of preference Share of preference
Par value of preference share X shareholder is shareholder is
Times: Dividend rate X equal to: actual equal to: zero
One basic dividend X dividend declared
52) What is the implied goodwill (or bargain purchase) acquired upon acquisition of investment?
Answer:
Purchase price of the investment X

Less: Fair value of the net asset of the investee acquired
Goodwill (bargain purchase) X
Carrying value of the net asset of the investee X

Add: Excess fair value of asset (understatement of asset) X
Less: Excess carrying amount of asset (overstatement of asset) (X)
Fair value of the whole net asset of the investee X
Times: Percentage of ownership acquired x%
Fair value of the net asset acquired X
53) What is the carrying amount of the investment in associate at year end?
Answer:
Investment in Associate
CA, Beg (purchase price of investment) X X Dividend received

Investment income (question 50) X
Carrying amount, End X
54) What is the gain or loss in sale of investment in associate?
Answer:
Selling price of the investment X

Less: Carrying amount at the date of sale (question 53) (X)
Gain on sale of investment X
Another question here is the “What is the total income during the year of sale”?
Share in profit of associate – prorated from January 1 to date of sale (question 50) X
Add: Dividend income (dividend received subsequent to the date of sale) X
Add: Gain or loss on sale of investment (question 53) X
Add: Gain or loss on reclassification of the remaining investment to FVPL or FVOCI X
Total income during the year X
Fair value of the remaining investment at the date of sale X

Less: Carrying amount of the remaining investment at the date of sale X
Gain or loss on reclassification of the remaining investment to FVPL or FVOCI X
Topic 16: Investment in Debt Securities
1. What is the initial measurement of the investment?
2. What is the subsequent measurement of the investment?
3. What is the unrealized gains and losses to be presented in the Statement of Profit or Loss?
4. What is the unrealized gains and losses to be presented in the Statement of Other Comprehensive Income?
5. What is the unrealized gains and losses to be presented in the Statement of Financial Position?
6. What is the interest income for the year?
7. What is the gain or loss on sale of the investment in Debt Securities?
Answer:
Investment in Fair Value Investment in Fair Value Through Investment Measured At

Through Profit or Loss Other Comprehensive Income Amortized Cost
(FVPL) (FVOCI) (AC)
Fair value X Fair value X

Fair value = Initial Measure Add: Transaction Cost X Add: Transaction Cost X
Initial Measurement X Initial Measurement X
Fair Value = Purchase Price
Alternative Method for Initial Measurement:
Principal x Present Value Factor = X

Add: Nominal Interest x Present Value Factor = X
Initial Measurement (Purchase Price) X
Note!
1- The effective interest rate should be used in getting the PVF.
2- The PVF for Principal is:

PV of 1 for Term Bonds
PV of annuity for Serial Bonds
3- The PVF for Nominal Interest is:

PV of 1 for Serial Bonds
PV of annuity for Term Bonds
Answer:

(FVPL) (FVOCI) (AC)
Fair value Fair value Initial Measurement X

(at the date of question) (at the date of question) Times: Effective Rate x%
Less: Principal payment (X)
Carrying amount, end X
57) What is the unrealized gains and losses to be presented in the Statement of Profit or Loss?
Answer:

(FVPL) (FVOCI) (AC)
Fair value, Ending X None None

Less Fair value, Beginning (X)
Unrealized G/L X
58) What is the unrealized gains and losses to be presented in the Statement of Financial Position?
Answer:

(FVPL) (FVOCI) (AC)
None Fair Value, Ending X None

Less: AC, Ending (X)
Unrealized G/L − BS X
59) What is the unrealized gains and losses to be presented in the Statement of Other Comprehensive Income?
Answer:

(FVPL) (FVOCI) (AC)
None Step 1: Compute the Unrealized G/L in None

the balance sheet (BS) at the beginning
of the period.
Fair Value, Beginning X

Less: AC, Beginning (question 56) (X)
Unrealized G/L − BS, Beg X
Step 2: Compute the Unrealized G/L in

the balance sheet (BS) at the end of the
period.
Fair Value, Ending X

Less: AC, Ending (question 56) (X)
Unrealized G/L − BS, End X
Step 3: Compute the change in

Unrealized G/L in the balance sheet
during the period.
Unrealized G/L – BS, End X

Less: Unrealized G/L – BS, Beg X
Unrealized G/L − OCI X
60) What is the interest income for the year?
Answer:

(FVPL) (FVOCI) (AC)
Face Amount X Amortized Cost, beg X Amortized Cost, beg X

Times: Nominal Rate x% Times: Effective Rate x% Times: Effective Rate x%
Interest income X Interest income X Interest income X
61) What is the gain or loss on sale of the investment?
Answer:

(FVPL) (FVOCI) (AC)
Selling price X Selling price X Selling price X

Less: FV, at the last year end(X) Less: AC, at the date of sale (X) Less: AC, at the date of sale (X)
Gain or loss on sale X Gain or loss on sale X Gain or loss on sale X
62) What is the balance of interest receivable at year end?
Answer:

(FVPL) (FVOCI) (AC)
Face amount of the bonds X

Times: Nominal interest rate X
Times: Number of months unpaid over 12 months x/12
Interest receivable X
Note! The number of months unpaid is equal to the months from the last interest payment date up to
December 31 (year end).
Example 1 – The interest date is every March 1 and October 1 (semi annual).
October 1 to December 31 = 3 months
Example 2 − The interest date is every January 1 (annual).

January 1 to December 31 = 12 months
Example 3 – The interest date is every December 31 (annual).

December 31 to December 31 = 0 months
Topic 17: PPE Acquisition
1. What is the initial measurement of the property, plant and equipment acquired?
2. What is the gain or loss on exchange of property, plant and equipment?
3. What is the total amount expenditure capitalized as building?
4. What is the total amount expenditure capitalized as land?
63) What is the gain or loss on sale of the investment?
Answer:
Acquisition cost of PPE (Step 1) X

Add: Direct attributable cost (Step 2) X
Add: Dismantling cost (Step 3) X
Initial measurement of PPE X
Step 1: The measurement of acquisition cost will depend on the MODE OF ACQUISITION:
MODE MEASUREMENT OF COST OF PPE

1. Cash Cash paid = Cost of PPE
2. On Account List price X

Less: Trade discounts (X)
Invoice price X
Less: Cash discount (X)
Cash price = Cost of PPE X
3 Issuance of note Priority 1:

(deferred payment) Cash price = Cost of PPE
Priority 2:
A. Interest Bearing Note (Nominal is given, Effective is not given)
Face amount (FV of note) X
Add: Down payment X
Cost of PPE X
B. Non-interest Bearing Note (Nominal is not given, Effective is given)

PV of Principal (FV of note) X
Add: Down payment X
Cost of PPE X
C. Interest Bearing W/ Unrealistic Rate (Both Nominal & Effective given)

PV of Principal X
Add: PV of Nominal Interest X
Fair value of note X
Add: Down payment X
Cost of PPE X
4. Issuance of shares Priority 1:

Fair value of PPE received = Cost of PPE
Priority 2:
Fair value of shares given up X
Add: Cash paid X
Cost of PPE X
Priority 3:
Par value of shares given up X
Add: Cash paid X
Cost of PPE X
MODE MEASUREMENT OF COST
5. Lump-sum Priority 1 – Relative Fair Value Method (ALL FV IN THE GROUP IS AVAILABLE)
Acquisition FV of SINGLE PPE
Purchase Price of the Group X FV of GROUP = Cost of the SINGLE PPE
(Acquiring a group
of PPE)
Priority 2 – Residual Value Method (FV OF ONE PPE IN THE GROUP IS NOT
AVAILABLE)
Purchase Price of the Group X

Less: Fair value of single PPE (Cost of Single PPE with available FV) (X)
Residual (Cost of SINGLE PPE with NO available FV) X
Priority 3 – Whole amount is allocated to the LAND and NONE is allocated to

the building. (ALL FV IN THE GROUP IS NOT AVAILABLE)
6. Exchange Priority 1:
(Trade-in)
Fair value of asset given up X
Add: Cash paid X
Less: Cash received (X)
Cost of PPE X
Priority 2:
Fair value of asset received = Cost of PPE
Priority 3:
Carrying amount of asset given up X
Add: Cash paid X
Less: Cash received (X)
Cost of PPE X
64) How much is the gain or loss on exchange?
Answer:
Fair value of asset given up X
Less: Carrying amount of asset given up (X)
Gain (loss) on exchange X
In case fair value of asset given up is NOT given:
Step 1: Compute the “assumed fair value” by referring to the asset received:
Fair value of asset received X
Add: Cash received X
Less: Cash paid (X)
Assumed fair value X
Step 2: Then you can compute the gain or loss by using the assumed fair value
Fair value of asset given up (used the assumed FV) X

Less: Carrying amount of asset given up (X)
Gain (loss) on exchange X
Fair value of asset received = Cost of PPE

7. Donation
Note: Cost of transferring the asset from the donor to the company is
NOT capitalized, instead it will be deducted to:
• Share-premium if the donor is shareholder
• Other income if not shareholder
MODE MEASUREMENT OF COST OF PPE
8. Construction (a) Demolition of old building (net of proceeds from sale of scraps)
(b) Payment to vacant the building
(c) Cost of materials (net of discounts); direct labor; overhead (if self constructed)
(d) Construction cost (if constructed by a contractor)
(e) Excavation cost
(f) Architect cost
(g) Cost of construction & removal of temporary structures (e.g., fences, shelters)
(h) Building permit
(i) Supervision and inspection
(j) Interest incurred (specific borrowings)
(k) Insurance during the construction
Total cost of constructed Building
Step 2: Identify expenditures are considered as direct attributable cost to be capitalized and which are not.
CLASS OF PPE DIRECT ATTRIBUTABLE COST – CAPITALIZED
1. Equipment & (a) Import duties and non-refundable taxes

Machineries (b) Freight, delivery, transportation and handling
(c) Installation cost
(d) Testing cost, net of proceeds
(e) Repair or reconditioning prior to use
(f) Registration cost
(g) Site preparation
(h) Professional fees (e.g., consultants, advisers, finders, brokers fee)
(i) Cost of safety platforms and other devices needed prior to use
2. Land (a) Options acquired

(b) Unpaid mortgage assumed
(c) Unpaid taxes assumed (before acquisition)
(d) Professional fees
(e) Title search, legal fees, title guarantee cost
(f) City assessments
(g) Cost of grading, leveling, surveying
(h) Payment to vacant the land prior to construction
(i) Demolition cost (if no building was constructed)
3. Building (a) Options acquired

(b) Unpaid mortgage assumed
(c) Unpaid taxes assumed (before acquisition)
(d) Professional fees
(e) Remodeling (repairs) prior to usage
CLASS OF PPE CAPITALIZED COST

4.
Land Improvement (a) Landscaping, trees, and scrubs
(b) Permanent fences
(c) Water systems
(d) External driveways, parking lots and safety lightings
(e) Sidewalks and pavements
Final note: The followings are the common distractions that should be ignored (not capitalizable):
Equipment and Machineries related Land and Building related
(a) Pre operating loss (a) Insurance after construction

(b) Loss on premature disposal of old PPE (b) Taxes subsequent to the acquisition
(c) Dismantling cost of the old PPE (c) Imputed interest
(d) Repair cost due to negligence (d) Damages incurred or accidents during construction
(e) Repair cost after during the use (e) Options not acquired
(f) Training cost of the personnel (f) Advertisement and open-house parties
(g) Insurance cost after delivery (g) Abnormal amount of wasted materials, labor and
(h) Recoverable taxes (VAT) overhead
(i) Advertisement cost or marketing cost (h) Internal profits or savings on constructions
Topic 18: Borrowing Cost
1. What is the amount of borrowing cost?
2. What is the interest expensed for the year?
3. What is the cost of the building?
65) What is the amount of borrowing cost?
Answer:
Scenario 1: Specific borrowing only (loan that can only be used to finance the construction of the building.
Principal amount of specific borrowing X

Multiply: Interest rate (mostly given) x%
Interest incurred X
Less: Investment income (X)
Borrowing cost X
Scenario 2: General borrowing only (loan that can be used to finance the construction & can be used for other
purposes aside from construction)
Step 1: Compute the weighted average expenditure
Number of months outstanding (Note 1) = Weighted average

Amount of expenditure x
Number of months under construction during the year (Note 2) expenditure
Number of months outstanding (Note 1):
Scenario 1: If completed at December 31 or next year

Number of months outstanding is equal to: Date of expenditure up to December 31
Scenario 2: If completed during the year before December 31 (e.g., October 31)
Number of months outstanding is equal to: Date of expenditure up to Date Completed (Oct. 31)
Number of months under construction during the year (Note 2):
Scenario 1: If completed at December 31 or next year

Number of months outstanding is equal to: January 1 up to December 31
Scenario 2: If completed during the year before December 31 (e.g., October 31)
Number of months outstanding is equal to: January 1 up to Date Completed (October 31)
= Weighted average expenditure (If incurred evenly)
Step 2: Compute the average interest rate
Total annual interest of all general borrowings

= Average interest rate
Total principal of all general borrowings
Step 3: Compute the borrowing cost
Weighted average expenditure (step 1) X

Multiply: Average interest rate (step 2) x%
Borrowing cost from general borrowing X
Note! The borrowing cost from general borrowing should not exceed the annual interest from all general
borrowings. If exceeded the borrowing cost is the annual interest interest from all general borrowings.
Scenario 3: Combination of Specific and General borrowing
Answer:
Weighted average expenditure (Scenario 2, Step 1) X

Less: Principal of specific borrowing (X)
Expenditures financed by general borrowing X
Multi: Average interest rate (Scenario 2, Step 2) x%
Borrowing cost from general borrowing X

Add: Borrowing cost from specific borrowing (Scenario 1) X
Total borrowing cost X
66) What is the interest expensed for the year?
Answer:
Interest expense of all general borrowing X

Less: Borrowing cost from general borrowing (interest capitalized) (X)
Interest expensed X
67) What is the total cost of the building constructed?
Answer:
Construction cost (refer to question 61 mode of acquisition number 8) X

Add: Total Borrowing cost X
Capitalized cost of building X
Note! In computing the weighted average expenditure and the construction lasted for more than one year. The
total cost of the building (including the capitalized interest in the prior period) will be included in full amount.
Topic 19: Government Grant
1. What is the grant income for the year?
2. What is the balance of unearned grant income at the end of the year?
3. What is the depreciation expense of the PPE related to the grant?
4. What is the carrying amount of the PPE related to the grant at year end?
5. What is the depreciation expense for the PPE in the year of repayment?
6. What is the amount of loss on repayment?
68) What is the grant income for the year?
Answer:
1. Grant Related To Income.

Amount of expense incurred for the year
Value of the grant x = Grant income for the year
Total estimated expenses over the period of grant
2. Grant Related To Asset.
Method 1 Method 2
Grant is treated as unearned income Grant is treated as deduction to
(deferred income) the cost of asset acquired
Value of the grant X Zero

Divide: Useful life X
(the grant income will be offset to depreciation
Grant income per year X
expense)
69) What is the balance of unearned grant income at the end of the year?
Answer:
Value of the grant received X

Less: Cumulative grant income recognized (question 66) (X)
Unearned grant income X
Method 1 Method 2
Value of the grant X Zero

Less: Cumulative grant income (X)
The liability (unearned grant income) is offset to the
Unearned grant income X
asset (PPE).
70) What is the depreciation expense of the PPE related to the grant?
Answer:
Method 1 Method 2
Cost of the PPE acquired X Cost of the PPE acquired X

Less: Residual value (X) Less: Value of the grant (X)
Depreciable cost X Adjusted cost X
Divide: Useful life X Less Residual value (X)
Depreciation expense X Depreciable cost X
Depreciation expense X
71) What is the carrying amount of the PPE related to the grant at year end?
Answer:
Method 1 Method 2
Cost of the PPE acquired X Cost of the PPE acquired X

Less: Accumulated depreciation (question 68) (X) Less: Value of the grant (X)
Carrying value of PPE acquired X
Adjusted cost X
Less: Accumulated depreciation (ques. 68) (X)
Carrying value of PPE acquired X
72) What is the depreciation expense on the year of repayment of grant?
Answer:
(ASSUMING STRAIGHT LINE DEPRECIATION)
Step 1: Compute the accumulated depreciation at the BEGINNING (January 1) of the year of re-payment
WITH GRANT BEING CONSIDERED (deducting the grant to the cost of PPE) the grant.
Cost of the PPE acquired X

Less: Value of the grant (grant being considered) (X)
Adjusted cost X
Less Residual value (X)
Depreciable cost X
Annual depreciation X
Multi: Number of years from grant date up to the BEGINNING (January 1) of the year of repayment X
Accumulated depreciation BEGINNING − WITH GRANT BEING CONSIDERED X
Step 2: Compute the accumulated depreciation at the ENDING (December 31) of the year of re-payment
WITHOUT CONSIDERING THE GRANT (not deducting the grant to the cost of PPE) the grant.
Cost of the PPE acquired X

Less Residual value (X)
Depreciable cost X
Annual depreciation X
Multi: Number of years from grant date up to the ENDING (December 31) of the year of repayment X
Accumulated depreciation ENDING − WITHOUT CONSIDERING THE GRANT X
Step 3: Compute the amount of depreciation required to bring the accumulated depreciation to its ENDING
BALANCE without grant
Accumulated depreciation ENDING without grant – REQUIRED ENDING (STEP 2) X

Less: Accumulated depreciation BEGINNING with grant – RECORDED BEGINNING (STEP 1) (X)
73) What is the loss on repayment?
Answer:
Balance of unearned grant income at the date of re-payment (refer to question 67) X
Less: Amount of re-payment (amount demanded by the government to be returned) (asset to give) (X)
Gain (loss) on re-payment X
Method 1 Method 2
Zero −
Balance of unearned grant income X the amount of re-payment will not be
Less: Amount of re-payment (X) recognized, instead it will be added
Gain or loss on re-payment X to the new depreciation expense.
Topic 20: Depreciation Expense

1. What is the depreciation expense for the year?
2. What is the gain or loss on sale of the PPE?
74) What is the depreciation expense for the year?
Answer:
1. STRAIGHT LINE METHOD
Cost of PPE – residual value

= Depreciation expense
Useful life
2. DOUBLE DECLINING
Step 1: Compute the depreciation rate.

2
= Depreciation rate
Useful life
Step 2: Compute the depreciation expense.
Initial measurement (Cost) of PPE X

Less: Accumulated Depreciation, Beg (X)
Basis for Depreciation X

Times: Depreciation rate (step 1) x%
3. SUM OF YEARS DIGIT
Useful life – number of years lapsed

Cost minus residual value x = Depreciation expense
Summation of useful life
4. OUTPUT METHOD
Step 1: Compute the depreciation rate per output.
Initial measurement (Cost) of PPE X

Less: Residual value (X)
Depreciable cost X
Divide: Total estimated X
Depreciation rate per output X
Step 2: Compute the depreciation expense.
Depreciation rate per output (step 1) X

Times: Actual output during the year X
5. COMPOSITE METHOD
Step 1: Compute the composite rate.
Cost
= Composite rate
Annual depreciation of all assets
Step 2: Compute the depreciation.
Cost X
Times: Composite rate (step 1) x%
Depreciation X
Step 3: Compute the depreciation for the subsequent period.
Cost, beginning X
Add: Cost of acquisition during the year X
Less: Cost of disposal during the year (X)
Adjusted basis for depreciation X

Times: Depreciation rate (step 1) x%
6. LEASEHOLD IMPROVEMENT
Cost
= Depreciation expense
Shorter
Useful life Remaining

of improvement Lease term Note: Add the renewal option (extension) if it is
probable or certain to be used (silent, not probable)
7. DEPRECIATION WITH CHANGE IN ESTIMATE
ASSUMING STRAIGHT LINE METHOD
Step 1: Compute the carrying amount at the date of change in estimate.
Cost X
Depreciable amount X
Annual depreciation expense X

Multi: Number of years lapsed from the acquisition date up to the date of change) X
Accumulated depreciation (cumulative up to the date of change) X
Cost X
Less: Accumulated depreciation (cumulative up to the date of change) (X)
Carrying amount at the date of change X
Step 2: Apply the changes (new remaining useful life, new residual value, new depreciation method,
addition to cost) from the carrying amount at the date of change: (Assuming straight line method)
Carrying amount at the date of change (Step 1) X

Less: New residual value (X)
Depreciable cost X
Divide: New remaining useful life X
New depreciation expense X
75) What is the gain or loss on sale of PPE?
Answer:
Initial measurement (cost) X

Less: Accumulated depreciation (question 72) (X)
Carrying amount of the PPE at the date of sale X
Selling price X
Less: Carrying amount of the PPE at the date of sale (X)
Gain or loss on sale X
Topic 21: Impairment of Asset
1. What is the amount of impairment loss?
2. What is the carrying amount of the PPE right after impairment?
3. What is the new depreciation expense after recording impairment?
4. What is the amount of reversal of impairment loss?
76) What is the amount of impairment loss?
Answer: Subsequently, property, plant and equipment (PPE) is measured either under cost model or
revaluation model. Under cost model, PPE carried at:
Cost (Initial measurement refer to topics: 16, 17, 18) X

Less: Accumulated depreciation (refer to 19) X
Less: Accumulated impairment (refer below) X
Decrease in Value of PPE
Revaluation Model
Record as Impairment Loss
Step 1: Determine the fair value less cost of disposal.
Fair value (a.k.a. estimated selling price) X

Less: Cost of disposal (X)
Fair value less cost to sell X
Step 2: Determine the value in use.
Annual net cash inflow x PVF of annuity = PV of annual net cash flow X
Add: Residual value x PV of 1 = PV of residual value X
Value in use X
Step 3: Determine the recoverable amount (RA).
Fair value less cost of disposal X

VS. Value in use X
Recoverable amount (select the higher value) X
Step 4: Compute the carrying amount at the date of impairment.
Cost X
Less: Accumulated depreciation (annual depreciation x age) X
Carrying amount at the date of impairment X
Step 5: Compute the amount of impairment.
Carrying amount at the date of impairment X

Less: Recoverable amount (step 3) (X)
Impairment loss X
CA > RA = WITH IMPAIRMENT CA < RA = NO IMPAIRMENT

77) What is the carrying amount of the PPE right after impairment?
Answer:
Initial measurement of PPE (Cost) X

Less: Accumulated depreciation (X)
Less: Impairment (question 74) (X)
Carrying amount of the PPE after impairment X
Alternative solution:
Recoverable amount = CA of PPE after impairment
78) What is the new depreciation expense after impairment?
Answer:
CA after impairment (equal to RA)

= New Depreciation
Remaining useful life
79) What is the gain on reversal of impairment loss?
Answer:
Step 1: Compute the carrying amount on the date of reversal.
Recoverable amount (New CA after impairment) X

Less: Subsequent new depreciation up to reversal date (question 76) (X)
Carrying amount on the date of reversal X
Step 2: Compute the carrying amount AS IF NO IMPAIRMENT.
Initial measurement of PPE (Cost) X

Less: Accumulated depreciation at reversal date (using the original depreciation) (X)
Carrying amount on the date of reversal (as if no impairment) X
Step 3: Determine the NEW recoverable amount.
Fair value less cost of disposal at reversal date X

VS. Value in use at reversal date X
NEW recoverable amount (select the higher) X
Note! The recoverable amount at the date of impairment is not the recoverable amount at the date of reversal.
Step 4: Determine reversal limit.
NEW recoverable amount X

VS. Carrying amount as if no impairment X
Reversal limit (select the lower) X
Step 5: Compute the gain on reversal of impairment.
Carrying amount on the date of reversal (step 1) X

Less: Reversal limit (step 2) X
Gain on reversal of impairment X
CA > LIMIT = NO REVERSAL CA < LIMIT = WITH REVERSAL

Topic 22: Revaluation Surplus
1. What is the revaluation surplus on the date of revaluation?
2. What is the balance of revaluation surplus subsequent to the date of revaluation?
3. What is the new depreciation expense for the revaluated PPE?
4. What are the journal entries to record the revaluation?
80) What is the revaluation surplus on the date of revaluation?
Answer: Under cost model, the company can not increase the value of their PPE to its fair value (unless there
was a previous impairment). While under revaluation model, the company can increase the value of their PPE
to its fair value, such increase is referred as revaluation surplus (one of the sever OCIs).
Increase in Value of PPE
Revaluation Model
PPE was PPE was not PPE was PPE was not
impaired
before
Record as both
Gain on reversal & Revaluation
Revaluation Surplus
Step 1: Compute the depreciated replacement cost or the sound value or the fair value.
Replacement cost – residual value

= Annual depreciation based on replacement cost
Useful life
Replacement cost X
Less: Accumulated depreciation based on replacement cost (from purchase to revaluation date) (X)
Depreciated replacement cost (a.k.a. sound value, fair value) X
Note! If what is given in the problem is FAIR VALUE OR SOUND VALUE, there is no need to compute for the
depreciated replacement cost. The fair value or sound value will be your depreciated replacement cost. If what
is given in the problem is REPLACEMENT COST, there is a need to compute the depreciated replacement cost.
Step 2: Compute for the carrying amount at the date of revaluation.
Initial measurement (original cost) X

Less: Accumulated depreciation – original (X)
Carrying amount at the date of revaluation X
Step 3: Compute for the initial revaluation.
Depreciated replacement cost (a.k.a. fair value, sound value) X

Less: Carrying amount at the date of revaluation (X)
Revaluation surplus − initial, before tax X
Step 4: Compute the initial revaluation, after tax (IF WITH TAX RATE GIVEN).
Revaluation surplus – initial, before tax X

Less: (100% - Tax rate) x%
Revaluation surplus − initial, after tax X
Note! All OCI items are presented in the statement of comprehensive income, after tax. If there is no tax rate
given, ignore step 4.
81) What is the balance of revaluation surplus subsequent to the date of revaluation?
Answer:
Step 1: Compute the amount of transfer of revaluation surplus to retained earnings.
Type of asset revalued
Depreciable Asset Non Depreciable Asset
Initial revaluation
= Annual transfer
Remaining life Asset not sold Asset was sold
Annual transfer X
Times: Years lapsed since revaluation X No amount Whole amount
Cumulative amount transferred X is transferred is transferred
Step 2: Compute the balance (REMAINING) of the revaluation surplus at year end?
Initial revaluation surplus (question 78) X

Less: Amount transferred to retained earnings (X)
Remaining revaluation surplus at year-end X
82) What is the NEW depreciation expense after recording the revaluation?
Answer: When the asset is revalued, there will be a change in estimate. Thus the new depreciation should be
computed.

Divide: Remaining useful life X
NEW depreciation expense X
83) What is the NEW depreciation expense after recording the revaluation?
Answer: The company can chose between proportional method or elimination method in recording the
revaluation surplus:
Proportional method:
Step 1: Compute the percentage of increase:
Initial revaluation (refer question 78)

= Percentage of increase
Carrying amount before revaluation (question 78)
Step 2: Journalize
Dr. PPE (Cost x percentage of increase) X

Cr. Accumulated depreciation (A.D. x percentage of increase) X
Cr. Revaluation surplus (question 78) X
Elimination method:
Dr. Accumulated depreciation (equal to initial revaluation) X

Cr. Revaluation surplus (question 78) X
Topic 23: Combination of Impairment & Revaluation
Revaluation first, before impairment

1. What is the amount of impairment loss of the revalued asset?
Impairment first, before revaluation

2. What is the amount of revaluation surplus of the previously impaired asset?
84) What is the amount of impairment loss of the revalued asset?
Answer: The company should zero out the remaining revaluation surplus first before recording any impairment.
PPE was PPE was

revalued before not revalued before
Record as
Impairment Loss
Step 1: Compute the initial revaluation surplus.

Revaluation surplus − initial, before tax X
Step 2: Compute the carrying amount of PPE on the date of impairment.
Depreciated replacement (a.k.a. fair value, sound value) – NEW CA X

Less: Accumulated depreciation based on NEW depreciation (question 80) (X)
Carrying amount on the date of impairment X
Step 3: Compute the remaining balance of revaluation on the date of impairment.
Initial revaluation surplus (question 78) X

Less: Amount transferred to retained earnings (X)
Remaining revaluation surplus at impairment date X
Step 4: Compute the impairment to be recorded.
Depreciated replacement (a.k.a. fair value, sound value) – NEW CA (step 2) X

Less: Recoverable amount on the date of impairment (FVCOD vs. VIU select higher) (X)
Total decrease in value of PPE X

Less: Remaining revaluation surplus at impairment date (step 3) (X)
Impairment loss recognized X
85) What is the amount of revaluation surplus of the previously impaired asset?
Answer:
Increase in Value of PPE
Revaluation Model
PPE was PPE was not PPE was impaired PPE was not
impaired impaired before impaired before
before before
Record the Do not record Record the increase Record the increase
increase in the increase in value WITHOUT in value WITHOUT
value WITH in value LIMIT as both LIMIT as,
LIMIT as:
GAIN ON REVERSAL REVALUATION
GAIN ON & REVALUATION SURPLUS
REVERSAL SURPLUS
Step 1: Compute the carrying value of PPE on the date of reversal.
Recoverable amount (NEW CA right after impairment) X

Less: NEW depreciation (question 76) (X)
Carrying amount at the date of revaluation X
Step 2: Compute the gain on reversal of impairment.
Carrying amount on the date of reversal X

Less: Reversal limit (X)
Gain on reversal of impairment (question 77) X
Step 3: Compute the total increase in value of the asset.
Recoverable amount at the date of revaluation X

Total increase in value X

Less: Gain on reversal of impairment (X)
Revaluation surplus X
Topic 24: Cash Generating Unit
1. What is the total impairment loss of the CGU?
2. What is the impairment loss allocated to individual asset included in the CGU?
86) What is the total impairment loss of the CGU?
Answer:
Step 1: Compute the carry amount of the CGU:
Cash X
Add: Accounts receivable X
Less: Allowance for bad debt (X)
Add: Notes receivable X
Less: Notes receivable – discounted (X)
Add: Inventory X
Less: Allowance for inventory write-down (X)
Add: Investments X
Add: PPE X
Less: Accumulated depreciation (X)
Add: Intangible assets (including goodwill) X
Carrying amount of CGU X
Note! Liabilities of CGU is not included in the computing the carrying value.
Step 2: Compute the total impairment of the CGU.
Carrying amount of CGU X

Less: Recoverable amount (FVCOD vs. VIU, Higher) (X)
Total impairment of CGU X
87) What is the impairment loss allocated to the individual asset included in the CGU?
Answer:
Step 1: Allocate to the impairment to Goodwill first:
Total impairment (question 84) X

Less: Goodwill (X)
Remaining impairment allocated to non-goodwill asset X
Step 2: Allocate the remaining impairment to “obviously impaired asset” (asset in which individual impairment
can be computed): SKIP THIS STEP IF NO ASSET IS OBVIOUSLY IMPAIRED
Carrying amount of asset obviously impaired X

Less: Recoverable amount for PPE or LCNRV for inventory (X)
Impairment allocated to obviously impaired asset X
Remaining impairment allocated to non-goodwill asset (step 1) X

Less: Impairment allocated to obviously impaired asset (step 2) (X)
Remaining impairment allocated to other assets X
Step 3: Last allocation
Remaining impairment
Carrying amount of individual asset = Impairment allocated to
allocated to other x
Carrying of all other assets in CGU(see note!) individual asset
asset (Step 2)
Note! All other asset do not include:

(1) goodwill; (2) obviously impaired asset; (3) cash; and (4) other asset stated in the problem that is not
impaired.
Topic 25: Investment Property (IP)
1. What is the total composition of investment property?
2. What is the carrying amount of the investment property at year end?
3. What is the depreciation expense for the year of the investment property?
4. What is the gain or loss due to change in fair value of the investment property?
5. What is the amount of impairment loss for the year?
6. What is the initial measurement of PPE or Inventory after reclassifying from investment property?
7. What is the initial measurement of PPE or Inventory after reclassifying to investment property?
8. What is the gain or loss from the reclassification of investment property from PPE or Inventory?
9. What is the gain or loss from the reclassification of investment property to PPE or Inventory?
88) What is the total composition of investment property?
Answer: To answer this question, one must know which asset is included as investment property and which are
excluded as investment property.
(1) Land held for capital appreciation;

(2) Land held for undetermined future use;
(3) Land being held as potential plant site;
INCLUDED
(4) Land or building being leased out under operating lease;
(5) Land or building leased out to subsidiary in the separate FS;
(6) Land or building being constructed or developed as investment property;
(1) Land or building being leased out as finance lease;

(2) Land or building used in production or administrative purposes (owner occupied);
(3) Land or building for sale in ordinary course of business;
(4) Land or building for sale not in ordinary course of business;
(5) Land or building being constructed or developed as owner-occupied; EXCLUDED
(6) Land or building leased out under operating lease to subsidiary in the consolidated FS;
(7) Land or building leased out under operating lease to employees at or below market rent;
(8) Building being constructed in behalf of third party;
(9) Hotel
(10) Machineries; equipment; furniture; fixtures;
89) What is the carrying amount of the investment property at year-end?
Answer:
Cost model Fair value model
Cost (same rule as PPE) X Fair value = Carrying amount

Less: Accumulated depreciation (X) (at the date of the question)
Carrying amount X
90) What is the amount of depreciation for the year?
Answer:
Cost X ZERO
Less: Residual Value (X)
Depreciable cost X
91) What is the gain or loss due to change in fair value of the investment property?
ZERO Fair value, Ending X

Less: Fair value, Beginning (X)
Gain (loss) in change in FV X
The answer should be the change for the CURRENT

year only. NOT the cumulative change in FV.
92) What is the amount of impairment loss during the year?
Carrying amount (question 87) X ZERO

Less: Recoverable amount (X)
Impairment loss X
93) What is the initial measurement of PPE or Inventory after reclassifying FROM IP?
94) What is the gain or loss from reclassification PPE or Inventory FROM IP?
1. COST MODEL
PPE
Investment Property
2. FAIR VALUE MODEL
PPE
Investment Property
95) What is the initial measurement of PPE or Inventory after reclassifying TO IP?
96) What is the gain or loss from reclassification PPE or Inventory TO IP?
Answer:
1. COST MODEL
PPE Investment Property
INVENTORY Investment Property
2. FAIR VALUE MODEL
PPE Investment Property
FV of IP X
Less: CA of PPE
Reval Surplus X
INVENTORY Investment Property
FV of IP X
Gain on reclass X
Topic 26: Depletion
1. What is the amount of depletion during the year?
2. What is the amount of depletion included in the cost of goods sold (a.k.a. depletion expense)?
3. What is the carrying amount of the wasting asset as of year end?
4. What is the NEW depletion in the event of change in estimate?
5. What is the depreciation expense for the year of the PPE used in mining activity?
6. What is the maximum amount of dividend that a mining company can declare?
97) What is the amount of depletion during the year?
Answer: Depletion is the increase in value of the nature acquired (also referred as the wasting asset) due to
extraction of natural resources from it. The depletion is inventoriable (e.g., same treatment as depreciation of
factory equipment).
Step 1: Compute the initial carrying amount of the wasting asset:
Acquisition cost of the land (area) X

Add: Exploration cost (notes below) X
Add: Development cost (intangible only, if not stated, considered as intangible) X
Add: Present value of restoration cost X
Initial carrying amount of wasting asset X
Exploration Cost – Successful Cost Method
Cost of successful exploration Cost of unsuccessful exploration

Capitalized (part of wasting asset) Expensed (not part of wasting asset)
Exploration Cost – Full Cost Method
Cost of successful exploration Cost of unsuccessful exploration

Capitalized (part of wasting asset) Capitalized (part of wasting asset)
Step 2: Compute the depletable amount:
Initial carrying amount of wasting asset (step 1) X

Less: Residual value (estimated selling price at the end of life) (X)
Depletable amount X
Step 3: Compute depletion rate:
Depletable amount (step 2)

= Depletion rate
Original estimated number of output
Step 4: Compute the depletion:
Depletion rate (step 3) X

Times: Actual output extracted (produced) X
Depletion for the year X
98) What is the amount of depletion expensed (depletion as part of cost of goods sold) during the year?
Answer: Depletion is initially recorded as inventory and will be expensed only when sold (as of part of cost of
goods sold).
Scenario 1: When there is no change in depletion rate:
Depletion rate (question 97) X

Multiply: Number of units sold X
Depletion expense X
Scenario 2: With change in depletion rate
Previous depletion rate x Number of units sold coming from previous year = X
Add: NEW depletion rate x Number of units sold coming from present year = X
Depletion expense X
99) What is the carrying amount of the wasting asset as of year end?
Answer: Development cost is not only incurred before the start of production process (extraction), but can also
be incurred during the process of extraction along the way.
Initial carrying amount (question 97, step 1) X

Add: Additional development cost subsequent to acquisition X
Less: Accumulated depletion (total of depletion from acquisition to the date of the question) (X)
Carrying amount at year-end X
Answer:
Compute the new depletion rate if

(1) There is an additional development cost incurred in the subsequent year;
(2) There is a change in the estimated number of outputs.
(3) New residual value
Initial measurement (question 95, step 1) X

Add: Additional development cost (from acquisition to date of change in depletion rate) X
Less: Accumulated depletion cost (depletion from acquisition to date of change in depletion rate) (X)
Carrying amount at the date of change in estimate X

Remaining depletable amount X
Remaining depletable amount (step 2)

= NEW depletion rate
Revised estimated remaining output
Step 4: Compute the NEW depletion:
Actual output extracted (produced) X

Times: New depletion rate X
NEW depletion X
101) What is the depreciation expense of PPE used in the mining activity?
Answer: The true question here is, “what method of depreciation should be used”?
Then you can refer to question 72 as a guide in computing the depreciation.
Depreciation method
With alternative use Without alternative use
Straight-line select is SHORTER
Life of the mine Useful life of PPE
Output method Straight line method
102) What is the maximum amount of dividend that a wasting asset company can declare?
Answer:
Un-appropriated retained earnings X

Add: Accumulated depletion (total of depletion from acquisition to date of question) X
Less: Capital liquidated* X
Less: Depletion not yet sold (depletion rate x ending inventory) X
Maximum dividend X
*Capital liquidated. The excess of dividend declared from the un-appropriated retained earnings.
Maximum dividend declared X

Less: Un-appropriated retained earnings X
Dividends not coming from RE but from capital (capital liquidated) X
Topic 27: Non Current Asset (NCA) Held for Sale
1. What is the amount of impairment loss on the date of reclassification to NCA held for sale?
2. What is the carrying amount of NCA held for sale at year end?
3. What is the amount of impairment or reversal of impairment of NCA held for sale at year-end?
4. What is the amount of gain or loss on sale of NCA held for sale?
5. What is the initial measurement of PPE after reclassification back from NCA held for sale?
6. What is the gain or loss on reclassification back to PPE?
103) What is the amount of impairment loss on the date of reclassification to NCA held for sale?
Answer:
Step 1: Determine the initial measurement of the NCA held for sale.
Fair value less cost to sell X

VS. Carrying amount of the asset before reclassified as NCA held for sale X
Initial measurement (select the LOWER value) X
Step 2: Compute the amount of impairment.
Carrying amount of the asset before reclassified as NCA held for sale X
VS. Initial measurement (step 1) X
Impairment loss X
Note! Once the asset is reclassified as NCA held for sale, no more depreciation will be recognized.
104) What is the carrying amount of NCA held for sale at year end?
Answer:
Fair value less cost to sell (at year end) X

VS. Carrying amount of the asset before reclassified as NCA held for sale X
Carrying amount (select the LOWER value) X
Note! The fair value less cost to sell at the reclassification date is not the same as the fair value less cost to sell
at year – end.
105) What is the amount of impairment or reversal of impairment of NCA held for sale at year-end?
Answer:
NCA HELD FOR SALE ACCOUNT

Initial Measurement (question 101) X
Reversal of impairment (SQUEEZE) X X Impairment loss (SQUEEZE)
Carrying amount at year end (question 102) X
Note!
1) You can solve for either impairment loss or reversal of impairment by squeezing the amount in the T-
account of NCA held for sale. Plot the ending balance (carrying amount) and the initial measurement,
then you can not squeeze for the answer.
2) Be sensitive with the question, impairment loss may happen in two periods, (1) is on the reclassification
date and; (2) at year end. If the problem is asking for the “total impairment for the year”, solve as follow:
Impairment at the reclassification date X

Add: impairment at year end X
Total impairment for the year X
106) What is the gain or loss on sale of the NCA held for sale?
Answer:
Selling price of the asset X
Note!
107) What is the initial measurement of PPE after reclassification back from NCA held for sale?
Answer:
Step 1: Compute the carrying amount of the PPE “AS IF IT WAS NEVER CLASSIFIED AS NCA HELD FOR
SALE AND THE DEPRECIATION WILL CONTINUE”.
Cost of the PPE X

Less: Accumulated depreciation (assuming continues up to reclassification back date) (X)
Carrying amount, AS IF X
Step 2: Compute the initial measurement of the reclassified back PPE.
Recoverable amount at the date of reclassification back (FVCOD VS. VUI, HIGHER) X
VS. Carrying amount, AS IF X
Initial measurement of the reclassified back PPE X
108) What is the gain or loss on the reclassification back?
Answer:
Initial measurement of the reclassified back PPE (question 105) X

Less: Carrying amount of the NCA held for sale (lower of CA before reclassification VS FVCOD) (X)
Gain or (loss) on the reclassification back X
Topic 28: Intangible Assets
1. What is the composition of intangible asset?
2. What is the amount of research and development expense?
3. What is the initial measurement (cost) of intangible asset?
4. What is the amortization expense during the year?
5. What is the total related to intangible assets?
6. What is the carrying amount of intangible assets at year end?
109) What is the composition of intangible asset?
Answer:
(1) Patent
(2) Franchise
(3) Trademark
(4) Copyright Included
(5) Licenses
(6) Computer software
(7) Website
(8) Organizational cost (start-up cost)

(9) Prepaid expenses
(10) Discount and premium on bonds Excluded
(11) Leasehold improvement
(12) Continuing franchise fee
(13) Cost of defending the intangible asset
purchased (silent), INCLUDED

Goodwill
Customer list
Brands
Mastheads
Secret formula or recipe
Production Backlogs
internally generated, EXCLUDED
Note!
1) Compute software rule:
Integral part of the machine – excluded from intangible asset (treated as PPE).
Not integral part of the machine – included as intangible asset.
2) Website rule:
Solely for advertisement and promotion – excluded from intangible asset (treated as expense).
Not solely for advertisement and promotion – included as intangible asset.
3) Research and development:

As a general rule (silent) – excluded from intangible asset (treated as expense)
Purchase from another party – included as intangible asset.
Acquired from a business combination – included as intangible asset.
Technical feasibility was establish – included as intangible asset.
110) What is the total amount of research and development (R & D) expense?
Answer: To answer this question, one must know which expenditures are treated as R & D expense and which
are not.
Expenditure Included or excluded?
(a) Material, labor and overhead used in conducting research & development
(b) Cost of activities aim to obtain new knowledge
(c) Cost of developing, designing, producing and testing prototype Included as research
(d) Cost of searching and testing alternatives and development
(e) Cost of designing tools, jigs and molds Expense
(f) Depreciation of PPE used in research and development with alternative use
(g) Whole of cost PPE used in research and development without alternative use
(a) Trouble shooting during commercial production Excluded from R & D

(b) Periodic, routine, seasonal changes of existing product expense
(c) Changes or modification for specific customer
(d) Engineering follow through during commercial production (treated as factory
(e) Quality control during commercial production overhead / inventory)
Excluded from R & D

expense
(a) Marketing or advertising cost
(Treated as selling
expense)
Excluded from R & D

(a) Payment to intellectual property office in connection with registration expense
(b) Legal expenses to register the patent
(c) Drawing cost required by the patent office (Treated as capitalized
intangible asset)
111) What is the initial measurement of intangible asset?
Answer: This will depend on how the intangible asset was acquired. If purchased, the accounting rule is the
same as the acquisition rule for PPE (refer to topic 16). The initial measurement will be different if self
constructed or developed.
Type of intangible asset Acquired by purchased Self-developed (internally generated)
Payment to register the patent

Add: Legal expense with registration
1. Patent Refer to topic 16
Add: Cost of drawing required by patent office
Initial measure of patent
R & D after technical feasibility

Trademark &
2. Refer to topic 16 Add: Direct cost (registration cost)
Copyright
Initial measurement
Cost of coding and testing

Add: Cost of producing product master
3. Website & Software Refer to topic 16
Add: Cost of installation
Initial measurement of Website
Franchise
Licenses
Goodwill
Brands
4. Refer to topic 16
Mastheads Not applicable
Customer list
Production backlogs
Secret formula or recipe
112) What is the amount of amortization of intangible asset?
Answer: This will depend on the life of intangible asset whether indefinite (unlimited) or finite (limited) life.
Life of Intangible Asset
Limited Life Unlimited Life
Record amortization using straight line method.
X
X
Amortization expense
Note! The legal life of patent is 20 years. All other intangible asset’s legal life will be state in the problem. If not
stated in the problem, use the useful life for amortization.
113) What is the carrying amount of the intangible assets at year end?
Answer: The intangible asset can be subsequently measured either under cost model or revaluation model.
The rule for subsequent measurement of PPE is the same as the rule for intangible asset.
Cost model Revaluation model (refer to topic 20)

Cost (refer to question 111) X Fair value X
Less: Acc’d amortization (question 112) X Less: Acc’d amortization (question 112) X
Less: Acc’d impairment (topic 19) X Less: Acc’d impairment (topic 19) X
Carrying amount at year end X Carrying amount at year end X
114) What is the total expenses related to intangible assets?
Answer:
Type of intangible asset Related expenses
Cost of successful or unsuccessful defense against litigation X

Add: Amortization expense for the year X
1. Patent Add: Impairment loss, if any X
Add: R & D expense related X
Total expense X
Continuing franchise fee X

Add: Interest expense related to the notes issued X
2. Franchise Add: Amortization expense X
Add: Impairment loss, if any X
Total expense X
Amortization expense X
3. Other intangible asset Add: Impairment loss X
Total expense X
Note! If the defense for litigation is unsuccessful, there will be an impairment equal to the carrying amount at the
date of loss of litigation.
Topic 01: Current Liabilities and Classifications
2. What is the adjusted balance of trade accounts payable at year end?
3. What is the amount of accrued expense at year end?
4. What is the amount of unearned income at year end?
5. What is the amount of escrow liability at year end?
6. What is the total current liability and non current liability at year end?
115) What is the adjusted balance of trade accounts payable at year end?
Answer:
1. If what is given is the beginning balance.
Trade − Accounts Payable

X Beginning balance
Purchase discount X X Gross credit purchases
Purchase return X
Disbursements (payments made) X
X Ending balance
2. If what is given is the ending balance.
Ending balance (unadjusted) X

Add: Drawn check, post-date X
Add: Drawn check, unreleased X
Add: Suppliers’ debit balance X
Add: Discount deducted but can no longer avail X
Less: Any unrecorded purchase returns X
Add or less: Recording of goods in transit * X
Ending balance (adjusted) X
Goods in transit adjustment *
Recorded Not recorded (silent)

With transfer of title
(1. FOB shipping point)
No adjustment Add
(2. FOB seller)
(3. FOB CIF / FAS)
Without transfer of title

(1. FOB destination)
Minus No adjustment
(2. FOB buyer)
(3. FOB ex-ship)
116) What is the amount of accrued expense at year end?
Answer:
Accrued Expense
X Beginning balance
Disbursements (payments made) X X Expenses incurred during the year
X Ending balance
Examples of accrued expenses:
(1) Interest payable (2) Salaries payable
(3) Insurance payable (4) Utilities payable
(5) Income tax payable (6) Rent payable
Computation of bonus payable:
Bonus based on profit before bonus and before tax Bonus based on profit after bonus and before tax
Formula: Formula:
B = B% (Profit) B = B% (Profit – B)
Trial and error (alternative):
Profit X
Less: Bonus X (trial amount)
Times: Bonus rate x%
Bonus X (should be trial amount)
Bonus based on profit before bonus and after tax Bonus based on profit after bonus and after tax
Formula: Formula:
B = B% [Profit – T%(Profit – B)] B = B% [Profit – B – T%(Profit – B)]
Trial and error (alternative): Trial and error (alternative):
Profit X Profit X
Less: Bonus X (trial amount) Less: Bonus X (trial amount)
Times: Tax remove x% (100% - tax rate) Times: Tax remove x% (100% - tax rate)
Add: Bonus X (trial amount) Times: Bonus rate x%
Times: Bonus rate x% Bonus X (should be trial amount)
Bonus X (should be trial amount)
117) What is the amount of unearned income at year end?
Answer:
Unearned income
X Beginning balance
Revenue earned for advance payments X X Cash advance payments
X Ending balance
Examples of accrued expenses:

(1) Advances from customers (2) Gift certificate payable
(3) Unearned revenue (4) Customers’ credit balance
118) What is the amount of escrow liability at year end?
Answer:
Escrow Liability
X Beginning balance
Taxes remitted (paid in behalf of customers) X X Cash receipt from customer for their taxes
X Ending balance
119) What is the amount of current and non current liability at year end?
Answer:
Common distractions (not liabilities)

(1) Share dividend payable (equity account) (2) Cash surrender value (asset account)
(3) Reserve for contingencies (equity account) (4) Dividends in-arrears (disclosure)
(5) Advances to (asset account) (6) Contingent liability (disclosure)
1. As a general rule, liabilities that will be paid within 12 months is current liabilities.
2. Trade payable (purchases of inventory) and accrued expenses (incurred in the process of production) is
always presented as current liabilities.
3. If the problem is silent as to when it will be paid, the classification should be as below-mentioned:
Commonly current liability Commonly non current liability

(1) Trade accounts payable (1) Mortgage payable
(2) Notes payable (2) Bonds payable (add premium, minus discount)
(3) Accrued expenses (3) Deferred tax liability (always non current)
(4) Unearned income (4) Lease deposit received
(5) Dividend payable: (5) Advances from:
a) Cash dividend a. Shareholders
b) Property dividend b. Officers
c) Dividend payable (silent as to kind) c. Subsidiary
(6) Deposits from customers d. Associates (affiliates)
(7) Advances from:
(a) Customers
(b) Suppliers
(c) Employees
(8) Bank overdraft (different bank and silent)
(9) Deposits from customer
(10) Liabilities payable on demand
(11) Provisions:
(a) Warranty payable
(b) Premiums payable
(c) Lawsuit payable
(12) Currently maturing originally long term debt
Currently maturing originally long term debt.
As a general rule, presented as current liability. Exception to the rule if any of the below-mentioned is met,
the liability is presented as non current liability:
1. Refinance (roll over) on or before year end (December 31).

2. The company has the discretion to refinance in long term. Non current liability
3. Grace period was provided on or before year end (December 31).
Topic 02: Provision & Contingencies

1. What is the amount of expense from lawsuit for the year?
2. What is the lawsuit payable at year end?
3. What is the amount of premium expense for the year?
4. What is the premium payable at year end?
5. What is the amount warranty expense for the year?
6. What is the warranty payable at year end?
PROVISIONS CONTINGENCIES
• Liability with uncertain time and/or amount • Liability with uncertain time and/or amount
• Recorded as liability V.S. • Not recorded as liability
• (a) measureable but not probable
• Both measureable and probable (or higher) (b) probable but not measureable
(c) not measureable and not probable
• If possible – disclosure to F/S is required
• No disclosure to F/S is required • If remote – no disclosure to F/S is required
Virtually certain − Above 90% chance

Probable − Above 50% chance
Possible − 50% and below chance
Remote − 5% and below chance
120) What is the amount of expense from lawsuit for the year?
121) What is the lawsuit payable at year end?
Answer: Measurement of liability and expense:
FIRST PRIORITY − Actual amount, if known before the F/S issuance date.
SECOND PRIORITY – Best estimate made by the company (company’s lawyer).
THIRD PRIORITY – Midpoint if a range of estimate is given [(highest point + lowest point) / 2].
FOURTH PRIORITY – Expected value, if multiple outcomes is given [total of (outcome x probability %)].
(Outcome 1 x Probability %) = X
Expected value X
WITH INSURANCE COVER LIABILITY – Best estimate made by the company (company’s lawyer).
Rule for the liability: Rule for the expense:

Rule 1: The liability is not affected (as is). Rule 1: If no deductible clause, expense is ZERO
Rule 2: If with deductible clause, expense is equal to
No offsetting of lawsuit liability and the deductible clause.
receivable (claims from) insurance
company. Best answer is to offset the expense from lawsuit and
the gains from insurance claims. Regardless, the
deductible clause will be paid and should be
expensed.
122) What is the premium expense for the year?

123) What is the premium payable at year end?
Answer:
Step 1: Compute for the premium expense, in units.
Total number of coupons (proof of purchase, bottle caps, etc.) X

Times: Percentage of expected redemption x%
Divide: Number of coupons required to redeem one premium X
Premium expense, in units (premiums to be distributed for the current year's sale) X
Step 2: Compute the net cost of each premium.
Cost of each premium X

Add: Cost to distribute the premiums X
Less: Cash demand from customers redeeming the premiums X
Net cost of each premium X
Step 3: Compute for the premiums distributed, in units.
Alternative 1 Alternative 2
Actual number of coupons redeemed X X
Divide: Number of coupons required for 1 prem. X X
Number of premiums distributed X X
Premiums distributed X
Step 4: Compute for the premium expense and premium payable by preparing the table below:
(Step 2)
In units Net cost In Peso
Beginning premium payable X X X
Add: Premium expense (Step 1) X X X
Less: Premium distributed (Step 3) X X X
Ending premiums payable X X X
124) What is the warranty expense for the year?
125) What is the warranty payable at year end?
Answer:
Step 1: Compute the amount of warranty expense.
Total sales during the period X

Times: Total expected warranty cost during the warranty period x%
Warranty expense X
Step 2: Compute the amount of warranty payable.
Beginning warranty payable X

Add: Warranty expense (Step 1) X
Less: Actual warranty expenditure during the year X
Ending warranty payable X
Alternative way:
Cumulative sales (from the very beginning up to date of question) X

Times: Total expected warranty cost during the warranty period x%
Cumulative warranty expense X
Less: Cumulative actual warranty expenditure (from beginning to question date) X
Ending warranty payable X
Topic 03: Bonds Payable

1. What is the initial measurement of bonds payable?
2. What is the total cash proceeds from issuance of bonds?
3. What is the subsequent measurement of bonds payable (carrying amount)?
4. What is the interest expense for the year?
5. What is the interest payable for the year?
6. What is the gain or loss from retirement of the bonds?
126) What is the initial measurement (initial carrying amount) of bonds payable?
Answer:
Fair value of the bonds (issue price, selling price) of the bonds X
Less: Transaction cost X
Initial measurement of bonds payable X
Alternative way:
Principal amount X PVF = X

Nominal interest X PVF = X
Initial measurement of the bonds X
Use effective interest rate.

PVF of Annuity if the bond payable is term bond.
PVF of 1 if the bond payable is serial bond.
127) What is the net cash proceeds from issuance of bonds?
Answer:
Step 1: Compute the interest receivable (accrued interest) sold.
Principal amount of the bonds X

Times: Number of months from the last interest date to issuance date / 12 months x/12
Interest receivable sold X
Step 2: Compute the net proceeds.
Fair value of the bonds (issue price) X

Add: Interest receivable sold (Step 1) X
Less: Transaction cost X
Net cash proceeds from issuance of bonds X
128) What is the subsequent measurement of the bonds payable (carrying amount)?
Answer: Bonds payable is subsequently measured at amortized cost using the effective amortization method.
Date Effective interest Nominal interest Amortization Carrying amount

Issue date -- -- -- Initial measurement
Year end (CA beg x ER) (Face x NR) (EI – NI) CA, beg (+ or − Amor.)
Alternative way:
Initial measurement X
Times: 1 + effective interest x%
Less: Nominal interest X
Less: Principal payment (only if serial bonds) X
129) What is the interest expense for the year?
Answer:
Carrying amount, beginning X

Times: Effective interest rate (original) X
Interest expense for the year X
Alternative way:
Nominal interest X
Add: Amortization of discount X
Less: Amortization of premium X
Interest expense X
The carrying amount should be updated when there are: (1) Principal payment made during the year; and (2)
Interest payment during the year.
130) What is the interest payable at year end?
Answer:
Principal amount X
Times: Nominal interest x%
Times: Number of months from last interest date up until December 31 X / 12mo.
Interest payable X
131) What is the gain or loss on retirement of the bonds payable?
Answer: The gain or loss happens only when the bonds were retired earlier than its original maturity date.
Step 1: Compute the amount of interest payment included in the total retirement price.
Face amount of the retired bonds (be sensitive if total or partial retirement) X
Times: Number of months unpaid (last interest date up to retirement date) X
Interest payment included in the retirement price X
Step 2: Calculate the retirement price of the bonds (using residual method).
Total retirement price X

Less: Interest payment (retirement price of interest, Step-1) X
Retirement price of the bonds X
Step 3: Get the gain or loss on bond retirement.
Carrying amount at date of retirement (refer to Question 14 in getting the CA) X

Less: Retirement price allocated to the bonds payable (Step 2) X
Gain or loss on retirement X
STRAIGHT LINE METHOD OF AMORTIZATION
The following questions should be answered in a different procedures for this method:
(a) Subsequent measurement of the bonds payable.

(b) Interest expense for the year.
(c) Gain or loss on retirement of the bonds.
(a) Subsequent measurement of the bonds payable
Answer:
Step 1: Compute the total premium or discount.
Initial measurement (refer to Question 12) X

Less: Principal amount of bonds X
Total premium (discount) X
Step 2: Compute the annual amortization of premium or discount
Total premium or discount (Step 1) X

Divide: Term of the bonds X
Annual amortization of premium or discount X
Step 3: Compute the subsequent measurement of the bonds payable (carrying amount).

Add: Amortization of discount X
(b) Interest expense for the year
Nominal interest X
Add: Amortization of discount (refer to a-Step 2) X
Interest expense X
(c) Gain or loss on retirement of bonds.

Add: Cumulative amortization of discount X
Less: Cumulative amortization of premium X
Carrying amount, date of retirement X
Less: Retirement price of the bonds payable X
Gain or loss on retirement of bonds X
Topic 04: Compound Financial Instrument

1. What is the amount of the issue price of a compound instrument assigned to equity?
2. What is the amount credited to share premium when the share warrants were exercised?
3. What is the amount credited to share premium when the conversion options were exercised?
132) What is the interest payable at year end?
Answer: The total selling price (issue price) of a compound financial instrument is composed of selling price of
the bonds payable and selling price of the equity instrument (share warrants or conversion option). Issue price
should be allocated using residual method.
From the issue price, first to allocate is the value assigned to the bonds. The fair value of the bonds is the
amount allocated to the bonds and whatever is the residual, it will be allocated to the equity instrument See
illustration below:
Equal to, Fair value of bonds
Bonds payable Equity instrument
Total issue price of the compound instrument (given in the problem) X

Less: Fair value of the bonds payable (refer to question 12) X
Value assigned to equity instrument (share warrants or conversion option) X
133) What is the amount credited to share premium when the share warrants were exercised?
Answer: The share warrants is an instrument giving the holder a privilege to purchase a share a fixed price.
Step 1: Compute the total exercise price (purchase price of shares using the warrants).
Exercise price of shares using each warrants (assume one is to one, if silent) X
Times: Number of share warrants exercised X
Cash received from selling shares X
Step 2: Compute the total consideration received from selling the shares.
Cash received from selling shares (Step 1) X

Add: Value of the equity instrument (share warrants) used/surrendered (refer to question 18) X
Step 3: Compute the share premium arise from exercise of share warrants.
Total consideration received (Step 2) X

Less: Total par value of shares issue (par value per share x number of shares issued) X
Share premium − ordinary shares X
Journal Entry, exercise of share warrants:

Dr. Cash (Step 1) X
Dr. Share premium – Share warrants (refer to question 18) X
Cr. Share capital (total par value) X
Cr. Share premium – ordinary shares (Step 3) X
134) What is the amount credited to share premium when the conversion options were exercised?
Answer: The conversion option is a right given to the holder to convert their right to collect cash to right to
receive shares of the company.
Step 1: Compute the carrying amount (amortized cost) of the bonds payable at the time of conversion.
Initial measurement of the bonds payable (FV of bonds) X

Times: 1 + effective interest rate x%
Less: Nominal interest X
Carrying amount of the bonds at conversion date X
Step 2: Compute the total consideration received from converting the bonds.
Carrying amount of the bonds at conversion date (which will be forgiven ☺) X

Add: Value assigned to the conversion option (refer to question 18) X
Total consideration X
Step 3: Compute the share premium from conversion (excess of consideration received from given up).
Total consideration X
Less: Total par value of shares issue (par value per share x number of shares issued) X
Share premium − ordinary shares X
Journal Entry, exercise of conversion option:

Dr. Bonds payable (face amount) X
Dr. Share premium – Share warrants (refer to question 18) X
Dr. Premium on bonds payable, if any (CA – face) X
Cr. Share premium – ordinary shares (Step 3) X
Cr. Discount on bonds payable, if any (CA – face) X
Topic 05: Notes Payable (NP)
9. What is the initial measurement of notes payable?
10. What is the subsequent measurement of notes receivable (carrying amount at year end)?
11. What is the interest expense for the year?
12. What is the interest payable as of year end?
13. What is the current portion of the notes payable?
14. What is the non current portion of the notes payable?
135) What is the initial measurement of notes payable?
Answer: The fair value of the notes minus any transaction cost. Usually, no transaction cost is incurred from
issuing a promissory note, so it is just the fair value. We have two (2) methods in getting the fair value, which
will be used will depend on the information given in the problem.
Method 1.
Fair value of the consideration received (cash, non-cash asset, service) X

Less: Down payment X
Fair value of the notes payable X
Method 2.
Type of note Fair value at date of recognition
4. Interest Bearing Face Amount = Fair value
Principal amount X
5. Non Interest Bearing Times: PVF X
Fair value X
Principal amount x PVF X

6. Interest Bearing With Unrealistic Nominal Add: Nominal interest x PVF X
Fair value X
136) What is the subsequent measurement of notes payable (carrying amount at year end)?
Answer:
4. Interest Bearing Face Amount = Carrying amount at year end

5. Non Interest Bearing

Less: Nominal interest (Face x NR) X
Unrealistic Nominal
137) What is the amount of interest expense for the year?
Answer:
Face Amount X
Interest expense X

5. Non Interest Bearing Times: Effective Rate x%
Interest Income X

Unrealistic Nominal
Interest expense X
138) What is the amount of interest payable as of the year end?
Answer:
Type of note Interest Receivable
Face Amount X
Interest payable X
5. Non Interest Bearing None
Face Amount X
Times: Nominal Rate x%
Unrealistic Nominal
Interest payable X
139) What is the current portion of the notes payable?

140) What is the non current portion of the note payable?
Answer: If the note is a term note (principal is payable one time), the whole NP will be classified as current if the
principal is payable within one year. If the principal will be paid beyond one year, the whole NP will be classified as
non current asset.
If the note is a serial note, it is both current and non current and can be computed as follows:
Type Current portion Non current portion
Payment of face and interest w/ one year X Carrying amount of NP at year end X
Interest
Less: Nominal interest for one year (X) Less: Current portion of notes receivable (X)
Bearing
Current portion of notes payable X Non current portion of NP X
Carrying amount of NP at year X

Non Carrying amount of NP at year end X
Interest Less: Non current portion of notes receivable (X)
Less: Principal payment next year (X)
Bearing Current portion of NP X
Interest Carrying amount of NP at year X

Bearing Carrying amount of NP at year end X Times: 1 + Effective rate x%
With Less: Non current portion of notes receivable (X) Less: Nominal interest (X)
Unrealistic Current portion of NP X Less: Principal payment next year (X)
Nominal Non current portion of NR X
Summary of rules for notes payable.
Initial Measurement Subsequent Measurement Interest Interest Non Current Current

Classification
(Fair Value) (Amortized Cost) Expense Payable Portion Portion
Face Amount
Face Amount
(1) x Nominal Rate Principal Payable beyond Principal payable
Face Amount Face Amount x Nominal Rate
Interest Bearing x Months unpaid / 12mo. 12 months within 12 months.
Interest Income
Interest Income
Initial Measurement
Carrying Amount, End
Multiply: 1+Effective Rate Carrying Amount, BEG Carrying Amount, End
(2) Multiply: 1+Effective Rate
PV of Principal Less: Principal Payment x Effective Rate None Less: NC Portion
Non Interest Bearing Less: Principal Payment
Amortized Cost Interest Income Current Portion
NC Portion
Initial Measurement Carrying Amount, End

(3) Face Amount
PV of Principal Multiply: 1+Effective Rate Carrying Amount, BEG Multiply: 1+Effective Rate Carrying Amount, End
Interest Bearing x Nominal Rate
Add: PV of Nominal Interest Less: Nominal Interest x Effective Rate Less: Nominal Interest Less: NC Portion
with Unrealistic x Months unpaid / 12mo.
Fair Value Less: Principal Payment Interest Income Less: Principal Payment Current Portion
Nominal Rate Interest Income
Amortized Cost NC Portion
Topic 06: Debt Restructuring
1. What is the gain or loss from extinguishment of debt through asset swap?
2. What is the gain or loss from extinguishment of debt through equity swap?
3. What is the share premium arise from equity swap transaction?
4. What is the gain or loss from extinguishment of debt through modification of terms?
5. What is the new interest expense after modification of terms?
141) What is the gain or loss from extinguishment of debt through asset swap?
Answer: Result of settlement of liability in exchange for non-cash asset. There are two possible answer here
depend on the acceptable framework used.
IFRS based.
Carrying amount of the liability (bonds or notes + interest payable if any) X

Less: Carrying amount of the non-cash asset (inventory, PPE, intangible, etc.) X
Gain or loss on extinguishment of liability X
U.S. GAAP based.
Assumption 1: The non-cash asset is sold to other party at fair value.
Fair value (assumed selling price) of non-cash asset used to settle debt X
Less: Carrying amount of the non-cash asset (inventory, PPE, intangible, etc.) X
Gain or loss disposal of non-cash asset
Assumption 2: The proceeds from assumed sale will be used to settle the debt.
Carrying amount of the liability (bonds or notes + interest payable if any) X

Less: Proceeds from assumed sale (fair value) of the non-cash asset X
Gain or loss on extinguishment of liability
142) What is the gain or loss from extinguishment of debt through equity swap?
143) What is the share premium arise from equity swap transaction?
Answer: The formula to compute the gain or loss and share premium will depend on the given information. Use
the level of priority below:
Priority Amount of gain or loss on extinguishment Share premium arise from equity swap
Carrying amount of debts X Fair value of shares issued to settle X

First Less: Fair value of shares issued to settle X Less: Par value of shares issued X
Gain or loss on extinguishment X Share premium X
Carrying amount of debts X Fair value of the debt (ref. ques. 18) X
Second Less: Fair value of the debt (ref. ques.18) X Less: Par value of shares issued X
Carrying amount of debts X Carrying amount of debts X

Third Less: Carrying amount of debts X Less: Par value of shares issued X
Journal Entry, exercise of conversion option:

Dr. Bonds/Notes payable (face amount) X
Dr. Premium on bonds/notes payable, if any (CA – face) X
Dr. Gain on extinguishment, if any (refer to question 28) X
Cr. Share premium (refer to question 29) X
Cr. Discount on bonds/notes payable, if any (CA – face) X
Cr. Loss on extinguishment, if any (refer to question 28) X
144) What is the gain or loss from extinguishment of through modification of terms?
Answer: If the modification is substantial – the old liability is extinguish and new liability arises. If this is the
case, the company should recognize gain or loss on extinguishment.
However, is the modification is not substantial – the old liability is not extinguish but will remain. If this is the
case, no gain or loss on modification is recognize, but the company should record gain or loss on modification
(not extinguishment). See illustration below:
Step 1: Compute the total amount of liability to be extinguish.
Carrying amount of the main debt (bonds payable or notes payable) X

Add: Interest payable, if any X
Total amount of liability to extinguish X
Step 2: Compute the present value of the new liability.
New principal amount x PVF = X

Add: New nominal interest, if any x PVF = X
PV of new liability X
Step 3: Compute gain or loss on extinguishment (>10%) or modification (10%).
Total amount of liability to extinguish (old liability, Step 1) X

Less: PV of new liability (Step 2) X
Gain or loss on extinguishment or modification X
145) What is the new interest expense after the modification of terms?
Answer:
PV of new liability (refer to question 30, Step 2) X

Times: Original effective interest rate X
Interest expense X
Topic 07: Contributed Capital
1. What is the balance of share capital at year end?
2. What is the balance of share premium at year end?
3. What is the balance of retained earnings at year end?
4. What is the number of shares outstanding?
146) What is the balance of share capital at year end?

147) What is the balance of share premium at year end?
148) What is the balance of retained earnings at year end?
Answer: The usual question in this topic-07 is the ending balance of equity accounts. To answer these
question, one must know how to journalize share transactions and subsequently post in a ledger (T-account or
column) and compute the ending balance.
Since posting and footing is very easy, this topic will focus on journalizing share transaction. The following
transaction affects the equity accounts of the company:
a) Authorization
b) Subscription
c) Issuance of shares
d) Reacquisition of shares
e) Reissuance of shares
f) Retirement of shares
g) Donation from shareholders
h) Conversion of preference shares
i) Share split
j) Conversion of convertible bonds (discussed in Topic 04: Compound Instrument)
k) Exercise of share warrants attached on a bonds (discussed in Topic 04: Compound Instrument)
l) Exercise of share options (discussed in Topic 09: Share Based Payments)
(a) Authorization.
There are two methods in accounting for Authorization transaction:
(1) Memo Entry Method − The most common method in accounting for authorization. In method, one
principal account will be used namely: “Share Capital” and no contra account is made. No entry is
made on Authorization transaction.
Journal Entry, Authorization: Journal Entry, Issuance:

None Dr. Cash 100
Cr. Share capital 100
(2) Journal Entry Method − In this method, one principal account and one contra-account is made. The
principal account “Authorized Share Capital” will remain the same all throughout, while the contra-
account “Unissued Share Capital” will decrease each time there is an issuance of share.
Journal Entry, Authorization:
Dr. Unissued Share Capital (authorized number of shares x par value per share) 1,000
Cr. Authorized Share Capital (authorized number of shares x par value per share) 1,000
Journal Entry, Issuance:
Dr. Cash 100

Cr. Unissued Share Capital (number of shares issued x par value per share) 100
Memo Entry Method Journal Entry Method
Principal Account : Share Capital 100 Principal Account : Authorized Share Cap 1,000
Contra Account : -- 0 Contra Account : Unissued Share Cap (900)
Carrying Amount 100 Carrying Amount 100
(b) Subscription.
It is not possible to issue shares if the full consideration is not yet received. Since there is a limited number of
shares that the company can sold (authorized shares), a potential investor who do not yet have the means to pay
the full consideration can “reserve” the shares.
Journal Entry, Subscription:
Dr. Subscription Receivable (selling price – downpayment) X

Dr. Cash (downpayment) X
Subscribed Share Capital (par value) X
X
Journal Entry, Subsequent Collection:
Dr. Cash (selling price – down payment) X

Subscription receivable (selling price – down payment) X
Journal Entry, Subsequent Collection:

Dr. X
Share Capital X
Journal Entry, Cancellation:
Dr. X
Dr. X
X
X
Share Premium – Forfeited Subscription (if not refundable) X
“Subscription Receivable” account is:

a) Contra-Equity Account – if collectible beyond 12 months (also if silent)
b) Current Asset Account – if collectible within 12 months
(c) Issuance.
C.1 Assigning Value to the Consideration Received − If the investor can pay in full immediately there is no
need to subscribed for the shares first, it can be issued already. Shares can be sold in exchange for the
following:
a) Cash
b) Non-cash
c) Services
d) Extinguishment of debt (Discussed in Topic 06: Debt Restructuring)
Step 1: Determine the value of the consideration received.
Consideration received Value assigned

a) Cash Face amount
1ST Priority – Fair value of the non cash asset received.

b) Non-cash 2ND Priority – Fair value of shares issued.
3RD Priority – Par value of shares issued.
1ST Priority – Fair value of the service received.

c) Service 2ND Priority – Fair value of shares issued.
3RD Priority – Par value of shares issued.
Step 2: Compute for the amount of Share Premium – Excess of Par.
Value of the consideration received X

Less: Par value of shares issued X
Share Premium − Excess of Par X
Journal Entry, Issuance:
Dr. X
X
Share Premium – Excess of Par X
C.2 Share Issuance Cost − Cost incurred in connection with selling or issuing of shares (e.g., commission to
brokers, finders fee, cost of printing share certificates, registrations, filing fees with SEC, legal fees, CPA fees,
underwriting fees, documentary stamp tax, etc.)
Share Issuance Cost
Treated as Expense
Journal Entry, Indirect: Journal Entry, Direct:
Dr. Expense X Dr. SP – Excess of Par X

Cr. Cash X Cr. Cash X
or
Dr. Retained Earnings X
Cr. Cash X
C.3 Lump-sum Issuance − Issuance of multiple class of shares (i.e., ordinary and preference) or two different
kinds of investment (i.e., shares and bonds) in exchange for a single consideration.
Shares
The Company
Cash
Relative FV method
Residual Value method
Use Relative FV Method

1. Relative FV Method
Step 1: Compute the total fair value of all instrument issued.
Number of ordinary shares issue x Fair value per share = Total fair value of O.S.
Number of preference shares issue x Fair value per share = Total fair value of P.S.
Total fair value of all instrument = Total fair value of all shares
Step 2: Allocate the consideration received (usually cash).

Total fair value of O.S.
Total issue price (cash proceeds) x = Amount allocated to O.S.
Total fair value of all shares
Total fair value of P.S.

Total issue price (cash proceeds) x = Amount allocated to P.S.
Total fair value of all shares
2. Residual Value Method
Total issue price (cash proceeds) X

Less: Fair value of shares with available fair value (amount allocated to it also) X
Amount allocated to shares with no available fair value (the residual) X
(d) Reacquisition.
Reacquiring your own shares that was previously issued. Shares reacquired is referred as treasury shares (TS).
Treasury shares is a contra-equity account (normal balance is debit).
The measurement of the treasury shares is cost, the value of consideration given up to acquire the treasury
shares. The cost is:
a) Cash – face amount

b) Non cash – carrying amount of the non cash.
Journal Entry, Reacquisition:
Dr. Treasury Shares (cash = face, non-cash = CA) X

X
(e) Reissuance.
Selling the same share for the second time is called reissuance. Always be careful in defining the transaction
whether issuance (selling shares for the first time, selling unissued shares) or reissuance (selling shares from
treasury shares). There are two (2) issue here:
a) Value of treasury shares sold − The value of the treasury shares is measured at cost. The problem
arises when there is a multiple reacquisition of shares with different cost. Follow the following level of
priority when assigning value to the treasury shares:
1. Specific identification – the problem will state from what reacquisition the treasury shares will be
sold.
2. First in, first out – if the problem is silent as to method in assigning value, FIFO should be used. The
treasury shares sold will be coming from the earliest acquisition.
3. Weighted average – the value of all treasury shares is equal. The equal value of each shares can be
computed by:
Treasury shares available for sale in Peso
= Value of EACH treasury shares
Treasury shares available for sale in Units
b) Gain or loss from sale of treasury shares − There will a gain if the treasury shares is sold above its
value (refer to first issue for the value). While a loss if sold below its value (it can be sold below par
value). After debiting the consideration received and crediting the value of treasury shares, it is down to
the gain or loss:
Selling price (consideration received) of treasury shares sold X

Less: Value of treasury shares sold X
Gain (loss) from issuance X
If GAIN, If LOSS,
Debited to:
Share Premium – Treasury Shares First – Share Premium – Treasury Shares, if any
Second – Retained Earnings
If GAIN, If GAIN,
Dr. Cash (at selling price) X Dr. Cash (at selling price) X
Treasury Shares X Dr. SP – Treasury Shares X
SP – Treasury Shares X Dr. Retained Earnings X
Cr. Treasury Shares X
(f) Retirement.
The corporation code requires the restriction (appropriation) of retained earnings equal to the amount of treasury
shares. Companies can retire their treasury shares so they can declare dividends without restriction.
One disadvantage of retirement though is that the company will incur new share issuance cost when issuing
unissued shares instead of issuing treasury shares. To journalize, we follow four (4) steps:
Step 1: Derecognize the Share Capital.
Number of shares retired X

Times: Par value of each shares X
Share Capital to derecognize (debited) X
Step 2: Derecognize the Share Premium – Excess of Par (SP from original issuance).
Total Share Premium Excess of Par X

Divide: Total Shares Issued X
Share Premium Excess Per Share X
Times: Number of shares retired X
Share Premium − Excess of Par to derecognized (debited) X
Step 3: Derecognize the Treasury Shares.
Number of treasury shares reacquired then retired X

Times: Cost per treasury shares X
Treasury shares to derecognize (credited) X
Step 4: Recognized the gain or loss from retirement.
Par value of shares retired X

Add: Share premium – excess of shares retired X
Original selling price (consideration received from first sale) X
Less: Cost of treasury shares (cost to reacquire and retire) X
Gain or loss from retirement X
Gain or loss from retirement
If GAIN, If GAIN,
Credited to: Debited to:

Share Premium – Retirement First – Share Premium – Treasury Shares, if any
Second – Retained Earnings
Dr. Share Capital X Dr. Share Capital X

Dr. Share Premium – Excess X Dr. Share Premium – Excess X
Cr. Treasury Shares X Dr. Share Premium – Treasury X
Cr. Share Premium – Retirement X Dr. Retained Earnings X
Cr. Treasury Shares X
(g) Donation.
The company received either: (1) cash; (2) non-cash; (3) service or (4) company’s own shares for free. The The
journal entry from receiving the following donation would include a credit to:
a) Other income – if donation is coming from a non shareholder.

b) Share Premium – Donated Capital (DC) – if donation is coming from a shareholder.
(1) Cash
Dr. Cash (face amount) X

Cr. Share Premium – DC X
(2) Non cash
Dr. Non cash asset (at FV) X

(3) Service
Dr. Service Expense (at FV) X

(4) Own Share
Upon receiving the donation:

No journal entry (memo only)
Upon reissuing the donated shares:

Dr. Cash (selling price) X
(h) Conversion of preference shares.
Ordinary shares Preference shares

(a) Residual income (a) Fixed income
(b) Least priority during liquidation (b) Priority during liquidation
(c) Can be issued with no par value (c) Par value is required
(d) With voting rights (d) Without voting rights
(e) No other features (e) Other features includes:
1. Can be convertible into ordinary shares
2. Can be redeemable preference shares
3. Share warrants can be attached
If the preference share is converted into ordinary shares, the preference returned will be retired, thus the step-
by-step procedure for retirement will apply. Then the ordinary shares will be issued, the issuance rule will apply.
Step 1: Derecognize the Preference Share (PS) – Share Capital.
Number of PS retired X
Times: Par value of each shares X
PS Share Capital to derecognize (debited) X
Step 2: Derecognize the Share Premium – Preference Shares (SP from original issuance).
Total Share Premium – Preference share X

Divide: Total PS Issued X
Share Premium – Preference share Per PS X
Times: Number of PS retired X
Share Premium − Preference share to derecognized (debited) X
Step 3: Recognized issuance of ordinary shares.
Number of preference shares converted X

Times: Exchange rate of PS to OS (e.g., one is to one, two is to one, etc.) X
Number of ordinary shares issued X

Times: Par value of each ordinary shares X
Total par value of ordinary shares issued X
Step 4: Recognized the gain or loss from conversion.
Par value of PS converted (Step 1) X

Add: Share premium – Preference shares of PS converted (Step 2) X
Original selling price of PS converted X
Less: Par value of ordinary shares issued (Step 3) X
Gain or loss from conversion X
If GAIN, If LOSS,
Credited to: Debited to:

Share Premium – Ordinary Retained Earnings
Dr. PS – Share Capital X Dr. PS – Share Capital X

Dr. SP – Preference Share X Dr. SP – Preference Share X
Cr. OS – Share Capital X Dr. Retained Earnings X
Cr. SP – Ordinary Share X Cr. OS – Share Capital X
(i) Share Split.
Equity account will remain the same after share split, thus, no journal entry is made for share split transaction. In
the memorandum, the number of shares (unissued, outstanding, treasury) increases, while the par value of
unissued and outstanding shares decreases and the cost per treasury shares also decreases.
149) What is the number of shares outstanding?
Answer: There are four classification of shares according to status:

a) Unissued – never been sold but can be sold.
b) Issued – shares that were sold –in the hands out the company (reacquired) and in the hands of investors.
c) Outstanding – shares that were sold –in the hands of investors (shareholders).
d) Treasury – shares that were sold –in the hands of the company (reacquired).
Number of shares issued (in the hands of the company and shareholders) X
Less: Number of shares reacquired (in the hands of the company) X
Number of shares outstanding (in the hands of the shareholders) X
Topic 08: Retained Earnings
1. What is the amount of cash dividend to be deducted from retained earnings?
2. What is the amount of cash dividends allocated to ordinary shareholders and preference shareholders?
3. What is the amount of equity accounts (share capital, share premium & retained earning) after share dividends?
4. What is the correct journal entry for property dividends?
5. What is the amount of appropriated retained earnings?
6. What is the ending equity accounts after quasi-reorganization?
150) What is the amount of cash dividend to be deducted from retained earnings?
Answer: Shares that are outstanding and subscribed are entitled to received dividends.
Step 1: Compute the total shares entitled to received dividends.
Number of shares issued X

Less: Number of treasury shares X
Number of shares outstanding X

Add: Number of shares subscribed X
Total shares entitled to received dividends X
Step 2: Compute the total dividends payable and amount deducted to retained earnings.
Total shares entitled to received dividends X

Times: Cash dividend per shares (e.g., P100 per share) X
Dividend payable (amounted deducted to retained earnings) X
Date of Declaration Date of Record Date of Settlement
Dr. Retained Earnings X Dr. X

X Cash X
151) What amount of cash dividends is allocated to ordinary shareholders and to preference shareholders?
Answer: The allocation will depend on the classification of the preference shares (PS) as to:
a) Non cumulative, non participating

b) Cumulative, non participating X
c) Non cumulative, fully participating
d) Cumulative, fully participating Basic dividend
a) Non cumulative, non participating.
Total dividends declared X

Less: One basic dividend of PS X
Residual dividend for OS X
b) Cumulative, non participating.
Total dividends declared X

Less: (One basic dividend x years in-arrears) for PS X
Residual dividend for OS X
Years in-arrears − number of years from the last time the company did not declare any dividends up to the year
the company declared a dividends (include the current year).
c) Non cumulative, fully participating
Particulars Ordinary Preference Total

Step 1 – Indicate the dividend declared X
Step 2 – Give one basic dividend for PS X (X)
Step 3 – Give one basic dividend for OS (OS par x DR) X (X)
Step 4 – Compute the remaining dividend X
Step 5 – Give the share of PS from the remaining X
Step 6 – Give the share of OS from the remaining X
Done X X
Total par of OS
Remaining dividend (Step 4) x = Share of PS from the remaining
Total par of PS + OS
Total par of PS
Remaining dividend (Step 4) x = Share of PS from the remaining
Dividend rate (DR) − borrow the dividend rate of the lowest participating preference share.
(d) Non cumulative, non participating.
Particulars Ordinary Preference Total

Step 1 – Indicate the dividend declared X
Step 2 – Give (one basic dividend x yrs. in-arrears) for PS X (X)
Step 3 – Give one basic dividend for OS (OS par x DR) X (X)
Step 4 – Compute the remaining dividend X
Step 5 – Give the share of PS from the remaining X
Step 6 – Give the share of OS from the remaining X
Done X X
152) What amount of equity accounts (share capital, share premium & retained earnings) after share
dividends?
Answer: The correct entry for the share dividend should be carefully understand because three (3) equity
accounts might be affected by this transaction. First question to ask yourself is, “How much should be
deducted from retained earnings?”
Share Dividend
Coming from: Coming from:

Unissued shares Treasury shares
Deduct from retained earnings:

Cost of the treasury shares declared
Large share dividend Dr. Retained Earnings (cost of TS) X

 20% Cr. Treasury Shares (cost of TS) X

Note!
Fair value of shares declared
The fair value
Dr. Retained Earnings (FV of shares) X of shares
Cr. Share Capital (Par of shares) X should not be
Cr. SP – Excess (FV – Par) X lower than its
par.
Par value of shares declared If lower than
par, use the
Dr. Retained Earnings (Par of shares) X par value
Cr. Share Capital (Par of shares) X instead of FV.
153) What is the correct journal entry for property dividends?
Initially measure dividends payable at fair value at the Subsequently, update dividends payable at fair value at Before settlement, the Property Dividends Payable
date of declaration and deduct to the retained earnings year end. Any changes in the measurement of dividends should be updated to its current fair value. Any
the fair value of the property. payable will be added or deducted to retained earnings. changes in the measurement will be +/- to R.E.
Increase in FV: Decrease in FV Increase in FV: Decrease in FV
Dr. Retained Earnings (FV) X Dr. Retained Earnings X Dr. Dividends Payable X Dr. Retained Earnings X Dr. Dividends Payable X
Cr. Property Dividends Payable (FV) X Cr. Dividends Payable X Cr. Retained Earnings X Cr. Dividends Payable X Cr. Retained Earnings X
Property Dividends Payable Property Dividends Payable Property Dividends Payable

X (Beg.) FV @ declaration X (Beg.) FV @ declaration X (Beg.) FV @ Beg. of year
Decrease in FV X X Increase in FV Decrease in FV X X Increase in FV

X (End) FV @ year-end X (End) FV @ settlement
Date of Declaration Year End Date of Settlement
At date of declaration, the non cash asset should be At year, update the NCA held for sale to its new At settlement, do not update the value of NCA Held for
reclassified to non-current asset (NCA) held for LOWER of CA at before reclassification VS. new fair Sale.
disposal (under PFRS 5). value at year end. Increase is asset = reversal of (1) Derecognize the dividends payable
impairment; Decrease in asset = additional impairment. (2) Derecognize the NCA Held for Sale
Carrying amount before reclassification X
(3) Recognize gain or loss on extinguishment of debt
VS. Fair value less cost of disposal X Increase in LOWER OF: Decrease in LOWER OF:
Initial measure (select LOWER) X Dr. NCA Held for Sale X Dr. Impairment loss X
Dividends payable (after update) X
Cr. Gain on Reversal X Cr. NCA Held for Sale X
Dr. NCA Held for Disposal X Less: NCA Held for sale (lower of @ last year end) X
Dr. Impairment loss (if any) X Gain or loss on extinguishment X
Cr. PPE X
NCA Held for Disposal NCA Held for Disposal Dr. Dividends payable X
X (Beg.) lower @ declaration (Beg.) lower @ declar’n X Dr. Loss (if any) X
Cr. NCA Held for Sale X
Reversal of impairment X X Additional impairment Cr. Gain (if any) X
(End) lower @ year end X
154) What is the balance of appropriated and un-appropriated retained earnings?
Answer: The following reasons for appropriation of retained earnings is mentioned below:
Legal requirement Contractual requirement Voluntary appropriation
1. Appropriated retained
1. Appropriated retained 1. Appropriated retained
earnings for contingency
earnings for treasury shares earnings for retirement of
2. Appropriated retained
(cost of TS at year end) debt
earnings for plant expansion
Entry for appropriation. Entry for reversal of appropriation (once the

purpose for appropriation is already met/done).
Dr. Un-appropriated retained earnings X Dr. Appropriation for treasury shares X

Cr. Appropriation for treasury shares X Cr. Un-appropriated retained earnings X
Note! – the following does not require appropriation of retained earnings:

a) Dividends in-arrears
b) Restriction of cash
155) What is the balances of equity accounts after quasi-reorganization?
Answer: The following steps should be done in effecting the quasi-reorganization:
1. Revalue the assets and liabilities (direct effect to RE)

2. Record the assessment from shareholders (additional share premium)
3. Record the recapitalization (transfer from share capital to share premium)
4. Eliminate the deficit (transfer from share premium to retained earnings)
Particulars Share Share RE /

Capital Premium Deficit
Balances before quasi-reorganization X X (X)
Step 1 – Revalue asset asset and liabilities
To RE Add: Increase in Asset X
To RE Less: Decrease in Asset (X)
To RE Less: Increase in Liabilities (X)
To RE Add: Decrease in Liabilities X
Step 2 – Record assessment as addition to share premium X
Step 3 – Record recapitalization as transfer from SC to SP (X) X
Step 4 – Eliminate all deficit by transferring SP to RE (X) X
Balances after quasi-reorganization X X nil
Transactions affecting retained earnings.
Retained Earnings
X Beginning Balance
(a) Closing of loss for the year X X a) Closing of profit for the year
(b) Correction of prior period error X X b) Correction of error prior period error
(c) Change in accounting policy X X c) Change in accounting policy
(d) Realization of OCI loss X X d) Realization of OCI gain
(e) Appropriation of RE X X e) Reversal of appropriation
(f) Dividends paid X X f) Ending Balance
(g) Loss from share transaction X X g) Quasi reorganization
X Ending Balance
Topic 09: Composition of Shareholders' Equity
1. What is the total amount of legal capital?
2. What is the total amount of contributed capital?
3. What is the total amount of reserve?
4. What is the total amount of shareholders’ equity?
156) What is the total amount of legal capital?
Answer: To easily answer this question, we will group the equity accounts into five (5) groups namely:
X
Share capital – preference X
X
X
X
Share premium – ordinary shares (only if O.S. is no par) X
Total legal capital
X
X
Share premium – treasury X
X
Share premium – donated capital (assessment) X
X
X
X
X
X
X
X
X
X
X
X
X
Revaluation surplus X
X
X
Treasury shares X
X
X
X
157) What is the total amount of contributed capital?
Answer:
Legal capital (group 1) X

Add: Total share premium (group 2) X
Less: Subscription receivable (if beyond 12 mos. or silent) X
Contributed capital X
158) What is the total amount of reserve?
Answer:
Total share premium (group 2) X

Add: Total other comprehensive income (group 4) X
Add: Appropriated retained earnings X
Total reserves X
159) What is the total shareholders' equity?
Answer:
Total legal capital (group 1) X

Add: Total share premium (group 2) X
Add: Total retained earnings (group 3) X
Add: Total other comprehensive income (group 4) X
Less: Total contra – equity X
Total shareholders' equity X
TOPlC 01 − SHARE BASED PAYMENT
Share Options
1. What is the amount of salaries (compensation) expense for the year?
2. What is the balance of share premium – share options as of year end?
3. What is the amount credited to share premium when the share options are exercised?
Share Appreciations Rights (SARs)
4. What is the amount of salaries (compensation) expense for the year?
5. What is the balance of salaries payable as of year end?
160) What is the amount of salaries expense for the year?
Answer: In this topic, the transaction is the employees are to received share options as a bonus (in addition to
salaries) in exchange for their services rendered. Since the services received has no future benefit it will be
recorded as an expense. We have two (2) things to consider:
a) What is the measurement of the salaries (compensation) expense?
Share Based Payment
Share Options will be given out Share Appreciation Rights will be given out
Measurement of Expense: Measurement of Expense:
First Priority: Fair Value of the Share Options at First Priority: Fair Value of the SARs at year
the date of agreement with the fair value NOT end with the fair value lS BElNG UPDATED when
BElNG UPDATED when subsequently changes subsequently changes (not fixed/use new FV).
(fixed/use original FV).
Second Priority: lntrinsic Value of the Share Second Priority: lntrinsic Value of the Share
Options at year end with the intrinsic value being Options at year end with the intrinsic value being
updated when subsequently changes (not updated when subsequently changes (use the
fixed/use the new intrinsic value). new intrinsic value).
Fair value (market price) of shares X Market price of shares at agreement X

Less: Purchase price of shares w/ option X Less: Market price of shares at exercise X
lntrinsic value of options X lntrinsic value of SARs X
a.k.a. exercise price
lntrinsic value of option − means the amount of lntrinsic value of SARs – means the amount of
savings that the buyer will have if when they used cash that the employee will received when SARs
the option in purchasing shares (at agreed price) is exercised. The amount of cash to be received
instead of purchasing the shares in the open by employee is equal to the increase in value
market (at market price). (appreciation) of the company’s shares.
b) When the expense will be recorded?
Vest Immediately
(Without condition)
Year 1 Year 2
Fair value or intrinsic value (refer to the rule above) X X
Times: New estimated number of options per employee X X
Times: New estimated number of employees expected to get options at the end X X
Total measurement of expense after condition X X
Times: Ratio of years completed over the total condition year (e.g., 1/3, 2/3, 3/3) X/X X/X
Cumulative amount of compensation expense X X
Less: Cumulative amount of compensation expense recorded in previous period X X
Compensation expense for this period X X
X
Cr. Share Premium – Share Options X
161) What is the balance of share premium − share options as of year end?
Answer: The share premium – share options arises from the recognition of compensation expense. The share
premium – share option is equal to the cumulative amount of compensation expense recorded from the date of
the agreement up to the date of the question.
Compensation expense in year 1 X

Add: Compensation expense in year 2 X
Add: Compensation expense in year 3 (continue up to the date of question) X
Share premium − share option (cumulative compensation expense) X
Alternative way:
Year 1
Fair value or intrinsic value options (refer to the rule above) X
Times: New estimated number of options per employee X
Times: New estimated number of employees expected to get options at the end X
Total measurement of expense after condition X
Times: Ratio of years completed over the total condition year (e.g., 1/3, 2/3, 3/3) X/X
Share premium − share option (cumulative compensation expense) X
162) What is the share premium credited from the exercise of share options?
Answer: The share premium recognized from the exercise of share option is equal to amount of gain (excess of
consideration received from what is given out).
Exercise price of the share options (cash received from sale of shares) X
Add: Fair value / intrinsic value of share options returned upon exercise X
Less: Par value of shares sold X
Share premium − excess of par (gain) X
163) What is the amount of salaries expense for the year?
Answer: The computation of salaries expense from SARs is almost the same as the computation for salaries
expense for share options. Always use the NEW estimate on the time the company will record salaries
expense (year end).
Year 1 Year 2
Fair value or intrinsic value of SARs (refer to the rule above) X X
Times: New estimated number of SARs per employee X X
Times: New estimated number of employees expected to get SARs at the end X X
Total measurement of expense after condition X X
Times: Ratio of years completed over the total condition year (e.g., 1/3, 2/3, 3/3) X/X X/X
Cumulative amount of compensation expense X X
Less: Cumulative amount of compensation expense recorded in previous period X X
Compensation expense for this period X X
Dr. Compensation Expense X

Cr. Salaries Payable X
164) What is the balance salaries payable as of year end?
Answer: The computation of salaries payable depend on whether there are no SARs were exercised yet or there
were SARs already exercised.
No SARs were exercised (not yet paid):
Compensation expense in year 1 X

Add: Compensation expense in year 2 (continue up to the date of question) X
Salaries Payable
X Beginning balance
Salaries Paid X X Salaries expense SQUEEZE
X
X
lntrinsic value (amount of appreciation/increase in value)
SARs were already exercised (paid):
X
X
TOPlC 02 − BOOK VALUE PER SHARE
1. What is the book value per ordinary shares?
2. What is the book value per preference shares?
165) What is the book value per ordinary shares?

166) What is the book value per preference shares?
Answer: Book value is being computed to know what is the amount of cash that each one piece of share will
received upon liquidation of the business.
We have three (3) scenarios here in which we will depend our computations of book value, namely:
a) Only one class of shares (i.e., all ordinary no preference)

b) Two class of shares with non participating preference shares
c) Two class of shares with participating preference shares
a) Only one class of shares.
Step 1: Compute the total shareholders’ equity WlTHOUT subscription receivable.
Total legal capital X

Add: Total share premium X
Add: Total retained earnings X
Add: Total other comprehensive income X
Less: Treasury shares X
Note! Since it is assumed that the company will be liquidated, it is also assumed that before liquidation all
subscription will be paid (within 12 months), thus, subscription will be considered as current asset instead of
contra equity. Subscription receivable is not deducted for book value per share purposes.
Step 2: Compute the number of shares entitled to received dividends (they are also the one who will received
their investment upon liquidation).
Number of shares issued X

Less: Number of treasury shares X
Number of outstanding shares X
Add: Number of shares subscribed X
Number of shares entitled to received X
Step 3: Compute the book value per share.
Total shareholders’ equity without subscription receivable

= Book value per share, ordinary
Number of shares entitled to received
b) Two class of shares with non participating shares.

Step 2: Compute the amount of equity that will go to preference shareholders.
First – Return of capital for preference shareholders X

Add: Second – Return of income for preference shareholders X
Total shareholders' equity for preference shareholders X
Return of capital for preference shareholder is equal to:

1ST Priority – Liquidation value of outstanding + subscribed (par value + liquidation premium)
2ND Priority – Par value of outstanding + subscribed
Return of income for preference shareholder is equal to:
Preference share
PS is NON CUMULATlVE PS is CUMULATlVE
Par of Outstanding + Subscribed PS X Par of Outstanding + Subscribed PS X

Times: Dividend rate X Times: Dividend rate X
Return of income of PS X One basic dividend X
Times: Years in-arrears X
Return of income of PS X
Step 3: Compute the book value per ordinary shares.
Total shareholders’ equity (STEP 1) X

Less: SHE for preference shareholders (STEP 2) X
SHE for ordinary shareholders (residual) X
SHE for ordinary shareholders (residual)

= Book value per share, ordinary
umber of shares entitled ordinary shares
c) Two class of shares with participating preference shareholders.

Total shareholders' equity without subscription receivable X
Step 2: Prepare four column distribution table.
Distribution table OS PS Total

1ST Total SHE w/o subscription receivable X
2ND Return the capital of preference share (see rule 1 below) X (X)
3RD Return the capital of ordinary share (par of outstanding + subscribed) X (X)
4TH Return the income of preference (see rule 2 below) X (X)
5TH Return the income of ordinary (one basic dividend) X (X)
6TH Compute the remaining SHE for participation X
7TH Return the share in remaining of preference share (see rule 3 below) X
8TH Return the share in remaining of ordinary share (see rule 3 below) X
9TH Compute the total distributed equity for each class of share X X
10TH Divide Compute the number of shares entitled (outstanding + subscribed) X X
Book value per share X X
Rule 1 – Return of capital for preference shareholder is equal to:

1ST Priority – Liquidation value of outstanding + subscribed (par value + liquidation premium)
2ND Priority – Par value of outstanding + subscribed
Rule 2 − Return of income for preference shareholder is equal to:
Preference share
Par of Outstanding + Subscribed PS X Par of Outstanding + Subscribed PS X

Times: Dividend rate X Times: Dividend rate X
Return of income of PS X One basic dividend X
Times: Years in-arrears X
Return of income of PS X
Rule 3 − Return the share in remaining SHE.
7TH Return the share in remaining of preference share.

Par of outstanding + subscribed PS
Remaining SHE for participation x = Share of PS from the remaining
8TH Return the share in remaining of ordinary share.

Par of outstanding + subscribed PS
Remaining SHE for participation x = Share of PS from the remaining
TOPlC 03 − EARNlNGS PER SHARE
1. What is the basic earnings per share (EPS)?
2. What is the diluted earnings per share (DEPS)?
167) What is the basic earnings per share (EPS)?
Answer: Basic earnings per share is the amount of income of one piece of ordinary share per year. Earnings
per share is not applicable to preference share since preference share has already fixed income (basic dividend).
Step 1: Compute the amount net income attributable to ordinary shareholders.
Net income (after tax) X

Less: Preference shareholder dividends X
Net income attributable to ordinary shareholders X
Preference share dividend
Par of Outstanding + Subscribed PS X

With declaration No declaration
Times: Dividend rate X
Actual dividend Zero
One basic dividend X
Step 2: Compute the weighted average outstanding ordinary (WAOO) shares.
Share dividends and share splits will have an effect to all share transactions whether issuance or
reacquisition.
Number of shares Weight Share dividend or split Weighted average

XX
XX Times Times x% (x2, x3) Times XX
12 months
Note! The numerator of the weight will be the number of months from the transaction date up to December 31.
Step 3: Compute the basic earnings per share.
Net income – preference share dividend

= Basic Earnings Per Share
Weighted average outstanding ordinary
Net loss + preference share dividend

= Basic Loss Per Share
Weighted average outstanding ordinary
168) What is the diluted earnings per share (DEPS)?
Answer: Diluted earnings per share is the lowest possible earnings per share assuming the “potential
shareholders” exercised their right to become a shareholder through the use of “diluter” instrument. Diluter
instrument are those instrument giving the holder the right to receive ordinary shares, namely:
a) Convertible preference shares

b) Convertible bonds
c) Share options
The computation of diluted earnings per share will depend on which diluter is present. In computing the DEPS
you will have to assume that the right to become ordinary shareholder was exercised (convertible PS was
converted, convertible bonds was converted, share options was used to purchase ordinary shares) immediately
upon issuance of the diluter instrument.
a) Convertible preference shares
Step 1: Compute the numerator of the fraction.
Net lncome
= Diluted Earnings Per Share
?
Since it is assumed that the preference share was converted, the preference shares will retired and there will be
no more preference shares, therefore no preference share dividend will be given out and all the net income will
be attributable to ordinary shareholders.
Step 2: Compute the denominator of the fraction.
?
WAOO + Weighted average potential ordinary
Weighted average potential ordinary:
Number of convertible preference shares X

Times: Exchange rate of preference to ordinary (e.g., 1:2, 1:3, 1:5) X
Potential ordinary shares X
Times: Weight (e.g., 12/12 months, 5/12 months) X
Weighted average potential ordinary X
Weight (whole) Weight (not whole)
Step 3: Compute the diluter earnings per share.
Net Income
b) Convertible bonds
Step 1: Compute the numerator of the fraction.
Net lncome − PS dividend + lnterest lncome Recorded After Tax

?
Since it is assumed that the convertible bonds were converted. Was once the bonds is converted it is extinguish
and the company will no longer incur interest expense, so we have to eliminate interest expense recorded. But
since the interest expense was deducted to the net income, it should be added back.
Since the net income in the numerator is net of tax, the interest income should be added back also net of tax.
Step 2: Compute the denominator of the fraction.
?
Weighted average potential ordinary:
Number of convertible bonds X

Times: Exchange rate of preference to ordinary (e.g., 1:2, 1:3, 1:5) X
Potential ordinary shares X
Times: Weight (e.g., 12/12 months, 5/12 months) X
Weighted average potential ordinary X
Step 3: Compute the diluter earnings per share.
Net Income – PS dividend + Interest Income Recorded After Tax

c) Share options
Step 1: Compute the denominator
Net income – preference share dividend (same as basic EPS)

?
The numerator of the fraction is not modified, the same as the numerator in the basic EPS.
Exercise price of the of the share options X

Times: Number of share options (potential ordinary) X
Total cash receipt from assumed exercised of options X
Divide: Average fair value (market price) of company’s share X
Assumed treasury shares (shares reacquired) X
Potential ordinary shares (shares that will be issued if options were exercised) X
Less: Assumed treasury shares (shares reacquired using the process from assumed sale) X
Incremental shares X
Times: Weight (same rule in convertible preference share and bonds) x/12
Weighted incremental shares X
Step 1: Compute the denominator
Net income – preference share dividend

Weighted average outstanding ordinary + weighted incremental
Name: John Bo S. Cayetano
Top 11 – May 2015 CPA Licensure Examination

BSA – Jose Rizal University (JRU)
MBA – Our Lady of Fatima University Valenzuala (OLFU)
Faculty – University of the East
Reviewer:
Neuva Ecija Training & Review Center (NETARC)
Calamba Review Center (L-CRC)
Batangas CPA Review Center (Batscpar)
Far Eastern University – Manila
Phinma – Araullo University
San Carlos College San Carlos City, Pangasinan

San Pablo, Laguna
Siniloan, Laguna
Former:
SGV & Company Associate
0936 – 407 – 4780

Email : johnbocaye22@gmail.com

Secret-Notes BY Cayetano: Accountancy (University of Northern Philippines)

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Secret- Notes BY Cayetano

Accountancy (University of Northern Philippines)

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1) What is the amount of cash and cash equivalents?

Cash and Cash Equivalents

Cash Cash Equivalents

a. Customer’s postdated check Excluded from Cash

Checks drawn by the company:

3. Time Excluded from cash If the question is:

How much is Cash & CE?

Legally restricted − Excluded from cash

Silent − Included as Cash

Legally restricted − Excluded from cash

5. Deposit in Not legally restricted − Included as Cash

Not legally restricted − Included as Cash

6. Deposit in Excluded from cash

Different Bank − Excluded in the computation of cash

7. Bank Same Bank − Included as Cash (included in the computation as a deduction)

Silent − Excluded in the computation of cash (different bank)

1. Cash fund for operation:

2. Cash fund not for operation:

d. Plant acquisition fund

Cash Equivalents (CE) − highly liquid investments.

If not classified as cash equivalents, the proper classification would be:

Three-month rule test:

Usual distractions (items that are NOT considered as cash)

2) What is the correct journal entries affecting petty cash fund?

Transaction Journal Entry Amount

Dr. Various Expenses XX

Dr. Various Expenses XX

3) What is the amount of shortage or overage of petty cash fund?

Total accountability of custodian X

Less: Cash included in currencies but do not belong to PCF

Add: Replenishment checks X

5) What is the adjusted balance of cash in bank?

Less: Errors Less: Errors

Adjusted balance Adjusted balance

Less: Errors Less: Errors

Less: Outstanding checks SQUEEZE

Less: Errors Less: Errors

Unadjusted receipt per book X X Unadjusted disbursement per book

Unadjusted disbursement per bank X X Unadjusted receipt per bank

How to proof of cash the bank balance?

How to proof of cash the book balance?

8) What is the balance of accounts receivable at year end?

Answer: If what is given is the opening balance of accounts receivable.

Answer: If what is given is the unadjusted closing balance of accounts receivable.

9) What is the balance of allowance for doubtful accounts at year end?

1. Using Percentage Of Sales Method.

First, solve for the allowance for doubtful accounts as follows:

Accounts receivable ending balance (from question number 8) X

Allowance for doubtful accounts

2. Using Percentage Of Sales Method.

First, solve for the bad debt expense as follows:

First, solve for the allowance for doubtful accounts as follows:

Group 1 Group 2 Group 3 Total

Allowance for doubtful accounts

11) What is the net realizable value of accounts receivable?

Accounts receivable balance at year end (question 07) X

Total amount of write off – total amount of recovery

Note! Be careful with the questions.

Fair value of the consideration given up (i.e., inventory, service or PPE) X

Type of note Fair value at date of recognition