c3 Notes To Financial Statements

 

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C3 Notes to Financial Statements

BS Accountancy (De La Salle-College of Saint Benilde)

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CHAPTER 3: NOTES TO FINANCIAL STATEMENTS Notes to Financial Statements Notes to fnancial statements provide narrave descripon or disaggregaon o items presented in the  fnancial statements and inormaon inormaon about items that do not qualiy or recognion. recognion. Order of Presenng the Notes

Under PAS 1, paragraph 114: a.

Stateme Statement nt of com compli plianc ance e with with PFRS PFRS

b. Sum Summar mary y of sign signic icant ant accou accounn nng g pol polici icies es use used d c.

Suppo Supporng rng in informa formaon on or com computa putaon on for line line items p presen resented ted in the the nanci nancial al state statements ments

d. Other dis disclosu closures, res, such conngent conngent liabili liabilies, es, unrecognize unrecognized d contractual contractual commi commitments tments and and nonnancial disclosures. Compliance with PFRS

PAS 1, paragraph 16, provides that an enty whose nancial statements comply with Philippine Financial Reporng Standards shall make an explicit and unreserved statement of such compliance in the notes. Accounng Policies  Accounng policies are are defned as the specifc specifc principles, methods, pracces, pracces, rules, bases and convenons adopted by an enty in preparing and presenng fnancial statements. Signicant Accounng Policies

The summary of signicant accounng policies shall disclose the following: a.

The measurement basis used

b. The accounng policies used Disclosure of Measurement Basis

It is important for an enty to inform users of the measurement basis used in the nancial statements because the basis on which the enty prepare the nancial statements signicantly aects the users’ analysis. Under the Revised Conceptual Framework, the measurement bases are historical cost  and  and current value. Current value includes air value, value in use, use, ulfllment value and current cost . Disclosure of Accounng Policies

In deciding whether a parcular accounng policy should be disclosed, management shall consider whether the disclosure would assist users in understanding how transacons, other events and condions are reected in the nancial statements. Disclosure of parcular accounng policies is especially useful to users when those policies are selected from alternaves allowed in Philippine Financial Reporng Standards.

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Disclosure of Judgement

PAS 1, paragraph 122, provides that an enty shall disclose in the summary of signicant accounng policies the judgements that management has made in the process of applying accounng policies and that have a signicant eect on the amounts recognized in the nancial statements. For example, management makes judgment in determining the following: a.

Whether Whether nancial nancial a assets ssets a are re to b be e measured measured at ffair air value value or a att amor amorzed zed cost. cost.

b. Wheth Whether er in substance substance parcular parcular sales sales of goo goods ds are produ product ct nancing nancing arran arrangement gement and and therefore do not give rise to revenue. Disclosure of Esmaon Uncertainty

PAS 1, paragraph 125, provides that an enty shall disclose informaon about the assumpons it makes about the future, and other major sources of uncertainty at the end of reporng period that have a signicant risk of resulng in a material adjustment to the carrying amount of assets and liabilies within the next nancial year. With respect to those assets and liabilies, the notes shall include the nature and carrying amount  of  of the assets and liabilies at the end of reporng period. Other Disclosures

PAS 1, paragraph 138, provides that an enty shall disclose the following: a.

The domicile and legal orm of the enty, its country o incorporaon  and the address of the registered oce or principal place of business.

b. A d des escr crip ipo on n of of the the nature of the enty’s operaons and its principal acvies. c.

The The nam ame e of th the e parent  and  and the ulmate parent of the group.

Paragraph 137 provides that an enty shall disclose the following: a.

The amount amount of dividends dividends pr propos oposed ed or declared declared before th the e nancial nancial state statements ments were were authorized authorized for issue but not recognized as distribuon during the period and the related amount per share.

b. The am amount ount o off any cumula cumulave ve preferen preference ce dividends dividends not recogniz recognized. ed.

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CHAPTER 3: NOTES TO FINANCIAL STATEMENTS PROBLEMS

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Problem 1

The audit of Anne Company for the year ended December 31, 2018 was completed on March 1, 2019. The nancial statements were signed by the managing director on March 15, 2019 and approved by the shareholders on March 31, 2019.  

On January 15, 2019, a customer owing P900,000 to Anne Company led for bankruptcy. The nancial statements included an allowance for doubul accounts pertaining to this customer of P100,000.

 

 

Anne Company’s issued share capital comprised 100,000 ordinary shares with P100 par value. The enty issued addional 25,000 shares on March 1, 2019 at par value. Equipment with carrying amount of P525,000 was destroyed by re on December 15, 2018. Anne Company has booked a receivable of P400,000 from the insurance enty on December 31, 2018. Aer the insurance enty completed an invesgaon on February 1, 2019, 2 019, it was discovered that the re took place due to negligence of the machine operator. As a result, the insurer’s liability was zero on this claim.

What total amount should be reported as “adjusng events” on December 31, 2018? a. 1,300,000

b. 1,200,000

c. 3,800,000

d. 3,700,000

Soluon: Answer B

Doubul accounts (900,000 minus allowance 100,000)

800,000

Loss on claim receivable

400,000

Total adjusng entries

1,200,000

Problem 2

The end of reporng period of Norway Company is December 31, 2018 and the nancial statements for 2018 are authorized for issue on March 15, 2019.  

On December 31, 2018, Norway Company had a receivable rec eivable of P400,000 from a customer that is due 60 days aer the end of reporng re porng period. On January 15, 2019, a receiver was appointed for the said customer. The receiver informed Norway that the P400,000 would be paid in full by June 30, 2019.

 

Norway Company had equity investments held for trading. On December 31, 2018, these investments were recorded at the fair value of P5,000,000. During the period up to February 15, 2019, there was a steady decline in the t he fair value of all the shares in the porolio, and on February 15, 2019, the fair value had fallen to P2,000,000.

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Norway Company had reported a conngent liability on December 31, 2018 related to a court case un which Norway Company was the defendant. The case was not heard unl the rst week of February 2019. On February 11, 2019, the judge handed down a decision against Norway Company. The judge determined that Norway Company was liable to pay damages and costs totaling P3,000,000.

 

On December 31, 2019, Norway Company had a receivable rec eivable from a large customer in the amount of P3,500,000. On January 31, 2019, Norway Company was advised in wring by the liquidator of the said customer that the customer was insolvent and that only 10% of the receivable will be paid on April 30, 2019.

What total amount should be reported as “adjusng events” on December 31, 2018? a. 6,150,000

b. 9,150,000

c. 9,550,000

d. 6,500,000

Soluon: Answer A

Ligaon loss

3,000,000

Bad debt expense (3,500,000 x 90%)

3,150,000

Total amount of adjusng events

6,150,000

The nancial assets held for trading are measured at fair value which must be determined at the end of each reporng period.

Problem 3

Ginger Company is compleng the preparaon of the nancial statements for the year ended December 31, 2018. The nancial statements are authorized for issue on March 31, 2019. 2 019.  

On March 15, 2019, a dividend of P1,750,000 was declared and a contractual prot share payment of P350,000 was made, both based on the prot for the year ended December 31, 2018.

 

On February 1, 2019, a customer went we nt into liquidaon having owed the enty P340,000 for the past 5 months. No allowance had been made against this debt in the nancial statements.

 

On March 20, 2019, a manufacturing plant was destroyed by re resulng re sulng in a nancial loss of P2,600,000.

What total amount should be recognized in prot or loss for the year ended e nded December 31, 2018 to reect adjusng events aer the end of reporng period? a. 1,750,000

b. 3,290,000

c. 2,600,000

d. 690,000

Soluon: Answer D

Contractual prot share payment

350,000

Bad debt loss

340,000

Total adjusng events

690,000

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The dividend declaraon is not recognized in prot and loss but a deducon from retained earnings on March 15, 2019. The manufacturing plant destroyed by re on March 20, 2019 is a Nonadjusng event requiring disclosure only.

Problem 4

During 2018, Marian Company was sued by a competor for P5,000,000 for infringement of patent. Based on the advice of the legal counsel, the enty accrued the sum of P3,000,000 as a provision on December 31, 2018. Subsequently, on March 15, 2019, the Supreme Court decided in favor of the party alleging infringement of the patent and ordered the defendant to pay the aggrieved party a sum of P3,500,000.

The nancial statements were prepared by management on February 15, 2019 and approved by the board of directors on March 31, 2019. 1. What amount should be recognized as accrued liability on December 31, 2018? a. 5,000,000

b. 3,500,000

c. 3,000,000

d. 1,500,000

2. What amount should be adjusted on December 31, 2018 in relaon to this event? a. 1,500,000

b. 3,000,000

c. 500,000

d. -0-

Soluon: Queson 1: Answer B

Accrued liability – December 31, 2018

3,500,000

The actual amount of P3,500,000 should be accrued as liability because the suit was decided on March 15, 2019 which is prior the issuance of the nancial statements on March 31, 2019. Queson 2: Answer C

Accrued liability – December 31, 2018

3,500,000

Provision already recognized

3,000,000

Increase in provision

500,000

Problem 5

Caroline Company provided the following events that occurred aer December 31, 2018: Jan. 15, 2019 2019

P3,000,000 P3,000,000 of accounts accounts receivab receivable le wa wass wrien wrien o due due to tthe he ba bankrup nkruptcy tcy of a maj major or customer

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Feb. 15, 2019 2019

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A shipp shipping ing vessel vessel of the the enty with with carry carrying ing amo amount unt of P5,000,0 P5,000,000 00 was completel completely y lost at sea because of a hurricane.

Mar. 10, 10, 2019 A court case case involvin involving g the enty as as the defe defendan ndantt was sel seled ed and th the e enty wa wass obligated to pay the plain P1,500,000. The enty previously has not recognized a liability for the suit because management deemed it possible that the enty would lose the case. Mar. 15, 2019 2019 A factory with with a carrying carrying amount amount of P4,000,000 P4,000,000 was completel completely y razed by forest forest re that erupted in the vicinity. The management completed the dra of the nancial statement for 2018 on February 10, 2019. On March 31, 2019, the board of directors authorized the nancial statements for issue. The enty announced the prot and other selected informaon on March 22, 2019. The nancial statements were approved by shareholders on April 2, 2019 and led with the regulatory agency the very next day. What total amount should be reported as adjusng events on December 31, 2018? a. 9,500,000

b. 8,500,000

c. 9,000,000

d. 4,500,000

Soluon: Answer D

Accounts wrien o Provision for lawsuit

3,000,000 1,500,000

Total adjusng events

4,500,000

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