Financial Accounting 1 summary VALIX.doc

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX

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1. ASC- accounting is a service activity. Its function is to provide quantitative information primarily financial in nature that is intended to be useful in making economic decisions. 2. AICPA- accounting is the ART of recording, classifying, summarizing(RCS--communication process) 3. AAA(statement of basic accounting theory)- PROCESS of identifying, measuring, communicating(IMC) 4. Identifying as the analytical component 5. Measuring as the technical component 6. Communicating as the formal component 7. In order to be identifiable, a certain event must be quantifiable or expressed in terms of a unit of measure. It must have an effect on Assets, Liabilties, OE. 8. External transaction is also known as exchange transaction which involves 2 entities. Example is payment of salaries to employees. 9. Internal transaction- production and casualty loss(unanticipated losses, act of god) 10. Accounting is the language of business because of the communication process. 11. Classifying- is accomplished by posting to the ledger 12. Summarizing- preparation of FS. 13. Accountant’s primary task is to supply financial information to statement users so that they could make informed judgment and better decision. 14. Rep. Act 9298- Philippine accountancy act of 2004 regulates the practice of accountancy in the Phil. 15. BOA- body authorized by law to promulgate rules and regulations affecting the practice of the accountancy profession 16. Certificate of registration shall be issued if the registrant has acquired a minimum of 3 years of meaningful experience in any areas of public practice including taxation. It will be valid for 3 years, renewable every 3 years upon payment of required fees. 17. Management advisory services- business conduct and operations 18. Controller is the highest accounting officer 19. Accounting is essentially constructive in nature 20. Auditor examines FS to ascertain whether they are in conformity with GAAP. 21. GAAP is a social process. 22. Development of GAAP is formalized initially through the creation of ASC. The accounting standards promulgated by the ASC constitute the GAAP. 23. SFAS is now known as PAS and PFRS 24. Accounting standards-proper accounting practice. It creates common understanding. 25. FRSC replaces ASC 26. FRSC is the accounting standard setting body created by PRC upon recommendation of BOA to assist the BOA in carrying out its powers and functions provided under RA 9298. Main function is to esbalish and improve accounting standards that will be generally accepted in the Phil. 27. FRSC is composed of 15 members with a chairman who had been or is presently a senior accounting practitioner. 2 members from Public practice, commerce and industry, academe, government. 28. The counterpart of PIC is the IFRIC in UK 29. IASC- improvement, harmonization and worldwide acceptance and observance of accounting standards 30. IASB replaces IASC. It is a global phenomenon intended to bring about great transparency and a higher degree of comparability in financial reporting; one uniform and globally accepted financial reporting standard 31. Accounting assumptions- serve as the foundation or bedrock of accounting to avoid misunderstanding. Known as postulates. 32. Accounting/fiscal period- 12months 33. Fiscal period could either be calendar or natural. If calendar, ends on dec. 31. if natural, ends on any month when the business is at the lowest or experiencing slack season. 34. Monetary Unit has 2 aspects, quantifiability and stability of peso(current replacement cost is ignored). Sometimes, it is not necessarily valid that peso is stable since there may be instances wherein there is a

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa considerable gap between historical and current replacement cost. Entity should therefore choose whether cost model or revaluation model they will apply to their entire class of PPE. 35. Framework for FS is promulgated by the IASB 36. Framework is the underlying theory for the development of accounting standards and revision of previously issued accounting standards. Assists FRSC, preparers of FS, users and auditors 37. Framework excludes special-purpose report such as prospectuses and tax computation 38. FS largely portray the financial effects of past events and do not necessarily provide nonfinancial information. It shows the result of the stewardship of management or the accountability of management for the resources entrusted to it. 39. Management has the primary responsibility for the preparation of FS. 40. Capacity for adaption or financial flexibility- using the entity’s available cash for unexpected requirements and investment opportunities. It is may be accomplished through raising cash at a short notice through borrowing, sale of securities, disposal of assets without disrupting normal operations 41. Accounting concepts: a. Entity theory= A=L+C (income statement) b. Proprietary= A-L=C (statement of FP) c. Residual equity= A-L-preference/OS=C d. Fund Theory= Fund= Cash inflows-cash outflows (custody and administration of funds) 42. Financial reporting= provision of financial information about an entity to external users. Not just financial statements but also other means of communicating information. It includes non-financial information. 43. Financial reporting objectives: a. provide information useful in investment, credit, and similar decision b. cash flow prospects c. resources and claims to those resources and changes in them. 44. Four principal qualitative characteristics: a. relevance b. reliability c. understandability d. comparability 45. relevance and reliability relate to content and are primary qualities. 46. understandability and comparability relate to presentation and are secondary characteristics. 47. Relevance is affected by its nature and materiality. It helps users form predictions and confirmations or revision to their expectation. 48. Ingredients of relevance are: a. Predictive value b. feedback value c. Timeliness 49. Reliability ingredients: a. Faithful representation-actual effects of transaction should be properly accounted for and reported b. Substance over formc. Neutrality d. Conservatism or prudence e. Completeness- Standard of adequate disclosure(notes to FS) 50. Understandability- Users are assumed to have a reasonable knowledge of the economic activities and accounting and a willingness to study the information with reasonable diligence 51. Accounting constraints: a. Timeliness b. Cost-benefit c. Materiality d. Balance between relevance and reliability 52. Materiality- doctrine of convenience. Quantitative threshold

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa 53. An example of trade-off between relevance and reliability is when entity reports quoted equity instruments at 54. . Information is relevant but not reliable. On the other hand, if entity reports an instrument at cost, information is reliable but may not be relevant. 54. Installment method- revenue is recognized at the point of collection. Revenue is determined by multiplying the gross profit by amount of collection 55. Immediate recognition of expense- reflects conservatism or prudence. Revenue expenditure 56. Financial performance is determined using 2 approaches: a. capital maintenance- net income occurs if capital is maintained(single entry) b. transaction approach- traditional preparation of income statement 57. 2 concepts of capital maintenance: a. financial capital- based on historical host b. physical capital-current cost Cash and cash equivalents 1. Cash not just include currency and coins but also those that are acceptable by bank for deposit or immediate encashment such as checks, bank drafts and money orders. 2. Cash is measured at face value. Cash in foreign currency is measured at current exchange rate 3. If the financial institution holding the funds of an entity is in bankruptcy or financial difficulty, cash should be written down to estimated realizable value if the amount recoverable is estimated to be lower than face value 4. excess cash should be invested in revenue-earning investment 5. deposits in foreign investment which are subject to foreign exchange restriction, if material, should be classified separately among noncurrent assets and the restriction clearly indicated. 6. Details comprising cash and cash equivalents should be disclosed in the notes to financial statements 7. the credit balance in the cash in bank account results from the issuance of checks in excess of the deposits—overdraft 8. Overdraft is not permitted in the Philippines 9. if entity maintains two or more accounts in one bank and one account results in an overdraft, such overdraft can be offset against the other bank account with debit balance in order to show, cash, net of bank overdraft 10. An overdraft can also be offset against the other bank account if the amount is immaterial 11. if the deposit is legally restricted because of a formal compensating balance agreement, the compensating balance is classified separately as “cash held as compensating balance” under current assets if the related loan is short term, otherwise, it is classified as noncurrent investment 12. In banking practice, checks become stale if not encashed within 6months from the time of issuance 13. if stale check is immaterial, it is simply accounted for as a miscellaneous income. Cash Miscellaneous Income 14. If material and liability is expected to continue, cash is restored and liability is again set up 15. Cash short/over Due from cashier Loss from cash shortage Cash Cash short/over Cash short/over 16. cash short/over account is a temporary account. When we already know the cause of such shortage or overage, we then cancel d cash short/over account and replace it with the “real cause”. 17. Imprest system- system of control of cash which requires that all cash receipts should be deposited intact and all cash disbursement should be made by means of check. 18. In imprest system, payment of expenses requires no formal entries. Petty cashier generally requires a signed petty cash voucher for such payments and prepares memo entry in the petty cash journal. 19. Petty cash disbursement should be replenished only by means of check and not from undeposited collection 20. If not replenished, the entry is to state the correct cash fund is:

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa expenses petty cash fund 21. Under fluctuating fund system, checks drawn to replenish the fund do not necessarily equal the petty cash disbursement. Expenses are immediately recorded and PCF fluctuates from to time. Accounts Receivable 1. Account receivable is an open account not supported by a promissory note. Also known as trade debtors 2. advances to affiliates are usually treated as a long-term investment 3. Creditors’ accounts with debit balances are classified as current assets. 4. Special deposits on contract bids normally are classified as other noncurrent assets 5. Financial assets shall be recognized initially at fair value plus transaction costs that are directly attributable to the acquisition. Fair value is usually the transaction price , fair value of the consideration given 6. AR is subsequently measured at net realizable value or estimated recoverable amount 7. assets shall not be carried at above their recoverable amount 8. freight collect means freight charge on the goods shipped is not yet paid. Buyer pays for it 9. freight prepaid is already paid by the seller 10. AR 100,000 Freight-out 5,000 Sales 100,000 Allow.for freight charge 5,000 Cash Sales discount Allowance for freight charge Accounts receivable

93,000 2,000 5,000 100,000

11. Sales return Allowance for sales return 12. Net method(beyond the discount period): Cash AR Sales discount forfeited(income)

100,000 95,000 5,000

13. Allowance method conforms with matching principle. AR is properly measured at NRV 14. Reversal in Direct write-off: AR Cash or if discovered in subsequent year: Cash Bad debts AR Miscellaneous Income 15. Correction of excessive allowance: Allowance for DA 30T Doubtful accounts 20T Miscellaneous income 10T 16. if granting of credit and collection of accounts are under the charge of the sales manager, doubtful accounts shall be considered as distribution cost. If under an officer, it is administrative expense. In the absence to the contrary it is admin expense. Loan receivable 1. Transaction costs that are directly attributable to the loan receivable include direct origination cost.

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX 2. direct origination cost is an origination fee not chargeable against the borrower 3. Loan receivable 5M Cash 331,800 Unearned 100T Cash 5M Unearned Interest 331,800 Cash Principal amount 5,000,000 Origination fees received ( 331,800) Direct origination cost incurred 100,000 4,768,200

jkycpa 100T

*next step is to find the effective interest that would discount the principal amount and future interest payment to 4,768,200 * the discount on loan receivable is 231,800 to be amortized using effective interest method Receivable financing 1. Financial flexibility or capability of an entity to raise money out of its receivables 2. Assignment of accounts receivable is transferring some of the rights in AR to a lender called the assignee in consideration for a loan. It is formal, evidenced by a financing agreement and a promissory note both of which the assignor assigns. 3. Pledging is general because all AR serve as collateral for the loan. 4. in Nonnotification basis, customers are not informed that that their accounts have been assigned. As a result, they continue to make payments to the assignor, who in turn remits collection to the assignee. In notification basis, customers are notified to make their payments directly to the assignee. 5. Assignee lends only a certain percentage of the face value of the accounts assigned because the assigned accounts may not be fully realized by reason of such factors as sales discount, sales return, and allowances and uncollectible accounts.] 6. Notification: Note payable 588,000 NP 800,000 Sales discount 12,000 Cash received (588,000) Accounts receivable assigned 600,000 Balance 212,000 Interest expense Cash

8,000 8,000

Remittance from the bank: Cash Interest expense(1%x212T) NP AR-assigned AR AR-assigned

AR-assigned Collection Balance

1,000,000 (900,000) 100,000

85,880 2,120 212,000 300,000 100,000 100,000

7. entity shall disclose its equity in the assigned accounts AR-assigned 1,000,000 Less: NP 800,000 Equity 200,000 8. factoring is a sale of AR on a without recourse, notification basis. Factor assumes responsibility for uncollectible factored accounts. In assignment, assignor retains ownership of the accounts assigned. 9. Casual factoring- normal sale of accounts receivable, without other deductions 10. Cash 365,000

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX Sales disc 10,000 Commission 25,000 Receivable from factor 100,000 Accounts receivable 500,000

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*Customer is subsequently allowed a credit of 50,000 for damaged merchandise: Sales returns and allowance 50,000 Sales discount(2%x50T) 1,000 Receivable from factor 49,000 *final settlement: Cash 51,000 Receivable from factor 51,000 11. if customer buys goods and uses a credit card, the credit card receipt must be forwarded by the retailer to the card issuer who will then pay the retailer the appropriate amount minus credit service charge Accounts receivable- Diners club 200T Sales 200T Cash 194,000 Credit card service charge 6,000 AR-diners club 200,000 12. Notes received from officers, employees, shareholders and affiliates shall be designated separately 13. Dishonored notes shall be removed from the notes receivable account and transferred to accounts receivable at an amount to include, if any, interest and other charges. Accounts receivable Notes receivable Interest Income 14. When a note is negotiable, the payee may obtain cash before maturity date by discounting the note at a bank or other financing company. Payee then becomes an endorser and the bank becomes the endorsee 15. Endorsement may be with recourse which means that the endorser shall pay the endorsee if the maker dishonors the note. This is the contingent or secondary liability of the endorser; or it could be without recourse which means that the endorser avoids future liability even if the maker refuses to pay the endorsee on the date of maturity. In the absence to the contrary, endorsement is assumed to be with recourse. 16. Principal 1,000,000 Interest(1Mx12%x180/360) 60,000 MV(full term of the note) 1,060,000 Term of the note Less: Days expired from july 1 to aug.30 Discount period Discount: (1,060,000 x 15% x 120/360)

180 60 120days 53,000

Net proceeds: 1,060,000-53,000= 1,007,000 Principal 1,000,000 Accrued interest(1Mx12%x60/360) 20,000 CV 1,020,000 Cash Loss on NR discounting

1,007,000 13,000

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX Notes receivable 1,000,000 Interest Income 20,000

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17. If the discounting is with recourse, the transaction is accounted for as either conditional sale of note receivable recognizing contingent liability and secured borrowing a. conditional sale: Cash Loss on NR discounting Note receivable discounted Interest Income

1,007,000 13,000 1,000,000 20,000

*the note receivable discounted account is deducted from the total note receivable when preparing the balance sheet with disclosure of contingent liability *the note is paid by the maker to the first bank NR discounted 1,000,000 Note receivable 1,000,000 *if the note is dishonored by the maker and the entity pays the first bank the maturity value, plus protest fee and other bank charges of 40,000 Accounts receivable 1,100,000 NR discounted 1M Cash 1,100,000 Note receivable 1M 18. if the discounting is treated as secured borrowing, NR is not derecognized but instead an accounting liability is recorded at an amount equal to the face amount of the NR discounted Cash 1,007,000 Interest expense 13,000 Liability for NR discounted 1,000,000 Interest income 20,000  no gain or loss because the discounting is borrowing 19. If the note discounted is made by the party discounting, a primary liability exists, not a contingent liability since in this case, the maker is the one originally liable to the bamk for the loan obtained Cash 440,000 Discount on NP(500Tx12%) 60,000 Note payable-bank 500,000 20. Interest-bearing note- interest being included in the face value 21. Interest-bearing note, interest is compounded annually: Note receivable 1M Land 800T Gain on sale of land 200T Accrued Interest receivable 120T Interest income(12%x1M) 120T 2nd year: Accrued IR Interest income

134,400

Face value Interest accrued for 1st year

1,000,000 120,000

134,400

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX Total 1,120,000 Interest: 1,120,000x12%

3rd year Cash NR Accrued IR Interest income

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134,400

1,404,928 1,000,00 254,400 150,528

Face value Interest accrued Total

1,000,000 254,400 1,254,400

Interest: 1,254,400x12%

150,528

Noninterest bearing note: Note receivable Sales Unearned interest income

400,000 350,000 50,000

Gross income: 350,000 cash price-280,000= 70,000 Cash 100,000 NR 100,000 Unearned interest income Interest income

20T

*bond outstanding method is used. 20T

Note receivable-current portion Less: Unearned interest income

100,000 15,000 85,000

Note receivable-noncurrent portion Less: Unearned interest income CV

200,000 15,000 185,000

Noninterest-bearing note with down payment and ordinary annuity. Cash price is not given Cash NR Equipment Gain on sale of equipment Unearned Unearned interest income Interest income

100,000 300,000 250,000 98,690 51,310 24,869 24,869

*effective interest is used using the prevailing market interest.

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX

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Inventories 1. Inventories are assets which are held for sale in the ordinary course of business, in the process of production for such a sale or in the form of materials or supplies to be consumed in the production process or in the rendering of services 2. FOB destination and shipping point determine ownership of goods and the party who is supposed to pay the freight charge 3. freight collect and freight prepaid determine the party who actually paid the freight charge. 4. FAS- free alongside. Seller bears all expenses and risk in delivering the goods to the dock. The nuyer bears the cost of loading and shipment and thus, title passes to the buyer when the carrier takes possession of the goods. 5. Consigned goods are recorded by the consignor by means of memorandum entry 6. Inventories shall be presented as one line item but the details of the inventories shall be disclosed in the notes to FS—finished goods, goods in process, raw materials, and manufacturing supplies. 7. Inventory shortage is usually closed to cost of goods sold because this often the result of normal shrinkage. If abnormal and material, shortage shall be separately classified and presented as other expense. 8. Net method( if the discount period has expired): Purchase discount lost AP 9. gross method is more practical than net method. Net method has theoreticall correct historical cost 10. Cost if inventories: a. cost of purchase b. cost of conversion c. other cost in bring the inventories to their present location and condition. 11. Cost of purchase includes purchase price, import duties, irrecoverable taxes, freight, handling and other costs directly attributable to the acquisition of finished goods, materials and services. 12. Trade discounts, rebates and other similar items are deducted in determining the cost of purchase 13. When inventories are purchased with deferred settlement terms, the difference between the purchase price for normal credit terms and the amount paid is recognized as interest expense over the period of financing. 14. Storage costs on goods in process are capitalized but storage costs on finished goods are expensed. 15. Abnormal amounts are expensed. 16. Cost of inventories of a service provider consists primarily of the labor and other costs of personnel directly engaged in providing the service, including supervisory personnel and attributable overhead Inventory valuation 1. Weighted average perpetual or moving average method- new weighted average unit cost must be computed after every purchase. 2. Inventory valuation in moving average involves early purchases

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa 3. Lifo perpetual and periodic differ in inventory value 4. Moving average unit cost changes everytime there is a new purchase or a purchase return. It is not affected by a sale or a sale return 5. Net realizable value is the estimated selling price in the ordinary course of the business less estimated cost of completion and the estimated cost necessary to make the sale. 6. Inventories are usually written down to NRV on an item by item or individual basis. It is not appropriate to write down inventories based on a classification of inventory 7. Direct method- inventory is recorded at the lower of cost or NRV. Any loss on inventory writedown is not accounted for separately but buried in the cost of goods sold Inventory-NRV 785,000 Income summary 785,000 * it has the effect of increasing the cost of goods sold due to lower inventory cost 8. Allowance method: Inventory-cost 800,000 Income summary 800,000 Loss on inventory writedown 15,000 Allowance for inventory writedown 15,000 *the allowance is presented as a deduction from the inventory Inventory, at cost 800,000 Allow. For inventory writedown (15,000) NRV 785,000 Cost NRV Required allowance Less: allowance balance Decrease

1,000,000 900,000 10,000 15,000 5,000

Allowance for inventory writedown 5,000 Gain on reversal 5,000 *gain on reversal is presented as a deduction from COS 8. Standard costs are predetermined product costs established on the basis of normal levels of materials and supplies, labor, efficiency and capacity utilization. It may be used for convenience if the results approximates cost. 9. When different commodities are purchased at a lumpsum, the single cost is apportioned among the commodities based on their relative sales price. Cost is proportionate to selling price. 10. Purchase commitments are obligations of the entity to acquire certain goods sometime in the future at a fixed price and fixed quantity. Purchase contract has already been made for future delivery of goods fixed in price and in quantity. 11. Recognition of loss on purchase commitment is an adaptation of the measurement at the lower of cost or NRV Contract purchase price of 500,000 and replacement cost at year-end of 450,000 Loss on purchase commitment 50,000 Estimated liability for purchase commitment 50,000

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX Purchase 420,000 Loss on purchase commitment 30,000 Estimated liability for purchase commitment 50,000 Accounts payable 500,000 If replacement cost is 600,000: Purchases 500,000 Estimated liability 50,000 Accounts payable 500,000 Gain on PC 50,000  Gain on PC was recognized to offset the previously recorded loss. If replacement cost is 480,000: Purchases 480,000 *loss is only 20,000 EPL 50,000 Accounts payable 500,000 Gain on purchase commitment 30,000

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12. Agricultural, forest and mineral products are measured at NRV at certain stages of production. This occurs when agricultural crops have been harvested and a sale is assured under a forward contract or a government guarantee, or when a homogeneous market exists and there is a negligible risk of failure to sell. 13. Commodities of broker-traders are measured at fair value less cost to sell. 14. Inventories of broker-traders are principally acquired with the purpose of selling them in the near future and generating a profit from fluctuations in price. 15. The amount of inventories recognized as an expense during the period is disclosed. Biological Assets 1. Pas 41 shall be applied to account for the biological assets, agricultural produce, government grant related to a biological asset when they relate to agricultural activity. 2. PAS41 is applied to agricultural produce at the point of harvest.Thereafter, PAS2 on inventories shall be applied 3. PAS41 does not deal with the processing of agricultural produce after harvest. Processing of grapes into wine is covered by PAS2. 4. Biological assets are living animals and plants 5. Agricultural produce is the harvested product of an entity’s biological assets. 6. Measurement of products after harvest is covered by PAS2 7. agricultural activity- management of an entity of the biological transformation and harvest of biological assets for sale or for conversion into agricultural produce or into additional biological assets. Includes raising livestock, annual or perennial cropping, cultivating, floriculture 8. Harvesting from unmanaged sources, such as ocean fishing and deforestation is not agricultural activity 9. Features of agricultural activity are: management of change (nutrient levels, moisture) and measurement of change. 10. Biological transformation comprises the processes of growth, degeneration, agricultural produce and procreation that cause qualitative or quantitative changes in a biological assets 11. Procreation- creation of additional living animal or plant 12. Biological asset shall be measured on initial recognition and at the end of each reporting period at fair value less costs to sell 13. Agricultural produce at fair value less costs to sell at the point of harvest 14. Costs to sell include costs that are necessary for a sale to occur, such as commissions to brokers and dealers, levies by regulatory agencies, commodity exchanges, and transfer taxes and duties. Excludes transportation costs, finance costs, and income taxes.

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa 15. On initial recognition, market determined prices are not available or estimates of fair value are determined to be clearly unreliable. In such a case, the biological asset shall be measured at cost less accumulated depreciation and any accumulated impairment loss. The entity shall measure the biological asset at fair value less costs to sell once the FV becomes clearly measurable. 16. In all cases, entity shall measure agricultural produce at the point of harvest at fair value less cost to sell. Can always be measured reliably. 17. Active market: (a) The items traded within the market are homogeneous, meaning similar or identical in nature or form (b)willing buyers and sellers (c)prices are available at the market 18. A loss may arise on initial recognition of a biological asset because costs to sell are deducted in determining fair value less costs to sell and any subsequent changes in FV shall be included in profit or loss. 19. A gain may arise on initial recognition when a calf is born 20. A gain/loss may arise on initial recognition of agricultural produce as a result of harvesting. 21. Entity shall disclose the aggregate gain/ loss arising on initial recognition of biological and agricultural and from the change in fair value less costs to sell of biological assets. 22. Agricultural land is not covered by PAS41. it is covered by pas16(PPE) 23. Fair value of the land may be deducted from the fair value of the combined assets to arrive at the fair value of the trees in the plantation forest 24. An unconditional government grant related to a biological asset that has been measured at fair value less costs to sell shall be recognized as income when the grant becomes receivable. 25. If conditional, the grant shall be recognized as income only when conditions attaching to the grant are met. 26. If a government grant relates to a biological asset measured at cost less any depreciation and impairment, PAS20 on government grant is applied. 1/1 7/1

Biological assets(at cost) Cash Biological assets Gain from change in FV

12/31 Biological assets(2,540,000-1,580,000) Gain from change in FV

1,500,000 1,500,000 80,000 80,000 960,000 960,000

* Biological assets undergo physical change at dec.31 27. biological assets are classified as noncurrent assets. Fair value of 3years old cows on dec. 31 Acquisition cost of 3 years old cow Price change

18,000 15,000 3,000

Fair value of 4 years old cows on dec. 31 Fair value of 3 years old cow dec. 31 Physical change

24,000 18,000 6,000

Fair value of newborn calf on dec. 31 Fair value of newborn calf on july 1 Price change

5,000 4,000 1,000

Fair value of ½ year old calf on dec.31 Fair value of newborn calf on dec.31

7,000 5,000

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX Physical change 4 years old cows Price change (100x3,000) Physical change (100x6,000) ½ year old cows Price change (20x1000) Physical change (20x2,000) Physical change at birth(20x4,000) Total

jkycpa 2,000

300,000 600,000 20,000 40,000 80,000 1,040,000

Inventory estimation 1. there are two methods for approximating inventory: gross profit method and retail 2. Sales discount and sales allowance are not included in the computation of net sales as this would create an ending inventory 3. In sales allowance , there is no physical transfer of goods from the customer but a mere reduction in the sales price. 4. Cost 200 Initial markup 40 Original retail 240 Additional markup 60 New sales price 300 Markup cancellation 40 New sales price 260 Markup cancelation (20) Markdown (30) New sales price 210 Markdown cancellation 20 New sales price 230 Net markup(60-40)=20 Net markdown(30-20)=10 Maintained markup=230-200=30 5. Departmental transfer in or debit= addition to purchases at cost and at retail. 6. Sales returns and allowances= deducted from sales. Increases ending inventory by decreasing COS. 7. Normal shrinkage= deducted from GAS at retail 8. Abnormal= at cost and retail. 9. Approaches in using retail: conservative, average cost, fifo approach Cost Retail Beginning inventory 180,000 250,000 Net purchases 1,020,000 1,575,000 Additional markup 200,000 Markup cancelation (25,000) Gas conservative 1,200,000 2,000,000 Cost ratio: 60% Markdown (140,000) Markdown cancellation 15,000 1,200,000 1,875,000

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX Cost ratio: 64% Less: Sales 1,450,000 Sales returns (50,000) Employee discount 40,000 Spoilage and breakage 35,000 Ending inventory at retail Conservative cost (400T x 60%) Average cost (400T x 64%)

jkycpa

1,475,000 400,000

240,000 256,000

10. Conservative cost: lower of average cost or market. 11. Average cost- historical cost 12. If there is no beginning inventory, inventory value would be the same under both average and FIFO method 13. Fifo is based on the assumption that markup and markdown apply to goods purchased during the year and not to beginning inventory. Beginning inventory Purchases Net markup Net markdown Net purchases Current year cost ratio: 60 % GAS Less: Sales Ending inventory at retail FIFO cost (1,200,000 x 60%)

Cost 495,000 1,800,000 1,800,000 2,295,000

Retail 900,000 3,300,000 300,000 (600,000) 3,000,000 3,900,000 2,700,000 1,200,000

720,000

Financial asset at fair value 1. Investment are assets not directly identified with the operating activities of an entity and occupy only an auxiliary relationship to the central revenue producing activities of the entity 2. Investments are held for (1)accretion of wealth(interest, rentals), (2)capital appreciation, (3)ownership control, (4)meeting business requirement( noncurrent fund), (5)protection( cash surrender value) 3. characteristics of Financial instrument: (1) contract (2)at least two parties (3)financial asset of 1 party and a financial liability or equity instrument of another party 4. Examples are: cash in the form of notes and coins. Cash in the form of checks 5. Gold is a commodity and therefore not a financial asset 6. Financial asset: (1) cash (2)contractual right to receive cash or other financial asset from other entity (3) contractual right to exchange financial instrument with another entity under conditions that are potentially favorable (4) equity instrument of another eentity 7. stock option is an example of a favorable condition held by the holder to purchase shares of another entity at less than market price. 8. Stock option is a financial liability of the issuer. 9. Delivery of goods or services in the future is not a financial liability. It must involve cash or other financial asset and must be contractual to qualify so. 10. Constructive obligations do not arise from contracts. 11. equity instruments: (1) OSC (2) PSC (3) Warrants or call options 12. Mandatory redeemable preference share is a financial liability. Accordingly, dividends paid to holders is an interest as component of finance cost

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa 13. financial assets at fair value include both equity securities and debt securities while financial assets at amortized cost include only debt securities 14. Fair value through profit/loss: a. Trading securities b. Financial assets designated on initial recognition as at fair value through profit/loss Like investment in bonds and other debt instruments c. Investments in quoted equity instruments ( by consequence) 15. In financial assets held for trading, transaction costs are expensed outright 16. Transaction costs do not include debt premiums or discounts, financing costs and internal and administrative or holding costs 17. Financial assets held for trading are derivatives and not an effective hedging instrument. 18. At initial recognition, an entity shall measure a financial asset at fair value plus, in the case of financial asset not at fair value, transaction costs. In subsequent measurement, an entity shall choose between fair value and amortized cost. 19. Disclosure of the cost of security is necessary 20. Notes to FS shall disclose the individual securities with their corresponding carrying amount and market value 21. Cumulative unrealized loss/gain is shown in the statement of changes in equity 22. Unrealized loss/gain may be transferred to retained earnings but not subsequently transferred to profit/loss 23. The entity shall disclose the change in business novel as this is a significant and demonstrable event. 24. For financial assets measured at fair value, all gains and losses are either presented in profit or loss or in other comprehensive income. It is not necessary therefore to assess financial assets measured at fair value for impairment. 25. Only financial assets at amortized cost is tested for impairment. 26. IASB rejected totally the tainting provision in PAS 39 27. PFRS 9 amended PAS 1 to require an entity to present as a separate line item in the income statement all gains and losses from the derecognition of financial assets measured at amortized cost. Investment in Equity securities 1. Equity securities may also represent rights and options to acquire ownership shares 2. Cash 150,000 Investment in equity securities 100,000 Dividends income 5,000 Gain on sale of investment 45,000 3. Property dividends: Investment in equity sec 50,000 Dividends income 50,000 *recorded at fair value. 4. Property dividends or dividends in kind are dividends in the form of property or noncash assets. Merchandise inventory Dividend income 4. Liquidating dividend may be in the form of cash or noncash assets 5. Wasting assets(partly income and return of capital): Cash Dividend income Investment in ES

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa 6. When liquidating dividends exceed the cost of investment, the difference is credited to gain on investment. If the cost of investment is not fully recovered, the balance is written off as a loss. 7. Stock dividends are in the form of the issuing entity’s own shares. The IAS term for stock dividend is bonus issue. Property dividends are shares of another entity declared as dividends 8. Stock dividends- changing the legal capital by capitalizing RE. Not an income since there is no distribution of assets. 9. Received 2,000 shares representing 20% stock dividend on 10,000 original shares held. Shares now held, 12,000 shares. 10. Shareholders may receive a stock dividend which is different from the original shares 11. Investment in preference share 50,000 Investment in OS 50,000  the allocated cost to OS is 750,000 based on its relative fair value. 50,000 to preference share. Total cost is 800,000 11. Shares received in lieu of cash dividend are income at fair value of the shares received . Such shares are in effect property dividends. 12. If there is no market value, dividend income is recorded at cash dividend 13. The “as if approach” is used when 150,000 cash is received in lieu of 1,000 stock dividend declared. It is then assumed that the shares are received and subsequently sold at the cash received. the original cost of 1,100,000 will now apply to 11,000 shares and so, the revised cost per share would then be 100. Cash 150,000 Investment in ES 100,000 Gain on Investment 50,000 14. In BIR, all cash received is income. Thus, the above transaction is simply recorded as: Cash 150,000 Dividend income 150,000 15, In split up, outstanding shares are called in, and replaced by a larger number, with the effect of increasing the no.of shares and decreasing the par value per share. 16. Received 20,000 new shares as a result of 2-for-1 split of 10,000 original shares. 17. Special assessments are addi.tional capital contribution of the shareholders. On the part of the shareholders, special assessments are recorded as additional cost of the investment and on the part of the entity as share premium Investment in ES Cash 17. Stock right is inherent in every share. Its purpose is to give the shareholders the chance to preserve their equity interest in the corporation 18. If stock rights are accounted for separately, carrying amount of the original investment in ES is allocated to the stock rights at an amount equal to the fair value of the stock rights at the time of acquisition. 19. Under PAS 39, embedded derivative shall be separated from the host contract. While under PFRS 9, if the host contract is a financial asset, the embedded derivative isn’t separated. 20. The shares are selling right-on if it is between the date of declaration and date of record. Same as in dividend-on. No accounting problem is encountered because stock rights are not yet received. 21. If between record date and expiration date, the shares are selling ex-right so it can now be sold separate from the right. 22. Accounted for separately: Stock rights(at FV) IES

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa *if stock rights do not have a fair value, the theoretical or parity value of the stock rights is used in measuring the fair value of stock rights. 23. When stock rights are exercised, the cost of the new investment includes the subscription price and the cost of the stock rights exercised. IES Cash SR 24. If expired, Loss on stock rights Stock rights 25. Right-on: 210-150 5+1

Ex right: 210-150 5

Not accounted for separately: Received 10,000 stock rights to subscribe for new shares at 100per share for every 5 rights held, or a total of 2,000 new shares Exercise of rights: IES Cash  if stock rights are not exercised but sold: debit cash and credit the original investment. No gain or loss from the sale. Cost recovery  If the stock rights are not exercised but expired, only a memo entry is necessary to record the expiration  Any subsequent transactions affecting the shares shall be accounted for using either the FIFO or average method. Investment in Associate 1. Significant influence is the power to participate in the financial and operating policy decisions of the investee but not control or joint control over those policies. 2. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities 3. Associate includes unincorporated entity such as partnership. It must not a subsidiary nor an interest in a joint venture 4. Subsidiary is controlled by a parent 5. Potential voting right is considered in assessing whether an entity has significant influence. However, the investor’s share of profit/loss of the investee is determined on the basis of present ownership interest and does not reflect the possible exercise or conversion of potential voting rights 6. The loss of significant influence can occur with or without change in the absolute or relative ownership interest. This is so when an associate becomes subject to control of a government, court, administrator, regular, or by contractual agreement 7. Equity method is adopted when the investor has a significant influence over the investee 8. Under the equity method, investment is initially recorded at cost but it is subsequently increased by the net income and decreased by the net loss and dividend payments of the investee 9. Investment must be in ordinary shares. If it is in preference, equity method is abandoned because preference share is a nonvoting equity 10. Investment in preference share may be accounted for as fair value through profit or loss or at fair value through other comprehensive income 11. Investment in associate is a noncurrent asset 12. Investment in associate(20% of reported income)

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa Investment income Loss on investment Investment in assoc. 13. Under equity method, cash dividend is not an income but a return of investment 14. If the assets are fairly valued, accountants frequently attribute the excess of cost over book value to goodwill 15. If the excess is attributable to land, it is not amortized because the land is nondepreciable 16. If the excess is attributable to inventory, the amount is expensed when the inventory is already sold. 17. If it is attributable to goodwill, it is not amortized but the entire investment in associate is tested for impairment at the end of each reporting period. Goodwill is included in the carrying amount. 18. If the fair value of equipment is 2,000,000 greater than its carrying amount, the investor should decrease its investment income by 80,000(2M/5 x 20%) since the investee’s income is overstated by 400,000 by the unrecorded depreciation of 400,000(2M/5). The share in loss of the investor is equal 20 percent of 400,000. Undervaluation of depreciable asset(2Mx20%) Goodwill remainder Excess of cost over net asset acquired

400,000(share in FV of 2M) 600,000 1,000,000

Investment income Investment in assoc

80T

Excess of cost over book value Excess attributable to eqpt Excess attributable to inventory

3,000,000 (2,800,000) (1,000,000) (800,000) 700,000 700,000

Investment income(2.8M/4) Investment in assoc

80T

Investment income Investment in assoc

1,000,000

Investment in assoc Investment income

800,000

Share in net income Amortization Inventory Excess

1,000,000 800,000 8,000,000 700,000 1,000,000 800,000 7,100,000

19. under equity method, if an investor’s share of losses of an associate equals or exceeds the carrying amount of an investment, investor discontinues recognizing its share of further losses. The investment is reported at nil or zero value 20. The carrying amount of the investment in associate also includes other-long term interests in an associate, such as long-term receivables, loans and advances. However, trade receivables and any longterm receivables for which adequate collateral exists, such as secured loans, are excluded from the carrying amount of the investment in associate 21. If the associate subsequently reports income, the investor resumes including its share of such income after its share of income equals the share of losses not recognized.

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa 22. The recoverable amount is measured as the higher between fair value less costs to sell and value in use 23. The recoverable amount is assessed for each individual associate, unless an individual associate does not generate cash inflows from continuing use that are largely independent of those from other assets of the reporting entity 24. When an associate has outstanding cumulative preference share, the investor shall compute its share of earnings or losses after deducting the preference dividends, whether or not such dividends are declared. 25. When an associate has outstanding noncumulative preference share , the investor shall compute its share of earnings after deducting the preference dividends only when declared. 26. when the reporting dates of the investor and the investee are different, the associate shall prepare for the use of the investor, financial statements as of the same date as the financial statements of the investor, unless it is impracticable to do so. In any case, the difference between the reporting date of the associate and that of the investor shall be no more than 3 months 27. If an associate uses accounting policies other than those of the investor, adjustments shall be made to conform the associate accounting policies to those of the investor. 28. Profits and losses resulting from upstream and downstream transactions between an investor and an associate are recognized in the investor’s financial statements only to the extent of the unrelated investors’ interests in the associate . the investor’s share in the associate’s profits and losses resulting from these transactions is eliminated. 29. Significant influence must be lost before the equity method ceases to be applicable 30. Sale of 20,000 shares out of 30,000, resulting to a loss of significant influence: Cash 5,000,000 Investment in assoc(2/3 x 6M) 4,000,000 Gain on sale of investment 1,000,000 To remeasure the retained investment of 10,000 shares or 10percent interest Investment in assoc 600T Gain from remeasurement to fair value 600T Fair value(10,000x260) 2,600,000 CV(6M-4M) 2,000,000 Gain from remeasurement 600,000 To reclassify: Investment in equity sec 2,600,000 Investment in assoc 2,600,000 31. Investor shall reclassify to profit or loss any gain or loss previously recognized in other comprehensive income of investee 32. Equity method is not applicable if: a. investment is classified as held for sale b. Investors debt and equity instruments are not traded in a public market, meaning stock exchange or over the counter market c. The investor did not file or it is not in the process of filing its financial statements with the SEC for the purpose of issuing any class of instruments in a public market d. The ultimate or any intermediate parent of the investor produces consolidated financial statements available for the public use that comply with the PFRS. 33. Investment in associate is classified as held for sale, it is accounted for in accordance with PFRS 5. Any noncurrent asset classified as held for sale shall be measured at the lower of carrying amount and fair value less costs to sell 34. Investment in unquoted equity does not share in the profit or loss of the investee because this method is based on the legal relationship between the investor and the investee. Investor and the investee are independent of each other. Does not share in income of investee. Dividends received is recorded as an income. Nonmarketable

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa 35. If it is marketable, FV is usually used 36. If retained earnings is 4,000,000 and the investee paid 4,500,000, there is no longer a return of investment. The entry is, debit cash credit dividend income for 4,500,000. No distinction between preacquisition and postacquisition 37. Investment in associate achieved in stages- subsequent acquisitions increase the ownership interest to 20% or more. 38. The principles for business combination achieved in stages must be applied for investment in associate achieved in stages. 39. 2008: 2009: IES 2M Cash 100T Cash 2M Dividend income 100T Cash 80T Dividend income 80T 2010(becomes 20%after investment): Investment in assoc 4M Cash 4M *reclassify the 10% interest Investment in assoc Investment in equity securities

2M

*remeasure the previously held 10% interest: Investment in assoc Gain in remeasurement to equity

160T

Share in net income: 2008(10% x 2M) 2009(10% x 3M) Amor. Of excess 2008(400T/5) 2009

2M

160T

200,000 300,000 (80,000) (80,000) 340,000 (180,000) 160,000

*record the share in 2010 net income: Investment in assoc Investment income *record the 2010 cash dividend: Cash Investment in assoc

*record the amortization: Investment income Investment in assoc

320,000 320,000

First acquisition(400T/5) 2nd acquisition(1.2M/5)

Financial asset at amortized cost: 1. Is classified as noncurrent assets 2. Bond investments are classified as trading securities and financial assets at amortized cost 3. Trading bond investments are measured at fair value through profit/loss. It is not necessary to amortize any premium or discount. 4. Trading sec 2,180,000 Accrued interest 20,000 Cash 2,200,000

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX Cash Accrued Interest Income

jkycpa

120,000 20,000 100,000

*the purchase price of 2,200,000 includes the accrued interest 5. Cash 630,000 Trading sec 576,000 Interest income 24,000 Gain on sale 30,000 Sales price( 600Tx101) Accrued interest(600Tx12%x4/12) Total cash received

606,000 24,000 630,000

Sales price Less: carrying amount(6/10x960T) Gain on sale 5. Investment in bonds(1Mx94) Cash

606,000 576,000 30,000

Investment in bonds(60T/5x9/12) Interest income Investment in bonds(1yr) Interest income

940,000 940,000 9,000 9,000 12,000 12,000

6. Investment in convertible bonds can be classified as financial assets measured at fair value 7. Nominal or coupon rate or stated rate. 8. Effective yield or market rate is actual or true rate of interest which the bondholders earns on the investment Investment property 1. Only land and buildings can qualify as investment property. An equipment or any movable property cannot. 2. An investment property is not held: a. For use in the production or supply of goods or services or for administrative purposes. b. For sale in the ordinary course of the business 3. If the property is held by the owner or lessee under a finance lease for administration it is known as owner-occupied property. 4. Investment property generates cash flows that are largely independent of the other assets of the entity. This is the characteristic that distinguishes investment property from owner occupied. The generation of profit is not merely due to administration but also to the other assets used in the production. The owneroccupied indirectly help or is just necessary to produce profit. Not an independent cash-generating unit. 5. Examples of investment property: a. Long-term capital appreciation b. Land held for a currently undetermined use. c. Bldg owned and leased out under an operating lease. d. Building that is vacant but is held to be leased out under an operating lease e. Property that is being constructed or developed for future use as an investment property. Not considered an investment property:

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa 1. Owner-occupied 2. Property held for future use as owner-occupied 3. Property held for future development and subsequent use as owner-occupied 4. Property occupied by employees, whether or not the employees pay rent at markrt rate 5. Owner-occupied property awaiting disposal 6. Property held for sale in the ordinary course of business 7. Property being constructed or developed on behalf of third parties 8. Property that is leased to another entity under a finance lease. 6. Property interest that is held by a lessee under an operating lease may be classified and accounted for as investment property provided: a. Property meets the definition of investment property b. Operating lease is accounted for as if it were a finance lease. c. The lessee uses the fair value model in measuring property interest 7. where a property held under a lease is classified as an investment property, the initial cost is the lower amount between fair value and the present value of the minimum lease payments 8. If in the property, portions could be sold or leased out separately, an entity shall account the portions separately as investment property and owner-occupied. If cannot be sold separately, property is investment property if only an insignificant portion is held for manufacturing or admin 9. Classification of property whether owner-occupied or investment property depends upon the significance of service. Example is an entity owns and manages hotel. The services provided to guests are a significant component of the arrangement as a whole. Therefore, it is owner-occupied. 10. Property leased to an affiliate- from the perspective of the individual entity that owns it, the property leased to subsidiary or parent is considered an investment property. From the perspective of a group as a whole and for purposes of consolidated FS, it is owner-occupied 11. Investment property shall be measured initially at its cost. Transaction costs shall be included in the initial measurement 12. The cost of purchased investment property comprises its purchase price and any directly attributable expenditure 13. The cost of self-constructed investment property is its cost at the date when the construction or development is complete 14. If payment is deferred, its cost is the cash price equivalent. The difference between this amount and total absolute payment is recognized a interest expense over the credit period—amortized 15. The cost of investment property acquired in exchange is measured at fair value of the asset given up unless the exchange transaction lacks commercial substance 16. Entity shall choose between fair value and cost. If cost is chosen, it is carried at cost less any accumulated depreciation and impairment. Fair value is disclosed. However, when property interest held under operating lease and classified as an investment property, the fair value model shall be applied. 17. fair value of investment property shall reflect market conditions at the end of reporting period. Fair value is time-specific as of a given date because market conditions change. Valuation shall take place at every end of reporting period. 18. Equipment such as lift or air-conditioning is often an integral part of a building and is generally included in the fair value of the investment property 19. If an office is leased on a furnished basis, the fair value of office generally includes the fair value of the furniture because the rental income relates to the furnished office. Fair value excludes prepaid or accrued operating lease income. 20. The best evidence of fair value of investment property is the current price in an active market for similar property in the same location and condition and subject to similar lease and other contract. In the absence of current price: a. Current price in an active market for property of different nature, condition and location adjusted to reflect those changes.

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa b. Recent price of similar property in less active market with adjustments to reflect changes in economic conditions c. Discounted cash flow projection based on reliable estimate of future cash flows supported by the terms of existing lease and other contract and by external evidence such as current market rent for similar property in the same location and condition 21. If the fair value cannot be determined reliably on a continuing basis, cost method is used and the residual value of the investment property shall be assumed to be zero 22. Pas40 states that an entity that uses the fair value model shall continue to measure its other investment property at fair value, notwithstanding the fact that one investment property is carried using cost due to exceptional cases 23. If fair value is used, No depreciation is recorded 24. When entity uses the cost model, transfers between investment property, owner-occupied and inventory shall be made at carrying amount 25. A transfer from investment property at fair value to owner-occupied or inventory, shall be accounted for at fair value which becomes the deemed cost for subsequent accounting 26. If owner-occupied is transferred to investment property that is to be carried at fair value, the difference between fair value and the carrying amount of the property shall be accounted for as revaluation of property, plant and equipment. 27. if an inventory is transferred to investment property that is to be carried at fair value, the remeasurement to fair value shall be included in profit or loss. 28. When an investment property under construction is completed and to be carried at fair value, the difference between fair value and carrying amount shall be included in profit or loss. An investment property shall be derecogonizedL A. On disposal B. When the investment property is permanently withdrawn from use. C. When no future economic benefits are expected from the investment property Gain or loss from the disposal of investment property shall be determined as the difference between the net disposal proceeds and the carrying amount of the asset and shall be derecognized in profit or loss Compensation from third parties for investment property that was impaired, lost or given up shall be derecognized in profit or loss when the compensation becomes receivable. General disclosures: 1. Whether the entity uses the cost model or fair value of measuring the investment property 2. The amount of rental income for the period along with the related expense. 3. Restrictions on the investment property either through rental or sale proceeds. 4. Contractual obligations to purchase or construct investment property If the fair value is used: 1. Detailed reconciliation, showing all the movements between the carrying amount of investment property at the beginning and end of the period 2. The method of determining the fair value of investment property and whether the valuation is carried out by an independent qualified valuer. 3. Net gains or losses from fair value adjustments 4. whether significant fixtures, such as lift and office furnitures, within an investment property, have been separately recognized When the cost model:  The depreciation method or rate and the useful life

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa  Detailed reconciliation of the gross cost of the investment property and the related accumulated depreciation showing all the movements during the year  fair value of the investment property where possible. If it is not possible, such fact shall be explained. Fund and other investments 1. Fund is defined as cash and other assets set aside for a specific purpose either by reason of the action of management or by virtue of a contract or legal requirement. It may be form of cash, securities, and other assets. 2. Sinking fund cash 2,120,000 Sinking fund securities 2,000,000 Accrued interest receivable 60,000 Total sinking fund 4,180,000 Less: appropriated 2,000,000 Additional appropriation 2,180,000 Entries: Sinking fund securities Sinking fund cash Sinking fund cash Sinking fund income Sinking fund cash Cash Accrued interest receivable Sinking fund income Retained earnings RE-appropriated for RE Payment of expenses: Sinking fund expense Sinking fund cash Sale: Sinking fund cash Sinking fund sec Gain on sale Retirement: Bonds payable Interest expense Sinking fund Cash Sinking fund cash RE-appropriated

120,000 120,000 2,000,000 2,000,000 60,000 60,000 2,180,000 2,180,000

20,000 20,000 2,100,000 2,000,000 100,000 5,000,000 500,000 5,500,000 940,000 940,000 6,440,000

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX RE 6,440,000 Under the TRUSTEE: Sinking fund-trustee 2,000,000 Cash Entry: Sinking fund-trustee (net cash) 280,000 Sinking fund cash expense 70,000 Sinking fund income Gain on sale

jkycpa

2,000,000

50,000 300,000

3. Contingency fund is set aside for the purpose of meeting obligations that may arise from contingencies like pending lawsuits or taxes in dispute 4. If the beneficiary is other than the entity itself, payment for the premium is simply charged to insurance expense 5. Life insurance policy has cash surrender value and loan value. 6. Cash surrender value is the amount which the insurance firm will pay upon the surrender and cancellation of the life insurance policy. It is a noncurrent investment. Prerequisites are that: a. Policy is life insurance b. Premiums for three full years must have been paid c. Policy is surrendered at the end of the third year or anytime thereafter 7. Loan value is the amount an insured can borrow from the insurance firm with the cash surrender value as a collateral security. When an amount is borrowed from the insurance entity, it is treated as an ordinary obligation. It shall not be deducted from the cash surrender value for financial statement purposes. 8. The cash surrender value of life insurance policy arises from the fact that the fixed annual premium is much in excess of the annual risk during the earlier years of the policy, such excess made necessary in order to balance the deficiency of the same premium to meet the annual risk during the later years of the policy. Such excess in the premium paid over the annual cost of insurance, with accumulated interest constitutes the cash surrender the value 9. Policy year coincides with accounting year Jan. 1 Life insurance expense 30T Cash 30T 2011 Life insurance expense 30T Cash 30T 2012 Life insurance expense Cash

30T

Dec.31 Cash surrender value Life Insurance expense RE

30T

30T

*cash surrender is applicable for 3years 2013 Life insurance expense 30T Cash Dec.31 CSV 12T Life insurance expense *to recognize the increase from 30T to 42T

10T 20T

30T 12T

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX 2014 Life insurance expense 30T Cash 30T June 30

CSV Life insurance exp

8T 8T

*58,000-42,000=16,000 x 6/12=8,000 July 31 cash 2M Cash surrender value Life insurance expense Gain on life insurance settlement

50T(42T+8T) 15T(unexpired) 1,935T

Policy year doesn’t coincide with accounting year: April.1 life insurance expense 30,000 Cash 30,000 Dec. 31 Prepaid Life insurance exp

7,500

2011 Life insurance expense Prepaid (reversing)

7,500

7,500 7,500

April 1 life insurance expense Cash

30T

Dec 31 Prepaid life Life insurance exp

7,500

2012 Life insurance exp Prepaid

7,500

April 1Life insurance Cash

30,000

30T 7,500 7,500 30,000

Dec 31 Prepaid Life insurance

7,500

2013

7,500

Life insurance exp Prepaid

7,500 7,500

April 1 Cash surrender Life insurance RE

30,000

April 1 Life insurance Cash

30,000

June 30 Cash surrender Life insurance

2,500 27,500 30,000 3,000 3,000

jkycpa

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX To recognize the increase from april 1to june 30 Balance, april 1 2014 42,000 Balance, april 1 2013 30,000 12,000 12,000 x 3/12 3,000 July 31 Cash CSV Life insurance Gain on life

jkycpa

2,000,000 33,000 22,500( 30Tx9/12) 1,944,500

DERIVATIVES 1. Entity use derivative financial instruments(hedging instrument) to manage financial risk. They are derived from primary financial instrument. Financial risk originates from sources such as change in commodity price, change in cash flows and foreign currency exposure 2. The reduction of financial loss stemming from the financial risk is the motivating factor in trading in derivatives. Derivative financial instruments create rights and obligations that have the effect of transferring between the parties to the instrument the financial risks inherent in an underlying primary financial instrument 3. Types of financial risks:  Price risk—uncertainty about the future price of an asset. Trading securities, purchase commitment, equipment to be imported at a future date.  Credit risk—possibility of nonpayment of loan.  Interest rate  Foreign currency—The peso equivalent of the foreign currency loan on the date of maturity will differ from the peso equivalent of the foreign currency loan when it was obtained.  A derivative is an executory contract, meaning, it is not a transaction but an exchange of promises about future action.  Parties to the derivative financial instrument are taking bets on what will happen to the underlying financial instrument in the future.(gambling)  Derivative characteristics:  Underlying variable—specified interest rate, commodity price, foreign exchange rate, price index. It must have a notional amount(quantity or volume)  Requires either no initial investment or initial net investment  Readily settled at a future date by a net cash payment.  Hedging is a means of protecting a financial loss or the structuring of a transaction to reduce risk  Derivatives are measured at fair value. Both the fair value and notional amount shall be fully dislosed.  Forecast transaction(primary financial instrument) is an uncommitted but anticipated future transaction  Cash flow hedge—measured at fair value. The changes in fair value are recognized in OCI to the extent that the hedge is effective. The ineffective portion is recognized in profit or loss. Hedged item is not adjusted to conform with fair value  Fair value hedge—offsets in whole or in part the change in fair value of an asset or liability. It is measured at fair value. The hedged item is also measured at fair value. Changes in fair value are recognized in profit or loss.

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa  Examples of derivatives:  Interest rate swap  Forward contract  Futures contract  Option  Foreign currency forward contract  These derivatives are stand-alone derivatives. They are separate from the primary instrument. They are created to solely to hedge against financial risks created by primary instrument or by transaction that have yet to occur  Jan 1,2010 Cash 5M Loan Payable 5M Dec31 Interest Expense 500T Cash 500T 31 Interest rate swap receivable 89,300 Unrealized gain—interest rare swap 89,300 *the 100T receivable on dec2011 is discounted at 12% Dec312011 Interest expense(5Mx12%) 600T Cash 600T Cash 100T Interest rate swap receivable 89,300 Unrealized gain 10,700 Loan payable 5M Cash 5M Unrealized gain 100T Interest expense 100T  Futures contract and forward contract have the same definition . The only difference is that a futures contract is traded in a futures exchange market in much the same manner as debt and equity securities being traded in the stock market. In other words, a forward contract is a private contract between 2 parties who know each other very well while a futures contract is a standard contract traded in a futures exchange market and one party will never know who is on the other side of the contract. All cash settlements are made through the exchange market.  Call options gives the holder the right to purchase an asset and put option gives the holder the right to sell an asset  An option must be paid for. This is a derivative that requires an initial small payment for the protection against unfavorable movement in price(option premium). It is a receivable. To be recovered from the increases in fair value.  The option is “in the money” if the market price is greater than the option price. We recognize loss equal to the option premium if the market price is less than the option price  Under PFRS 9, if the host contract is a financial asset, the imbedded derivative is not separated. It is measured at fair value or amortized cost. In PFRS 39, it can be separated provided that: (1) The combined contract is not measured at fair value and the change in fair value recognized in profit or loss. Thus, if it is measured at fair value, there is no need to separate it because the combined contract is already accounted for similar to a derivative (2) The embedded and the host are not closely related.  Examples of embedded derivatives: (1) equity conversion option (2) Redemption option (3) investment in bond whose interest and principal payment is linked to the price of gold or silver. Government Grant

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa 1. Assistance by the government(monetary or nonmonetary) in return for past or future compliance with conditions relating to the operating activities of the entity. It is also known as subsidy, subvention or premium 2. A forgivable loan from government can be considered as a government grant when it is certain that the entity will meet the terms and conditions. 3. Benefit of a government grant loan with a below-market rate of interest is treated as a government grant 4. PAS20 does not deal with the government participation in ownership of an entity, grant covered by PAS41 on agriculture and government assistance in the form of tax benefits 5. Classification of Government grant:  Grants related to assets-purchase or construct long-term assets.  Grants related to income—other than those related to asset 6. Grants shall be recognized as income over 3 years in proportion to the costs incurred. Property Plant and Equipment 6. Assets that are held for sale, including land, or held for investment are not included in PPE 7. Pas16 on PPE does not apply to Biological assets related to agricultural activity and mineral rights and mineral reserves such as oil, natural gas, and similar nonregenerative resources. Such assets are shown as separate line item on the face of the statement of FS. 8. An entity is required to apply PAS 16 to PPE used to develop or maintain biological assets, mineral rights and mineral reserves. 9. Spare parts and servicing equipment are usually carried as inventory and recognized as an expense when consumed. However, major spare parts and stand-by equipment qualify as PPE when the entity expects to use them more than one period. 10. If the spare parts and servicing equipment can be used only in connection with an item of PPE, they are accounted for as PPE and are depreciated over a time period not exceeding the useful life of the related asset. 11. A chemical manufacturer may have to install certain new chemical handling processes in order to comply with environmental requirements on the production and storage of dangerous chemicals. Such related plant enhancements are recognized as assets to the extent that they are recoverable because without them, the entity is unable to manufacture and sell. 12. The cost of an item of PPE comprises:  purchase price, including import duties and nonrefundable purchase taxes, after deducting trade discounts and rebates  Cost directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by mgt.  Initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which the entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period. 13.

Directly attributable:  Cost of employee benefits arising directly from the construction or acquisition  Cost of site preparation  Initial delivery and handling cost  Installation and assembly cost  Professional fees

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa  Cost of testing whether the asset is functioning properly, after deducting the net proceeds from selling any items produced while bringing the asset to that location and condition, such as samples produced when testing eqpt. 14. Costs that are expensed immediately:  Cost of opening a new facility  Costs of introducing a new product or service, including costs of advertising and promotion  Costs of conducting business in a new location or with a new class of customer, including costs of staff training  Administration and other general overhead costs  Costs incurred while an item capable of operating in the manner intended by the management has yet to be brought into use or is operated at less than full capacity  Initial operating losses  Cost of relocating or reorganizing part or all of an entity’s operations. 15. After initial recognition, an entity shall choose either the cost model or revaluation model as its accounting policy and shall apply that policy to an entire class of PPE 16. When carried at revaluation, its cost is the fair value at the date of revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. 17. If the machinery has cash price: Machinery 290,000 Discount on NP 60,000 Note payable 300,000 Cash 50,000 Note outstanding method is used to amortize the discount 18. If the asset is acquired by installment and there is no available cash price, the asset is recorded at an amount equal to present value of all payments using an implied interest Machinery 597,400 Discount on NP 102,600 Cash 100,000 NP 600,000 The present value of installment payment of 200,000 is 497,400. so the implied interest is 102, 600. the downpayment of 100,000 is included in the cost of machinery—597,400 19. For equity-settled transaction( issuance of share capital), the proceeds shall be measured by the fair fair value of the consideration received.  fair value of property received  Fair value of the share capital  Par or stated value of share capital 20.

Asset acquired by issuing bonds payable is measured in the following order:  Fair value of bonds payable  Fair value of asset received  Fair value of bonds payable

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa 21. A transaction has a commercial substance when the expected cash flows after the exchange differ significantly relative to the fair value of the asset exchanged from the expected cash flows before the exchange 22. If an entity is able to determine reliably the fair value of either the asset received or the asset given, then the fair value of the asset given is used to measure the cost of the asset received unless the fair value of the asset received is more clearly evident. 23. In an exchange, where there is no cash involved, the order is:  fair value of the property given  Fair value of property received  Carrying amount of property given * letter a is preferable since this approximates a cash transaction. The acquisition is conceived as a two-way transaction, meaning as if the investment is sold at its fair value and the proceeds is used to acquire equipment 24. If exchange transaction lacks commercial substance, the cost is measured at the carrying amount of the asset given up. Payor: Equipment-new Accumulated depreciation Loss on exchange Equipment old Cash

800,000 900,000 100,000 1,600,000 200,000

Fair value of asset given Add: cash payment Cost of new asset Fair value of the asset given Less:carrying amount Loss on exchange Books of the recipient: Equipment-new Cash Accumulated depreciation Equipment old Gain on exchange

600,000 200,000 800,000 600,000 700,000 100,000 600,000 200,000 1,350,000 2,000,000 150,000

Fair value of asset given Less: cash received Cost of new asset

800,000 200,000 600,000

Fair value of asset given Less: carrying amount Gain on exchange

800,000 650,000 150,000

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa 25. Trade-in is in a form of exchange. Property is acquired by exchanging another property as part payment and the balance payable in cash or any other form of payment. It involves a nondealer acquiring the asset from a dealer. Involves significant amount of cash. Order of priority:  Fair value of the asset given plus cash payment  Trade in value of asset given plus cash payment(in effect, fair value of the asset received. Old equipment: Cost Accumulated depreciation Carrying amount Fair value Trade in value

1,400,000 1,000,000 400,000 350,000 500,000

New equipment List price Trade in value of old equipment Cash payment

2,000,000 500,000 1,500,000

Fair value approach: Fair value of asset given Cash payment Cost of new asset

350,000 1,500,000 1,850,000

Fair value of the asset given Less: CV Loss on exchange

Equipment Accumulated depreciation Loss on exchange Equipment-old Cash

350,000 400,000 50,000

1,850,000 1,000,000 50,000 1,400,000 1,500,000

If the fair value of asset given is not clearly determinable, the new asset is recorded at the trade in value of the asset given plus cash payment Equipment-new Acc.depreciation Equipment-old Cash Gain on exchange Trade in value of asset given

2,000,000 1,000,000 1,400,000 1,500,000 100,000 500,000

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX Cash payment Cost of new asset Trade in value of asset given Less: carrying amount Gain on exchange

jkycpa 1,500,000 2,000,000 500,000 400,000 100,000

26. The cost of fully depreciated asset remaining in service and the related accumulated depreciation ordinarily shall not be removed from the accounts. However, entities are encouraged but not required to disclose fully depreciated property. 27. PFRS 5 provided that an item of property plant and equipment is classified as “held for sale” if the asset is available for immediate sale in its present condition within 1 year from the date of classification as held for sale. It is excluded from PPE and classified as current asset 28. Any noncurrent asset classified as held for sale shall be measured at the lower of carrying amount or fair value less cost to sell. It shall not be depreciated 29. The writedown to fair value less cost to sell is treated as an impairment loss 30. Entity shall not classify as held for sale a noncurrent asset that is to be abandoned. This is because its carrying amount would be recovered principally through continuing use 31. Temporary idle activity or abandonement does not preclude depreciating asset as future economic benefits are consumed not only through usage but also through wear and tear and obsolescence 32. Noncurrent asset to be abandoned includes an item of property plant and equipment that is to be used until the end of its economic life 33. Cost of self-constructed asset shall include direct cost of material and labor and indirect cost and incremental overhead 34. If there is clear evidence that the actual cost is materially excessive and this is due to construction inefficiencies or failures, the excess shall be treated as a loss chargeable against management. Future periods shall not be burdened with management inefficiencies and errors. 35. Intervening operations or incidental income and loss gain or incurred that are not necessary to bring an item to the location and condition for its intended use are recognized in profit or loss.(e.g. using the building site as carp park until construction starts) 36. The cost of asset is equal to the invoice price minus the cash discount, whether taken or not(net method) because this approximates the cash price equivalent Cash discount is generally considered as reduction of cost and not as income. 37. Gross or net method, ultimately, an item of PPE is stated at net amount (this doesnt apply to inventories where gross method reports inventory at net amount only if a cash discount is availed).If net method is used and payment is made beyond the discount period, an other expense account( purchase discounts lost) is debited and a PPE asset is credited. 38. If a fully depreciated property is no longer used, the asset account and related acc.depreciation are closed and the residual value is set up in a separate account. Borrowing Cost 1. Commencement of capitalization: a. When the entity incurs expenditures for the asset b. When the entity incurs borrowing costs c. When the entity undertakes activities necessary to prepare the asset for the intended use or sale

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa 2. Activities necessary to prepare the asset for the intended use or sale encompass not just the physical construction but also the technical and administrative work prior to the commencement of physical construction such as drawing up plans and obtaining permit for a building 3. borrowing cost incurred during the period in which the asset is idle or there is no development activites undertaken is not capitalizable 4. Capitalization is suspended during the period in which active development is interrupted 5. If temporary delay is necessary for the intended sale, capitalization is not suspended 6. Segregation qualifying assets from other assets is not required Land, Building and machinery 1. Classification of land depends on the nature and purposes of the land 2. Land used as a plant site shall be treated as property, plant and equipment 3. Land held for currently undetermined use is treated as an investment property 4. Land that is held definitely as a future plant site is classified as owner-occupied

5. Cost of land includes: a. Legal fees and other expenditure for establishing clean title b. Broker’s commission and escrow fees c. Fees for registration and transfer of title d. Cost of relocation or reconstruction of property belonging to others in order to acquire possession e. Mortgages,encubrances and interest on such mortgages assumed by the buyer f. Unpaid taxes up to date of acquisition assumed by the buyer g. Cost of survey j. Cost of clearing and demolishing unwanted old structures, less proceeds from salvage value k. payments to tenants to induce them to vacate the land. l. Cost of permanent improvements such as cost of grading, leveling and landfill m. Cost of option to buy the acquired the land. If the land is not acquired, the cost of option is expensed outright 5. if Land improvements are additions to cost not subject to depreciation, they are charged to the land account. Examples are cost of surveying, cost of clearing, cost of grading, leveling and landfill, cost of subdividing and other cost of permanent improvement 6. Special assessments are taxes paid by the landowner as a contribution to the cost of public improvements. It is treated as part of the cost of land. The reason for this is that public improvements increase definitely the value of land 7. Real property taxes are treated as outright expense. Unpaid real taxes assumed by the buyer are capitalized up to date of acquisition 8. Land improvements that are depreciable should be charged to a special account—Land Improvements and be depreciated Cost of Building when purchased 1. Materials used, labor employed,overhead incurred during construction 2. Building permit and license 3. Architect fee 4. Superintendent fee

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa 5. Cost of excavation 6. Cost of temporary buildings used as a construction offices and tools or materials used 7. Expenditures incurred during th construction period such as interest on construction loans and insurance 8. Expenditures for service equipment and fixtures made a permanent part of the structure 9. Cost of temporary safety fence around construction site and cost of subsequent removal thereof. However, the construction of a permanent fence after the completion of the building is recognized as land improvement 10. Safety inspection fee. 9. Any expenditures not in connection with the construction of a new building is not part of the building account. Sidewalks, pavements, parking lot, driveways are land improvements unless they are part of the blueprint for the construction of a new building. 10. Where insurance is taken during construction of a building, the cost of insurance is charged to the building because it is necessary and reasonable cost of bringing into existence. 11. However, where insurance is not taken, an accounting problem arises when the company is required to pay claims for the damages for injuries during the construction. In this regard, it is believed that the payment for damages should be expensed outright because the damages represent management failure or negligence in procuring insurance and are not reasonable and necessary cost of construction. To charge the damages to the building would be tantamount to concealment of the management failure or negligence 12. Expenditures for shelves, cabinets, and partitions may be charged to the building or furniture and fixtures depending upon the nature of the expenditures. If such expenditures are immovable in the sense that they are attached to the building in such a manner that the removal thereof may destroy, they are charged to the building account. On the other hand if such expenditures are movable, they are charged to furniture and fixtures and depreciated over their useful life. 13. If installed during construction, the ventilating system, lighting system and elevator are charged to the building. Otherwise, they are charged to building improvements and depreciated over their useful life or remaining life of the building, whichever is shorter. 14. It is incorrect to maintain a single account for land and building because land does not depreciate but building depreciates. Land is not insurable but building is insurable. Thus if they are acquired at a single cost, the single cost is allocated to the land and building on the basis of their relative fair value. 15. If land and an old building which is to be razed are acquired at a single cost, the single cost is allocated to the land only. The net cost of razing the building, meaning cost of razing minus salvage, is also charged to the land account. IF the premises are subject to a lease contract, any payments to tenants to induce them to vacate the premises before lease expiration are charged to the land account. If the building owned by the entity is leased to tenants and the building is demolished to make room for the construction of a new one, any payments to induce them to vacate shall be charged to the cost of new building 16. The carrying amount of the old building, if any, and the net cost of demolishing the building shall be charged to the loss on retirement of the old building. The cost of demolishing the old building cannot be charged to the cost of new building because this part of the service cost related to the old building when retired from use. 17. any safety measures in acquisition of asset is capitalized 18. If machinery is moved to new location, the undepreciated cost of the old installation cost is expensed and the new installation cost is charged to the new asset 19. If machinery is removed and retired to make room for the installation of a new one, the removal cost not previously recognized as a provision is charged to expense on the theory that this is part of the service cost related to the retirement of the old machinery

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa 20. VAT on the purchase of machinery is not capitalizable but charged to input tax to be offset against output tax. Any irrecoverable purchase tax is capitalized 21. Tools should be segregated from the machinery account 22. Patterns and dies used for regular products of the company are recorded as assets and depreciated over their useful life. If they are used for specially order products, they are expensed outright and form part of the cost of special product 23. The term equipment includes delivery equipment, store equipment, office equipment, F&F, similar assets 24. Motor registration fees should be expensed and not be included as part of the cost of the delivery equipment 25. If assets are identified with the selling function, they are classified as store equipment, otherwise, charged to office equipment 26. Furniture and fixtures include showcases, counters, shelves, display fixtures, cabinets, partitions, safes, desks, tables and similar items. In broad sense, it includes store and office equipment 27. Returnable containers are classified as PPE when they are in big units as in the case of tanks, drums, and barrels. If small amounts, classified as other noncurrent assets 28. If not returnable, expensed outright 29. Revenue expenditure is an expenditure that benefits only the current period. Therefore reported as an expense. If it benefits current and future periods, it is a capital expenditure and reported as an asset. 30. Subsequent costs is capitalized when: a. Expenditure extends the life of the property b. It increases the capacity of the property and quality of output(upgrading machine parts) c. Improves the efficiency and safety of the property by adopting a new production processes leading to large reduction in operating cost. 31. The cost of addition which is a new unit is depreciated over its useful life. But the cost of an expansion should be depreciated over its useful life or remaining life of the asset of which it is part, whichever is shorter 32. Improvements or betterment may represent replacement of an asset or part with one of a better quality or superior quality 33. Replacement also involve substitution but the new asset is not better than the old asset when acquired. 34. Ordinary repairs are expensed. Extraordinary are capitalized 35. An entity does not include in the carrying amount of PPE the costs of day to day servicing of the property 36. Rearrangement cost is capitalized and amortized over the remaining life of the asset. 37. If the original part of an existing asset is separately identifiable, the major replacement is debited to the asset account. The cost of the part eliminated and the related accumulated depreciation are removed from the accounts and the remaining carrying amount of the old part is treated as a loss. If it not practicable for an entity to determine the carrying amount of the replaced part, it may use the cost of the replacement cost as an indication of what the cost of the replaced part was at the time it was acquired or constructed. 38. Total cost of the building constructed is 5,000,000 for 20 years. After 10 years, the wooden roof is replaced with concrete roofing costing 500,000. The cost of wooden roof is 400T Loss on retirement of building Accumulated dep

200,000 200,000

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX Building

jkycpa 400,000

Building Cash

500,000

Depreciation Acc. depreciation

280,000

Building(5M-400T+500T) Accumulated depreciation (2.5M-200T) CV Divided by 10 years remaining

5,100,000 2,300,000 2,800,000 280,000

If it is not practicable: Loss on retirement Accumulated dep Building

500,000 280,000

139,500 139,500 279,000

*this requires discounting of the replacement cost with the appropriate discount rate for 10 periods. 500,000 multiplied by present value of 1 at 6% for 10periods Depreciation 1. Omission of depreciation may somehow impair legal capital if and when dividends are declared out of earnings before provision for depreciation 2. 2 kinds of depreciation: a. Physical-related to asset’s wear and tear and deterioration over a period. It is caused by wear and tear due to frequent use, passage of time due to nonuse, action of elements, accidents and disease b. Functional or economic-arises from obsolescence or inadequacy of the asset to perform efficiently 3. Obsolescence arises when there is no future demand for the product which the depreciable asset produces 4. When a new depreciable asset becomes available and the new asset can perform the same function for substantially less cost 5. Inadequacy arises when the asset is no longer useful to the firm because of an increase in the volume of operations 6. To the extent that an entity depreciates separately some significant parts of an item of PP, it also depreciates separately the remainder of the item 7. Factors to be considered in determining the useful life(expected utility) of the asset a. expected usage of the asset—asset’s expected capacity b. expected physical wear and tear—operational factors(repair and maintenance program) c. Obsolescence—change in market demand d. Legal limits—expiry date of the related lease 8. Methods of depreciation: a. Equal or uniform—straight line, composite, group b. Variable charge—working hrs, output c. Decreasing charge or accelerated or diminishing balance—SYD,DB DDB d. Other methods—Inventory appraisal, retirement method, replacement

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX

jkycpa

Depletion 1. Wasting assets are physically consumed and irreplaceable by man 2. Exploration and evaluation asset is classified either as tangible or intangible. 3. Residual land value is the residual value in wasting asset. It is deducted from the acquisition cost to get the depletable amount 4. Exploration may result in either success or failure. It may be accounted for as successful effort and full cost method 5. Under successful effort method, only the exploration cost directly related to the discovery of resource is capitalized. Exploration cost related to dry wells is expensed in the period incurred 6. Under full cost, all exploration costs, whether successful or not are capitalized. The cost of drilling dry wells is part of the cost of locating productive wells. 7. Successful effort is popular among large and successful oil entities. Full cost is for small oil entities 8. Development cost may be in the form of tangible or intangible. Intangible is capitalized. It includes drilling, sinking mine shaft and construction of wells 9. Restoration cost may be added to the cost of resource property or netted against the expected residual value of the resource property. The estimated cost of restoring property to its original condition is capitalized only when the entity incurs the obligation when the asset is acquired. 10. In essence, depletion is recognized as the cost of the material used in the production(cost per unit) and thus becomes the finished product since the wasting asset is conceived as the total cost of the materials available for extraction 11. Wasting asset doctrine is an exception to the trust fund doctrine. 12. The accumulated depletion balance is used only for purposes of determining how much capital can be legally returned to shareholders 13. Wasting asset doctrine is based on the philosophy that to limit dividend declaration to the retained earnings balance would have the effect of retaining in the business funds which are not needed because the wasting assets are irreplaceable. Not going concern anymore. Revaluation 1. The frequency of revaluation depends upon the movement in the fair value of the items of PPE being revalued. When a fair value of a revalued asset differs materially from its carrying amount a further revaluation is necessary. Some items of PPE may experience significant and volatile movements in fair value thus necessitating annual revaluation 2. Revaluation every 3-5 years may be sufficient for items of PPE with only insignificant movements in fair value 3. A class of PPE is a grouping of assets of a similar nature and use in an enterprise operation. Examples of separate classes are land, buildings, machinery, ships, motor vehicles, furniture and fixtures and office equipment. 4. Items within a class of PPE are revalued simultaneously in order to avoid selective revaluation and the reporting of amounts which are a mixture of costs and values at different dates. 5. In the absence of fair value, depreciated replacement cost(sound value) is used 6. revaluation increment is equal to fair value or depreciated RC minus the carrying amount of the asset 7. Replacement cost is the current purchase price of a particular asset 8. Appreciation or revaluation increase is the excess of the revalued amount over the historical cost. Appreciation minus the corresponding Acc depreciation equals net appreciation or revaluation surplus 9. 2 approaches in recording revaluation: proportional and elimination 10. Revaluation surplus is a component of OCI. It is transferred to RE when realized over the remaining life of the asset or fully realized on disposal of asset. 11. The historical cost and the related accumulated depreciation shall be disclosed in the notes

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa 12. Proportional approach is the preferable method because it preserves the gross and net amounts after revaluation Impairment 1. Impairment is the fall in the market value of an asset so that its recoverable amount is now less than it carrying amount 2. The events and changes in circumstances that lead to an impairment of asset may be classified as external or internal sources of information 3. External sources: (1)decline in market value or a new competitor in the industry(2) Significant change in the technological, market, legal or economic environment of the business or change in customer taste(3) Decrease in value in use due to increase in interest or discount rate. 4. Internal: (1) Obsolescence or physical damage (2)restructuring, held for sale or idle. (3) economic performance of an asset will be worse than expected. 5. Recoverable amount is the higher between fair value less cost to sell and value in use. 6. If there is binding sale agreement, fair value less cost to sell is the sales price less costs to sell. If there is no binding sale agreement but is traded in an active market, fair value less cost to sell is equal to the market price(current bid price, sales price of recent transaction) less costs to sell. If there is no binding sale agreement and the asset is not traded in an active market, it is equal to the best estimate of knowledgeable and willing parties in an arm’s length transaction. 7. Cash flow projections shall be based on the most recent budgets on financial forecasts, usually up to a maximum of 5 years, unless a longer period can be justified 8. Estimate of cash flows include inflows and outflows from continuing use of the asset and net cash flows received or paid on the disposal of the asset at the end of useful life in an arms length transaction. It excludes restructuring to which the entity is not yet committed, inflows and outflows from enhancement of asset, financing and income tax. 9. Foreign currency future cash flows shall be forecast in the currency in which they will be generated and will be discounted using a rate appropriate to that currency and the resulting figure shall then be translated into the reporting currency at the spot exchange rate at the date of value in use calculation. 10. Discount rate is the current pretax rate that reflects the current assessment of the time value of money and the risks specific to the asset. It shall not reflect risk for which the future cash flow estimates have already been adjusted. 11. As a basic rule, the recoverable amount of an asset shall be determined for the asset individually. If it is not possible, the recoverable amount of the CGU to which the asset belongs is determined 12. CGU should be the smallest aggregation of assets for which cash flows can be identified and which are independent of cash flows from other assets or group of assets. If aggregation is done at the “entity level”, there would be no impairment to be recognized. But if it is done at the department or product line level, we could easily identify those loss-producing unit from cash generating ones. Thus, impairment can be recognized. 13. Carrying amount of CGU does not include the carrying amount of any recognized liability 14. Corporate assets other than goodwill contribute to future cash flows of CGU. It is divisional assets such as head office building, EDP, research center. It does not generate independent cash flows thus recoverable amount of an individual corporate asset cannot be determined unless management has decided to dispose of the asset( fair value less cost to sell) 15. The increased carrying amount of an asset due to reversal of an impairment loss shall not exceed the carrying amount that would have been recognized for the asset in prior years 16. Impairment Loss shall be recognized immediately in profit or loss and presented separately 17. PAS36 does not specify whether the impairment shall be credited to the asset directly or use accumulated depreciation or accumulated impairment loss. 18. If aggregation of assets for the purpose of determining the cash generating unit is done at the “entity level”, there would be no impairment to be recognized since those unprofitable assets would be

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa concealed. Instead, it should be done at the department or product line level so that those lossproducing assets would be written down to recoverable amount 19. Corporate assets are assets other than goodwill that contribute to the future cash flows of both the cash generating unit under review and other cash generating unti Intangible Assets 1. Essential criteria for intangible assets: (1) Identifiability(separable, contractual) (2) Control(competitive advantage) (3)future economic benefits( max revnue and min.cost) 2. The capacity of an entity to control future economic benefit would stem from legal rights 3. Skill of employees arising from training costs, market share, and customer loyalty are not intangible assets since entity cannot control those. 4. Cost of intangible assets are initially measured at cost and it depends on the ff: a. Separate acquisition b. Acquisition as part of business combination—Fair value at the date of acquisition c. Government grant—fair value or nominal amount or zero plus direct costs d. Exchange—fair value of the asset given up. If it has no commercial substance, at carrying amount of the asset given up. 5. Intangible asset can only be carried at revalued amount if there is an active market for the asset because usually, fair value or residual value of intangibles is presumed to be zero. Specific Intangible assets 1. Legal life of patent is 20 years. It cannot be renewed but its life can be extended beyond the legal life by a new patent for improvements and changes 2. If patent is internally developed, it cost includes licensing and other related legal fees in securing the patent rights 3. Legal fees of successfully prosecuting or defending the patent shall be expensed because the effect is maintenance. If it is unsuccessful, legal costs and the remaining cost of the patent is written off as a loss. 4. Competitive patent protect the original patent and thus amortized over the remaining life of the old patent 5. Related patent extends the life of the old patent. The patents shall then be amortized over the extended life 6. If there is no extension, they shall be amortized over their own life. 7. In practice, cost of copyright is written off against the revenue of the first printing instead of theoretically amortizing it over the useful life. 8. The term of protection for copyright is during the life of the author and for 50 years after his death. 9. Franchise may be granted for a definite or indefinite period. 10. Periodic franchise fee which is usually based on the gross sales is normally expensed, while initial franchise fee is capitalized—FRANCHISE 11. Leasehold improvements are classified as PPE and legally revert to the lessor upon termination of the lease. 12. If renewal option is highly probable, cost of the leasehold improvements is spread over the extended period, assuming it is shorter than the life of the improvement. If it us uncertain, it is generally amortized over the life of the lease, assuming it is shorter than the life of the improvements. 13. Legal life of trademark is 10 years and may be renewed for periods of 10years each. Considering the almost automatic renewal of trademark, it may properly be classified as an intangible asset with indefinite life and thus, tested for impairment annually. 14. Goodwill has indeterminate life, inherent in a continuing business and relates to the entity as a whole. It is created by a good relationship between an entity and its customers. 15. Internally developed goodwill is not recognized because there is no cash or objective transaction involved.

FINANCIAL ACCOUNTING VOL1 SUMMARY _VALIX jkycpa 16. Measurement of goodwill acquired in business purchase may be accounted for in residual or direct approach. 17. Negative goodwill term is abandoned and replaced as Gain on bargain purchase 18. In computing for impairment of intangible asset with indefinite life, future cash flows is divided by the discount rate to get the present value 19. Acquired in process R and D project separately or in business combination is recognized as an asset at cost, even if a component is research 20. USA GAAP says that expenditures for research and development which have future alternative uses can be capitalized. Subsequent expenditures, depreciation, amortization are charged to R and D expense. 21. Capitalizable software costs include the cost of coding and testing and the cost to produce the product masters. Costs to actually produce the software from masters and package the software for sale shall be charged as inventory. 22. A computer software purchased as an integral part of machine that cannot operate without the specific software shall be treated as PPE. If it is not an integral part of a related hardware, it is classified as intangible asset. 23. Web site development costs are expensed 24. Service concession is an arrangement between concession operator and grantor public sector whereby private sector shall provide services to the public for some consideration. The scheme is to build, operate and transfer (BOT). 25. The infrastructure asset is not recognized as PPE because the grantor controls the asset. It is either treated as financial asset if there is a contractual right to receive payment from the grantor. It is intangible asset if the entity has no right to receive cash but has the right to charge users toll fee as revenue

-JKYAP