Financial accounting 2 SUMMARY VALIX.doc

Financial Accounting vol2 summary VALIX jkycpa *Conceptually, all liabilities are measured at present value 1. The essence of provision is that there is an uncertainty about the timing or amount of the future expenditure. 2. Recognition of provision a. present obligation- legal or constructive b. probable outflow of benefit c. amount of obligation can be measure reliably 3. Constructive obligation is derived from entity’s actions. Creates a valid expectation 4. An accounting provision cannot be created in anticipation of future event. 5. An entity shall determine whether a present obligation exists at the end of reporting period by taking into account all available evidence, including the opinion of experts. Evidence considered includes any additional evidence provided by events after the end of the reporting period 6. The estimates of outcome are determined by the judgement of management of the entity supplemented by the experience of similar transactions and reports from independent experts 7. Midpoint of the range is used 8. Other measurement considerations: a. Risks and uncertainties—describes the variability of outcome. May increase or decrease the amount of liability. Prudence is required b. present value c. Future events—there must be sufficient evidence that they will occur (new legislation, changes in technology) d. Cash inflows from disposal are treated separately from provision e. Reimbursement shall be treated as a separate asset and not netted against estimated liability f. Change in provision—should be reversed if it is no longer probable g. Expectation of future operating losses is an indication that certain assets may be impaired. An impairment test is necessary. 9. Restructuring is a program that is planned and controlled by management and materially changes either the scope of a business of an entity or the manner in which that business is conducted a. Sale or termination of a line of business b. closure of business location or relocation c. Change in management structure d. fundamental reorganization of an entity 10. In Provision for restructuring there must be a detailed plan and valid expectation 11. It shall include only direct expenditures that are necessarily incurred for the restructuring and not associated with the ongoing activities of the entity. Example: salaries and benefits of employees to be incurred after operations cease and that are associated with the closure of operation. It excludes: a. cost of retraining and relocating continuing staff b. Mktg and admin c. Investment in new system and distribution network. *These are considered to be expenses relating to the future conduct of business. 12. Onerous contract is measured at the least net cost of exiting from the contract or the lower of cost between to pay for the penalty of not fulfilling it or for the lease payments. Bonds payable 1. Bond indenture or deed of trust is the document which shows in detail the terms of the loan and the rights and duties of the borrower and other parties to the contract. 2. If property is pledged as security for the loan, a trustee is named to hold title to the property serving as security. Trustee acts as the representative of the bondholders and is usually a bank or trust entity 3. First mortgage bonds—bonds with senior claims on entity assets. 4. Second mortgage—bonds with subordinated claims on entity assets 5. Collateral trust bonds—bonds secured by stocks and bonds of other corporation

Financial Accounting vol2 summary VALIX jkycpa 6. Debenture—without collateral. Unsecured and therefore rank as general creditors in the preference of credit. 7. Coupon or bearer bonds- interest is paid to the person submitting a detachable interest coupon. 8. Registered bonds—interest is paid to bondholders of record. 9. Journal entry: Unissued Authorized 10. Bond issue costs or transaction costs include printing and engraving cost, legal and accounting fee, registration fee, commission paid to agents and underwriters. It is amortized over the life of the bond issue. It is conceived as cost of borrowing and therefore will increase interest expense. It shall be included in the initial measurement of a financial liability. It shall be presented as a deduction from bonds payable. Under effective interest method, bond issue cost must be lumped with the discount on bonds payable and netted against premium (if not effective)Interest expense Bond issue cost 11. If bonds are sold between interest dates, an accrued interest is involved and it is paid by the buyer. The unexpired life is computed from the date of sale to the maturity date. Monthly amortization would be the best approach. 12. In premature retirement, the discount and bond issue cost are updated up to the date of retirement. Total cash payment is equal to retirement price + accrued interest from the last payment date up to the retirement date. Operating lease 1. Operating lease is the rental approach 2. Lease bonus is treated as a prepaid rent expense to be amortized over the lease term on the part of the lessee. On the part of the lessor, it is unearned income. 3. Lessor may pass to the lessee the payment insurance and maintenance cost. 4. Initial direct cost shall be added to the CV of the leased asset 5. Security deposit refundable should be accounted for as a liability by the lessor Rent deposit-lessee Cash Prepaid rent(lease bonus) deferred initial direct cost Cash Cash Cash-lessor Rent deposit Amortization of initial direct cost Cash-lessor deferred initial Unearned 6. Idle property is subject to depreciation as long as it is available for its intended use. 7.The balance of deferred shall be presented as an addition to the CV of machinery. 8. Unequal rental payments(rent free of 6months): 2010(1Mx6/12) 500,000 2011 1,250,000 2012 1,250,000 3,000,000/3= 1,000,000 2010 Cash Rent receivable Rent income

500,000 500,000 1,000,000

Financial Accounting vol2 summary 2011 Cash 1,250,000 Rent income Rent receivable

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jkycpa

1,000,000 250,000

2012 Cash Rent income Rent receivable

1,250,000 1,000,000 250,000

9. If the sale and leaseback transaction is an operating lease, any gain or loss shall be recognized immediately. If it is a finance lease, any gain on sale is deferred and amortized over the lease term but any loss is recognized immediately. In finance lease, depreciation is based on the life of asset because ultimately, the asset would become the property of the lease by reason of bargain purchase option that is certain. 10. Leaseback as an operating: Cash 2,000,000 Acc. Dep. 1,200,000 Machinery 3,000,000 Gain 200,000 Rent Exp. 100,000 Cash 100,000 Leaseback as a finance lease: Seller-lessee Cash Accumulated depreciation Equipment Deferred gain on sale and leaseback Equipment Lease liability *depreciation is based on useful life *amortization is based on lease term Purchaser-lessor: Equipment Cash

Lease receivable equipment Unearned

4,520,000 1,250,000 5,000,000 770,000 4,520,000 4,520,000

Cash Lease receivable.

Unearned Income

Finance lease-lessee 1. Commencement is the date which the lessee is entitled to use the leased asset. Date of which recognition of assets, liabilities, income and expenses. 2. A land lease with a lease term of several decades or longer may be classified as a finance lease even if title will not pass to the lessee at the end of lease term 3. The minimum lease payments are allocated between the land and building elements in proportion to the relative fair value of the leasehold interests in the land and building elements at the inception of the lease. If the lease payments cannot be allocated reliably between the 2 elements, entire lease is classified as a finance lease or operating 4. Fair value or present value of lease payments, whichever is lower. 5. Minimum lease payments: a. rental payments

Financial Accounting vol2 summary VALIX jkycpa b. Bargain purchase option c. Guaranteed residual value 6. Exercise of bargain purchase option: Lease liability Cash 7. If not exercised: Acc depreciation Lease liability Loss on finance lease Machinery 8. Criteria for finance lease: a. Transfer of ownership b. Bargain purchase c.75% of the economic life of the asset even if title is not transferred d. Leased asset is of such specialized nature that only the lessee can use it without major modification e. The lessee can cancel the lease; the lessor’s losses associated with the cancellation are borne by the lessee. f. Gains or losses from the fluctuation in the fair value of the residual accrue to the lessee in the form of a rent rebate equaling most of the sale proceeds at the end of the lease. g. The lessee has the ability to continue the lease for a secondary period at a rent that is substantially lower than the market rent. 9. In general, if there is an option to cancel the lease and the lessee likely to exercise such an option, then the lease is likely to be an operating lease. Finance lease-Lessor 1. On the part of the lessor, a finance lease is either the following: a. Direct financing lease b. Sales type lease 2. In direct financing lease, the net investment in the lease is the present value of rental payments so that there would be no gross profit to be realized—only interest income 3. Lease receivable 2,000,000 Machinery 1,518,650 Unearned interest income 481,350 4. Cost of machinery Initial direct cost Net investment

1,518,650 66,300 1,584,950

*this requires computation of new effective rate. This reduces the interest income because the initial cost is effective spread over the lease term. In direct financing, initial direct cost is added to the cost of the leased asset while in sales type, it is expensed immediately Machinery(initial direct cost) Cash

66,300

Lease receivable Machinery Unearned interest income

2,000,000

5. Direct financing lease-with residual value Cost of machinery

66,300

1,584,950 415,050 3,194,410

Financial Accounting vol2 summary VALIX Present value of residual value(500Tx.683) (341,500) Net investment to be recovered from rental 2,852,910 Divide by PV of ordinary annuity 3.1699 Annual rental 900,000 Gross rentals(900Tx4) Residual value Gross investment Cost of machinery Unearned Machinery Lease receivable

jkycpa

3,600,000 500,000 4,100,000 (3,194,410) 905,590 500T 500T

Under guaranteed scenario (fair value is 400T): Cash 100T Machinery 400T LR 500T Unguaranteed: Machinery Loss on finance lease LR

400T 100T 500T

6. In sales type lease, present value of lease payments does not necessarily equal to the cost of the leased asset; so that, there would be a gross profit or loss to be realized. (no residual value): Lease receivable 2,000,000 Sales 1,440,000 Unearned interest 560,000 Cost of sales Inventory

1,000,000 1,000,000

1,440,000 (1,000,000) Gross profit: 440,000 7. With guaranteed residual value: Lease receivable 4,200,000(800Tx5+residual value, 200T) Cost of sales 2,000,000 Sales 3,156,820 Unearned 1,043,180 Inventory 2,000,000 Initial direct cost Cash 8. Unguaranteed residual: LR Cost of Sales

100T 100T 4,200,000 1,875,820

Initial 100T Cash 100T

Financial Accounting vol2 summary VALIX jkycpa Sales 3,032,640 Unearned 1,043,180 Inventory 2,000,000 *The present value of residual value is deducted from cost of sales and revenue because the asset is conceived as not sold. But the same method of accounting for LR and unearned is applied. Gross income is the same in both guaranteed and unguaranteed. Inventory 200T Lease receivable 200T * If it is guaranteed, lessee pays for the excess of residual Cash Inventory LR Inventory Loss LR 9. Actual sale: Cash Unearned Loss on sale Lease receivable

50T

value over fair value of the asset. If unguaranteed, it is

150T

accounted for as a loss 200T

150T 50T 200T 3,500,000 1,200,000 300,000 5,000,000

Note Payable and Debt Restructuring 1. Note Payable is initially measured at fair value which is equal to the present value and subsequently measured at amortized cost 2. When the note is issued solely for cash, the cash proceed is the present value using a discount rate. Straight line method of depreciation is used. Using 12%, the entry is: Cash 880,000 Discount on N/P 120,000 Note payable 1,000,000 3. If a promissory note is interest-bearing, the purchase price is the present value. Example: an entity acquired equipment for 1,000,000 payable in 5 annual equal installments every dec.31 of each year. Interest is 10percent on the unpaid balance. 1/1/11: Equipment Note payable 12/31 Interest Expense Note payable Cash 12/31/12: Interest Expense Note Payable Cash

1M 1M 100T 200T 300T 80T 200T 280T

Financial Accounting vol2 summary VALIX jkycpa 4. When a noninterest-bearing note is issued for a property with cash price, the cash price is assumed to be the present value of the note issued. Entity acquired an equipment with a cash price of 350T for 500T, 100T down and the balance payable in 4 equal annual installments: 1/1 Equipment Discount on N/P Cash N/P

350T 150T

12/31 NP Cash 100T 400T

Interest Exp Disc. On NP

100T 100T 60T 60T

* Bond outstanding method is used to amortize discount. * the cash paid is not added to the cost of equipment since the 350T cash value includes already the 100T cash paid. So the 400T note payable applies to the 250T portion of the equipment. Thus, 400-250=150T discount on note payable. 5. If there is no cash price in a noninterest bearing note, present value/cash price is determined by multiplying the annual installment by the present value factor. Entity acquired an equipment for 1M payable in 5 annual installments on every dec.31 of each year. Using 10percent prevailing market interest, the entry is: 1/1 equipment Discount on N/P Note payable

758,160 241,840 1,000,000

12/31 NP Cash Interest exp Disc.on NP

200T 200T 75,816 75,816

*Effective interest method is used.

6. Note Payable Lumpsum using a present value factor of .7513: Equipment 776,170 Discount on NP 223,830 Cash 100,000 Note payable 900,000 *Since the equipment has no established fair value, we shall discount the 900T payable + 100T cash paid to get the cash value of the equipment. The discount is 900T minus the PV. Interest Method is used. 7. In Dacion en pago accounting, mortgage properties are being given to extinguish a liability. Book value is used. Mortgage Payable 3M Accrued interest 200T Bank service 50T Loss on extinguishment 450T Acc. Depreciation 800T Land 500T Building 4M 8. Debt restructuring- granting of concession to the debtor to maximize investment recovery. a. Asset swap(PAS39): Note payable 2M Accrued interest 400T Land 1.5M

Financial Accounting vol2 summary Gain on extinguishment

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jkycpa 900T

USA GAAP: Note Payable Accrued interest Land Gain on exchange Gain on debt restructuring b. Equity Swap: Bonds payable Accrued interest Share capital Share premium Gain on extinguishment

2M 400T

*fair value is 2.2M. To recognized the increase in value, gain on exchange is 1.5M credited. 2-way transaction. It is as if 700T the land was sold and the proceeds is used 200T to extinguish the obligation

5M 500T

*fair value of SC is 4.5M. 2-way transaction 2M 2.5M 1M

Bonds payable Accrued Share capital Share premium Gain

5M 500T

Bonds payable Accrued Share capital Share premium

5M 500T

*fair value of Bonds is 4.7M 2M 2.7M 800T *carrying amount of bonds is used *no gain is recognized(PAS32) 2M 3.5M

9. Modification of terms a. Interest concession-reduction of interest rate or forgiveness of unpaid interest b. Maturity value-extension of maturity date or reduction of the maturity value. 10. There is a substantial modification if the gain/loss is at least 10perecent of the old liability. Accordingly, it shall be accounted for as an extinguishment of the old liability and the recognition of a new liability. Any costs or fees incurred are recognized as part of gain or loss. Illustration: Note payable-due now-14% 5M Note payable old 5M Accrued 1M Accrued interest 1M Discount 466,120 -accrued interest is forgiven Note payable-new 4M -principal is reduced to 4M Gain 2,466,120 -new interest is 10percent payable very dec.31 -new date of maturity is dec.31,2013 11. Under USA GAAP, old liability minus the absolute amount of restructured liability (total cash to be paid) is gain or loss on debt restructuring. Note payable-old Accrued interest Note payable-restructured Gain

5M 1M 5.6M 400T

Financial Accounting vol2 summary

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12. If the gain/loss is not atleast 10percent of the old liability, there would be no gain or loss to be recognized. The carrying amount of the old liability shall be the aggregate present value of the principal liability and future interest payments of the new liability using a NEW EFFECTIVE RATE. Thus, there would be no gain or loss to be recognized upon modification. Any costs incurred in modifying the terms are adjusted to the carrying amount of the old liability and amortized over the remaining term of the modified liability

Note payable-old Accrued NP-new Premium on NP

5M 1M

PV 5M 1M

Accounting for Income Tax: 1. Public entity is an entity whose equity and debt securities are traded in stock exchange or over-the-counter market or whose equity or debt securities are registered with SEC in preparation for the sale of it. 2. Accounting income-financial income or the net income for the period before income tax expense. It is income seen in the income statement computed in accordance with accounting standards. 3. Taxable income- the income for the period determined by the rules of taxation authorities. Income tax return. 4. Permanent differences- items of revenue and expenses which are included in either accounting income or taxable but will never be included/recognized in the other. It pertains to nontaxable revenue and nondeductible expenses. It doesn’t give rise to deferred tax asset and liability because they have no future tax consequences. Nontaxable: Interest income on deposits and dividends received. Nondeductible: Life insurance premium, tax penalties, surcharges, fines 5. Accounting income after permanent differences is equal to accounting income subject to tax. Accounting income subject to tax after temporary difference is equal to taxable income 6. Timing differences are items of income and expenses which are included in both accounting and taxable income but at different time periods (what is recognized in accounting income now may not be recognized yet in taxable until future periods), resulting to a temporary difference. It is temporary because eventually a certain item’s treatment will be the same in accounting and taxable income. 7. Taxable temporary difference-will result in future taxable amount in determining taxable income of future periods when the asset or liability is recovered or settled. 8. Deductible temporary difference- will result to a future deductible amount 9. Deferred tax liability- amount of income tax payable in future periods with respect to taxable temporary diff. 10. Tax base- amount of asset or liability that is recognized or allowed for tax purposes. 11. Other taxable temporary differences: A. When asset is revalued upward and no equivalent adjustment is made for tax purposes B. Subsidiaries, associates or joint venture has not distributed its entire income to the parent or investor resulting to higher carrying amount of investment in subsidiary, associate or joint venture C. Cost of a business combination that is accounted for as purchase is allocated to the identifiable assets and liabilities acquired at fair value and no equivalent adjustment is made for tax purposes. 12. Deferred tax liability is not recognized when the taxable temporary difference arises from: A. goodwill resulting from a business combination and which is nondeductible for tax purposes B. Initial recognition of an asset or liability in a transaction that is not a business combination and affects neither accounting or taxable income. C. When the parent,investor, or venturer is able to control the timing of the reversal of undistributed profit or temporary difference or the temporary difference is not probable to reverse in the future. 13. Standard prohibits a deferred tax liability for goodwill on initial recognition or where any reduction in the value of goodwill is not allowed for tax purposes.

Financial Accounting vol2 summary VALIX jkycpa 14. deferred tax liability for goodwill could be recognized to the extent that it does not arise from initial recognition. 15. If the goodwill arises from business combination and the goodwill is not deductible for tax purposes, deferred tax liability shall not be recognized. If it deductible, deferred tax liability exists. 16. In deferred tax asset, entity is at first at loss but will receive benefit in the future in the form of reduced taxable income (future deductible amount). Just a reversal. While in deferred tax liability, entity benefits but later suffer from an increase in future taxable income. 17. Income statement approach focuses in timing differences only while statement of financial approach considers all temporary differences(asset revaluation) 18. Interperiod tax allocation- recognition of a deferred tax asset or liability 19. Current tax expense- taxable income times tax rate. It is the amount of income tax paid or payable for a year 20. Total income tax expense- accounting income subject to tax multiply by the tax rate. 21. It is deferred asset if the items are on the disadvantage of the entity at the first year (accrual of expenses) and deferred tax liability if it is on the advantage of the entity (excess tax depreciation or installment sale). 22. Acctg income per book 6,000,000 Permanent differences: Nondeductible 500,000 Nontaxable (300,000) Accounting subject to tax 6,200,000 Deductible temporary: Doubtful 200,000 Est.Warranty cost 400,000 Taxable temporary: Excess tax depreciation (200,000) Installment sale (100,000) Taxable Income 6,500,000 23. Deferred tax and liability shall be classified as noncurrent regardless of the reversal period. 24. deferred tax asset and liability shall be presented separately on balance sheet as line items. 25. Intraperiod tax allocation- allocation of income tax expense to the various revenues that brought about the tax. 26. Current tax liability or asset is measured at the current tax rate but deferred liability and asset shall be measured at the newly enacted tax rate at the end of the period which is expected to apply next periods Employee Benefits: 1. Employees include directors and other management personnel under PAS 19 2. Short-term benefits include: a. Salaries, wages, and SSS contributions b. Short-term compensated absences such as paid annual leave and sick leave c. Profit sharing and bonuses payable d. Nonmonetary benefits ( medical care, housing, car, free or subsidized goods) 3. Short-term employee benefits require no actuarial assumptions because they are all payable no later than 12 months and thus are not discounted. 4. Entitlement to compensated absences may be accumulating and nonaccumulating. Accumulating are those that are carried forward and can be used in future periods if current period’s entitlement is not used in full. Non-accumulating is common for sick pay, maternity or paternity leave, military service. 5. Postemployment benefits include retirement benefits(pension), life insurance, medical care. 6. Postemployment benefit plans are informal if evidenced only by an entity’s practice to pay postemployment benefits and formal if required by law whereby entities are required to contribute to national benefit plans(SSS) or to provide postemployment benefits to qualified public sectors.

Financial Accounting vol2 summary VALIX jkycpa 7. Postemployment benefit plan may be contributory/noncontributory or funded and unfunded. In contributory, employer and employee contribute to the fund but they do not necessarily contribute equal amounts. In noncontributory, only the employer makes contributions. Under funded plan. Entity sets aside funds for future retirement benefits by making payments to a funding agency, such as trustee, bank or insurance company. Under unfunded, the entity retains the obligation for the payment of retirement benefits without the establishment of a separate fund. 8. Under Defined contribution plan, contribution is definite but the benefit is indefinite. Employee therefore bears the investment risk. Once the defined contribution is paid, employer has no more obligation under the plan. Benefit expense is equal to the contribution 9. Under Defined benefit plan, the benefit is definite but the contribution is indefinite. If the plan is poor, entity must make additional contributions for any expected shortfall in order to satisfy the promised future benefits 10. SSS is classified as defined contribution plan because entity’s obligation is limited to specified contributions to the plan as a percentage of salary. 11. RA 7641 is a defined benefit plan because the entity’s obligation is to provide specific level of benefit for every year of service. 12. PAS19 encourages but does not require an entity to involve an actuary in measuring benefit obligation under defined benefit plan. It also requires that the projected unit credit method(accrued benefit method) shall be used in determining the present value of the defined benefit obligation 13. Plan assets include assets held by a long-term benefit fund and qualifying insurance policies. The conditions are: (1)The fund is legally separate from the reporting entity (2)assets are available only to pay only employee benefits(3)assets are not available to the reporting entity’s own creditors even in bankruptcy (4) assets cannot be returned or can be returned only if there is surplus funds or to reimburse it for employee benefits already paid. 14. Qualifying insurance policy is an insurance policy issued by an insurer that is not a related party of a reporting entity and the proceeds of the policy can be used only to pay employee benefits and are not available to the reporting entity’s own creditors even in bankruptcy 15. Plan assets exclude unpaid contributions due from the reporting entity to the fund, as well as any nontransferable financial instruments held by the fund. 16. The expected return on plan assets is based on the market expectations at the beginning of the period, for returns over the entire life of the related obligation. It reflects changes in the fair value of plan assets as a result of contribution and benefits paid. In determining the expected and actual, an entity deducts expected administration costs 17. Accumulated benefit obligation is based on current salary while projected is based on future salary 18. Corridor approach is the deferral approach required by the standard 19. Full recognition approach is an option available when fluctuations are so great that deferral is not deemed to be wise. 20. The 10percent corridor represents materiality threshold in determining whether actuarial gains and losses are included in the computation of total benefit expense 21. Only unrecognized gains and losses from prior years or at the beginning of the year are subject to amortization. Actuarial gains and losses in the current year are amortized starting next year 22. Under full recognition approach, actuarial gains and losses occurring in the current year are recognized immediately in the current year as component of OCI rather than as part of total benefit expense. Thus, the reported benefit expense is not saddled with the amortization of deferred gains and losses that may have occurred years before. In corridor approach, benefit expense or accrued or deferred benefit cost is yet to be adjusted next year or the following year 23. Unamortized past service cost and actuarial losses are added to the fair value of plan assets and unamortized actuarial gain is added to the benefit obligation in reconciliation to get the prepaid/accrued benefit cost per book. This is to conform with the expected balance or actuarial assumption

Financial Accounting vol2 summary VALIX jkycpa 24. Unamortized past service cost is already included in the benefit obligation. Expense is deferred. As it is amortized, benefit expense for the current year increases and prepaid/accrued decreases/increases. 25. Actuarial assumptions are mutually compatible if they reflect the economic relationships between factors such as inflation, rates of salary increase, return on plan assets and discount rates. It is unbiased if they are neither imprudent nor excessively prudent. 26. Actuarial assumptions comprise of demographic and financial assumptions. Demographic deal with mortality, rate of employee turnover, early retirement, claim rates under medical plans. Financial deals with discount rate, future salary and benefit levels, future medical costs and expected return. 27. Discount rate shall be determined by reference to market yields at the balance sheet date on high quality bonds. If there is no such bonds, market yields on government bonds is used. 28. Settlement occurs with a curtailment if a plan is terminated 29. The measurement of other long-term employee benefits expense includes actuarial gains and losses and past service cost recognized immediately. 30. Termination is the event which gives rise to an obligation rather than the employee service. 31. If transitional liability is more than the liability that would have been recognized at the same date under the entity’s previous accounting policy, it shall recognize the transition loss as expense immediately to be included in the total benefit expense or amortize it over a maximum of 5years(the choice is irrevocable. Transition gain is recognized immediately. 32. Hybrid plan is deemed to be a defined benefit plan 33. Plan assets shall be carried at fair value. In many cases, plan assets will have determinable fair value because in discharge of their fiduciary responsibility, plan trustees will mandate that retirement plans hold only marketable investments 34. In many countries, actuarial valuations are every 3 years. The standard does not make it incumbent upon the plan to use annual actuarial valuation. If an actuarial valuation has not been prepared on the date of report, the most recent valuation is used and the date of actuarial valuation is disclosed. 35. Unamortized actuarial losses and past service cost are shown as debit in the memorandum records. Shareholders Equity: 1. Certificate of incorporation- right to do business. Juridical personality and legal existence commences. 2. Organization cost shall be expensed immediately. However, share issuance cost shall be debited to share premium arising from the issuance of share capital. The excess is charged to expense. 3. Ordinary shareholders have no fixed or specific return on investment. Their financial reward is dependent on the operations of the entity. 4. In case of par value share, legal capital is the aggregate par value of the shares issued and subscribed. 5. Articles of incorporation- corporation’s right to do business, juridical personality and legal existence commences. 6. Corporation must formally organize and commence operations within 2 years from the date of incorporation 7. Formal organization -adoption of by laws and election of officers by the board of directors. 8. By-laws-rules of action adopted by the corporation for its internal government and for the government of its officers, shareholders, or members. 9. Place of shareholders meeting must be the principal place of business. 10. 25 percent of authorized shall be subscribed and at least 25% of the subscription has been paid. 11. Artificial person- corporation 12. Natural- incorporators/corporators 13. Share issuance cost- shall be debited to share premium arising from issuance of share capital. If SP is not sufficient to absorb the issuance cost, excess is charged to expense. 14. Contributed capital includes SP, aggregate par value of issued and subscribed 15. Par value- minimum issue price; no indication of market price. 16. Ordinary shareholders have no fixed or specific return on investment. Financial reward is dependent on the operation of the entity 17. No par shares contributed capital is the total consideration received

Financial Accounting vol2 summary VALIX jkycpa 18. Corporation can pay dividends to shareholders limited only to the retained earnings balance. But in wasting asset entity, it is up to the accumulated depletion balance 19. It is illegal to pay dividends if the entity has a deficit. 20. Normal balance of unissued share capital is debit. 21. Authorized share capital 4,000,000-beg Unissued share capital (2,900,000)-end Issued 1,100,000 22. Corporation code prohibits the issue of share at a discount. Cash 800T Disc.in SC 200T Share capital 1M 23. Discount is a deduction from total SHE 24. Watered Share: land’s FV is 800T Land 1M SC 1M no discount is recorded. Debited all to land account 25. Secret reserve-opposite of watered share. Asset is understated or liability is overstated 26. Call-official declaration of due and payable unpaid subscription 27. Mae failed to pay the remaining balance of 400,000. Delinquency sale followed with an offer price of 450,000, including interest and other costs A- 4,500 shares B- 5,000 shares C- 6,000 shares * the 10,000 are deemed fully paid, A gets 4,500 while Mae gets 5,500 Advances on delinquency sale 30,000 Cash 30,000

Cash Subscription receivable Interest Income Advances

450,000 400,000 20,000 30,000

28. Callable preference- can be called in for redemption at a specified price at the option of the corporation. 29. Redeemable- at the option of the holder. Mandatory. Classified as a financial liability 30. Right of preemption- legal right of stockholders 31. Rights issue-accounting term for preemptive right (stock right) 32. No entry is required when share warrants are issued to existing shareholders because these warrants are issued usually without consideration. Just indicate the no. of rights issued to shareholders and the number of shares that can be purchased through the exercise of rights 33. If rights are exercised, memorandum is made for the decrease in the no. of shares claimable through the exercise of rights 34. If bonds payable is issued with warrants, the value of the warrants is the residual after deducting the market price of the bonds. Reissuance of TS below cost: a. SP-TS b. RE Retirement:

Financial Accounting vol2 summary VALIX a. SP- original issuance b. SP-treasury c. RE 35.Donated shares are treasury shares. “Received from shareholders as donation 10,000 OS with par value of 100” Reissuance: Cash xx Donated capital xx Canceled: OS xx Donated capital xx Subterfuge Land’s value is 800T Land OSC

jkycpa

xx xx

Correcting entry upon reissuance: Cash xx Land xx Donated capital xx * the should-have-been payment has been recovered upon reissuance of donated shares Share split: Issued 50,000 new shares with par value of 20, as a result of 5-for-1 split of 10,000 old shares with par value of 100. Share-based compensation 1. Equity settled—share option 2. Cash settled—incurs liability and the liability is based on the entity’s equity instruments(share appreciation rights) 3. Share option- at the option of a shareholder, therefore not a liability 4. 2 methods for measuring compensation: a. Fair value—compensation is equal to the fair value of SO on the date of grant. Mandated by PFRS 2 b. Intrinsic—excess of market price over option price Rules: 1. If SO vest immediately, employee is not required to complete a specified period of service before unconditionally entitled to SO. On grant date, entity shall recognize the compensation expense in full with corresponding increase in equity 2. If it doesn’t vest immediately, compensation is recognized as expense over the service period (matching) Salaries—SO (100Tx20fair value) 2,000,000 SOO 2,000,000 Exercise: Cash SOO OSC SP

6,000,000 2,000,000 5,000,000 3,000,000

Financial Accounting vol2 summary VALIX jkycpa *In effect, it is capitalization of RE. From RE (salaries) to SWO or SP. It is like the entity pays cash and the same was subsequently invested. 3. With vesting period: Total fair value/compensation(100Tx15) Dec.31,2010: Salaries—SO SWO 2011: Salaries—SO SWO 2012: Cash SWO OS SP

1,500,000/2=750,000

750,000 750,000 750,000 750,000 6,000,000 1,500,000 5,000,000 2,500,000

*So outstanding account is reported as component of share premium. IF not subsequently exercised, SO shall be adjusted and credited to SP 2010: No of employees Employees who left 2010 Expected Employees entitled to SO SO Total SO Fair value Total compensation

500 (30) (30) 440 X100 4,000 30 1,320,000/3=440,000

No of employees 2010 2011 Expected

500 (30) (28) (25) 417x100=41,700x30=1,251,000/3x2=834,000-440,000=394,000

No of employees 2010 2011 2012

500 (30) (28) (22) 420x100=42,000x30=1,260,000-834,000=426,000

2011:

2012:

4. Intrinsic value: MV(OS). dec.31,2010 Option price 2011

150 (125) 25x10,000=250,000/2=125,000 180

Financial Accounting vol2 summary VALIX (125) 55x10,000=550,000-125,000=425,000(end of vesting period) Dec 31,2012(exercise date) 200 2011 (180) Increase in intrinsic 20x10,000=200,000(additional compensation) 2010 salaries-SO 125,000 SO 125,000 2011 Salaries-SO 425,000 SOO 425,000 2012 Salaries 200,000 SOO 200,000 Execise: Cash SOO OS SP

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1,250,000 750,000 1,000,000 1,000,000

5. If SO are canceled or settled during the vesting period, it is as if the vesting date had been brought forward and the balance of the fair value not yet expensed is recognized immediately Total compensation 4,000,000 Cumulative 2010 and 2011 2,050,000 Compensation expense 2012 1,950,000 Exercise in 2012 Cash SOO SC SP

3,000,000 4,000,000 2,500,000 4,500,000

6. If it is settled in cash: SOO 2,050,000 Salaries (expense) 450,000 Cash 2,500,000 7. Share appreciation creates liability. 8. During the vesting period from the date of grant to the exercise date, if there are increases or decreases in the market value of share over a predetermined price for a given number of shares, the liability for the compensation shall be adjusted. The predetermined price is the beginning of the earliest period. 9. Market value of shares at the end of the period less the predetermined price times the no. of shares equals the total compensation to be distributed equally over the service period. If there is no increase at the end of the service period, the entry is: Accrued salaries payable Gain on reversal of SAR 10. If the entity has the choice of settlement, entity shall account for the instrument either as a liability or equity. If the employee has the right to choose the settlement, entity is deemed to have issued a compound financial instrument. It shall be accounted for as partly liability (cash alternative) and partly equity (share alternative) 11. Fair value of share alternative(12,000x48) 576,000 Fair value of liability on grant date,jan1(10,000x51) 510,000 Equity component 66,000

Financial Accounting vol2 summary 12. Cash alternative: Accrued salaries payable Share options outstanding Cash Share premium Share alternative: 13. Accrued salaries payable Share options outstanding Share capital Share premium 14. Fair value of the equipment purchased Fair value of the liability(40Tx110) Equity component Equipment Accounts payable Share options outstanding

VALIX

jkycpa 650,000(65x10,000) 66,000 650,000 66,000 650,000 66,000 300,000 416,000 5,000,000 4,400,000 600,000

5,000,000 4,400,000 600,000

Cash alternative(market price is 130,dec.31) Accounts payable 4,400,000 Share options outstanding 600,000 Interest expense 800,000 Cash Share premium Share alternative: Accounts payable Share options outstanding SC Share premium

5,200,000 600,000

4,400,000 600,000 2,500,000 2,500,000

Retained earnings and Book value per share 1. Property dividends is distribution of noncash assets or shares of another entity to owners 2. Entity shall measure a noncurrent asset classified for distribution at the lower of carrying amount and fair value less cost to distribute. If fair value is lower, there is impairment loss. 3. In closely held entities, if stock dividends are declared, retained earnings shall be capitalized only to the extent of par value or stated value of the shares. 4. Wasting asset doctrine states that entity can declare dividends not only to the extent of the retained earnings balance but also to the extent of the accumulated depreciation balance Retained earnings 3,000,000 Capital liquidated-acc. Depletion 2,000,000 Dividends payable 5,000,000 5. Distribution to holders of an equity instrument classified as financial liability are recognized in the same way as interest expense on a bond. Dividends paid to holders of mandatorily redeemable preference share shall be accounted for as interest expense as component of finance cost 6. Appropriation may be legal, contractual, or voluntary.

Financial Accounting vol2 summary VALIX jkycpa 7. Quasi-reorganization is a permissive but not a mandatory procedure under which a financially troubled entity restates its accounts and establishes a fresh start in accounting sense. It is called corporate readjustment. It may be accomplished through recapitalization or revaluation of PPE. (PPE’s fair value is 6,000,000) Accumulated dep 1,000,000 RE 500,000 PPe 1,500,000 Revaluation: PPE Acc. Dep Revaluation surplus

4,000,000 1,200,000 2,800,000

Cost Replacement cost 5,000,000 9,000,000 4,000,000 (1,500,000) 2,700,000 1,200,000 3,500,000 6,300,000 2,800,000 8. The result of revaluation of PPE must be made by an independent expert or specialist 9. The resulting deficit from the reorganization is offset against the revaluation surplus 10. Retained earnings subsequent to the quasi-reorg shall be restricted to the extent of the deficit wiped out during the reorganization and therefore cannot be declared as a dividend 11. The quasi-reorg shall be disclosed for at least 3 years—date, mechanics, purpose and effect of quasireorg on the entity’s statement 12. Quasi-reorganization must be approved by SEC. 13. When preference as to assets, the preference shareholders are entitled to payment not only for the liquidation value but also for dividends in arrears. 14. Dividends in arrears usually include current dividends 15. In case where there are two classes of preference share with different dividend rates and both are participating, the lower rate shall be the basis for allocation to the ordinary share. 16. Participating up to 16% means that the preference share shall receive for the current year a maximum of 16 percent on the par value. Since the preference share already receives 12% as basic dividend for the current year, then it participates only to the extent of 4% on the par of 2,500,000 or 100,000. 17. When dividends has preference as to assets, it shall be given dividends even when there is a deficit. Total deficit is charged to Ordinary shareholders. 18. Preference as to dividends means that preference holders will receive first dividends if and when dividends are declared. No dividends can be declared when there is deficit. Preference and ordinary share on the deficit on a pro rata basis. 19. Subscribed shares are entitled to dividends. Issued 2,500,000 Subscribed 1,000,000 Total 3,500,000 Treasury at par (500,000) Outstanding 3,000,000  treasury shares are treated as retired for book value purposes. 1. Preference share capital 500T Treasury 400T SP 100T 20. Subscription receivable is not deducted for book value purposes. PPE Acc. Dep(30%)

Financial Accounting vol2 summary

VALIX

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Earnings per share: 1. EPS pertains only to ordinary shareholders. 2. 2 computations of earnings per share is covered by PAS 33 which requires two presentations of earnings per share: basic earnings per share and diluted 3. Public entities are required to present earnings per share 4. An entity shall present basic and diluted earnings per share on the face of income statement with equal prominence for all periods presented 5. When an entity presents both consolidated and separate, disclosures required by the standard need be presented only on the basis of the consolidated info. 6. An entity that chooses to disclose earnings per share on its separate financial statements shall present such earnings per share info on the face of its separate income statement. An entity shall not present such earnings per share on the consolidated financial statements. 7. Net income is equal to the amount after deducting dividends on preference share 8. If the preference share is cumulative, preference dividend for the current year only is deducted from the net income whether such dividend is declared or not. If the preference share is noncumulative, preference dividend for the current year is deducted from net income only if there is declaration 9. If there is a significant change in the ordinary share capital during the year, weighted average no. of ordinary shares outstanding during the period should be used. 10. Where stock dividends or share splits create a change in the capital structure, the increase and decrease in the number of shares shall be recognized retroactively, meaning the stock dividends or split shall be treated as a change from the date the original shares were issued. JKYAP