INTERMEDIATE ACCOUNTING REVIEWER

CHAPTER 10: INVENTORIES

&

CHAPTER 11: Inventories / Inventory Cost Flow

• INVENTORIES – are assets held for sale in the inventories of a trading concern and inventories
ordinary course of business, in the process of of manufacturing concern.
production for such sale or in the form of • Trading concern – is one that buys and sells
materials or supplies to be consumed in the goods in the same form purchased.
production process or in the rendering of • Merchandized inventory – is generally applied
services. to goods held by trading concern.
• Inventories encompasses goods purchased • Manufacturing concern – is the one that buys
and held for resale, for example: goods which are altered or converted into
a) Merchandized purchased by a retailer another form before they are made available for
and held for resale. sale.
b) Land and other property held for • The Inventories of Manufacturing concern
resale by a subdivision entity and real are:
estate developer. ➢ Finished goods
• CLASSES OF INVENTORIES – inventories ➢ Goods in process
are broadly classified into two, namely ➢ Raw materials
➢ Factory or manufacturing supplies.

PROBLEM #1

• What is the correct amount of inventory? point. Joice prepaid P150, 000 of delivery costs
➢ 4,750,000 for Ann as an accommodation. On June 11,
• Calzado Company incurred the following cost: 2021, what amount was received by Joice from
Materials = 500,000; Storage cost of finished Ann as remittance in full?
goods = 150,000; Delivery to customers = ➢ 3,457,500
75,000; Irrecoverable purchase taxes = 50,000. • Arias Company took a physical inventory at the
At what amount should the inventory be end of the year and determined that P5, 500,000
measured? of goods were on hand. In addition, the entity
➢ 550,000 determined that P300,000 of goods purchased in
• On June 1, 2021, Joice Company sold transit shipped FOC shipping point were
merchandise with a list price (sales price) of P5, actually received two days after the physical
000,000 to Ann on Account. Joice allowed trade count and that the entity has P750,000 of goods
discounts of 25% and 10%. Credit terms were out of consignment. What amount should be
2/10, n/30 and the sale was made FOB shipping reported as inventory at year-end?
➢ 6,550,000
PROBLEM #2

• What is the correct amount of inventory?

➢ 5,600,000

PROBLEM #3

• What is the cost of inventory on August 31 under the FIFO method?

➢ 75,900

PROBLEM #4

• What is the ending inventory on August 31?

➢ 1,737,600
• What is the ending balance of inventory in units on August 31?
• 48,000

PROBLEM #5

• Using the weighted average method, what is the cost of inventory on February 28?
➢ 6,375,000
• What is the unit cost of the closing inventory using the weighted average method?
➢ 106.25
PROBLEM #6

• What is the cost of inventory on January 31 under the FIFO method?

➢ 10,350,000
• How many units of the January 31 inventory were from January 18 purchases?
➢ 250,000

PROBLEM #7

• Using the relative sales value method, what amount of cost should be allocated to Class A lots?
➢ 6,000,000
• How much is the total cost to be allocated?
➢ 15,000,000

PROBLEM #8

• What is the unit cost of the closing inventory using the weighted average method?
➢ 74.00
• What amount of inventory should be reported on January 31?
➢ 1,850,000
 CHAPTER 12: Lower of Cost and Net Realizable Value
• Per PAS2, how should inventories is measured?
➢ LOWER OF COST AND NET REALIZABLE VALUE
• Commodities of broker-traders are measured at fair value less cost of disposal.
• Inventories of agricultural, forest and mineral products are measured at net realizable value at certain stages of
production.
• The method of accounting for inventory writes down where inventory is recorded at the lower of cost or net
realizable value.
➢ LOWER COST AND NET REALIZABLE VALUE
• With respect to inventories, the Financial Statements shall disclose the following:
➢ Amount of any inventory write down of inventories recognized as an expense during the period.
➢ Amount of reversal of write down that is recognized as income.
➢ The accounting policies adapted to measure inventories.
• The cost of inventories may not be recoverable under the following circumstances:
➢ Inventory are damaged
➢ Inventory has become wholly or partially obsolete.
➢ The selling prices have declined.
➢ The estimated cost of completion or the estimated cost of disposal has increased.
• Inventories are usually written down to net realizable value on an item by item or individual basis.
• Purchase commitments - An obligation of the entity to acquire certain goods sometime in the future at a fixed
price and fixed quantity.
• Writing down of inventories happens when the net realizable value is lower than cost.
• Net Realizable value - The estimated selling price in the ordinary course of business less the estimated cost of
completion and the estimated cost of disposal.
• In Direct methods of accounting inventory write down, the loss on inventory write down is NOT included BUT
BURIED in the computation of cost of goods sold.
• If the cost is lower that net realizable value, there is no accounting problem because the inventory is measured at
cost and the increase in value is not recognized.
• If the net realizable value is lower than cost, the inventory is measured at net realizable value and the decrease in
value is recognized.

PROBLEM #1

Shaw company provided the following data the current year:

Inventory - Jan 01
Cost =P3,000
NRV =P2,800
Net purchases =P8,000
Inventory - Dec 31
Cost =P4,000
NRV =P3,700

• Required Allowance as of Dec31?

➢ 300
• Cost of goods sold before inventory write down?
➢ 7,000
• Goods available for sale?
➢ 11,000
• What amount should be reported as cost of goods sold or Cost of goods sold after inventory write down?
➢ 7,100
• Amount of Loss on inventory write down?
➢ 100

PROBLEM #2
 •What is the measurement (LCNRV) of Product B?
➢1,800
•What is the Net realizable value of Product B?
➢2,300
•What is the Net realizable value of Product A?
➢1,400
•What is the Cost of Product A?
➢1,500
•What is the measurement (LCNRV) of Product A?
➢1,400
CHAPTER 13: GROSS PROFIT METHOD
• Gross profit method - This method is based on • The basic formula under the gross profit method
the assumption that the rate of gross profit includes Goods available for sale (GAS) less
remains approximately the same from period to Cost of goods sold to arrive at ending inventory.
period and therefore the ratio of cost of goods • These are ignored in computing the net sales to
sold to net sales is relatively constant from get the gross profit rate:
period to period. ➢ Sales discount
• Gross profit rate on cost - It is the common way ➢ Sales allowance
of quoting gross margin because goods are • It is called gross profit method because cost of
stated on a sale price basis rather than on a cost goods sold is computed through the use of the
basis. gross profit ratio.
• Gross profit rate on sale - This method provide • In many cases, it is necessary to know the
lower gross profit rate which creates a approximate value of inventory when it is not
favourable impression on the part of the possible to take a physical count.
customers. • Gross profit method and retail inventory method
• Sales allowance and sales discount DO NOT are the two widely accepted procedures for
increase the physical inventory of goods, same approximating the value of inventory.
in sales return where there is an actual addition
to goods on hand.
• In sales allowance, there is no physical transfer
of goods from the customer but a mere reduction
in the sales price.
PROBLEM #1

Let company sells merchandise a gross profit of 30%. On June 30, 2021, the entire inventory was destroyed by fire. The
following figures pertain to the operations for the six months ended June 30, 2021.

Net Sales =P8, 000

Beginning Inventory =P2, 000
Net Purchases =P5, 200

• What is the estimated cost of the destroyed inventory?

➢ 1,600
PROBLEM #2

Buko Company provided the following information for the year ended December 31, 2021:
Inventory, Jan 01 =P650
Purchases =P2, 300
Purchase returns =P80
Freight In =P60
Sales =P3, 400
Sales discounts =P20
Sales return =P30

on December 31, 2021, a physical count revealed that the ending inventory was only P420.
The gross profit on sales has remained constant at 30% in recent years.
Then entity suspects that some inventory may have been pilfered by one employee.
On December 31, 2021, provide the following:

• What is the Cost of sales?

➢ 2,359
• What is the amount of Ending Inventory before adjusting the missing inventories?
➢ 571
• What is the estimated cost of missing inventory?
➢ 151
• What is the net sale?
➢ 3,370
• What is the value of Goods Available for Sale?
➢ 2,930

PROBLEM #3
On October 31, 2021, Table Company reported that a flood caused severe damage to the entire inventory.
Based on recent history, the entity has a gross profit of 25% of sales.
The following is available from the records for ten months ended October 31, 2021:
Inventory, Jan 01 =P520
Purchases =P4, 120
Purchase returns =P60
Sales =P5, 600
Sales returns =P400
Sales allowances =P100
A physical inventory disclosed usable damaged goods which can be sold for P70.

• Using the gross profit method, what is the estimated net sale for ten months ended October 31, 2021?
➢ 5,200
• Using the gross profit method, what is the estimated cost of goods sold for ten months ended October 31, 2021?
➢ 3,900

PROBLEM #4

A fire destroyed Newborn Company's inventory on October 31. On January 01, the inventory has a cost of P2, 500.
During the period, January 1 to October 31, the entity has net purchases of P7, 500 and net sales of P15, 000. Undamaged
inventory at the date of fire had a cost of P150. The mark up on cost is 66 2/3%.

• What was the cost of goods sold for the period January 1 to October 31? (Bonus item, choices was not updated
while preparing. Answer should be P9,000)
➢ 1,000
• What was the cost of inventory destroyed by fire?
➢ 850
PROBLEM #5
Book Company provided the following information for the year ended December 31, 2021:
Inventory, Jan 01 =P650
Purchases =P2500
Purchase returns =P25
Purchase allowance =P60
Purchase discount =P15
Freight In =P50
Sales =P3, 500
Sales return =P250
Sales Allowance =P60
Sales discount =P140
Gross profit rate on sales =32%
Gross profit rate on cost =30%
Using the above data, kindly provide the following:

• Gross Profit rate based on Sales - Cost Ratio (No • Gross Profit rate based on Sales - Gross profit.
need to input the % sign) ➢ 1,040
➢ 68 • Gross Profit rate based on Sales - Cost of goods
• Gross Profit rate based on Sales - Net Sales sold
➢ 3,250 ➢ 2,210
• Gross Profit rate based on Sales - Inventory, Dec • Gross Profit rate based on COST - Gross profit
31 ➢ 750
➢ 890 • Gross Profit rate based on COST - Cost Ratio
• Gross Profit rate based on COST - Net Sales (No need to input the % sign)
➢ 3,250 ➢ 100
• Gross Profit rate based on COST - Cost of • Gross Profit rate based on Sales - Net Purchases
goods sold ➢ 2,450
➢ 2,500 • Gross Profit rate based on Sales - Goods
• Gross Profit rate based on COST - Inventory, available for sale
Dec 31 ➢ 3,100
➢ 600
CHAPTER 14: Retail Inventory Method

• MARKDOWN - Refer to the decrease in sales price below the original sales price.
• A conservative approach includes net mark up and excludes net markdown in determining the cost ratio in order
to arrive a conservative cost
• ORIGINAL RETAIL - The sales price at which the goods are first offered for sale.
• THE TERM “RETAIL” SIMPPLY MEANS SELLING PRICE.
• Retail inventory method requires the following:
➢ Beginning inventory at cost and at retail price
➢ Purchase during the period at cost and at retail price
➢ Adjustments to the original retail price.
• In retail inventory method, the required adjustment for Sales Discount and Sales Allowances to Gross Sales were
DISREGARDED.
• PURCHASE DISCOUNT – deducted from purchases at cost only.
• PURCHASE RETURN – deducted from purchases at cost and at retail.
• PURCHASE ALLOWANCE – deducted from purchases at cost only.
• APPROACHES IN THE USE OF RETAIL METHOD:
➢ Conservative or conventional or lower of cost and net realizable value approach
➢ Average cost approach
➢ FIFO approach
• RETAIL INVENTORY METHOD - A method in estimating the value of inventory often used in the retail
industry for measuring inventory of large in the retail industry for measuring inventory for large number of
rapidly changing items.
PROBLEM #1

• Net Sales to be considered • Cost of Inventory, Dec31 – Average

➢ 4,250,000 ➢ 495,000
• Available for Sale - Average at Retail • Available for Sale - Conservative at Retail
➢ 5,000,000 ➢ 5,500,000
• Available for Sale - Conservative at Cost • Available for Sale - Average at Cost
➢ 3,300,000 ➢ 3,300,000
• Cost Ratio - Average (exclude % sign) • Cost Ratio - Conservative (exclude % sign)
➢ 66 ➢ 60
• Value of Inventory, Dec31 – Retail • Cost of Inventory, Dec31 – Conservative
➢ 750,000 ➢ 450,000

CHAPTER 15: FINANCIAL ASSET AT FAIR VALUE

• Investments are asset held by an entity for the ➢ Investment in non-trading equity
accretion of wealth through distribution such as securities
interest, royalties, dividends, and rentals, for ➢ Investment in bonds or financial asset at
capital appreciation or for other benefits to the amortized cost
investing entity such as those obtained through ➢ Investment in associate
trading relationships. ➢ Investment in subsidiary
• Investment assets are not directly identified ➢ Investment in property
with operating activities of an entity and occupy ➢ Investment in joint venture
only an auxiliary relationship to the central • Classification of financial assets
revenue producing activities of the entity. ➢ Financial assets at fair value through
• Investments are classified either as current and profit or loss – include both equity
non-current assets. securities and debt securities.
• Residual means that the non-current investments ➢ Financial assets at fair value through
are intended to be held for more than one year or other comprehensive income – include
are not expected to be realized within twelve both equity securities and debt
mos. After the end of the reporting period. securities.
• The following are the purpose of investment per ➢ Financial assets at amortized cost –
International Accounting Standards Board include only debt securities.
(IASB): • The classification depends on the business
➢ For Accretion of health model for managing financial assets which
➢ For Capital appreciation may be:
➢ For Ownership control ➢ To hold investments in order to realize
➢ For Meeting business requirements fair value changes.
➢ For Protection ➢ To hold investments in order to collect
• Debt instrument/securities contractual cash flows.
➢ A type of instrument that represents a ➢ To hold investments in order to collect
creditor relationship with an entity contractual cash flows and sells
• Equity instrument/securities investment.
➢ Equity securities represent an ownership • The following are considered as financial assets:
interest in an entity ➢ Cash or currency
➢ Owners of equity securities are legally ➢ Deposit of cash
known as shareholders • The following are NOT considered as financial
• The following is an example of investment: assets:
➢ Trading securities or financial assets ➢ Gold bullion
held for trading ➢ Intangible assets
➢ Financial asset at fair value through ➢ Physical assets (inventory and property,
other comprehensive income plant and equipment)
➢ Prepaid expenses
➢ Leased assets
• Initial measurement of financial assets is at fair • Fair value through other comprehensive
value plus, in the case of financial asset not at income (FVOCI)
fair value through profit or loss, transaction costs • Amortized cost
that are directly attributable to the acquisition of
the financial assets. RECOGNIZED AT
INITIALLY AT FAIR VALUE.
• Fair value through profit or loss (FVPL)

Problem Solving:
1. During 2021, Rizal Co. purchased marketable equity securities as a trading investment. For the year
ended December 31, 2021, the entity recognized an unrealised loss of 230,000. There was no security
transaction during 2022. Patient information on December 2022 is as follows:

Security Cost Market Value

A 2,450,000 2,300,000
B 1,800,000 1,820,000
4,250,000 4,120,000
If market value is higher than the cost, it is unrealized gain
If the value of cost is higher than the market value, it is unrealized loss
Solution:
Cost
Less: Market value
Total gain or loss of Cost vs. FV/MV
Unrealized loss 2021
Less: Cost vs. FV/MV
Unrealized gain/loss of 2022

• In the 2022 income statement, what amount should be reported as unrealised gain or loss?
➢ Unrealized gain of 100,000
2. On June 01, 2021, Koppel Co. purchased marketable equity security not qualifying as financial asset held
for trading. Hence, the entity elected to present changes in FV as component of other comprehensive
income. On Dec 31, 2021, the securities have the following cost and market value.
Dec 2021
Type Cost Market Gain/(Loss)
Security A 1,500,000 1,200,000 -300,000
Security B 2,500,000 2,700,000 200,000
4,000,000 3,900,000 -100,000
• Which of these accounts should be used to record the purchase transaction?
➢ Dr-Financial Asset-FVOCI (should be debit to financial asset fair value of comprehensive
income and credit to cash for the purchase of equity instrument)
• What is the related amount to record the purchase transaction?
➢ 4,000,000 (total amount of cost)
• What is the total adjustment on Dec 31, 2021 related to the change on market value of the financial asset?
➢ -100,000
SOLUTION:
Cost
Less: Market value
Total gain or loss of Cost vs. FV/MV
 CHAPTER 16: EQUITY INVESTMENTS (Dividends, Share split, Share right)
• Investment categories are the following: • When dividends are received from wasting asset
➢ Trading securities of financial assets at Corporation, the dividends are designated as
FVPL partly return of capital.
➢ Financial assets at FVOCI • Shares of another entity declared as dividends
➢ Investment in associate are not share dividends but property dividends.
➢ Investment in subsidiary • The IAS term for share is “bonus issue”.
➢ Investment in unquoted equity • KINDS OF SHARE DIVIDENDS:
instruments ➢ Share Dividends of Same Class – are
• When a financial asset is recognized initially, recorded only be means of memorandum
an entity shall measure it at fair value plus entry for the receipt of share dividends. It
transaction costs that are directly attributable does not affect the total cost of investment
to the acquisitions. but reduce the cost of the investment per
• Financial assets held for trading shall be share.
expensed immediately. ➢ Share Dividends Different from those
• FIFO or Average cost approach must be used to held – a shareholder may receive a share
determine the cost of the sold equity shares dividend which is different from the original
(same class) acquired on different dates and cost. shares. Share dividends of different class are
• Cash dividend does not affect the investment not income.
account. o Ordinary shares – share hold
• Shares received in lieu of cash dividend are multiplied by the market value of
generally accepted as income at fair value of the ordinary share.
shares received. o Preference share – share hold value
• If the equity security was acquired in an multiplied by the market value of
exchange, the fair value of the asset given is the preference share.
top priority as reference in determining the ➢ Cash Received in lieu of Share Dividends
acquisition cost. – when dividends are declared and received,
• Shares of another entity declared as dividends questionably, they are not income. A
are not an example of bonus issue or share problem will arise when cash is received in
dividend but property dividend. lieu of share dividends.
• For more than one equity security acquired at ➢ Share Received in Lieu of Cash Dividends
lump sum, the cost must be allocated to the – it is generally accepted that share received
securities acquired on the basis of the fair value. in lieu cash dividends are income at fair
• When are dividends considered earned? value of the shares received.
➢ Date of records - Only those • As if approach – this means that the share
shareholders registered as of this date dividends are assumed to be received and
are entitled to receive dividends. subsequently sold at the cash received.
➢ Date of declaration – On which the Therefore, a gain or loss may be recognized.
payment of dividends is approved by the • BIR approach – under the ruling of BIR, all
Board of Directors. Only those cash received whether originally designated as
shareholders registered as of this date cash dividend or share dividend is recognized as
are entitled to receive dividends. income.
➢ Date of payments – on which the
dividends declared, shall be paid. • Share split - a corporation may restructure its
• Dividends shall be recognized as revenue when capital by affecting a change in the number of
the shareholder’s right to receive payments is share without of capitalizing retained or
established. changing the amount of its legal capital.
• Accordingly, the dividends shall be recognized
as revenue on the date of declaration. • Split up – is a transaction whereby the
• Liquidating dividend - It represents the return outstanding shares are called in and replaced by
of invested capital, and therefore, are not a large number, accompanied by reduction in
income. the par or stated value of each other.
• Split down – is a transaction whereby
outstanding shares are called in and replaced by • Share right or stock right – a share right or
smaller number, accompanied by an increase in pre-emptive right is a legal right granted to
par or stated value. shareholder to subscriber for new share issued
by a corporation at a specified price during a
• Special assessments – are additional capital definite period. The IAS term for share right is
contribution of the shareholders. a “right issue”.

• Redemption of shares – shares, particularly • Property Dividends - Also known as dividend

preference shares, may be called in for in kind in which dividends is in the form of
redemption and cancelation by an entity issuing property or noncash assets.
them.
PROBLEM SOLVING:

1. ➢ UNITS SOLD * UNIT COSTS = COST OF

SHARE SOLD
➢ 30,000 * 93.33 = 2, 800, 000
➢ TOTAL SALES LESS COST OF SHARE
SOLD = GAIN ON SALE
➢ 3,750,000 – 2,800,000 = 950, 000
2. Day Company received dividends from share
• What is the cost of shares sold in FIFO investments during the year end December 31,
Approach? 2021 as follows:
➢ 2,600,000 >A stock dividends of 4,000 shares from Parr
Company on July 31, 2021 when the market
• What are the total units of shares outstanding
price of Parr's share was P20.
after the Jan20 stock dividend?
Day owns less than 1% of Parr's share capital.
➢ 60,000
>A cash dividend of P150, 000 from Lark
• If the Average approach is used, what is the Company in which Day owns a 25% interest.
gain on the sale of the shares? A majority of Lark's directors are also directors
➢ 950,000 of Day.
• If the FIFO approach is used, what is the gain on • What amount of dividend revenue should be
the sale of the shares? reported in 2021?
➢ 1,150,000 ➢ 0
• What is the cost of shares sold in Average ➢ NOTE: >Stock Dividend from Parr Company -
Approach? Not an income. It will only affect the total
➢ 2,800,000 number of units held.
➢ SOLUTION: 20,000 + (20, 000 *20%) >Cash Dividend from Lark Company - Not an
UNITS + 30, 000 + (30, 000 * 20%) income but return of investment or reduction on
➢ = 60, 000 ( OUTSTANDING total investment.
SHARES) Because Day holds at least 25% therefore Equity
➢ 2, 000, 000/24, 000 = 83.33 & Method is used.
3, 600, 000/36, 000 = 100 3. Rice Co. owned 30,000 ordinary shares of Wood
➢ 24, 000 + 6,000 = 30, 000 Co. acquired on Jul 2021, at a total cost of P1,
TOTAL UNITS SOLD 100,000.
➢ 24, 000 * 83.33 = 2, 000, 000 On Dec 01, 2021, Rice received 30,000 stock
➢ 6, 000 * 100 = 600, 000 rights from Wood.
TOTAL COST THAT HAVE Each right entitles the holder to acquire one
BEEN SOLD IS 2, 600, 000 share at P45.
➢ COST MULTIPLIED BY SOLD SHARES = The market price of Wood's share on this date
SOLD UNITS was P50 and the market price for each right was
➢ 125 * 30, 000 = 3, 750, 000 (TOTAL SALES) P10.
➢ SOLD – CAPITAL = 3, 750, 000 – 2, 600, 000 Rice sold its right on Dec 31, 2021 for P450,
= 1, 150, 000 000 less a P10, 000 commissions.
➢ TOTAL COST DIVIDED BY TOTAL ➢ What amount should be reported as gain from
UNITS OUTSTANDING = UNIT COST the sale of the rights?
➢ 5,600,000/30,000 = 93.33
 ➢ 140,000
➢ SOLUTION: NET SALE PRICE =
SALE – COMMISSIONS
➢ 450,000 – 10,000 = 440,000
➢ UNIT COST OF RIGHTS SOLD =
UNITS * MARKET PRICE
➢ 30,000 * 10 = 300, 000
➢ GAIN = NET SALE PRICE – UNIT
COST OF RIGHTS SOLD
➢ 440,000 – 300, 000 = 140,000
➢ NOTE: >Stock Dividend from Parr
Company - Not an income. It will only
affect the total number of units held.
>Cash Dividend from Lark Company -
Not an income but return of investment
or reduction on total investment.
Because Day holds at least 25%
therefore Equity Method is used.
CHAPTER 17: INVESTMENT IN ASSOCIATE (BASIC PRINCIPLES)

• SIGNIFICANT INFLUENCE - is the power to • The investor and the investee are viewed as a
participate in the financial and operating policy single economic unit. The investor and the
decisions of the investee but not control or joint investee are one and the same.
control over these policies. • ACCOUNTING PROCEDURES:
• INTERCORPORATE SHARE ➢ The investment is initially recognized at
INVESTMENT – an intercorporate share is the COST.
purchase of the equity shares of one entity by ➢ The investor’s share of the profit or loss
another entity. of the investee is recognized as
• Beyond the mere 20% threshold of ownership, investment income.
PAS 28, paragraph 6, provides that the existence ➢ Distribution or dividends received from
of significant influence is usually evidenced by an entity investee reduce the carrying
the following factors: amount of the investment.
a) Representation in the board of directors ➢ The investment in preference share may
b) Participation in policy making process be accounted for as at fair value through
c) Material transactions between the investor profit or loss or at fair value through
and the investee other comprehensive income or at cost.
d) Interchange of managerial personnel ➢ Technically, if the investor has
e) Provision of essential technical information significant influence over the investee is
• POTENTIAL VOTING RIGHTS – is aid to be an associate.
considered in assessing whether an entity has ➢ The investment in associate accounted
significant influence. Potential voting rights are for using the equity method shall be
not currently exercisable or convertible when the classified as noncurrent asset.
rights cannot be exercised or converted until the ➢ An accounting problem arises if the
occurrence of a future event. investors pay more or less for an
• LOSS OF SIGNIFICANT INFLUENCE – investment than the carrying amount of
loss of significant influence could occur when an underlying net assets.
associate becomes SUBJECT TO CONTROL of ➢ In the investors pays more than the
GOVERNMENT, COURT, and carrying amount of the net assets
ADMINISTRATOR OR REGULATOR. acquired, the difference is commonly
• The loss of significant influence could also known as “excess of cost over carrying
occur as a result of a contractual agreement. amount” and may be attributed to the
• EQUITY METHOD – the equity method is following:
based on the economic relationship between the a) Undervaluation of the investee’s
investor and the investee. assets, such as building, land
and inventory.
b) Goodwill
 • If the assets of the investee are fairly valued, • If the excess is attributable to undervaluation of
accountants frequently attribute the excess of land, it is not amortized over the REMAINING
cost over carrying amount of the underlying net LIFE of the depreciable asset.
assets to goodwill. • The amount is expensed when the land is sold.
• If the excess is attributable to undervaluation of
depreciable asset, it is amortized over the
remaining life of the depreciable asset.

PROBLEM #1
On Jan 1, 2021, Home Company purchased 20% of Hide Company's ordinary shares outstanding for P6, 000,000. The acquisition cost
is equal to the carrying amount of the net assets acquired. During 2021, the investee reported net income of P7, 000,000 and paid cash
dividend of P4, 000,000. What is the balance in the investment in associate on December 31, 2021?

➢ 6,600,000

PROBLEM # 2
On Jan 1, 2021, few investors purchased a portion of outstanding shares of Rural Co.
Investee's record for 2021 shows the following:
Outstanding Shares = 8,000,000
Net Income = P5,000,000
Cash Dividend = P3,000,000

• If Investor A purchased 1,200,000 of ordinary shares for P2, 000,000, what is the balance in the investment in
associate on December 31, 2021?
➢ 2,000,000
• If Investor B purchased 1,600,000 of ordinary shares for P3, 000,000, what is the balance in the investment in
associate on December 31, 2021?
➢ 3,400,000

PROBLEM #3
On Jan 1, 2021, Few Co. purchased a portion of outstanding shares of Rural Co.
After the acquisition, Few Co. becomes the largest single shareholder of Rural Co.
Rural's officers are majority of Few's board of director.
Investee's record for 2021 shows the following:
Outstanding Shares = 5,000,000
Net Income = P5,000,000
Cash Dividend = P2,500,000
Few Co. acquired 600,000 units for P1,000,000

• On Dec 31, 2021, what amount should be reported as investment in Rural Co.?
➢ 1,300,000
PROBLEM #4
On Jan 1, 2021, Max Co. acquired 10% of the outstanding ordinary shares of Fox Co. for P1, 500,000.
The investment was accounted for using the cost method.
On Jan 1, 2022, the entity acquired a further 15% interest in the investee for P3, 375,000.
On such date, the carrying amount of the net assets of the investee was P18, 000,000 and the fair value of the 10% interest was P2,
250,000.
The fair value of the net assets of the investee is equal to carrying amount except for equipment whose fair value exceeds carrying
amount by P2, 000,000.
The equipment has a remaining life of 5 years.
The investee reported net income of P4, 000,000 and paid dividend of P2, 500,000 on December 31, 2022.

• What is the gain on remeasurement to equity to be recognized for 2022?

750,000
 • What is the carrying amount of the investment in associate on December 31, 2022?
5,900,000
• What is amount from the total excess will be considered in 2022?
100,000
• What portion of the total excess of cost from the acquisition on Jan 1, 2022 is attributable to fair value excess of
equipment?
500,000
• What is the total excess between total Cost of Investment and Fair Value of Net Assets from the acquisition on
Jan 1, 2022?
1,125,000
• What is the goodwill arising from the acquisition on Jan 1, 2022?
625,000

CHAPTER 18 & 19: Investment in Associate (Other Accounting Issues) / Financial Asset at Amortized
Cost (Bond Investment)
PROBLEM #1
An entity purchased 50,000 ordinary shares of the 200,000 outstanding shares of another entity representing 25% interest several years
ago.
At year-end, the investment in associate has a carrying amount of P6, 000,000.
On the same date, the investor sold 20,000 shares for net proceeds of P2, 300,000.
The quoted market price for such investment is P175 per share on the date of sale.

• How much is the gain from remeasurement?

➢ 1,650,000
• How much is the gain/loss on sale?
➢ -100,000

PROBLEM #2
On Jan 1, 2021, Pearl Co. purchased as a long-term investment P6,000,000 face value of Show Co.'s 9% bonds for P5,500,000.
The bonds were purchased to yield 11% interest.
The bonds mature on Jan 1, 2026 and pay interest annually on Dec 31.
The interest method of amortization is used.
Using the above information, provide what is asked.

• Interest income for the year 2022

➢ 612,150
• Interest received for the year 2021
➢ 540,000
• Amortization of discount for 2021 Input only numbers and comma. Remove other characters like spaces.
➢ 65,000
• Carrying amount of the investment on Dec 31, 2022?
➢ 5,637,150
• Carrying amount of the investment on Dec 31, 2021
➢ 5,565,000
• Amortization of discount for 2022 Input only numbers and comma. Remove other characters like spaces.
➢ 72,150
• Interest income for the year 2021
➢ 605,000

CHAPTER 20: EFFECTIVE INTEREST METHOD (AMORTIZED COST, FVOCI AND FVPL)

PROBLEM #1
Makulit Co. provided the following information regarding its bond investment.
Face amount of bonds = P5, 000,000
Acquisition cost = P4, 750,000
Annual installment on Dec 31, 2021 and every Dec 31 thereafter = P1, 000,000
Date of issue = Jan 1, 2021
Nominal interest rate payable annually every Dec 31 = 8%
Effective interest rate = 10%
Using these information, prepare an amortization table and compute the following.

• Carrying amount as of Dec. 31, 2023 ➢ 250,000

➢ 1,936,250 • Interest Income as of Dec. 31, 2021
• Interest Received/Receivable as of Dec. 31, ➢ 475,000
2022 • Amount of amortization as of Dec. 31, 2025
➢ 320,000 ➢ 30,125
• Total discount on bonds
CHAPTER 21: RECLASSIFICATION OF FINANCIAL ASSET

PROBLEM #1
On Jan 1, 2021, an entity purchased P2, 000,000 face value bonds for P1, 500,000 in accordance with the business model of managing
financial asset by collecting contractual cash flows.
The bonds pay interest annually on Dec 31.
In Dec 2021, the objective of the entity's business model for managing the bonds has changed to realizing gains.
Assume that the carrying amount of the bond investment on Dec 31, 2021 is P1, 600,000 after recording the effective amortization of
discount of P100, 000.
On reclassification date, the FV of the bond investment is P1, 550,000.

• To record the acquisition of the bond these accounts should be used? Select all correct
investment, which of these accounts should be answers.
used? Select all correct answers. ➢ Dr - Financial Asset - FVPL
➢ Cr – Cash ➢ Cr - Investment in Bonds
➢ Dr - Investment in Bonds • To record the change in Fair Value of the bond
• How much is the total gain/loss on investment on Jan 1, 2022, which of these
reclassification of financial asset on Jan 1, 2022? accounts should be used? Select all correct
➢ Loss - 50,000 answers.
• When is the reclassification date? Consider that ➢ Dr - Loss on reclassification of financial asset
the entity follows calendar year as its accounting ➢ Cr - Investment in Bonds
period. • How much is the amount of financial asset to be
➢ Jan. 1, 2022 reclassified on Jan 1, 2022?
• To record the reclassification of the bond ➢ 1,550,000
investment on reclassification date, which of
PROBLEM #2
On Jan 1, 2021, an entity purchased bonds with face amount of P5, 000,000 for P5, 200,000.
The entity's business model of managing the financial asset is collecting contractual cash flows and selling the asset.
The bonds pay interest annually every Dec. 31.
On Dec. 31, 2021, the entity's business model for managing financial assets changed to realizing fair value changes.
The fair value of the bonds on that date was P5, 400,000 and the premium amortization is P100, 000 for 2021.
The fair value changed to P5, 500,000 on Jan 1, 2022.

• To record the reclassification of unrealized ➢ Cr - Unrealized Gain - OCI

gain/loss on Jan 1, 2022, which of these • To record the change in Fair Value of the bond
accounts should be used? Select all correct investment on Jan 1, 2022, which of these
answers. accounts should be used? Select all correct
➢ Dr - Unrealized Gain - OCI answers.
➢ Cr - Unrealized Gain - PL ➢ Cr - Unrealized Gain - OCI
• To record the change in Fair Value of the bond ➢ Dr - Financial Asset-FVOCI
investment on Dec 31, 2021, which of these • When is the reclassification date? Consider that
accounts should be used? Select all correct the entity follows calendar year as its accounting
answers. period.
➢ Dr - Financial Asset-FVOCI ➢ Jan. 1, 2022
• To record the acquisition of the bond • To record the reclassification of the bond
investment, which of these accounts should be investment on Jan 1, 2022, which of these
used? Select all correct answers. accounts should be used? Select all correct
➢ Dr - Financial Asset-FVOCI answers.
➢ Cr - Cash ➢ Dr - Financial Asset-PL
• How much is the amount of financial asset to be ➢ Cr - Financial Asset-FVOCI
reclassified on Jan 1, 2022? • How much is the total unrealized gain/loss on
➢ 5,500,000 reclassification of financial asset?
➢ Gain - 400,000