AE 221 UNIT 3 PROBLEM SOLVINGST 2020

EVENTS AFTER ACCOUNTING PERIOD

Problem 3-9 (Caroline Company)​: Caroline Company provided the following information on December
31, 2020:

1/15/2021 P3,000,000 of accounts receivable was written off due to the bankruptcy of a major
customer

2/14/2021 A shipping vessel of Caroline with a carrying amount of P5,000,000 was completely lost
at sea because of a hurricane

3/11/2021 A court case involving Caroline as the defendant was settled and the entity was
obligated to pay the plaintiff P1,500,000. Caroline previously recognized a P1,000,000
liability for the suit because management deemed it probable that the entity would lose
the case.

3/25/2021 One of Caroline’s factories with a carrying amount of P15,000,000was completely razed
by forest fires that erupted in its vicinity.

The management of the entity completed the draft of the financial statements for 2020 on February 10,
2021. On March 20, 2021, the board of directors authorized the financial statements for issue. The
entity announced the profit and other selected information on March 22, 2021. The financial statements
were made available to the shareholders on April 2, 2021 at the annual shareholders’ meeting where
the financial statements were approved. The financial statements were filed with the regulatory agency
the very next day.

Requirements:

1. Prepare adjusting entries on December 31, 2020 to reflect the adjusting events after reporting
period.
2. Prepare the necessary disclosures to reflect the non-adjusting events after the reporting period.

Problem 3-14 (Anne Company): The audit of Anne Company for the year ended December 31, 2020 was
completed on March 1, 2021. The financial statements were signed by the managing director on March
15, 2021 and was approved by the shareholders on March 31, 2021. The following events had occurred:

● On January 15, 2021, a customer owing P900,000 to Anne Company filed for bankruptcy. The
financial statements included an allowance for doubtful accounts pertaining to this customer of
P100,000.
● Anne Company’s issued share capital comprised 100,000 ordinary shares with P100 par value.
The entity issued additional 25,000 shares on March 1, 2021 at par value.
● Equipment with a carrying amount of P525,000 was destroyed by fire on December 15, 2020.
Anne Company had booked a receivable of P400,000 from the insurance entity on December 31,
2020. After the insurance entity completed an investigation on February 1, 2021, it was
discovered that the fire took place due to negligence of the machine operator. As a result, the
AE 221 UNIT 3 PROBLEM SOLVINGST 2020

insurer’s liability was zero on this claim. What total amount should be reported as “adjusting
events” on December 31, 2020?

NON-CURRENT ASSET HELD FOR SALE

Problem 6-2 (Arlene Company): ​Arlene Company accounted for noncurrent assets using the cost model.
On October 30, 2020, the entity classified an equipment as held for sale. At that date, the carrying
amount of the equipment was P1,500,000, the fair value was estimated at P1,100,000 and the cost of
disposal at P150,000. On December 31, 2020, the equipment was sold for net proceeds of P800,000.

Requirements:
1. What amount should be reported as impairment loss for 2020?
2. What amount should be recognized as loss on disposal for 2020?

Problem 6-4 (Surreal Company): S​ urreal Company accounted for noncurrent assets using the revaluation
model. On October 1,2020, the entity classified a land as held for sale. At that date, the carrying amount
of the land was P5,000,000 and the balance in the revaluation surplus was P1,500,000. At the same
time, the fair value of land was estimated at P5,500,000 and the cost of disposal at P100,000. On
December 31, 2020, the fair value less cost of disposal of the land did not change. The land was sold on
January 31, 2021 for P6,000,000.

Requirements:
1. What is the adjusted carrying amount of the land on December 31, 2020?
2. What is the impairment loss for 2020?
3. What is the revaluation surplus on December 31, 2020?
4. What amount should be reported as gain on disposal of land in 2021?

Problem 6 -9 (Affable Company)​ : Affable Company purchased an equipment for P5,000,000on January 1,
2020. The equipment had a useful life of 5 years with no residual value. On December 31, 2020, the
entity classified the equipment as held for sale. On such date, the fair value less cost of disposal of the
equipment was P3,500,000. On December 31, 2021, the entity believed that the criteria for classification
as held for sale can no longer be met. Accordingly, the entity decided not to sell the equipment but to
continue to use it. On December 31, 2021, the fair value less cost of disposal of the equipment was
P2,700,000.

Requirements:
1. What is the carrying amount of the equipment on December 31, 2020 before classification as held
for sale?
2. What amount of impairment loss should be recognized in 2020?
3. What amount should be included in profit or loss in 2021 as a result of the reclassification of the
equipment to property, plant and equipment?
4. What is the adjusted carrying amount of the equipment on December 31, 2022?

DISCONTINUED OPERATION

Problem 7 – 9 (Green Company): ​On December 1, 2020, Green Company committed to a plan to dispose
of a business component’s assets. The disposal meets the requirements to be classified as discontinued
AE 221 UNIT 3 PROBLEM SOLVINGST 2020

operation. On that date, the entity estimated that the loss from the disposition of the assets would be
P700,000 and the component’s operating loss was P200,000. What amount of pre-tax loss should be
reported for discontinued operations for 2020?

Problem 7 – 11 (Sky Company​): Sky Company reported the following data for the current year: Income
from continuing operations – P700,000; Net Income – P500,000; Selling and administrative expenses –
P2,250,000; Income before income tax – P1,000,000. What amount should be reported as income or loss
from discontinued operations?

INTERIM FINANCIAL REPORTING

Problem 10 – 5 (Apucao Company)​: Apucao Company operated in the travel industry and incurs costs
unevenly through the financial year. Advertising costs of P2,000,000 were incurred on March 1, 2020
and staff bonuses are paid at year end based on sales. Staff bonuses are expected to be around
P20,000,000 for the year. Of that sum, P3,000,000 would relate to the period ending March 31, 2020.
What total amount of expenses should be included in the quarterly financial report ending March 31,
2020?

​ hairmaine Company prepared the following condensed trial

Problem 10-13 (Chairmaine Company): C
balance on March 31, 2020:

1. Uncollectible accounts typically average 1% of net sales.

2. On January 1, 2020, buildings and equipment have an average remaining life of 10 years. 1/3 of the
account balance consists of assets related to selling activities. The entity uses the straight line
method.
3. The note receivable is dated January 1, 2020, matures on January 1, 2022, and carries a 12% interest
rate. Interest will be collected annually starting January 1, 2021.
4. On January 1, 2020, the entity had purchased a one-year insurance policy debiting the payment to
prepaid insurance.
AE 221 UNIT 3 PROBLEM SOLVINGST 2020

5. The gross profit method is used to determine the interim inventory. Gross profit has averaged 40%
of net sales.
6. The income tax rate is 30% and the income tax will be paid on or before April 15, 2020.

Requirements:
1. What is the net income in in the first quarter of 2020?
2. Compute for the following as of the period ending March 31, 2020:
a. Current Assets
b. Non-current assets
c. Current liabilities
d. Non-current liabilities
e. Shareholder’s equity

OPERATING SEGMENT

20,000,00
Sales to unaffiliated customers 0
Intersegment sales of products similar to
those sold to unaffiliated customers 5,000,000
Interest earned on loans to other industry
segments 1,000,000
Problem 11 – 5 (Aris Company):​ Aris Company provided the following information in relation to
operating divisions for the current year:

The entity and all of its divisions are engaged solely in manufacturing operations. Under the revenue
test, what is the minimum revenue of a reportable segment?

Problem 11 -6 (Grum Company): ​Grum Company is subject to the requirements of segment reporting. In
the income statement for the current year, the entity reported revenue of P50,000,000 excluding
intersegment sales of P10,000,000, expenses of P47,000,000 and net income of P3,000,000. Expenses
included payroll costs of P15,000,000. The combined total assets of all operating segments at year-end
amounted to P45,000,000.

Requirements:
1. What is the minimum amount of sales to a major customer?
2. What is the minimum amount of external revenue to be disclosed by the reportable segments?

Problem 11 – 16 (Revlon Company): ​Revlon Company provided the following data for the current year:

Segment Revenue Profit (loss) Assets

AE 221 UNIT 3 PROBLEM SOLVINGST 2020

1 620,000 200,000 400,000

2 100,000 20,000 80,000
3 340,000 70,000 300,000
4 190,000 -30,000 140,000
5 180,000 -25,000 180,000
6 70,000 10,000 120,000
7 120,000 -20,000 140,000
Others 380,000 -25,000 140,000

▪ The “other” category includes five operating segments, none of which has revenue or assets
greater than P80,000 and none with an operating profit.
▪ Operating Segments 1 and 2 produce very similar products and use very similar production
processes, but serve different customer types and use quite different product distribution
system. Such differences are due in part to the fact that Segment 2 operates in a regulated
environment while Segment 1 does not
▪ Operating segments 6 and 7 have very similar products, production processes and product
distribution systems but are organized as separate divisions since they serve substantially
different types of customers. Neither segments 6 and 7 operate in a regulated environment.

Requirements:
1. Determine the reportable segments without regard to the aggregation criteria.
2. If the 75% overall size test for reportable segments is not yet met, identify additional reportable
segments.
3. What are the reportable segments after considering all factors?