Zerda, Jessa Mae P.

BSA 202
CHAPTER 6
QUESTIONS:

1. Explain recognition of the elements of financial statements.

Recognition is the process of incorporating in the balance sheet or income statement
an item that meets the definition of an element and satisfies the following criteria for
recognition. Any future economic benefit associated with the item will probably flow to or
from the enterprise, and the item’s cost or value can be measured with reliability. The amount
for which an asset, obligation or equity is recognized in the declaration of financial condition
shall be reported as a carrying amount. Recognition ties the components to the statement of
financial condition and the statement of financial results. The statements are related since the
acknowledgement of the item in one declaration involves the recognition of the same item in
another declaration.

2. Explain the recognition criteria for the elements of financial statements.

Those items that satisfy the concept of an asset, obligation or equity shall be recognized
in the statement of financial status. Similarly, only things that satisfy the concept of benefit or
expenditure are recognized in the financial performance statement. Also, objects are
identified only if their identification provides the recipients of the financial statements with
the knowledge that is both important and correctly portrayed. Recognition no longer depends
on how likely economic gains can flow to or from an individual and how expensive can be
calculated accurately.

3. What is derecognition?
Derecognition is the removal of a previously recognized financial asset or financial
liability from an entity's balance sheet. Derecognition typically happens when an item no
longer fits the concept of an advantage or responsibility. Detection of an asset occurs when an
entity loses control of all or part of the asset. Recognition of liability occurs when the entity
no longer has a present obligation for all or part of the liability.

4. Explain the point of sale income recognition.

Income recognition at the point of sale refers to the process of recording revenue from
manufacturing and selling activities at the time of sale. The revenue recognition principle
states a company can record revenue when two conditions are met. They must be realized or
realizable and earned. These requirements are typically met when a product is delivered or a
service is rendered to a customer. About the selling of goods in the ordinary course of
business, the point of sale is certainly the point of acknowledgment of profits. The entity
passed substantial costs and benefits of possession of the products to the consumer. In other
words, the legal title of the goods transfers to the purchaser at the point of sale. Also, it is at
the point of sale that the entity has passed ownership of the products to the buyer.

5. What are the three applications of the matching principle?

a. Cause and effect association
b. Systematic and rational allocation
c. Immediate recognition
6. Explain cause and effect association principle.
In the cause and effect association principle, the expenditure is acknowledged while
the income is already recognized. This method refers to the balancing of costs with sales.
Some expenses are presumably directly associated with specific revenues. In this case,
transactions simultaneously result in both revenues and expenses, and as a result, these
revenues and expenses are directly related to each other. For example, the cost of goods sold
is directly associated with the sales revenue. Sales commissions can also be directly matched
against sales revenues. The association of cause and effect principle can be applied to
transportation costs incurred to deliver goods to customers.

7. Explain systematic and rational allocation principle.

When there is no cause and effect relationship, some expenses can be allocated to the
accounting period benefited systematically and rationally. For example, the cost of
manufacturing equipment is difficult to allocate to specific inventory sale transactions. As the
result, the cost of equipment is systematically allocated as depreciation expense among the
periods in which the equipment provides the benefit. The allocation scheme is based on the
expected benefit. The systematic and rational allocation method can also be used to amortize
intangibles and allocate prepaid costs such as insurance and rent.

8. Explain immediate recognition principle.

When both the associating cause and effect and systematic and rational allocation
methods cannot be used, expenses are recognized immediately. For example, it can be
difficult to identify future benefits of some costs incurred, or for some costs, no rational
allocation scheme can be devised. Period costs are usually immediately recognized.
Examples of costs that might be immediately recognized include utilities, routine
maintenance costs, officers’ salaries, and most selling and administrative costs.

9. What are the two categories of measurement?

 Historical cost
 Current value

10. Explain historical cost.

Historical cost is the original cost of an asset, as recorded in an entity's accounting
records. Many of the transactions recorded in an organization's accounting records are stated
at their historical cost. This concept is clarified by the cost principle, which states that you
should only record an asset, liability, or equity investment at its original acquisition cost.

11. Explain fair value.

Fair value is the price that an asset would sell for on the open market. It has come to
represent the price of an asset. The prospective buyers and sellers are reasonably
knowledgeable about the asset, behaving in their own best interest, free of undue pressure to
trade, and given a reasonable period for completing the transaction.

12. Explain value in use.

Value in use is the current value of the cash flows that the company plans to obtain
from the use of the asset and its final disposal. Price in usage does not require transaction
costs for the purchase of the asset, but includes transaction costs for the disposal of the asset.
Worth in usage is the value of the exit or exit price.
13. Explain fulfillment value.
Fulfillment value is the current value of the cash that an individual plans to pass
through the payoff or settlement of liability. Fulfillment value does not include transaction
costs for the incurrence of a liability but includes transaction costs for the execution of a
liability. The completion value is the exit price or the exit value.

14. Explain current cost.

The current cost is the cost required to replace an asset in the current period. This
derivation would include the cost of manufacturing a product with the work methods,
materials, and specifications currently in use. The concept is used to generate financial
statements that are comparable across multiple reporting periods. The current cost shall be the
cost of the equivalent asset at the date of calculation, plus the consideration charged and the
cost of the sale.

15. Explain the guideline in selecting an appropriate measurement basis.

In selecting an appropriate measurement basis for an asset, liability, or the associated
income and cost, it is important to understand the quality of the details that the measurement
basis would generate. In certain cases, no single element can decide which basis of
measurement should be chosen. The relative value of each aspect depends on the facts and
circumstances. The details provided based on the calculation shall be of interest to the
consumers of the financial statements. To do this, the knowledge must be both relevant and
faithfully interpreted.

PROBLEMS:

Problem 6-1 MC (Conceptual Framework)

1. A 4. B
2. B 5. A
3. C

Problem 6-2 MC (IAA)

1. A. 4. C
2. D 5. C
3. D

Problem 6-3 MC (AICPA Adapted)

1. D 4. A
2. D 5. B
3. B

Problem 6-4 MC (AICPA Adapted)

1. D 6. C
2. C 7. B
3. A 8. B
4. D 9. B
5. A 10. B

Problem 6-5 MC (IAA)

1. B 6. D
2. A 7. C
3. D 8. C
 4. D 9. D
5. B 10. C

Problem 6-6 MC (Conceptual Framework)

1. D 4. D
2. D 5. B
3. B

Problem 6-7 Identification (IAA)

1. Cost Principle
2. Revenue recognition
3. Historical Cost
4. Separate Entity Concept
5. No violation
6. Materiality
7. Income Recognition Principle
8. Full disclosure Principle
9. Consistency Concept
10. Faithful Representation

Problem 6-8 Identification (IAA)

1. Historical cost
2. Materiality
3. Matching Principle/ Expense Recognition Principle
4. Substance over form
5. Income recognition Principle
6. Comparability / Consistency
7. Conservatism
8. Completeness/ Standard Adequate Disclosure
9. Matching Principle
10. Conservatism

Problem 6-9 Discussion (IAA)

1. The entire cost of leasehold improvement is to be charged to an expense account.
- I totally agree with this statement. The entire cost of leasehold improvements is
charged to an expense account at the time it is incurred. When you pay for leasehold
upgrades, capitalize them if they surpass the corporate capitalization quota. If not, bill them
to cost in the time accrued. If you capitalize these costs, amortize them for the shorter
duration of their usable life or the remaining length of the contract.

2. An account receivable carried with a customer who has not been seen for about a
year is expensed.
- I agree with this statement. When an account receivable is no longer collectible for
about a year, it will automatically be recorded as an expense, specifically, a bad debt expense.
It is because account receivable is a current asset. It is required to be converted to cash within
one year (or within the operational period, whichever is longer), the company's balance sheet
could overstate its receivable accounts if any portion of its receivable accounts is not
collectible.
3. An amount paid for an advertising campaign to promote a new product that will be
placed on the market in the advertising following year is charged to prepaid
advertising.
- I agree with this statement. When a company pays in advance, they will record it as
prepaid. Just like in the statement, the company paid for an advertising campaign that will be
placed on the market in the following year, that transaction is charged to prepaid advertising
expense. Prepaid expenses are expenses accrued in one accounting year, but will not be
remembered until the later accounting period.

4. Cash surrender value of life insurance is reported as a loss since the entity does not
expect to make any claim on the policy until maturity. 
- The general rule is that losses recognized upon surrender or sale of a policy are not
deductible to the policy owner. However, in some cases, a taxpayer may be able to deduct a
loss if the loss was incurred in a trade or business or a for-profit transaction. If a policy has a
cash surrender value, the purchaser's cost will undoubtedly exceed this amount, resulting in a
sizable loss for financial reporting purposes on the acquisition date. For term policies without
cash surrender values, the purchaser's entire cost is recognized as a loss. 

5. Goods with measurable cost have become obsolete. The goods are included as part of
the inventory since no loss can be incurred until the goods are sold.
- I disagree with this statement. Since goods with measurable cost are part of the
inventory system of a certain entity but since it had become obsolete it is recorded as loss of
the company for it cannot be sold anymore. Obsolete inventory is an inventory that a business
only maintains on hand since it was supposed to be completed. When inventory can’t be sold
in the markets, they fall dramatically in value and may be considered worthless to the
business. To recognize the fall in value, obsolete inventory must be written-down or written-
off in the financial statements in accordance with generally accepted accounting principles
(GAAP). GAAP requires companies to establish an inventory reserve account for obsolete
inventory on their balance sheets and expense their obsolete inventory as they dispose of it,
which reduces profits or results in losses.

6. An amount paid in excess of net tangible and intangible identifiable assets acquired
because of exceptionally high earnings of the acquire is charged to a loss account.
- The statement is not true because goodwill impairment is recorded after the
company acquires assets and pays a price in excess of the identifiable net value and the
goodwill impairment is some earnings charge that companies record on their income
statements after they identify that there is convincing proof that the asset synonymous with
goodwill will no longer show financial re-indebtedness, therefore, it is not charged as loss
account.

7. Inasmuch as profit for the year appears to be extremely small, no depreciation is

recorded for the year.
- I agree with this statement because even if the company has an extremely small
profit for the year, depreciation is recorded for the year. As long as the company has
depreciable assets, regardless of the profit they can make for the year, they are still subjected
to deduct a depreciation expense on their asset.

8. No entry is made when a storm surge destroyed a considerable amount of uninsured

inventory. 
- I disagree with this because an uninsured inventory is an accountable case since it is
still part of the inventory, in general acquisition. There should be an entry, and it should be
recorded in the financial statements of an entity, for them to know how much damage has
been suffered in its inventory scheme since it has been subject to spoilage and expiration.
9. Sales made by canteen operated by the entity are credited to the regular sales account
for product sales. Food purchased for the canteen operations is recorded in the regular
purchases account.
- The statement is correct. The sales made by the ordinary course of business should
be credited from the sales revenue account. The food purchases by the canteen is recorded in
the purchases account, since it will be part of the inventory system of the company or entity. 

10. A building purchased five years ago including the land on which it stands, can now
be sold at a fair value that exceeds the historical cost. The controller instructs that the
fair value be entered in the accounts.
- It is impossible to do the controller’s instruction because, under the historical cost
principle, most assets are to be recorded on the balance sheet at their historical cost even
though they have risen dramatically over time. However, when the subject matter is a short-
term asset, it must be recorded on the balance sheet using fair value accounting or at their
market price. 

Problem 6-10 Discussion (IAA)

1. Because of a “fire sale” delivery truck obviously worth P600,000 was acquired at a
cost of P500,000. The truck was recorded at P600,000 and an income of P100,000 was
recognized.
- This situation violates the principle of historical cost, record the purchase at cost.
Besides, no sales revenue should be recorded.

2. The entity is being sued for P500,000 by a customer who claims damage for personal
injury apparently caused by a defective product. The legal counsel believed that the
entity will have no liability for damages resulting from the situation. Nevertheless, the
entity decided to recognize a loss and an estimated liability of P500,000.
- I agree with this statement because the amount is both possible and can be
accurately calculated. Therefore, the company should record the loss.

3. The president of Monica Company used an expense account to purchase a new car
solely for personal use. The payment for the car was debited to an expense of the entity.     
- It is not the appropriate way of recognizing data because under the Separate Entity
Concept, personal transactions of the owner shall be separate from the entity’s expenses. The
business must be viewed as a separate person, distinct from its owner(s). 

4. Merchandise costing P300, 000 is reported in the statement of financial position at

P400,000, the estimated selling price less estimated cost of disposal. The increase in
value of P100, 000 is recognized as an income.
- This falls under the Accounting principle of the Consistency Concept because this
concept mainly requires a business to apply accounting policies and present information
consistently, from one period to another.

5. Monica Company had been concerned about whether intangible asset could generate
cash in case of liquidation. As a consequence, goodwill arising from a purchase
transaction during the current year and recorded at P1, 000,000 was written off and
charged to retained earnings.
- In this case, the sales revenue is reported in the income statement and the cost of
goods sold is also recognized in the same period. Revenues are matched with the cost of
goods sold in the income statement. But in this case, Monica company could not recognize
the payments that they received from customers as revenue. This is because goods are not
delivered to customers yet.
Problem 6-11 Identification (IAA)
1. Relevance characteristics
2. Reliability
3. Comparability
4. Full disclosure principle.
5. Expense recognition principle
6. Revenue recognition
7. Materiality
8. Going concern assumption
9. Expense recognition principle
10. Adjusting events

Problem 6-12 Discussion (IAA)

1. The entity accountant increased the carrying amount of a patent from the original
cost of P1,000,000 to the recently appraised value of P3,000,000.
- I disagree. The accountant's act towards recording the carrying value violates the
historical cost (original transaction value) principle. He or she should record the patent’s
historical cost even if they have significantly increased in value over time.
 
2. The entity paid for the personal travel of the chief executive officer and charged to
travel expense. 
- I disagree. The transaction made by the chief executive offer is personal. If it will be
charged to travel expenses, it will violate the concept of a Separate Entity, which states that a
business is viewed as a separate person, distinct from its owner(s).
 
3. At the end of the current reporting period the entity received an order from a
customer. The merchandise will be shipped in early next year.
- I agree. Since the merchandise was received at the current reporting period, the
entity can ship it early next year. And since the ending inventory of the one period is the
beginning inventory for the next period.
 
4. In the middle of the current year, the entity paid a certain amount to an insurance
company for one-year comprehensive insurance coverage. The entity recorded the
entire expenditure as an expense in the current year.
- I agree. Insurance policies are usually purchased in advance. Cash is charged upfront
to cover a future period of protection. The residual balance will be added to the cost for a
term of one year by preparing modifications at the end of the year.
 
5. The entity included a note in the financial statements that described a pending
lawsuit against the entity.
- I agree. The company complies with the concept of full disclosure. The comments
on the financial statements relate to the supplementary notes contained in the financial
statements. The annotations are used to make significant disclosures and clarify the factors
used to prepare the company's financial statements.
 CHAPTER 7

QUESTIONS:

1. Explain presentation and disclosure can be an effective communication tool.

The presentation and disclosure as an effective communication tool about the
information in financial statements make the information more relevant and contribute to a
faithful representation of an entity’s assets, liabilities, income, and expenses. It also enhances
the understandability and comparability of information in the financial statements. It is
supported by not duplicating information in different parts of the financial statements.

2. Explain classification of assets, liabilities, and equity.

Classification is the sorting of assets, liabilities, equity, income, and expenses based
on shared or similar characteristics. Classifying dissimilar assets, liabilities, equity, income,
and expenses can obscure relevant information. It can also reduce understandability and
comparability. And this may not provide a faithful representation of financial information.
For example, it could be appropriate to classify an asset or liability into current and non-
current. Furthermore, it may be necessary to classify equity components separately if they are
subject to legal, regulatory, and other requirements.

3. Explain classification of income and expense.

Income and expense are classified as components of profit loss and other
comprehensive income. The statement of profit or loss is the primary source of information
about an entity’s financial performance for the reporting period. All income and expenses
should be appropriately classified and included in the income statement.

4. What is aggregation? Aggregation is the adding together of assets, liabilities, equity,

income and expenses that have similar or shared characteristics and are included in the same
classification. It makes information more useful by summarizing a large volume of detail.
However, aggregation may conceal some of the detail.

5. Explain capital maintenance?

Capital maintenance is an accounting concept based on the principle that a company's
income should only be recognized after it has fully recovered its costs or its capital has been
maintained. A company achieves capital maintenance when the amount of its capital at the
end of a period remains unchanged from the beginning. Any excess amount above this
represents the company's profit. The entity's financial performance is determined using two
approaches. The transaction approach is the traditional preparation of an income statement.
The capital maintenance approach means that the net income occurs only after the capital
used from the beginning of the period is maintained.

6. Distinguish return on capital and return of capital.

The difference between a return of capital and a return on capital is that the return of
capital is an erosion of the capital invested in the entity. It is an event where the initial capital
invested by a shareholder or an investor is paid back to the shareholder. On the other hand,
Return on Capital is a profitability ratio that indicates the efficiency of a business to generate
profits from the capital employed. It helps understand how many rupees of profit each rupee
of capital employed is generating. Thus, the return of capital is not taxed, while only the
return on capital is taxable.

7. Explain financial capital.

Financial capital refers to assets needed by a company to provide goods or services, as
measured in terms of money value. It is the monetary amount of the net assets contributed by
shareholders and the amount of the increase in net assets resulting from earnings retrained by
the entity. Also, it is the traditional concept based on historical cost and adopted by most
entities.
8. Explain the net income under the financial concept.
Under the financial concept, net income occurs when the nominal amount of the net
assets at the end of the year exceeds the nominal amount of the net assets at the beginning of
the period, after excluding distributions to and distributions by owners during the period.

9. Explain physical capital.

Physical capital is the quantitative measure of the physical productive capacity to
produce goods and services. Examples include tools and assets that facilitate a production
process. It is part of the overall organization. Also, it contributes to the profits as an asset of
the organization. It derives its value from the valuation of the organization as a whole. Any
changes to the organization affect the value of the physical capital.

10. Explain the net income under the physical capital concept.
The physical capital concept should be adopted if the main concern of users is the
operating capability of the entity. It means that the resource or fund is needed to achieve
operating capability or capacity. Under this concept, net income occurs when the physical
productive capital of the entity at the end of the year exceeds the physical productive capital
at the beginning of the period. And also, after excluding distributions to and contributions
from owners during the period.

Problems 7-1 Multiple Choice (Conceptual Framework)

1. D 4. A
2. A 5. D
3. D

Problems 7-2 Multiple Choice (Conceptual Framework)

1. A 4. D
2. B 5. C
3. A

CHAPTER 8

QUESTIONS:

1. What are financial statements?

Financial statements are the end product or main output of the financial accounting
process. They are a structured financial representation of the financial position and financial
performance of an entity. These are intended to meet users' needs who are not in a position to
require an entity to prepare reports tailored to their particular information needs. These shall
be presented at least annually.

2. What are the components of financial statements?

 Statement of financial position
 Income statement
 Statement of comprehensive income
 Statement of changes in equity
 Statement of cash flows
 Notes, comprising a summary of significant accounting policies and other explanatory
notes

3. Explain the objective of financial statements.

Financial statements provide information about the financial position, financial
performance, and cash flows of an entity. It is useful to a wide range of users in making
economic decisions. The balance sheet objective is to specify the financial position of the
entity on a specific date. The income statement has an objective to glorify the financial
performance of the entity on a year-on-year basis. The cash flow statement is prepared with
the objective to specify the cash earnings and liquidity position of the entity during the
period.

4. What is the frequency of reporting of financial statements?

The frequency of reporting of financial statements shall be presented at least annually.
However, when an entity’s end of reposting period changes and financial statements are
presented for a period longer or shorter than one year, an entity shall disclose:
a. The period covered by the financial statements
b. The reason for using a longer or shorter period
c. The fact that amounts presented in the financial statements are not entirely
comparable.

5. Define a statement of financial position.

A statement of financial position is a formal statement showing the three elements
comprising financial position, namely assets, liabilities, and equity. Moreover, investors,
creditors, and other statement users analyze the statement of financial position to evaluate
such factors as liquidity, solvency, and the need of the entity for additional financing.

6. What are the essential characteristics of an asset?

a. It embodies a probable future benefit that involves a capacity, singly or in
combination with other assets, to contribute directly or indirectly to future net cash
inflows,
b. A particular entity can obtain the benefit and control others’ access to it, and
c. The transaction or other event giving rise to the entity’s right to or control of the
benefit has already occurred.

7. What are the classification of assets?

Assets are classified only into two, namely current assets and noncurrent assets. When
an entity supplies goods or services within an identifiable operating cycle, the separate
classification of current and noncurrent assets is useful information by distinguishing
between net assets that are continuously circulating as working capital from the net assets
used in long-term operations.

8. Define current assets.

Current assets are all the assets of a company that are expected to be sold or used as a
result of standard business operations over the next year. Current assets include cash, cash
equivalents, accounts receivable, stock inventory, marketable securities, pre-paid liabilities,
and other liquid assets. According to PAS 1, paragraph 66, provides that an entity shall
classify an asset as current when:
a. The asset is cash or cash equivalent unless the asset is restricted to settle a liability for
more than twelve months after the reporting period.
b. The entity holds the asset primarily for the purpose of trading.
c. The entity expects to realize the asset within twelve months after the reporting period.
d. The entity expects to realize the asset or intends to sell or consume it within the entity’s
normal operating cycle.

9. What are the line items for current assets?

Current assets are usually listed in order of liquidity. PAS 1, paragraph 54, provides
that as a minimum, the line items under current assets are:
a. Cash and cash equivalents
b. Financial assets at fair value such as trading securities and other investments in quoted
equity instruments
c. Trade and other receivables
d. Inventories
e. Prepaid expenses
10. Define noncurrent assets.
A noncurrent asset is an asset that is not expected to turn to cash within one year of
the date shown on a company's balance sheet. It is also known as a long-term asset. Non-
current assets are capitalized rather than expensed, and their value is drawn down and
allocated over the number of years that the asset will be in use. Companies purchase non-
current assets to use them in the business since their benefits will last for a period exceeding
one year. The assets may be amortized or depreciated, depending on their type.

11. Identify the non-current assets:

a. Property, plant, and equipment
b. Long-term investments
c. Intangible assets
d. Deferred tax assets

12. What are the essential characteristics of a liability?

 it embodies a present duty or responsibility to one or more other entities that entail
settlement by probable future transfer or use of assets at a specified or determinable
date, on the occurrence of a specified event, or on-demand, 
 the duty or responsibility obligates a particular entity, leaving it little or no discretion
to avoid the future sacrifice, and 
 the transaction or other event obligating the entity has already happened.

13. What are the classifications of liabilities?

 Current liabilities (short-term liabilities) are liabilities that are due and payable within
one year.
 Non-current liabilities (long-term liabilities) are liabilities that are due after a year or
more.
 Contingent liabilities are liabilities that may or may not arise, depending on a certain
event.

14. Define current liabilities.

Current liabilities, also known as short-term liabilities, are debts or obligations that
need to be paid within a year. These should be closely watched by management to ensure that
the company possesses enough liquidity from current assets to guarantee that the debts or
obligations can be met. Examples are accounts payable, interest payable, accrued expenses,
etc.

15. What are the line items for current liabilities?

a. Trade and other payables
b. Current provisions
c. Short-term borrowing
d. Current portion of long-term debt
e. Current tax liability

16. Explain the treatment of currently maturing long-term debt.

It refers to the portion of a company's liabilities that are coming due in the next 12
months. It is a current liability if an agreement to refinance or to reschedule payment on a
long-term basis is completed after the reporting period and before the financial statements are
authorized for issue. Examples of this long-term debt include bonds as well as mortgage
obligations that are maturing. This portion of long-term debt is classified as a current liability
on a company's balance sheet. As these debt obligations come due in the next 12 months,
they are moved from the long-term liabilities section of the balance sheet to current liabilities.
There are three exceptions to this guideline. If one of the following conditions exists, the debt
should not be moved to the current liabilities section of the balance sheet:
 If the company has established an asset (fund) to retire this debt, and that fund is not
classified as a current asset.
 If the long-term debt coming due is going to be refinanced or retired using new debt.
 If the maturing portion of the long-term debt is going to be converted into shares of
common or preferred stock.

17. Explain the effect of breach of covenants on the classification of liability.

The effect of breach of covenant is mandated by PAS 1, paragraph 74. It provides that
the liability is classified as current even if the lender has agreed after the reporting period and
before the statements are authorized for issue, not to demand payment as a consequence of
the breach.

18. What are the elements comprising the equity of a corporation?

The following are the elements comprising the shareholders’ equity of a corporation:
Philippine term/IAS Term
o Capital stock / Share Capital
o Subscribed capital stock / subscribed share capital
o Preferred stock / preference share capital
o Common stock / ordinary share capital
o Additional paid capital / share premium
o Retained earnings (deficit) / accumulated profits (losses)
o Retained earnings appropriated / appropriation reserve
o Revaluation surplus / revaluation reserve
o Treasury stock / treasury share

19. What is the meaning of "notes to financial statements”?

It is also known as footnotes. These provide additional information about a company's
operations and financial position. The notes are required by the full disclosure principle.
These provide narrative descriptions or disaggregation of items presented in the financial
statements and information about items that do not qualify for recognition. This is used to
report information that does not fit into the body of the financial statements in order to
enhance the understandability of the financial statements.

20. Explain the two forms of statement of financial position.

Report form – The report form has a traditional balance sheet heading with subtotals for
each of the asset, liability, and equity accounts. GAAP offers a lot of flexibility with the
accounts that can be listed or not listed on the balance sheet. For example, some companies
list cash as one account and cash equivalents as another. Other companies combine these
accounts into one cash and cash equivalents account.
Account form – the presentation follows that of an account, meaning, the assets are shown
on the left side and the liabilities and equity on the right side of the statement of financial
position. The report format is easier to read than the account format because all the account
totals are listed on the right side of the report.
PROBLEMS:

Problems 8-1 (IAA)

Simple Company provided the following account balances on December 31, 2020:
Required: Prepare a properly classified statement of financial position on December 31,
2020.

SIMPLE COMPANY
Statement of Financial Position
December 31, 2020

ASSETS

Current Assets: Note

Cash 420,000
Trading securities 250,000
Trade and other receivables (1) 620,000
Inventories (2) 1,250,000
Prepaid expenses (3) 20,000
Total current assets 2,560,000

Noncurrent Assets:
Property, plant and equipment (4) 4,640,000
Long-term investments (5) 2,000,000
Intangible assets (6) 300,000
Total noncurrent assets 6,940,000
Total assets 9,500,000

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities: Note

Trade and other payables (7) 620,000
Serial bonds payable – current portion 500,000
Total current liabilities 1,120,000

Noncurrent Liabilities:
Serial bonds payable – remaining portion 2,000,000

Shareholders’ equity:
Share capital 5,000,000
Share premium 500,000
Retained earnings 880,000
Total shareholders’ equity 6,380,000
Total liabilities and shareholders’ equity 9,500,000
Note 1- Trade and other receivables
Accounts receivable 500,000
Allowance for doubtful accounts (50,000)
Notes receivable 150,000
Claims receivable 20,000
Total 620,000

Note 2 – Inventories
Finished goods 400,000
Goods in process 600,000
Raw materials 200,000
Factory supplies 50,000
Total 1,250,000

Note 3 – Prepaid expenses

Prepaid insurance 20,000

Note 4 – Property, plant and equipment

Cost Accum. Depr. Book Value
Land 1,500,000 - 1,500,000
Building 4,000,000 1,600,000 2,400,000
Machinery 2,000,000 1,300,000 700,000
Tools 40,000 - 40,000
Total 7,540,000 2,900,000 4,640,000

Note 5 – Long-term investments

Investments in bonds 1,500,000
Plant expansion fund 500,000
Total long-term investments 2,000,000

Note 6 – Intangible assets

Franchise 200,000
Goodwill 100,000
Total 300,000

Note 7 – Trade and other payables

Accounts payable 300,000
Notes payable 100,000
Income tax payable 60,000
Advances from customers 100,000
Accrued expenses 30,000
Accrued interest on note payable 10,000
Employee income tax payable 20,000
Total 620,000
Problems 8-2 (IAA)

Exemplar Company provided the following account balances on December 31, 2020:
Required: Prepare a properly classified statement of financial position on December 31,
2020.
EXEMPLAR COMPANY
Statement of Financial Position
December 31, 2020

ASSETS
Note
Current Assets:
Cash and cash equivalents 500,000
Trading securities 280,000
Trade and other receivables (1) 640,000
Inventories 1,300,000
Prepaid expenses 70,000
Total current assets 2,790,000

Noncurrent Assets:
Property, plant and equipment (2) 5,300,000
Long-term investments (3) 1,310,000
Intangible assets (4) 3,350,000
Other noncurrent assets (5) 150,000
Total noncurrent assets 10,110,000
Total assets 12,900,000

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities: Note

Trade and other payables (6) 1,000,000

Noncurrent Liabilities:
Bonds payable 5,000,000
Premium on bonds payable 1,000,000
Total noncurrent liabilities 6,000,000

Shareholders’ equity:
Share capital (7) 7,000,000
Reserves (8) 700,000
Retained earnings (deficit) (1,800,000)
Total shareholders’ equity 5,900,000
Total liabilities and shareholders’ equity 12,900,000
Note 1 - Trade and other receivables
Accounts receivable 400,000
Allowance for doubtful accounts (20,000)
Notes receivable 250,000
Accrued interest on notes receivable 10,000
Total 640,000
Note 2 - Property, plant and equipment
Cost Accum. Depr. Book Value
Land 1,500,000 - 1,500,000
Building 5,000,000 2,000,000 3,000,000
Equipment 1,000,000 200,000 800,000
Total 7,500,000 2,200,000 5,300,000

Note 3 – Long-term investments

Land held for speculation 500,000
Sinking fund 400,000
Preference share redemption fund 350,000
Cash surrender value 60,000
Total 1,310,000

Note 4 – Intangible assets

Computer software 3,250,000
Lease rights 100,000
Total 3,350,000

Note 5 – Other noncurrent assets

Advances to officers – not currently collectible 100,000
Long term refundable deposit 50,000
Total 150,000

Note 6 – Trade and other payables

Accounts payable 400,000
Notes payable 300,000
Unearned rent income 40,000
SSS payable 10,000
Accrued salaries 100,000
Dividends payable 120,000
Withholding tax payable 30,000
Total 1,000,000

Note 7 – Share capital

Preference share capital 2,000,000
Ordinary share capital 5,000,000
Total 7,000,000

Note 8 – Reserves
Share premium –preference 500,000
Share premium – ordinary 200,000
Total 700,000

Problems 8-3 (IAA)

Relax Company provided the following information for the purpose of presenting the
statement of financial position on December 31, 2020:

Required: Prepare in good form a properly classified statement of financial position on

December 31, 2020 with supporting notes and computations.

RELAX COMPANY
Statement of Financial Position
December 31, 2020

ASSETS

Current Assets: Note

Cash 400,000
Trade accounts receivables (1) 750,000
Inventories 1,000,000
Prepaid expenses 100,000
Total current assets 2,250,000

Noncurrent Assets:
Property, plant and equipment (2) 5,600,000
Investment in associate 1,300,000
Intangible assets (3) 350,000
Total noncurrent assets 7,250,000
Total assets 9,500,000

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities: Note

Trade and other payables (4) 1,350,000
Mortgage note payable –current portion 400,000
Total current liabilities 1,750,000

Noncurrent Liabilities:
Mortgage note payable, remaining portion 1,600,000
Bank loan payable, due June 30, 2022 500,000
Total noncurrent liabilities 2,100,000

Shareholders’ equity:
Share capital 3,000,000
Reserves (5) 1,400,000
Retained earnings 1,250,000
Total shareholders’ equity 5,650,000
Total liabilities and shareholders’ equity 9,500,000

Note 1- Trade and other receivables

Accounts receivable 800,000
Allowance for doubtful accounts (50,000)
Net Realizable Value (NRV) 750,000

Note 2 – Property, plant and equipment

Cost Accum. Depr. Book Value
Land 500,000 - 500,000
Building 5,000,000 2,000,000 3,000,000
Machinery 3,000,000 1,200,000 1,800,000
Equipment 400,000 100,000 300,000
Total 8,900,000 3,300,000 5,600,000

Note 3 – Intangible assets

Trademark 150,000
Secret processes and formulas 200,000
Total 350,000

Note 4 – Trade and other payables

Notes payable 750,000
Accounts payable 350,000
Income tax payable 50,000
Accrued expenses 60,000
Estimated liability for damages 140,000
Total 1,350,000

Note 5 – Reserves
Additional paid in capital 300,000
Retained earnings appropriated for plant expansion 1,000,000
Retained earnings appropriated for contingences 100,000
Total 1,400,000

Problems 8-4 (IAA)

Summa Company revealed the following account balances on December 31, 2020:
Required: Prepare a statement of financial position, presented and classified according to
generally accepted accounting principle with appropriate notes.

SUMMA COMPANY
Statement of Financial Position
December 31, 2020

ASSETS

Current Assets: Note

Cash (1) 700,000
Bank sinking fund 2,000,000
Trade and other receivables (2) 830,000
Inventory 1,200,000
Prepaid expenses 100,000
Total current assets 4,830,000
Noncurrent Assets:
Property, plant and equipment (3) 5,500,000
 Investment property 700,000
Intangible assets (4) 370,000
Total noncurrent assets 6,570,000
Total assets 11,400,000

LIABILITIES AND EQUITY

Current Liabilities: Note

Trade and other payables (5) 2,050,000
Bonds payable due June, 30, 2021 2,000,000
Total current liabilities 4,050,000

Noncurrent Liabilities:
Deferred tax liability 650,000

Equity:
Share capital (6) 3,500,000
Reserves (7) 500,000
Retained earnings 2,700,000
Total equity 6,700,000
Total liabilities and equity 11,400,000

Note 1- Cash
Cash on hand 50,000
Cash in bank 650,000
Total 700,000

Note 2 - Trade and other receivables

Accounts receivable 650,000
Allowance for doubtful accounts (50,000)
Notes receivable 200,000
Accrued interest receivable 30,000
Total 830,000

Note 3 – Property, plant and equipment

Cost Accum. Depr. Book Value
Land 1,000,000 - 1,000,000
Building 5,500,000 2,500,000 3,000,000
Furniture and equipment 2,400,000 900,000 1,500,000
Total 8,900,000 3,400,000 5,500,000

Note 4 – Intangible assets

Patent 370,000
Note 5 – Trade and other payables
Accounts payable 1,000,000
Notes payable 850,000
Accrued taxes 50,000
Other accrued liabilities 150,000
Total 2,050,000

Note 6 – Share capital

Authorized share capital, 50,000 shares, P100 par 5,000,000
Unissued share capital (2,000,000)
Issued share capital 3,000,000
Subscribe share capital, 2000 shares 1,000,000
Subscription receivable (500,000) 500,000
Paid in capital 3,500,000

Note 7 – Reserves
Share premium 300,000
Retained earnings appropriated for contingences 200,000
Total 500,000

Problem 8-5 Multiple Choice (PAS 1)

1. B 4. A
2. D 5. D
3. A

Problem 8-6 Multiple Choice (PAS 1)

1. C 6. A
2. A 7. A
3. D 8. A
4. D 9. D
5. A 10. C

Problem 8-7 Multiple Choice (IFRS)

1. D 6. C
2. A 7. A
3. C 8. D
4. D 9. D
5. A 10. D

Problem 8-8 Multiple Choice (AICPA Adapted)

1. A 6. D
2. D 7. D
3. D 8. C
4. B 9. D
5. D 10. D

Problem 8-9 Multiple Choice (AICPA Adapted)

1. A 4. D
2. D 5. B
 3. C

Problem 8-10 Multiple Choice (IAA)

1. A 4. D
2. D 5. A
3. C

Problem 8-11 Multiple Choice (IAA)

1. C 6. C
2. B 7. D
3. B 8. B
4. A 9. D
5. D 10. A

Problem 8-12 Multiple Choice (IAA)

1. A 4. D
2. D 5. B
3. D
.