Finals Int Acc 2

INTERMEDIATE ACCOUNTING 2
FINALS
MODULE 1 which results in either a LEGAL
LIABILITIES OBLIGATION or a
CONSTRUCTIVE OBLIGATION.
DEFINITION AND NATURE OF LIABILITIES ➔ LEGAL OBLIGATION: one that
● As per IASB’s Conceptual Framework for derives from a contract through its
FInancial Reporting, liability is defined as a explicit or implicit terms),
present obligation of an enterprise arising legislation, or other operation of
from past event, the settlement of which is law. EX. accounts payable (arising
expected to result in an outflow from the from a contract with a supplier),
enterprise of resources embodying withholding taxes payable (arising
economic benefits. from a contract with a supplier), and
value added taxes payable (arising
➔ “outflow of resources embodying
from legislation and other operation
economic benefits”
of law).
● In the new Conceptual Framework to be
released by IASB, liability has been ➔ CONSTRUCTIVE OBLIGATION:
simplified into “a present obligation of an one that derives from an
entity to transfer an economic resource as enterprise’s actions whereby an
a result of past event”. established pattern of past practice,
published policies or a sufficiently
➔ “transfer an economic resource”
specific current statement, the
● A liability possesses the ff. essential
enterprise has indicated to other
characteristics:
parties that it will accept certain
➔ PRESENT OBLIGATION responsibilities, and as a result, the
★ An obligation is a duty or enterprise has created a valid
responsibility that an entity expectation on the part of those
has no practical ability to other parties that it will discharge
avoid. those responsibilities.
★ The entity liable must be ● the settlement of a present obligation
identified but it is not involves the enterprise giving up economic
necessary that the payee to resources. Such settlement of a present
whom the obligation is owed obligation may occur in a number of ways,
to be identified. such as by:
➔ PAST EVENT; and ➔ payment of cash;
★ The liability is not ➔ transfer of other assets;
recognized until it is ➔ provision of services;
incurred. ➔ replacement of an obligation with
➔ TRANSFER OF AN ECONOMIC another obligation; and
RESOURCE ➔ conversion of the obligation to
★ is the very heart of the equity
definition of an accounting ● EXAMPLES OF CURRENT LIABILITIES
liability ➔ Trade payables
★ The economic resource is ➔ Accrual of cost or expenses
the asset that represents a
➔ Customer’s credit balances
right with a potential to
produce economic benefits. ➔ Bank overdraft
● OBLIGATION: is a duty or responsibility to ➔ Dividends payable(except share
act or perform in a certain way which may dividends)
be legally enforceable as a consequence of ➔ Income tax payable
a binding contract or statutory requirement; ➔ Current portion of long-term
or it may be an obligation acknowledged by financial liabilities
an enterprise as other parties are made to ➔ Accounts payable
believe that it will carry out an undertaking ➔ Short-term notes payables
or certain action. ➔ Liability under trust receipts
➔ such obligation is the result of an ➔ Deposits and advances
event called OBLIGATING EVENT,
1 diamla, foronda, gan
➔ Deferred or unearned revenue form its obligation as a result of the
➔ Provisions expected to be settled contractual provisions of a contract.
within twelve months ● Initially recognized at fair value, which is
the transaction price. For financial liabilities
● EXAMPLES OF NON-CURRENT that are measured at amortized cost, the
LIABILITIES transactions directly attributable to the
➔ Non-current portion of long term issuance of the financial instrument is
debt considered in the initial measurement.
➔ Deferred revenue - noncurrent
portion ACCOUNTS PAYABLE
➔ Finance lease liability ● Also known as, trade accounts payable are
liability arising from the purchase of goods,
➔ Deferred tax liability
materials, supplies, or services on an open
➔ Long-term obligations to company charge account basis. The credit time
officers period generally varies (e.g. from 30-120
days) without any interest being charged
FINANCIAL LIABILITIES on the deferred payment.
● As defined in IAS 32 Financial Instruments: ● Theoretically, however, an entity must
Presentation (noe superseded by IFRS 9 recognize the accounts payable when
FInancial Instruments), a financial liability acquired economic control over the goods
is any liability that is a contractual ordered, because that is the date when the
obligation entity becomes a party to the financial
➔ to deliver cash or another financial instrument.
asset to another entity, or ● Attention must be given to transactions
➔ to exchange financial assets or occurring near the end of one reporting
financial liabilities to another entity period and at the beginning of the next
under conditions that are potentially reporting period.
unfavorable to the entity, ir ● FOB Shipping point: a purchase made
➔ that will or may be settled in the towards the end of the accounting period,
entity’s own equity instruments and where goods are still in transit should be
is a non-derivative for which the recognized as a liability.
entity may be obliged to deliver a ● FOB Destination: the liability is
variable number of the entity's own recognized upon receipt of the goods
equity instruments that will or may ● NOTE: The record of goods received
be settled in the entity’s own equity (inclusion in ending inventory) should be in
instruments and is a derivative that agreement with the recognition of account
will or may be settled other than by payable.
exchange of a fixed amount of cash ● EXAMPLES OF ACCOUNTS PAYABLE
or a financial asset for a fixed ➔ Accounts payable to suppliers for
number of the entity’s own equity the purchase of goods.
instruments ➔ Amounts withheld from employees
● Financial liabilities also include those for taxes and for contributions to the
contractual obligations that will or may be SSS.
settled by issuing equity instruments (e.g. ➔ Accruals for salaries, interest, rent,
convertible bonds) taxes, product warranties and profit
● However, rights, options and warrants sharing bonus.
issued by an entity on a prorate basis to its ➔ Cash dividend declared but not
existing owners that impose on the entity to paid
issue its own share capital are not financial ➔ Deposits and advances from
liabilities but are classified as equity. customers
➔ Debt obligations for borrowed funds
INITIAL RECOGNITION - notes, mortgages and bonds
● an entity shall recognize its financial liability payable
when and only when it becomes a party to ➔ Income tax payable
the contractual provision of the instrument; ➔ Unearned revenue
that is when the entity issues the financial
instrument or acknowledges in whatever

METHODS OF ACCOUNTING FOR CASH
DISCOUNTS NET METHOD
● Under the gross method and when the
entity adopts the periodic inventory system,
the purchases account and the Accounts Purchases 194,000
Payable are recorded at the gross invoice
price. Freight-in 2,000
● Under the net method and when the entity
adopts the periodic inventory system, both A/P 196,000
purchases and Accounts Payable are
initially recorded at the invoice press less NOV 10, 2019
the cash discounts available.
GROSS METHOD
➔ A cash discount not taken is
recorded as PURCHASE
DISCOUNTS LOST, which is Purchases 202,000
reported in profit or loss as part of
the finance cost. Purchase disc. 6,000
● Between the two methods, the NET
METHOD is more theoretically sound Cash 196,000
because it results in separate recognition of
FINANCE COST that arises from non-
payment of the account within the discount NET METHOD
period.
● The GROSS METHOD incorporates the A/P 196,000
discounts lost in the cost of purchases,
thereby not showing the actual situation Cash 196,000
that an expense has been incurred
because of a credit related transaction.
If the account is paid beyond the discount period,
➔ Under this method, any discount the JE for the payment would be:
lost is not accounted for separately
and is absorbed by the cost of GROSS METHOD
purchases, thereby increasing
operating cost. A/P 202,000
ILLUSTRATION Cash 202,000
Assume that ABC Corporation purchased
merchandise form DEF Company with an invoice
price of P200,000; terms: FOB shipping point, NET METHOD
3/10; n/30.
The purchase took place on November 2, 2019. A/P 196,000

DEF Company prepaid the freight charges of
Purch. disc. lost 6,000
P2,000. ABC paid the full account on November
10,2019. Assume further that ABC Corporation Cash 202,000
uses a periodic inventory system. Entries in the
books of ABC Corporation to record the purchase *NOTE: The 3% cash discount is based on the cost
and payment under the gross and net methods of goods purchased, excluding the freight cost.
are: If payment is not made yet at the reporting date
and the discount period has already lapsed, an
NOV 2, 2019 adjusting entry is required to be recorded under the
net method as follows:
GROSS METHOD
Purch. disc. lost 6,000

Purchases 200,000
A/P 6,000
Freight-in 2,000
A/P 202,000

NOTES PAYABLE ● When the principal amount is payable
● A promissory note is an unconditional PERIODICALLY, the present value shall
promise in writing made by one person to be divided into current and noncurrent
another, signed by the maker, engaging to liability not unless that the liability is
pay on demand or at fixed or determinable payable within one year from the reporting
future time a sum certain in money to order period in which case it shall be presented
or to bearer. as current liability.
INITIAL MEASUREMENT NOTE ISSUED SOLELY FOR CASH

● PFRS 9, paragraph 5.1.1, provides that a ● When a note is issued solely for cash, the
note payable not designated at fair value present value is equal to the cash process.
through profit or loss shall be measured
initially at fair value minus transaction costs ILLUSTRATION
that are directly attributable to the issue of On November 1, 2020, an entity discounted its own
the note payable. note of P1,000,000 at 12% for one year.
➔ transaction costs are included in Note payable P1,000,000
the measurement of note payable.
● Furthermore, in the absence of fair value,

Less: Discount (12% x 120,000
the notes shall be measured at discounted
1,000,000)
or present value.
● However, if the note payable is irrevocably NET PROCEEDS 880,000
designated at fair value through profit or
loss, the transaction costs are expensed
immediately. Cash 880,000
SUBSEQUENT MEASUREMENT Discount on N/P 120,000

● PFRS 9, paragraph 5.3.1, provides that
after initial recognition, a note payable shall N/P 1,000,000
be measured:
➔ At amortized cost using the Actually, the discount on the note payable of
effective interest method 120,000 is the total interest expense for one year.
➔ At fair value through profit or loss if Thus, on December 31, 2020, after 2 months, the
the note payable is designated discount on note payable is amortized as interest
irrevocably as measured at fair expense.
value through profit or loss
Interest expense 20,000
AMORTIZED COST OF NOTE PAYABLE
● the amortized cost of note payable is the Discount on N/P 20,000
amount at which the note payable is (120,000 x 2/12)
measured initially:
➔ Minus principal repayment
If a statement of financial position is prepared on
➔ Plus or minus the cumulative
December 31, 2020, the note payable is classified
amortization using the effective
and reported as current liability.
interest method of any difference
between the face amount and
present value of the note payable. Note payable P1,000,000
● NOTE: The difference between the face
amount and present value is either
discount or premium on the issue of note Discount on Note (100,000)
payable. payable
● When the principal amount is payable in
LUMP-SUM, the entire present value at the Carrying amount 900,000
end of the reporting period shall be
presented as noncurrent liability not unless
Observe that the discount on note payable is a
that the liability is payable within one year
direct deduction from the face amount of the note
from the reporting period in which case it
payable.
shall be presented as current liability.
The carrying amount of P900,000 is actually the
“amortized cost” of the note payable. ★ PRESENT VALUE OF NOTE = FACE
VALUE OF NOTE
ILLUSTRATION ★ NO DISCOUNT/PREMIUM
Mocha Company’s A/P at December 31,2020
totaled P1,000,000 before ny necessary year-end
adjustments relating to the following transactions NOMINAL RATE ≠ EFFECTIVE RATE
(UNREALISTIC RATE)
and information: ➜ 1,000,000
★ PRESENT VALUE OF NOTE ≠ FACE
VALUE OF NOTE
REQUIRED: How much is the adjusted balance of
A/P on December 31,2020? Adjusted A/P = ★ DISCOUNT ON N/P (NR < ER ; PV < FV)
997,000 ★ PREMIUM ON N/P (NR > ER ; PV > FV)
1. The A/P general ledger balance of P1,000,000
is net of P80,000 debit balance in one supplier’s ILLUSTRATION
account representing deposit on goods to be On January 1, 2017, West Corporation acquired a
delivered on January 2021. [Advances to supplier tract of land for P1,000,000. West Corporation paid
(Current Asset)] ➜ 80,000 P100,000 down and signed a two-year promissory
2. On December 27, 2020, Mocha wrote and note for the balance plus 10% interest
issued checks to creditors totaling P350,000. The compounded annually. The note matures on
issuance of the checks was recorded on January January 1, 2019.
3, 2021. ➜ (350,000)
3. On December 28,2020, Mocha purchased and Prepare journal entries to record:
received goods for P150000, terms 2/10, n/30. 1. Purchase of land on January 1, 2017.
Mocha records purchases and A/P at net amounts. FACE VALUE, 1/1/17 = 900,000
The invoice was recorded and paid January 3,
Downpayment P100,000
2021. (150,000 x.98) ➜ 147,000
4. Goods costing P120,000 were purchased from
Harry Company. The goods were shipped by Harry
on December 28, 2020, FOB Shipping point. The Present value of note 900,000
goods, together with the invoice, were received by (initial CV of N/P)
Mocha on January 4, 2021. ➜ 120,000 INITIAL COST OF 1,000,000
5. Goods shipped FOB Destination on December LAND
20,2020 from a vendor to Mocha were received on
January 2,2021. The invoice cost was P65,000.
The purchase was recorded on January 2,2021. ➜ Land 1,000,000
x
N/P 900,000
INTEREST BEARING NOTE ISSUED FOR
PROPERTY Cash 100,000
● Since the note is interest bearing (and
assuming that the stated rate approximates 2. Accrued interest on December 31, 2017.
the prevailing market rate for similar INTEREST EXPENSE (2017) = 900,000 x .10 x
obligations), the fair value (and also the 12/12/= 90,000
present value) of the note at the time of its
ACCRUED INTEREST, 12/31/17
issuance is equal to its face value.
● When a property or noncash asset is
acquired by issuing a promissory note Interest expense 90,000
which is interest bearing, the property or
asset is recorded at the PURCHASE Interest payable 90,000
PRICE.
● The purchase price is reasonably assumed 3. Accrued interest on December 31, 2018.
to be the present value of the nore and *interest compounded annually
therefore, the fair value of the property 900,000 + 90,000 = 990,000
because the note issued is interest bearing. INTEREST EXPENSE (2018) = 990,000 x .10 x
12/12/= 90,000
NOMINAL RATE = EFFECTIVE RATE
(REALISTIC RATE)
ACCRUED INTEREST, 12/31/18 Downpayment P0

Present value of note 2,591,760 (initial CV of
Interest payable 99,000 N/P)
INITIAL COST OF 2,591,760

BLDG
4. Full payment of the note on January 1, 2023.
TOTAL PAYMENT (1/1/19) = 900,000 + 90,000
+99,000 = 1,089,000 Land 2,591,760
PAYMENT, 1/1/19
N/P 2,591,760
N/P 90,000
2. How much is the interest expense for the year
Interest payable 189,000 2019?
INTEREST EXPENSE (2019) = 233,258 x 3/12/=
Cash 1,089,000 58,315
DATE PAYME INTERES PRINCIPAL CV OF N/P
NT T PAYMENT (Face Value)
5. How much is the carrying value of N/P on Dec. 9% (Face
31, 2017 and Dec. 31, 2018? (CV OF Value)
NP X ER)
Face value, 1/1/17 P900,000 10/1/19 - - 2,591,760
9/30/20 800,000 233,258 566,742 2,025,018

Payment of Principal / (0) 9/30/21 800,000 182,252 617,748 1,407,270
Face value (2017)
9/30/22 800,000 126,654 673,346 733,924
CV OF N/P, BS DATE 900,000
12/31/17 9/30/23 800,000 66,076 733,924 -
3,200,0 608,240 2, 591,760

00 Total Total
Face value, 12/31/17 P900,000 Total interest principal
face expense
value
Payment of Principal / (0)
Face value (2018) 3. How much is the interest payable on December
31, 2019?
CV OF N/P, BS DATE 900,000 INTEREST PAYABLE, 12/31/19 = 233,258 x
12/31/18 3/12/= 58,315
ILLUSTRATION ACCRUED INTEREST, 12/31/19

On October 1, 2019, KAPIT Corporation acquired
a building from LANG Corporation by issuing four-
year, 9% promissory note with face value of Interest expense 58,315
P2,591,760. The note and accrued interest are
Interest payable 58,315
payable in equal amounts of P800,000 every
September 30, starting September 30, 2020. The
periodic payment of P800,00 is to be applied first 4. How much is the carrying value of N/P on
to interest, and the remainder to the principal. The December 21, 2019?
accounting period of the company is the calendar
year.
Face value, 10/01/19 P2,591,760
REQUIRED:
1. How much is the initial cost of the building?
FACE VALUE, 10/1/19 = 2,591,760
Payment of Principal / (0) Interest payable 45,563
Face value (2019)
CV OF N/P, BS DATE 2,591,760 9. How much is the carrying value of N/P on

12/31/19 December 21, 2020?
Face value, 12/31/19 P2,591,760
5. How much is the current and non-current portion
of the N/P on December 31, 2019?
Payment of Principal / (566,742)
Face value, 9/30/20
CV OF N/P, 12/31/19
= 2,591,760 CV OF N/P, BS DATE 2,025,018
12/31/20
⬋ ⬊
CURRENT NON-CURRENT
↓ ↓ 10. How much is the current and non-current
566,742 2,025,018 portion of the N/P on December 31, 2020?
CURRENT = 617,748
NON-CURRENT = 1,407,270
6. How much is the total amount that should be
presented as part of current liabilities in the CV OF N/P, 12/31/20
Statement of Financial Position on December 31, =2,025,018
2019? 566,742 + 58,315 = 625,057
7. How much is the interest expense for the year ⬋ ⬊
2020? CURRENT NON-CURRENT
INTEREST EXPENSE (2019) = 233,258 x 3/12= ↓ ↓
58,315 617,748 1,407,270
INTEREST EXPENSE (2020)

11. How much is the total amount that should be
presented as part of current liabilities in the
Statement of Financial Position on December 31,
1/1/20 - 9/30/20 174,943
2020?
(233,258 x 9/12)
TOTAL CURRENT LIAB = 617,748 + 45,563 =
663,311
10/1/20 - 12/31/20 45,563
(182,252 x 3/12) ILLUSTRATION (UNREALISTIC)
On July 1, 2020, JUST Company issued a 5-year,
TOTAL 220,506 2,000,000 face value notes to PRAY Company.
The note bears interest at 10% and the market
interest rate of similar notes on July 1,2020 was
12%. The present value of the note on July 1,
8. How much is the interest payable on December 2020, was P1,855,760. Interest is payable every
31, 2020? June 30.
PAYMENT, 9/30/20 Present value, of P2,591,760

FACE VALUE
Notes payable 58,315 (2,000,000 x.5674)
Interest payable 566,742 Payment of Principal / 720,960

Face value (200,000 x
Interest expense 174,943 .5674)
Cash 800,000 PV OF NOTE 1,855,760

12/31/19
ACCRUED INTEREST, 12/31/20

DATE NOMIN EFFECTI AMORTIZ CV OF 7.How much is the discount on N/P on Dec.
AL VE ATION OF N/P 31,2021?
INTERE INTERES DISCOUN
ST T T FV, 12/31/21 2,000,000
10% 12%
7/1/21 - - - 1,855,760
CV OF N/P, 12/31/21 (1,891,158)
6/30/21 200,000 222,691 22,691 1,878,451

DISCOUNT ON N/P, 12/31/21 108,842
6/30/22 200,000 225,414 25,414 1,903,865
1. How much is the initial carrying value of N/P?

1,855,760 ILLUSTRATION (Empleo)
On December 1, 2020, an entity acquired
2. How much is the interest expense for the year equipment for P 1,000,000 payable in 5 annual
2020? 222,691 x 6/12 = 111,346 equal installments every December 31 of each
year. Interest is 10% on the unpaid balance.
3. How much is the CV of N/P on Dec.31, 2020?
JAN 1, 2020
CV, 7/1/20 1,855,760
Equipment 1,000,000
N/P 1,000,000
AMORTIZATION - 7/1/20 - 11,346
12/31/20
(22,691 x 6/12) DEC 31, 2020
TOTAL 1,867,106 Interest expense 100,000

(10%x1,000,000)
N/P 200,000
4. How much is the discount on N/P on
Cash 300,000
Dec.31.2020? 132,894 (2,000,000 - 1,867,106)
Payment of the
first installment
and the interest
2021?
for 2020.
1/1/21 to 6/30/21 (222,691 x 6/12) 111,346
=
DEC 31, 2021
7/1/21 - 12/31/21 112,707 (10%x800,000)
(22,691 x 6/12)
N/P 200,000
TOTAL 224,053
Cash 280,000
Payment of the
second
6. How much is the CV of N/P on Dec.31, 2021? installment and
the interest for
CV, 6/30/21 1,878,451 2021.
AMORTIZATION 7/1/20 - 12,707 NON-INTEREST BEARING NOTE

12/31/20 ● A non-interest-bearing note does not
(25,414 x 6/12) explicitly state an interest rate on the face
of the note. Thus, the face value represents
TOTAL 1,891,158 the present value of the obligation plus the
imputed interest for the term of the note.
However, there is still an interest imputed
on the face value of the note. Thus, the
face value represents the present value of
the obligation plus the imputed interest for ★ PRESENT ★ DISCOUNT
the term of the note. VALUE OF ON NOTES
● The TRANSACTION PRICE of the non- NOTE PAYABLE
interest bearing note at the date of
issuance is the amount of cash received, or ★ PRESENT VALUE OF NOTE = Fair
the fair value of goods and services Value of the Assets or Services Received
received.
● If the note is issued in exchange for goods ★ PRESENT VALUE OF NOTE =
and services whose fair value cannot be Discounted value of Future Cash
reliably determined, the note is initially Outflows
measured based on the PREVAILING
MARKET RATE of interest for a similar ★ PERIODIC PAYMENT = Periodic equal
obligation. payment x PV of an Ordinary Annuity
● The discounted amount (face value less an
★ LUMP SUM PAYMENT = Face value x
imputed interest) of the note should be
used initially to record the liability. PV of a Single Payment
● The Notes Payable account is credited
equal to the face value of the note and a ILLUSTRATION (LUMP SUM)
corresponding debit is made to the account On January 1, 2020, Manila Bay Company
Discount on Notes Payable. acquired a tract of land for P5,250,000. Manila Bay
● The net credit account (Notes payable less Company paid 1,250,000 down and signed a non-
Discount on Notes Payable) is the initial interest-bearing note for the balance which is due
amortized cost of the liability. Interest on December 31, 2022. There was no established
expense is then recognized over the term exchange price for the land and the note had no
of the note, using the effective interest ready market. The prevailing interest rate for this
method, as an adjustment of this type of note was 12%. The present value of an
discounted amount. ordinary annuity of 1 for three periods is 2.4018.
➔ This is done by charging Interest The present value of 1 for three periods is .7118.
Expense and crediting Discount on
Notes Payable.
Downpayment P1,250,000
● When an noninterest bearing note is issued
for property, the property is recorded at the
CASH PRICE of the property.
➔ The CASH PRICE is assumed to be Present value of 2,847,200
the present value of the note Future Cash Outflows To amortization table
issued. (P4,000,000 x .7118) (Initial CV of Notes
● The difference between the cash price and Payable)
the face of the note issued represents the
INITIAL COST OF 4,097,200
imputed interest.
LAND
➔ The IMPUTED INTEREST is based
on the sound philosophy that no
lender would part away with his FACE VALUE OF NOTE
money or property interest-free.
● At the reporting date, the balance of
discount on notes payable is deducted from ⬋ ⬊
the face value of the note to arrive at the PRINCIPAL INTEREST
amortized cost of the note to be presented ↓ ↓
PRESENT VALUE OF DISCOUNT ON NOTES
in the statement of financial position.
NOTE PAYABLE
● The balance of the discount represents ↓ ↓
interest expense over the remaining term of 2,847,200 1,152,800
the note.
FACE VALUE OF NOTE
Land 4,097,200
⬋ ⬊ Discount on N/P 1,152,800

PRINCIPAL INTEREST
↓ ↓ N/P 4,000,000

Cash 1,250,000
6. How much is the carrying value of N/P on
December 31, 2021?
LUMP-SUM PAYMENT
Face value, 12/31/21 4,000,000
DATE INTEREST CV OF N/P
12% (CV OF NP +
(CV OF NP X ER) AMORT. OF
DISCOUNT) Discount on N/P (482,472)
(1,152,800 - 341,664 - 382,664)
1/1/20 - 2,847,200
12/31/20 341,664 3,188,864

CV OF N/P 3,571,528
12/31/21 382,664 3,571,528
12/31/22 428,472 4,000,000 AMORTIZATION OF DISCOUNT (1/1/20 TO

12/31/21)
1,152,800
(TOT. INT. EXP) Interest expense 382,664
REQUIRED:
1. How much is the initial cost of land? 4,097,200 Discount on N/P 382,664
2. How much is the initial carrying value of N/P?
2,847,200 7. How much is the current portion and noncurrent
portion of N/P on December 31, 2021?
Face value P4,000,000
Current portion - 3,571,528; Non Current
portion - 0
Discount on N/P (1,152,800) ILLUSTRATION (Valix)
On January 1, 2020, an entity acquired equipment
INITIAL CV OF N/P 2,847,200
with a cash price for P 350,000 for P500,000,
3. How much is the interest expense for the year P100,000 down and the balance payable in 4
2021? annual equal installments.
Interest expense (2020) = 341,664 x 12/12 = JAN 1, 2020
341,664
Equipment 350,000
Interest expense (2021) = 382,664 x 12/12 =
382,664 Discount on N/P 150,000
December 31, 2020? Cash 100,000
Face value, 12/31/20 4,000,000 N/P 400,000
DEC 31, 2020

Discount on N/P (811,136) N/P 100,000
(1,152,800 - 341,664)
Cash 100,000
CV OF N/P 3,188,864 Payment of annual
installment
AMORTIZATION OF DISCOUNT (1/1/20 TO
12/31/20)
Interest expense 341,664 DEC 31, 2020

Discount on N/P 341,664
5. How much is the current portion and noncurrent Amortization of the
portion of N/P on December 31, 2020? discount for 2020
Current portion - 0; Non Current portion - 3,18
8,864
AMORTIZATION TABLE
1. To record the purchase of equipment on Jan 1,
Year N/P Fraction Amortization
2020
2020 400,000 4/10 60,000 JAN 1, 2020
Equipment 776,170
2021 300,000 3/10 45,000
2022 200,000 2/10 30,000
Cash 100,000
2023 100,00 1/10 15,000
N/P 900,000
1,000,000 150,000
2. To record the interest expense for 2020:
● Note payable represents the amount DEC 31, 2020
outstanding every year.
● The note was issued on January 1, 2020 Interest expense 60,000
and the first payment was made on
December 31, 2020. Discount on N/P 60,000
● Thus, for 2019, the note payable *The discount on note payable is amortized as
outstanding is P400,000. interest expense using the effective interest
● Fraction is developed from the note method.
payable outstanding every year.
● Amortization is the amount of discount 3. To record the full payment of the note on
multiplied by the fraction developed. January 1, 2023.
● Thus, for 2020, 150,000 times 4/10 equals JAN 1, 2023
P60,000.
N/P 900,000
NON-INTEREST BEARING NOTE PAYABLE
ILLUSTRATION (LUMP SUM) Cash 900,000
On January 1, 2020, an entity acquired equipment
for P1,000,000. The entity paid P100,000 down AMORTIZATION TABLE
and signed a noninterest bearing note for the
balance which is due after three years on January Date Interest Discount on Present value
expense N/P
1, 2023.
1/1/20 223,830 676,170
There was no established cash price for the
equipment. The prevailing interest rate for this type 12/31/20 67,617 156,213 743,787
of note is 10%. The present value of 1 for 3 periods
is .7513. 12/31/21 74,379 81,834 818,166
12/31/22 81,834 - 900,000

Downpayment P100,000
● Interest expense is equal to the preceding
present value multiplied by the implied
Present value of note 676,170 interest rate.
(P900,000 x .7513) ● Thus, for 2020, P676,170 times 10%
equals P67,617.
COST OF 776,170
● Discount on note payable is the balance
EQUIPMENT
minus the interest expense every year.
● Thus, on December 31, 2020, P223,830
Face value of the note P900,000 minus the interest of P67,617 equals
P156,213.
● Present value is the preceding balance
plus the interest expense every year.
Present value of note 676,170 ● Thus, on December 31, 2020, P676,170
(P900,000 x .7513) plus the interest of P67,617 equals
P743,787.
IMPUTED INTEREST 223,830

ILLUSTRATION (INSTALLMENT) Total interest principal
On April 1, 2020, Dolomite Company acquired an face expense
equipment by issuing a four-year, non-interest value
bearing, P3,200,000 note. The note is payable in
annual installments of P800,000. THe first REQUIRED:
installment is due on March 31, 2021. There was 1. How much is the initial cost of land? 2,591,760
no equivalent cash price for the equipment and the 2. How much is the initial carrying value of N/P?
note had no ready market. The prevailing interest
rate for a note of this type is 9%. Face value P3,200,000
Downpayment 0
Discount on N/P (608,240)
INITIAL CV OF N/P 2,591,760

Present value of 2,591,760
Future Cash Outflows To amortization table 3. How much is the interest expense for the year
(P800,000 x 3.2397) (Initial CV of Notes 2021?
Payable) Interest expense (2020) = 233,258 x 9/12 =
174,944
COST OF 2,591,760
EQUIPMENT INTEREST EXPENSE 2021
FACE VALUE OF NOTE (1/1/21 TO 3/31/21) 58,314

3,200,000 (233,258 - 174,944)
⬋ ⬊ 4/1/21 TO 12/31/21 136,689

PRINCIPAL INTEREST (182,252 x 9/12)
↓ ↓
PRESENT VALUE OF DISCOUNT ON NOTES TOTAL INTEREST 195,003
NOTE PAYABLE EXPENSE
↓ ↓
2,591,760 608,240
December 31, 2020?
Equipment 2,591,760
608,240 Face value, 12/31/20 P3,200,000

Discount on N/P
(3,200,000 - 0)
N/P 3,200,000
Discount on N/P, 12/31/20 (433,296)
(608,240 - 174,944)
PERIODIC PAYMENT
DATE PAYME INTERES RED. IN CV OF N/P CV OF N/P, 12/31/20 2,766,704
NT T PRINCIPAL (CV OF NP -
9% (Payment LESS RED.
(CV OF less IN
NP X ER) interest) PRINCIPAL) AMORTIZATION OF DISCOUNT (4/1/20 TO
12/31/20) = 233,258 x 9/12 = 174,944
4/1/21 - - - 2,591,760
3/31/22 800,000 233,258 566,742 2,025,018
Discount on 174,944
3/31/23 800,000 182,252 617,748 1,407,270 N/P
12/31/2 800,000 126,654 673,346 733,924
4 5. How much is the current portion and noncurrent
12/31/2 800,000 66,076 733,924 -
5 Current portion - 741,696; Non Current portion
- 2,025,018
3,200,0 608,240 2, 591,760
00 Total Total

TOTAL CURRENT NONCURR TOTAL CURRENT NONCURR
ENT ENT
FV, 3,200,000 800,000 2,400,000 FV, 2,400,000 800,000 1,600,000

12/31/20 12/31/21
DNP, (433,296) (58,314) (374,982) DNP, (238,292) (45,562) (192,730)

12/31/20 (233,258- 12/31/21 (182,252 x
174,944) 3/12))
2,776,704 741,696 2,025,018 2,161,708 754,438 1,407,270

(566,742- *cv of n/p, (617,748+ *cv of n/p,
174,944) next period 136,689) next period
6. How much is the carrying value of N/P on BONDS PAYABLE

December 31, 2021?
● A bond is a formal unconditional prompt,
made under seal, to pay a specified sum of
Face value, 12/31/21 P2,400,000 money at a determinable future date, to
(3,200,000 - 800,000) make periodic interest payments at a
stated rate until the principal sum is paid.
Discount on N/P, (238,292) ● Bonds are financial liabilities that are
12/31/21 subsequently measured at amortized cost.
(608,240 - 174,944 - ➔ The amortized cost of a financial
58,315, 136,689) liability is the amount at which it is
measured at initial recognition
minus the principal repayments
CV OF N/P, 12/31/21 2,161,708 plus or minus the cumulative
amortization using the effective
interest method.
INSTALLMENT PAYMENT OF P800,000 ● TYPES OF BONDS:
3/31/21) ➔ TERM BONDS - matures on a
single date
N/P 800,000
➔ SERIAL BONDS - matures on a
Cash 800,000 series of installments
➔ REGISTERED BONDS - the
creditor’s name is indicated in the
AMORTIZATION OF DISCOUNT (1/1/21 TO bond certificate
3/31/21) = 233,258 x 3/12 = 58,315 ➔ COUPON/BEARER BONDS - the
creditor’s name is not indicated in
Interest expense 58,315 the bond certificate. Also known as
unregistered bonds.
Discount on 58,315 ➔ SECURED BONDS - bonds with
N/P collateral or security in case of
breach in debt undertaking
➔ UNSECURED BONDS - bonds
AMORTIZATION OF DISCOUNT (4/1/21 TO without any form of collateral or
12/31/21) = 182,252 x 9/12 = 136,689 security
Interest expense 136,689 ➔ COLLABLE BONDS - bonds which
can be called or retired by the
Discount on 136,689 issuing debtor
N/P ➔ BONDS WITH EQUITY
CHARACTERISTICS - bonds that
can be converted into ordinary
7. How much is the current portion and noncurrent
shares (convertible bonds) or
bonds with attached equity security
Current portion - 754,438; Non-current portion
such as share warrants (bonds with
- 1,407,270
share warrants)

➔ ZERO-INTEREST BONDS - also
known as deep discount bonds. It PERIODIC xx PERIODIC xx
issued at significantly lower than INTEREST x INTEREST x
PVOA PVSP
their face value.
ISSUE PRICE xx ISSUE PRICE xx
ISSUANCE OF BONDS
● BONDS PAYABLE are initially recognized
Journal Entry:
at the date of the actual issue of the bonds. PREMIUM
● Bond liabilities are initially recognized at Cash xx
their discounted value, which equals the B/P xx
net proceeds from their issuance. Premium on B/P xx
➔ The ISSUE PRICE of the bond is
the market price of the bond, which DISCOUNT
varies with the safety of the Cash xx
Discount on B/P xx
investment and the prevailing
B/P xx
market rate of interest for similar
instruments. *B/P account is recorded
● The rate of interest on the face of the bid at Face value
is termed as the contract rate, stated rate,
or nominal rate of interest.
➔ This interest rate depends on the INTEREST EXPENSE = CV of bonds x ER
financial condition and earnings of
the issuing corporation. When the
financial condition and earnings of NOMINAL INTEREST (FV x NR)
the issuing corporation.
● BOND PRICES are quoted in the market Interest expense xx
as a percentage of face value.
● When bond quotations are not available, Cash or Int./P xx
the market price can be determined by
discounting the maturity value of the bond
and all interest payments at the market rate AMORTIZATION (Nominal interest - effective
of interest for similar debt on that date. interest)
● The issue price of the bonds is equal to the
present value of the maturity value plus the ↑ DISCOUNT ↓ PREMIUM
present value of the periodic interest Int. exp. xx Premium on B/P xx
payment, both discounted at the market Discount on B/P xx Int. exp. xx
rate of interest at the date the bonds are
issued.
● When the bond year does not coincide with ACCRUED INTEREST ON BONDS
the reporting period: If the bond year does
not coincide with the reportineriod, other ISSUED
than the entries every interest payment ● Date of payment of interest does not
date, an adjusting entry made at year-end coincide with:
to accrue interest and update the ➔ DATE OF ISSUANCE
amortization of premium or discount. ➔ BALANCE SHEET DATE
➔ DATE OF RETIREMENT
ISSUANCE OF BONDS ● FORMULA:
➔ FACE VALUE x NOMINAL RATE
x TIME (months accrued)
⬋ ⬊
TERM BONDS SERIAL BONDS
↓ ↓ DATE OF ISSUANCE
bonds that mature on a bonds that mature in
single date installments
⬋ ⬊
↓ ↓
EXCLUDE INCLUDE
↓ ↓
FV x PVSP xx FV x PVOA xx INITIAL CV OF B/P CASH RECEIVED
↓ ↓

Journal entries:
engraving of bond certificates, taxes and
commissions and similar charges.
PREMIUM FV x PVOA xx ● When a financial liability is recognized
initially, an entity shall measure it at its fair
PERIODIC xx
Without accrued value(issue price) and considering
INTEREST x
interest PVSP transaction costs that are directly
attributable to the issue of the financial
Cash xx ISSUE PRICE xx liability.
B/P xx
CARRYING VALUE OF BONDS PAYABLE
Premium xx
on B/P
⬋ ⬊
↓ PREMIUM ON B/P ↑ DISCOUNT ON B/P
PREMIUM ↓ ↓
Premium on B/P xx Discount on B/P xx
With accrued interest Cash xx Cash xx
Cash xx
(Issue price +
accrued int)
DATE OF RETIREMENT
DATE OF RETIREMENT
B/P xx
Premium on xx EXCLUDE
B/P ★ GAIN OR LOSS ON RETIREMENT (i.e retirement
price without accrued interest)
Interest xx
payable
Without With
accrued accrued
DISCOUNT interest interest
Without accrued RETIREMENT PRICE xx xx

interest
CARRYING VALUE (xx) (xx)
Cash xx
GAIN OR LOSS xx xx
Discount on xx
B/P JOURNAL ENTRY
Premium scenario and without accrued interest
B/P xx
B/P xx
DISCOUNT Premium on B/P xx
With accrued interest Cash xx
Cash (Issue xx Gain on retirement of bonds xx

price +
accrued int) Premium scenario and with accrued interest
Discount on xx B/P xx
B/P
Premium on B/P xx
B/P xx
Interest payable or Interest xx
Int. payable xx expense (*if the problem stated
that the accrued interest is not
included in the total retirement
price)
BOND ISSUE COST
● Expenditure incurred by the issuing Cash (Retirement price + xx
company for legal fees, printing and
JOURNAL ENTRY - PAYMENT OF BOND
accrued interest) ISSUE COST OR TRANSACTION COST
Gain on retirement of bonds xx
Premium on B/P 20,000
INCLUDE Cash 20,000
★ CASH PAID
ILLUSTRATION (Balance sheet date is in

between interest payment dates)
ILLUSTRATION (Issuance of bonds in On March 1, 2020, Venus Corporation issued four-
between interest payment dates) year, P3,000,000 face value 11% term bonds for
Marvel Corporation issued P1,000,00,12%, 20 P3,197,877. The bonds pay interest semi-annually
year bonds at 105 plus accrued interest on April every March 1 and Sept. 1 and were issued to yield
30, 2020. The bonds are dated on January 1, 2020 9%. The accounting period is the calendar year.
and pay interest semi-annually every June 30 and
December 31. Transaction costs totaled P20,000. AMORTIZATION TABLE
Things to consider:
DAT NOMINAL EFFECTIV AMORT CV OF
Issue price = 1,000,000 x 1.05 = 1,050,000 E INTERES E OF BONDS
T (5.5%) INTERES PREMIU PAYABLE
T (4.5 %) M
Face value x Nominal rate x time → 4 months
(Dec.31 to April 30) 3/1/ - - - 3,197,877
20
1. How much accrued interest on the bonds shall 9/1/ 165,000 143,904 21,096 3,176,781
Marvel Corporation collect from the investor on 20
April 30, 2020?
Accrued interest, 4/30 → 1,000,000 x .12 x 4/12 or 3/1/ 165,000 142,955 22,045 3,154,736
21
1,000,000 x .06 x 4/6 = 40,000
9/1/ 165,000 141,963 23,037 3,131,699
2. How much is the initial carrying value of bonds 21
payable on April 30, 2020?
3/1/ 165,000 140,926 24,074 3,107,625
22
Face value 1,000,000
Premium on B/P 50,000 1. How much is the interest expense for the year
2020?
CV of B/P (without 1,050,000
BIC/transaction cost) INTEREST EXPENSE (2020)
Bond issue cost (20,000)
3/1/20 to 8/31/20 143,904
Initial CV of B/P 1,030,000
(P1M FV + 30,000 balance of 9/1/20 to 12/31/20 (142,955 x 4/6) 95,303
premium after the effect of BIC)
TOTAL 239,207
Journal entries:
Cash 1,090,000 2. How much is the carrying value of bonds
(1,050,000 + 40,000) payable on Dec. 31, 2020?
B/P 1,000,000
CARRYING VALUE, 12/31/20
CV, 9/1/20 3,176,781
AMORTIZATION (14,697)
9/1/20 to 12/31/20
(22,045 x 4/6) *amort. of premium
kaya dapat deducted

31 at 12%.
TOTAL CARRYING VALUE 3,162,084
On April 1, 2022, Mercury Corporation retired
P2,000,00 bonds at 95 plus accrued interest. The
3. How much is the interest payable on Dec. 31, accounting period is the calendar year and the
2020? company uses the effective interest method of
Accrued interest, 12/31/20 → 165,000 x 4/6 = amortization.
110,000
JOURNAL ENTRY ON DEC. 31, 2020 AMORTIZATION TABLE
Interest expense 110,000 DAT NOMINA EFFECTI AMORTIZ CV OF B/P
E L VE ATION OF
Interest payable 110,000 INTERES INTERES PREMIUM
T (12%) T (10%)
4. How much is the interest expense for the year 1/1/2 - - - 5,851,160
0
2021?
12/31 600,000 585,116 14,884 5,836,276
/20
INTEREST EXPENSE (2021)
12/31 600,000 583,628 16,372 5,819,904
/21
1/1/21 to 2/28/21 47,652
(142,955 x 2/6) 12/31 600,000 581,990 18,010 5,801,894
/22
3/1/21 to 8/31/21 141,963
9/1/21 to 12/31/21 93,951 1. How much is the interest expense for the year
(140,926 x 4/6) 2020? 585,116
2. How much is the carrying value of B/P on
TOTAL 283,566 Dec.31, 2021? 5,819,904
3. How much is the carrying value of the bonds

5. How much is the carrying value of bonds retired on April 1, 2022?
payable on December 31, 2021?
CARRYING VALUE BEFORE RETIREMENT,

CARRYING VALUE, 12/31/21 4/1/22
CV, 9/1/21 3,131,699 CV, 12/31/21 5,819,904
AMORTIZATION (16,049) AMORTIZATION (4,503)

9/1/21 to 12/31/21 1/1/22 to 4/1/22
(24,074 x 4/6) *amort. of premium (18,010 x 3/12)
kaya dapat deducted
TOTAL 5,815,401
TOTAL CARRYING VALUE 3,115,650
CV of BONDS RETIRED, 4/1/22
6. How much is the interest payable on
December 31, 2021?
Accrued interest, 12/31/21 → 165,000 x 4/6 = 5,815,401 x 2,000,000/5,000,000 = 2,326,160
110,000
JOURNAL ENTRY ON DEC. 31, 2021
4. How much is the gain or loss on retirement of
Interest expense 110,000 bond taken to Profit or loss?
Retirement price without accrued interest =
2,000,000 x .95 = 1,900,000
ILLUSTRATION (Retirement of bond with
accrued interest) Accrued interest = 2,000,000 x .12 x 3/12 =
On January 1, 2020, Mercury Corp. issued 20- 60,000
year bonds of P5,000,000 for P5,851,160, to yield
10%. Interest is payable annually every December
nominal interest and the effective
RETIREMENT PRICE 1,900,000
interest becomes wider.
*CARRYING VALUE (2,326,160) ● Trends using the effective interest method
when bonds are sold at premium:
GAIN ON RETIREMENT 426,160 ➔ Interest expense decreases each
period, because the carrying value
also decreases as the premium is
CV of BONDS RETIRED, 4/1/22 amortized.
➔ The amount of the premium
amortization increases each period
*5,815,401 x 2,000,000/5,000,000 = 2,326,160
as the difference between the
nominal interest and the effective
interest becomes wider. each
5. Prepare the journal entry to record the period
retirement of bonds on April 1, 2022?
JOURNAL ENTRY
ILLUSTRATION FOR EFFECTIVE
Bonds payable 2,000,000 INTEREST METHOD OF AMORTIZATION
Premium on B/P 326,160 PREMIUM DISCOUNT
SCENARIO SCENARIO
Interest payable or 60,000
interest expense NOMINAL INTEREST = NOMINAL INTEREST =
FV x semi-annual FV x semi-annual
Cash 1,960,000 interest rate interest rate
(1,900,000 + 60,000)
EFFECTIVE INTEREST EFFECTIVE INTEREST
= Bond carrying value, = Bond carrying value,
Gain on retirement 426,160 beg of period x semi- beg of period x semi-
of bonds annual market rate annual market rate
6. How much is the carrying value of bonds PREMIUM DISCOUNT

AMORTIZATION = (A) - AMORTIZATION = (B) -
payable on December 31, 2022?
(B) (A)
CV of REMAINING BONDS, 12/31/22 Carrying value, end = Carrying value, end =

Bond carrying value, beg Bond carrying value, beg
of period - premium of period + discount
5,801,894 x 3,000,000/5,000,000 = 3,481,136 amortization for the amortization for the
period period
EFFECTIVE INTEREST METHOD CARRYING VALUE OF BONDS

● Under the effective interest method, a PAYABLE
constant interest rate based on the
beginning of the period carrying the amount
PREMIUM
of the bonds is recognized as interest DATE NOMINA EFFECTI AMORTIZA CV OF
expense each period, resulting in unequal L VE TION OF BONDS
INTERES INTERES PREMIUM (CV OF
recorded amounts of interest expense. T T (Nominal BP -
● The effective interest method provides an (FV x NR) (CV of interest - Amortiza
increasing premium or discount bonds x effective tion of
amortization each period. effective interest) premium
rate)
● Trends using the effective interest method
when bonds are sold at discount: xx xx xx xx
➔ Interest expense increases each
period, because the carrying value
also increases as the discount is Face value xx
amortized.
➔ The amount of the discount Premium on B/P xx
amortization increases each period
as the difference between the CV OF B/P xx

(800,000 x 3.9927)
DISCOUNT
DAT NOMINAL EFFECTI AMORTIZA CV OF ISSUE PRICE, 1/1/20 8,638,960
E INTERES VE TION OF BONDS
T INTERES DISCOUNT (CV OF
(FV x NR) T (Nominal BP + Cash 8,638,960
(CV of interest - Amortiza
bonds x effective tion of
B/P 8,000,000
effective interest) discount
rate)
xx xx xx xx
Face value xx DATE NOMINA EFFECTI AMORTIZ CV OF

L VE ATION OF BONDS
INTERES INTERES PREMIUM (CV OF
Discount on B/P (xx) T T (Nominal BP -
(FV x NR) (CV of interest - AMORT.
bonds x effective OF
CV OF B/P xx effective interest) PREMIU
rate) M)
FREQUENTLY ASKED QUESTIONS
1/1/2 - - - 8,638,960
● How much is the issue price of the bonds? 0
● How much is the Interest expense?
● How much is the Amortization of Premium 12/31 800,000 691,117 108,883 8,530,077
or Discount? /20
● How much is the Discount on Bonds
12/31 800,000 682,406 117,594 8,412,483
Payable at the balance sheet date? /21
● How much is the Premium on Bonds
payable at the balance sheet date? 12/31 800,000 672,999 127,001 8,285,482
● How much is the Carrying value of the /22
bonds at the balance sheet date?
12/31 800,000 662,839 137,161 8,148,321
● How much is the Interest payable/accrued /23
Interest at the balance sheet date? 0, if the
balance sheet date = interest payment date 12/31 800,000 651,679 148,321 8,000,000
/24
ILLUSTRATION (TERM BONDS)
On January 1, 2020, Poseidon Company issued a DEC. 31, 2024
5-year, P8,000,000 bond with a stated interest rate
Bonds payable 8,000,000
of 10% payable every December 31. The bonds
were acquired to yield 8%. (Premium) Cash 8,000,000
Annual nominal interest = 8,000,000 x .10 = 2. Prepare the JE to record the nominal interest for
800,000 the year 2020.
Present value factors are: Interest expense 800,000

PV of an annuity of 1 for 5 periods at 8% - 3.9927
PV of 1 for 5 PERIODS AT 8% .6806 Cash 800,000
PVOA of 1 for 10 periods at 10% 3.7908
PV of 1 for 10 periods at 10% .62209
3. Prepare the JE to record the amortization of the
premium for the year 2020.
1. How much is the issue price of the bonds?

Present value of FACE VALUE 5,444,800
(FV x PVSP) Interest expense 108,883
(8,000,000 x .6806)
Present value of INTEREST 3,194,160

(PERIODIC INTEREST x PVOA)

4. How much is the unamortized premium on PV of 1 for 10 periods at 7% .5084
bonds payable at December 31, 2020 and
December 31, 2021? 1. How much is the issue price of the bonds?
Premium on B/P, 1/1/20 638,960 Present value of FACE VALUE 2,033,600

(FV x PVSP)
Amortization of premium-2020 (108,883) (4,000,000 x .5084)
Premium on B/P, 12/31/20 530,077 Present value of INTEREST 1,685,664

(PERIODIC INTEREST x PVOA)
(240,000 x 7.0236)
Premium on B/P, 1/1/20 638,960
ISSUE PRICE, 1/1/20 3,719,264
Amortization of premium-2020 (108,883)
Amortization of premium-2021 (117,5949 Jan. 1, 2020

Cash 3,719,264
Premium on B/P, 12/31/21 412,483
Discount on B/P 280,736
5. How much is the interest expense for the years B/P 4,000,000
2020 and 2021? Int. exp. = CV of bonds x ER
INTEREST EXPENSE (2020): 8,638,960 x 8% x
12/12/ = 691,117 DATE NOMINA EFFECTI AMORTIZ CV OF
INTEREST EXPENSE (2021): 8,530,077 x 8% x L VE ATION BONDS
12/12= 682,406 INTERES INTERES OF (CV OF BP
T T DISCOU + AMORT.
(FV x NR) (CV of NT OF
6. How much is the carrying value of bonds bonds x (Nominal DISCOUNT
payable on December 31, 2020 and December 31, effective interest - )
2021? rate) effective
interest)
6% 7%
Face value, 12/31/20 8,000,000
1/1/2 - - - 3,719,264
Premium on B/P, 12/31/20 530,077 0
CV of B/P, 12/31/20 8,530,077 7/1/2 240,000 260,348 20,348 3,739,612

0
1/1/2 240,000 261,773 21,773 3,761,385

Face value, 12/31/21 8,000,000 1
Premium on B/P, 12/31/20 412,483 7/1/2 240,000 263,297 23,297 3,784,682

1
CV of B/P, 12/31/21 8,412,483
1/1/2 240,000 263,297 24,928 3,809,610
2
ILLUSTRATION (TERM BONDS) 7/1/2 240,000 266,673 26,673 3,836,283

On January 1, 2020, Zeus Company issued a 2
P4,000,000 of 12% bonds to yield 14%. Interest is 1/1/2 240,000 268,540 28,540 3,864,823
payable semi-annually on January 1 and July 1. 3
The bonds mature in five years. Zeus Company
uses the calendar year and the effective interest 7/1/2 240,000 269,538 30,538 3,895,361
method of amortization. 3
1/1/2 240,000 272,675 32,675 3,928,036

Semi-annual nominal interest = 4,000,000 x .06 4
= 240,000 7/1/2 240,000 274,963 34,963 3,962,999
Present value factors are: 4
PV of an annuity of 1 for 5 periods at 14% - 3.4331 1/1/2 240,000 37,410 37,001 4,000,000
PV of 1 for 5 periods at 14% .5194 5
PV of an ord. of 1 for 10 periods at 7% 7.0236
JAN. 1, 2025 5. How much is the interest expense for the years
2020 and 2021? Int. exp. = CV of bonds x ER
INTEREST EXPENSE (2020) = 260,348 +
Cash 4,000,000 261,773 = 522,121
INTEREST EXPENSE (2021) = 263,297 +
264,928 = 528,225
2. Prepare the JE to record the nominal interest for 6. How much is the carrying value of bonds
the year 2020. payable on December 31, 2020 and December 31,
JULY 1, 2020 2021?
FACE VALUE, 12/31/20 4,000,000
Cash 240,000
DEC. 31, 2020 DISCOUNT O B/P, 12/31/20 (238,615)
Interest expense 240,000 CV OF B/P, 12/31/20 3,761,385
Cash 240,000
3. Prepare the JE to record the amortization of the FACE VALUE, 12/31/21 4,000,000
premium for the year 2020.
JULY 1, 2020 DISCOUNT O B/P, 12/31/21 (190,390)
Interest expense 20,348 CV OF B/P, 12/31/21 3,809,610
Discount on B/P 20,348

ILLUSTRATION (SERIAL BONDS)
DEC. 31, 2020 On January 1, 2020, Skycastle Company issued
Interest expense 21,773 serial bonds with face value of P3,000,000 and a
stated rate of 12% payable annually every
Discount on B/P 21,773 December 31. The bond has a price that yields
10%. The bonds mature at an annual installment
of P1,000,000 every December 31. The present
Discount on B/P, 1/1/20 280,736 value of 1 at 10% for one period is 0.91; for two
Amortization of discount-2020 (42,121)
periods is 0.83 and for three periods is 0.75. The
(20,348 + 21,773) present value of an ordinary annuity of 1 at5 10%
for 3 periods is 2.49.
Discount on B/P, 12/31/20 238,615
1. How much is the issue price of the bonds?
Discount on B/P, 1/1/20 280,736

FV x PVOA xx
Amortization of discount-202 (42,121)
PERIODIC INTEREST xx
Amortization of discount-2021 (48,225) x PVSP
(23,297 + 24,928)
ISSUE PRICE xx
Discount on B/P, 12/31/20 190,390
1,000,000 x 2.49 2,490,000

4. How much is the unamortized premium on
bonds payable at December 31, 2020 and 360,000 x .91 327,600
December 31, 2021?
240,000 x .83 199,200
12/31/20 12/31/21 120,000 x .75 90,000
FACE VALUE 4,000,000 4,000,000 ISSUE PRICE, 1/1/20 3,106,800
DISCOUNT ON B/P (238,615) (190,390)
ALTERNATIVE COMPUTATION:
CV OF B/P 3,761,385 3,809,610
FV + PERIODIC INTEREST x xx

PVSP Cash 360,000
3. Prepare the JE to record the amortization of

2020 1,000,000 360,000 1,360,000
(3,000,000 x 12%) premium for the year 2020.
2021 1,000,000 240,000 1,240,000 Premium on bonds 49,320

(2,000,000 x 12%) payable
2022 1,000,000 120,000 1,120,000 Interest expense 49,320
(1,000,000 x 12%)
4. How much is the interest expense for the years

1,360,000 x .91 1,237,600 2020 and 2021?
*INTEREST EXPENSE = CV of Bonds x
1,240,000 x .83 1,029,200 Effective rate
1,120,000 x .75 840,000 INTEREST EXPENSE (2020): 310,680
ISSUE PRICE, 1/1/20 3,106,800
INTEREST EXPENSE(2021): 205,748
5. How much is the carrying value of bonds

JAN 1,2020 payable on December 31, 2020 and December 21,
Cash 3,106,800 2021?
B/P 3,000,000 FV, 12/31/20 2,000,000

(3,000,000 -
1,000,000)
2. Prepare the JE to record the nominal interest for PREMIUM ON B/P, 57,480
the year 2020. 12/31/20
CV OF BONDS 2,057,480
DAT FACE NOMIN EFFEC AMORT CV OF PAYABLE, 12/31/20
E VALU AL TIVE IZATIO BONDS
E INTER INTERE N OF (CV OF BP
EST ST DISCO + AMORT.
(FV x (CV of UNT OF
NR) bonds x (NI - EI) DISCOUNT FV, 12/31/20 1,000,000
ER) Less Face
(2,000,000 -
Value)
1,000,000)
PREMIUM ON B/P, 23, 228

1/1/2 - - - 3,106,800 12/31/21
0
12/31 1,000,0 360,000 310,680 49,320 2,057,480 CV OF BONDS 1,023, 228

/20 00 PAYABLE, 12/31/20
12/31 1,000,0 240,000 205,748 34,252 1,023,228
/21 00
COMPOUND FINANCIAL INSTRUMENT
12/31 1,000,0 120,000 102,323 23,228 0 ● BONDS WITH WARRANTS
/22 00
➔ Bondholders are given the right to
acquire a specified number of
DEC 31, 2020 ordinary res of the issuing
corporation at a GIVEN PRICE
within a certain time period.
Cash 1,000,000 ➔ EQUITY component = SHARE
WARRANTS OUTSTANDING
(SWO)

● CONVERTIBLE BONDS
➔ Bondholders are given the right to Cash xx Cash xx
EXCHANGE their bond holding into B/P xx Discount on xx
ordinary shares or other securities B/P
of the issuing company within a Prem.on B/P xx
specified period of time.
B/P xx
➔ EQUITY component = SHARE Sp-Bond
conversion
xx
PREMIUM - BOND CONVERSION privilege Sp-Bond xx
PRIVILEGE (BCP) conversion
privilege
➔ Convertible bonds give the holders
thereof the right to exchange their
bondholding into ordinary shares or
other securities of the issuing ★ EXERCISE WARRANTS
company within a specified period
of time.
Cash xx
ISSUE PRICE
bifurcation Share warrants outstanding xx
⬋ ⬊ Ordinary share (par or stated value) xx

LIABILITY EQUITY
↓ ↓ Share premium-ordinary xx
(without) (residual amount)
↓ ↓
★ Total Amount ★ SWO (bonds with ★ CONVERSION BONDS
★ Quoted Price WARRANTS)
→ FV x Quoted price ★ BCP (convertible
→ Ex. 101.105, 95, 98 bonds) Bonds payable xx
★ Effective Rate (PV of
FV+ PV of Periodic
Premium on Bonds payable xx
Interest)
SP-Bond conversion privilege xx
ISSUANCE OF BONDS
Discount on Bonds payable xx
★ BONDS WITH WARRANTS Ordinary share (par or stated value) xx
Share premium-ordinary xx
PREMIUM DISCOUNT
EXERCISE CONVERSION
Cash xx Cash xx
WARRANTS BONDS
B/P xx Discount on xx
B/P CASH ↑ 𝖷
Premium on xx
B/P
B/P xx
CV OF B/P 𝖷 ↓
Share xx
warrants Share xx SWO/SP-BCP ↓ ↓
outstanding Warrants
outstanding ORDINARY ↑ ↑
SHARE
CAPITAL
★ CONVERTIBLE BONDS
SP-ORDINARY ↑ ↑
PREMIUM DISCOUNT
ILLUSTRATION
On January 1, 2020, ATHENA Corporation issued
P 5,000,000 of its 10%, 7-year bonds with one
detachable warrant attached to each P 1,000 JOURNAL ENTRY - EXERCISE OF WARRANT
bond. Each warrant provides for the right to DEC 31, 2022
purchase 20 ordinary shares of P15 par value Cash (100,000 shares x 2,000,000
ordinary shares for P 20 each. The market value P20)
of the ordinary share was P25 per share at January
1, 2020. The detachable warrant has a market Share warrants 350,000
price of P70 each and the market value of the outstanding (350,000 x
bonds without warrants attached is 97. The bonds 100%)
were sold at 104.
Ordinary share 1,500,000
(100,000 shares x P15)
On December 31, 2022, all of the warrants were
exercised. Share premium - 850,000
ordinary
Things to consider:
P20 → exercise price or option price 3. How much should be taken to equity on the date
of issuance? 350,000
Issue price = 5,000,000 x 1.04 = 5,200,000 4. How much for the issue price should be reported
as liability? 4,850,000
Number of WARRANTS = **5,000 bonds x 1
5. How much should be credited to the Share
warrant per bond = 5,000 warrants
premium account upon exercise of the warrants?
850,000
**5,000 = P5,000,000 / P1,000
7. Assuming that 60% of the warrants were
(one detachable warrant attached to each P
exercised at a time when the market value of
1,000 bond)
the share is P50, how much should be credited
Number of SHARES = 5,000 warrants x 20 to share in the premium account? 510,000
shares per warrant = 100,000 ordinary shares Things to consider:
*market value of the share is P50 =
IRRELEVANT
1. Prepare the journal entry to record the issuance Cash received should be based on AGREED
of the bonds. PRICE, EXERCISE PRICE OR OPTION PRICE
Hence, P20 will prevail as it is the agreed price.
ISSUE PRICE = 5,200,000
bifurcation
JOURNAL ENTRY - EXERCISE OF WARRANT
⬋ ⬊ DEC 31, 2022
LIABILITY EQUITY
Cash (*60,000 shares x 1,200,000
↓ ↓
P20)
*100,000 shares x 60% =
↓ ↓
60,000 shares
★ 5,000,000 x .97 = ★ 5,200,000 -
4,850,000 4,850,000 = 350,000 Share warrants 210,000
outstanding (350,000 x
60%)
JOURNAL ENTRY - ISSUANCE OF BONDS Ordinary share 900,000
JAN 1, 2020 (60,000 shares x P15)
*Discount on b/p = amount attributable to liability <
the face value Share premium - 510,000
ordinary
Cash 5,200,000
Discount on B/P 150,000 ILLUSTRATION

On January 1, 2020, URANUS Company issued P
5,000,000, 8% convertible bonds at 103. Interest
Share warrants 350,000 is payable annually every December 31 and the
outstanding bonds mature on December 31, 2024. Each P
1,000 bond is convertible into 5 shares of P100 par
value ordinary share. Without the conversion
2. Prepare the journal entry to record the exercise feature, the bonds would have sold to yield 10%.
of the warrants.
On December 31, 2022, after paying the periodic 0
interest, all of the periodic interest, all of the bonds
were converted. 12/31 400,000 462,082 62,082 4,682,902
/20
1. Prepare the journal entry to record the issuance 12/31 400,000 468,290 68,290 4,751,192
of the bonds. /21
Things to consider:
12/31 400,000 475,119 75,119 4,826,311
Issue price = 5,000,000 x 1.04 = 5,150,000 /22
Number of SHARES = **5,000 bonds x 5 shares ↓

per bond = 25,000 ordinary shares CV of bonds converted = 4,826,311 x 100% =
4,826,311
**5,000 = P5,000,000 / P1,000
(one detachable warrant attached to each P JOURNAL ENTRY - CONVERSION OF BONDS
1,000 bond) DEC 31, 2022
ISSUE PRICE = 5,150,000 SP- Bond conversion 529,180

bifurcation privilege
(529,180 x 100%)
⬋ ⬊
LIABILITY EQUITY Discount on B/P 173,689
↓ ↓ (5,000,00 - 4,826,311)
↓ ↓ Ordinary share 2,500,000
★ Effective rate ★ 5,150,000 - (25,000 shares x P100)
PV of FV 3,104,500
4,620,820 = 529,180
Share premium - 2,855,491
(5,000,000 x ordinary
.6209)
PV of 1,516,320 3. How much should be taken to equity on the date

INTEREST
of issuance? 529,180
(400,000 x
3.7908)
4. How much from the issue price should be
Issue price 4,620,820 reported as liability? 4,620,820
(LIABILITY)
5. How much should be credited to share premium
account upon conversion of the bonds?
JOURNAL ENTRY - ISSUANCE OF BONDS 2,855,491
JAN 1, 2020
Cash 5,150,000 6. How much is the gain or loss on conversion
should be reported in profit or loss? 0
Discount on B/P 379,180 Evidences:
(5,000,000 - 4,620,820) Refer to the journal entry on Dec. 31, 2022.
8. Assuming that only P1,000,00 face value of the
SP - Bond conversion 529,180 bonds were converted on Dec. 31, 2022, how
privilege much should be credited to the share premium
account upon conversion? 571,098
2. Prepare the journal entry to record the
conversion of the bonds. 1,000,000 /5,000,000 = 20%
AMORTIZATION TABLE
DAT NOMINA EFFECTI AMORTIZA CV OF BP AMORTIZATION TABLE
E L VE TION OF
DAT NOMINA EFFECTI AMORTIZA CV OF BP
INTERES INTERES DISCOUNT
E L VE TION OF
T T (10%)
INTERES INTERES DISCOUNT
(8%)
T T (10%)
(8%)
1/1/2 - - - 4,620,820

1/1/2 - - - 4,620,820 RETIREMENT OF BONDS
0
12/31 400,000 462,082 62,082 4,682,902 ★ BONDS WITHOUT ★ BONDS WITH

/20 EQUITY COMPONENT EQUITY
→ No bifurcation COMPONENT(i.e.
12/31 400,000 468,290 68,290 4,751,192
/21
→ Gain or loss on convertible bonds)
retirement (Liability) → → Bifurcation
12/31 400,000 475,119 75,119 4,826,311 P/L → Gain or loss on
/22 Retirement
★ LIABILITY → P/L
↓
★ EQUITY → Share
CV of bonds converted =
premium-unexercised
4,826,311 x 20% = 965,262 BCP
JOURNAL ENTRY - CONVERSION OF BONDS

DEC 31, 2022 DATE OF RETIREMENT
Bonds payable (at face 1,000,000
value but not the whole
P5M since P1M lang ang ⬋ ⬊
na-convert) Before maturity date On maturity date
↓ ↓
SP- Bond conversion 105,836 ★ Gain or loss on ★ No gain or loss on
privilege retirement retirement
(529,180 x 20%) → Retirement price < → Retirement price =
or > CV of Bonds CV of Bonds payable
Discount on B/P 34,738 payable
(1,000,00 - 965,262) → GAIN = RP < CV
→ LOSS = RP > CV
Ordinary share 500,000
(*5,000 shares x P100)
*since 20% lang ang na- GAIN OR LOSS ON RETIREMENT OF BONDS
convert, 25,000 x 20% = WITHOUT EQUITY COMPONENT
5,000
LIABILITY (B/P)
Share premium - ordinary 571,098
RETIREMENT PRICE xx
(RP)
RETIREMENT OF BONDS
● The issuing corporation may retire bonds at CARRYING VALUE (CV) (xx)
maturity date or before the maturity date
GAIN OR LOSS xx → P/L
either by redeeming the bonds or
repurchasing them in the open market.
● If bonds are retired at their maturity date, JOURNAL ENTRIES:
any premium or discount will have been Bonds payable xx
completely amortized.
● The retirement is recorded as an ordinary
payment of debt, and no gain or loss is Premium on Bonds payable xx
recognized upon retirement on maturity
date. Loss on retirement of bonds (RP > CV) xx
● When bonds are retired before maturity
date, the ff. must be observed: Discount on Bonds payable xx
➔ The amortization of premium or
Cash (Total Retirement Price) xx
discount must be updated to
determine Gain on retirement of bonds xx
➔ Any accrued interest on the retired
bonds from the recent interest
payment date up date of retirement
must be recorded and paid.

RETIREMENT OF CONVERTIBLE BONDS Discount on Bonds payable xx
Cash (Total Retirement Price) xx

★ BONDS WITHOUT ★ BONDS WITH
EQUITY COMPONENT EQUITY Gain on retirement of bonds (RP < CV) xx
→ No bifurcation COMPONENT(i.e.
→ Gain or loss on convertible bonds) SP-Unexercised BCP (RP<CV) xx
retirement (Liability) → → Bifurcation
P/L → Gain or loss on
Retirement SUMMARY OF RETIREMENT AND
★ LIABILITY → P/L CONVERSION OF BONDS PAYABLE
★ EQUITY → Share
premium-unexercised SCENARIO ACCOUNTING TREATMENT
BCP
Retirement of Gain or loss may be recognized
bonds (Non- on retirement of bonds prior to
ISSUE PRICE convertible maturity.
(Date of Issuance) bonds) No gain or loss on retirement of
bond on maturity.
⬋ ⬊ (Retirement price minus carrying
LIABILITY EQUITY amount = gain loss)
↓ ↓
(without) (residual amount) Retirement of Gain or loss may be recognized
↓ ↓ convertible on retirement of bonds prior to
★ Total Amount ★ BCP (convertible bonds (PFRS ) maturity.
★ Quoted Price bonds) Net increase or decrease in equity
→ FV x Quoted price shall also be computed.
→ Ex. 101.105, 95, 98 No gain or loss on retirement of
★ Effective Rate (PV of bonds on maturity date.
FV + PV of Periodic
Interest)
Conversion of No gain or loss on conversion of
convertible convertible bonds (unless under
GAIN OR LOSS ON RETIREMENT OF bonds induced conversion)
CONVERTIBLE BONDS
Conversion of Gain or loss on conversion may
LIABILITY EQUITY (SP- nonconvertible be recognized (fair value of equity
(B/P) BCP) bonds because instrument (or if not reliably
of equity swap determinable fair value of liability)
RETIREMENT xx xx (IFRIC 19) minus carrying amount of liability
PRICE (RP) + Loss (or gain)
CARRYING (xx) (xx)

VALUE (CV) ILLUSTRATION (RETIREMENT OF BONDS
WITHOUT EQUITY COMPONENT)
GAIN OR xx → P/L xx → EQUITY On January 1, 2020, the Mercury Corporation
LOSS issued 20-year bonds of P5,000,000 for
P5,851,160, to yield 10%. Interest is payable
annually on December 31 at 12%. On December
31, 2022, Mercury Corporation retired 2,000 of its
Bonds payable xx own P1,000 bonds at 95. The accounting period is
the calendar year and the company uses the
Premium on Bonds payable
effective interest method of amortization.
xx
Loss on retirement of bonds (RP > CV) xx 1. How much is the interest expense for the year
2020? 585,116
SP-Bond Conversion privilege xx
AMORTIZATION TABLE
SP-Unexercised on BCP or Retained xx DAT NOMINA EFFECTI AMORTIZA CV OF BP
earnings (RP > CV) E L VE TION OF
INTERES INTERES PREMIUM

T T (10%) CARRYING VALUE (CV) (2,320,758)
(12%)
GAIN OR LOSS 420,758 → P/L
1/1/2 - - - 5,851,160
0
5. How much is the gain or loss on cancellation of
12/31 600,000 585,116 14,884 5,836,276 share premium-bond conversion privilege taken to
/20
Equity? 0 (Walang equity component sa problem)
12/31 600,000 583,628 16,372 5,819,904
/21 6. Prepare the journal entry to record the
retirement of bonds on December 31, 2022.
12/31 600,000 581,990 18,010 5,801,894
/22
JOURNAL ENTRY DECEMBER 31, 2022
Bonds payable (at face 2,000,000
value but not the whole
payable on December 31, 2021? 5,819,904
P5M since P2M lang
ang na-retire)
AMORTIZATION TABLE
DAT NOMINA EFFECTI AMORTIZA CV OF BP Premium on bonds 320,758
E L VE TION OF payable (2,320,758 -
INTERES INTERES PREMIUM 2,000,000)
T T (10%)
(12%)
Cash 1,900,000
1/1/2 - - - 5,851,160
0 Gain on retirement 420,758
of bonds
12/31 600,000 585,116 14,884 5,836,276
/20
12/31 600,000 583,628 16,372 5,819,904 payable after retirement on December 31, 2022?
/21
3,481,136
12/31 600,000 581,990 18,010 5,801,894
/22 Carrying Value 12/31/22 5,801,894
3. How much is the carrying value of the bonds Multiply. Remaining bonds 3,000,000
retired on December 31, 2022? 2,320,758
Divide. 5,000,000
Carrying Value 12/31/22 5,801,894

Carrying Value of Remaining 3,481,136
Multiply. Retired Bonds (2,000 of 2,000,000 Bonds
its own P1,000 bonds)
Divide. 5,000,000 8. How much is the gain or loss of retirement bonds

assuming the bonds were retired on maturity date?
0 No gain or loss on retirement on maturity date
Carrying Value of Bonds 2,320,758 (Retirement price = CV of Bonds payable
Retired
JOURNAL ENTRY ON MATURITY DATE
4. How much is the gain or loss on retirement of Bonds payable 5,000,000
bonds taken to Profit or Loss? 420,758
Cash 5,000,000
GAIN OR LOSS ON RETIREMENT OF BONDS
WITHOUT EQUITY COMPONENT ILLUSTRATION (RETIREMENT OF
CONVERTIBLE BONDS)
LIABILITY (B/P)
On January 1, 2020, Mercury Corporation issued
RETIREMENT PRICE 1,900,000 20-year P5,000,000, 12% convertible bonds at
(2,000,000 x .95) 120. Interest is payable annually every December
31. Without the conversion feature, the bonds
would have sold for P5,851,160 based on a market 12/31 600,000 583,628 16,372 5,819,904
rate of 10%. /21
On December 31, 2022, Mercury Corporation 12/31 600,000 581,990 18,010 5,801,894
/22
retired 2,000 of its own P1,000 bond at 104.
Without the conversion privilege, these bonds
would have sold on this date at 102. The 3. How much is the carrying value of the bonds
accounting period is the calendar year and the retired on December 31, 2022? 2,320,758
company uses the effective interest method of
amortization
Carrying Value 12/31/22 5,801,894
TOTAL ISSUE PRICE = 5,000,000 X 1.20 = Multiply. Retired Bonds (2,000 of 2,000,000
6,000,000
its own P1,000 bonds)
6,000,000 Divide. 5,000,000
⬋ ⬊ Carrying Value of Bonds 2,320,758

LIABILITY EQUITY Retired
↓ ↓
↓ ↓ 4. How much is the gain or loss on retirement of
5,851,160 148,840 bonds taken to Profit or Loss? 280,758
TOTAL RETIREMENT PRICE = 2,000,000 X 1.04

= 2,080,000
2020? 585,116
AMORTIZATION TABLE 2,080,000

E L VE TION OF
⬋ ⬊
T T (10%) LIABILITY EQUITY
(12%) ↓ ↓
1/1/2 - - - 5,851,160 ↓ ↓
0 2,040,000 40,000
(2,000,000 X 1.02) (2,080,000 - 2,040,000)
12/31 600,000 585,116 14,884 5,836,276
/20
GAIN OR LOSS ON RETIREMENT OF
12/31 600,000 583,628 16,372 5,819,904
/21 CONVERTIBLE BONDS
12/31 600,000 581,990 18,010 5,801,894 LIABILITY EQUITY (SP-

/22 (B/P) BCP)
RETIREMENT 2,040,000 40,000

2. How much is the carrying value of bonds PRICE (RP)
payable on December 31, 2021? 5,819,904
CARRYING 2,320,758 59,536
AMORTIZATION TABLE VALUE (CV) (148,840 x 2/5)

E L VE TION OF
GAIN OR 280,758 → 19,536 →
LOSS Gain on Increase in SP-
T T (10%) Retirement to Unexercised
(12%) P/L BCP to
EQUITY
1/1/2 - - - 5,851,160
0
5. How much is the gain or loss on cancellation of
12/31 600,000 585,116 14,884 5,836,276 share premium-bond conversion privilege taken to
/20 Equity? 19,536

TOTAL RETIREMENT PRICE = 2,000,000 X 1.04 7. How much is the carrying value of bonds
= 2,080,000 payable after retirement on December 31, 2022?
3,481,136
2,080,000
Carrying Value 12/31/22 5,801,894
⬋ ⬊ Multiply. Remaining bonds 3,000,000
LIABILITY EQUITY
↓ ↓ Divide. 5,000,000
↓ ↓
2,040,000 40,000 Carrying Value of Remaining 3,481,136
(2,000,000 X 1.02) (2,080,000 - 2,040,000)
Bonds
NOTE: FORMULA IF THE QUESTION IS

GAIN OR LOSS ON RETIREMENT OF CARRYING VALUE OF COMPOUND
CONVERTIBLE BONDS FINANCIAL INSTRUMENT AFTER
RETIREMENT
LIABILITY EQUITY (SP-
(B/P) BCP)
Carrying Value of Remaining 3,481,136
RETIREMENT 2,040,000 40,000 Bonds Payable
PRICE (RP)
Carrying Value of Remaining SP- 89,304
CARRYING 2,320,758 59,536 BCP (148,840 x 3/5)
VALUE (CV) (148,840 x 2/5)
Carrying Value of Compound 3,570,440
GAIN OR 280,758 → 19,536 →
LOSS Gain on Increase in SP-
Financial Instrument AFTER
Retirement to Unexercised Retirement
P/L BCP to
EQUITY
DEBT RESTRUCTURING
● During periods of depressed economic
6. Prepare the journal entry to record the conditions, some debtors experience
retirement of bonds on December 31, 2022. difficulty in meeting their maturing
obligations. For this reason, the creditor
JOURNAL ENTRY DECEMBER 31, 2022 may grant concession to the debtor that it
Bonds payable (at face 2,000,000 would not otherwise grant under normal
value but not the whole conditions.
P5M since P2M lang ● Debt restructuring could either be a legal
ang na-retire) requirement or mutual agreement between
a financially troubled debtor and its
Premium on bonds 320,758 creditors to reorganize its liabilities as a
payable (2,320,758 - more feasible alternative to foreclosure or
2,000,000) liquidation.
● A troubled debt restructuring involves one
SP-Bond conversion 59,536 of three forms:
privilege (148,840 x ➔ Asset swap
2/5) ➔ Equity swap
➔ Modification of debt terms
Cash 2,080,000
ASSET SWAP
Gain on retirement 280,758 ● CV of LIABILITY → GAIN on DEBT
of bonds RESTRUCTURING (P/L)
● FAIR VALUE of ASSET GIVEN UP →
SP-Unexercised 19,536 GAIN on DEBT RESTRUCTURING (P/L)
BCP (59,536 - 40,000) ● CV of ASSET GIVEN UP → GAIN OR
LOSS on DISPOSAL/EXCHANGE/SALE
(P/L)
1,900,000 FAIR GAIN on DEBT
EQUITY SWAP VALUE of RESTRUCTURIN
● CV of LIABILITY → GAIN on debt ASSET G (P/L)
RESTRUCTURING (P/L) GIVEN UP
● SHARES ISSUED/FAIR VALUE of GAIN = 280,000
LIABILITY SETTLED → GAIN on debt
RESTRUCTURING (P/L) 1,690,000 CV of GAIN OR LOSS
● PAR VALUE OF SHARES ISSUED → ASSET on
SHARE PREMIUM (EQUITY) GIVEN UP DISPOSAL/EXCH
ANGE/SALE (P/L)
MODIFICATION OF TERMS
Carrying value of OLD LIABILITY xx GAIN = 210,000
PV of Restructured Future Cash xx**

Outflows 2,180,000 TOTAL AMOUNT
(1,690,000) TAKEN TO P/L =
Difference xx = 490,000 490,000
ILLUSTRATION (EQUITY SWAP)

Present value of FACE VALUE xx MILK CO. is experiencing financial difficulty and is
Present value of INTEREST xx negotiating a troubled debt restructuring with its
creditors to relieve its financial stress. Milk has a
**PV of Restructured Future Cash xx P6,000,000 note payable to Coffee Bank. The
Outflows bank accepted an equity interest from Milk
Company in a form of 200,000 ordinary shares.
*using ORIGINAL EFFECTIVE RATE The fair value of ordinary shares is P24 per share
while the par value of the ordinary shares is P20
DIFFERENCE per share.
1. What is the amount of gain on debt restructuring

⬋ ⬊ to be reported by Milk in its profit or loss as a result
With Substantial Without Substantial of the restructuring? 490,000
Modification of Terms Modification of Terms
↓ ↓
At least 10% of the CV of Less than 10% of the CV 6,000,000 CV of GAIN on DEBT
Old liability of Old liability LIABILITY RESTRUCTURIN
G (P/L)
4,800,000 SHARES
(200,000 x 24) ISSUED/FAI GAIN = 1,200,000
ILLUSTRATION (ASSET SWAP) R VALUE of
BREAD CO. owed P2,000,000 plus P180,000 of LIABILITY
accrued interest to BUtter Bank which is due to be SETTLED
paid on December 31,2017. During 2017, Bread’s
business deteriorated because of a faltering 4,000,000 PAR VALUE SHARE
regional economy. On December 31, 2017, Butter (200,000 x 20) OF PREMIUM
Bank agreed to accept an old machine and cancel SHARES (EQUITY) =
the entire debt. The machine has a cost of ISSUED 800,000
P3,900,000, accumulated depreciation of
P2,210,000, and a fair value of P1,900,000.
6,000,000 TOTAL AMOUNT
1. How much should Bread Company report in its (4,800,000) TAKEN TO P/L =
profit or loss as a result of the financial liability’s = 1,200,000 1,200,000 (hindi
derecognition? pwede i-combine,
since isa lang ang
pumasok sa P/L)
2,180,000 CV of
LIABILITY
*IF TAKEN TO EQUITY = 800,000

ILLUSTRATION (MODIFICATION OF
TERMS) 1. How much is the gain on debt restructuring?
BACON CO. has an overdue 10% note payable to
Cereal Bank of 8,000,000 and recorded accrued Carrying value of OLD LIABILITY 8,800,000
interest of P8,000,000 as of December 31,2017.
On December 31, 2017, Cereal Bank agreed to the PV of Restructured Future Cash (5,791,440)
following restructuring agreement: Outflows **
● Reduce the principal obligation to GAIN ON DEBT 3,008,560

P6,000,000. RESTRUCTURING (34.18%)
With SMOT
● Waive the P800,000 accrued interest.
● Extend the maturity date to December 31,
2019. Present value of FACE VALUE 4,958,400
● Annual interest of 8% of the new principal (6,000,000 x .8264)
is to be paid on December 31, 2018 and
2019. 6,000,000 x 8% = 480,000 Present value of INTEREST 833,040
● The prevailing market interest rate on (480,000 x 1.7355)
December 31, 2017 is 10%.
● Present value of P1 at 10% for 2 periods is **PV of Restructured Future 5,791,440
0.8264. Present value of an ordinary Cash Outflows
annuity of P1 at 10% for 2 periods is
1.7355. *using ORIGINAL EFFECTIVE RATE
● Present value of P1 at 8% for 2 periods is
0.8573. Present value of an ordinary
annuity of P1 at 8% for 2 periods is 1.7833.
MODULE 2 INVENTORIABLE COSTS — these are
INVENTORIES expenditures that are included as part of
● IAS 2 - Inventories: Assets that are inventories then later when sold, become Cost of
➔ Held in the ordinary course of Goods sold.
business. 1. COST OF PURCHASE — Purchase
➔ In the process of production for price/invoice price of the goods, import
such sale. duties, transport and other costs less trade
discounts and other rebates
➔ In the form of raw materials to be
2. COST OF CONVERSION — All costs
consumed in the production
necessary to convert raw materials into
princess or in rendering of services.
goods that are in saleable form (e.g. direct
● It encompasses:
labor, factory overhead of a manufacturing
➔ Goods purchased and held for entity).
resale. 3. COST OF INVENTORIES OF A SERVICE
➔ Finished goods produced. PROVIDER — includes labor and other
➔ Work-in-progress being produced costs of personnel directly engaged in
by the enterprise. providing the service and directly
➔ Materials and supplies awaiting attributable overhead.
production. 4. COST OF AGRICULTURAL PRODUCE
➔ Cost of service (in the case of HARVESTED FROM BIOLOGICAL
service providers). ASSETS (IAS 41) — Fair value at the point
● The nature of the entity determines the of harvest less cost to sell. Example of a
classification or description of the biological asset is a sheep; its agricultural
inventory. produce is wool.
● Manufacturing entity: (1) Raw materials 5. DIRECTLY ATTRIBUTABLE COSTS —
inventory; (2) Work-in-process inventory; All other costs necessary to bring an asset
(3) Finished goods inventory; (4) Supplies to its present location and condition (e.g.
or factory supplies. insurance of inventories while in transit).
● Merchandising entity: “Merchandise
Inventory” - buying and selling goods in the EXCLUSIONS FROM INVENTORIABLE COST
same form. 1. ABNORMAL SPOILAGE/WASTAGE

2. STORAGE COSTS (UNLESS ➔ Legally speaking, the ownership of
NECESSARY AS A FURTHER STEP IN the goods on goods on installment
THE PRODUCTION PROCESS). will only transfer from the seller to
3. ADMINISTRATIVE OVERHEAD the buyer upon payment of full
4. SELLING COSTS invoice price. However, certain
5. SALES AND GENERAL accounting procedures allow for the
ADMINISTRATIVE COSTS recognition of the sale on the part of
6. PROFIT MARGINS OR NON- the seller and purchase on the part
ATTRIBUTABLE OVERHEAD. of the buyer. An example would be
7. FINANCING ELEMENT FROM IFRS 15 — Revenue from
DEFERRED PAYMENT PLANS Contracts with Customers. This the
8. BORROWING COSTS only exception to the legal
ownership rule where the economic
WHAT GOODS INCLUDIBLE AS INVENTORY? substance prevails over its legal
● Generally, when an entity has economic form.
control over the goods. ● Maritime shipping terms:
● Economic control = Legal title over the ➔ FAS (Free alongside)
goods. ➔ CIF (Cost, Insurance, and Freight)
➔ However, legal title must not be ➔ Ex-ship – seller bears/retains
confused with physical possession. costs/risks until unloaded
Having the physical possession of
the goods does not necessarily (The following table may help describe which
mean that there is a legal title as inventories are excluded or included in the books
there may be arrangements that of an entity).
may indicate who has ownership of
the goods (e.g. consignment
arrangement – a consignor (has the ITEM TREATMENT
legal title) who transfers the goods
to another entity called consignee 1. Goods in-transit, - Included (if buyer)
(has the physical possession) who FOB Shipping Point - Excluded (if seller)
is contracted to sell the goods for
commission. 2. Goods in-transit, - Excluded (if buyer)
● In-transit goods – transfer of legal title FOB Destination - Included (if seller)
depends on the freight terms.
3. Goods purchased, - Included in the
➔ FOB Shipping point – Buyer is FAS (Free Alongside) inventory of the buyer
legally required to pay for the upon physical
freight. 4. Goods purchase, possession of the
➔ FOB Destination – Seller is legally CIF (Cost. Freight, common carrier.
required to pay for the freight. Insurance)
➔ Freight collect – Freight is actually
paid by the buyer (e.g. Freight-In). 5. Consigned goods - Included (if
➔ Freight prepaid – Freight is actually consignor)
paid by the seller (e.g. Freight-out - - Excluded (if
a selling expense). consignee)
● Consigned goods — The consignor
(owner) transfers the goods physically to 6. Segregated goods - If goods are
the consignee (agent) who then sells the manufactured
inventories. according to customer
specification, seller will
➔ The consignor retains the risks and
exclude the item.
rewards over the goods so he
- If goods are
retains ownership of the goods.
customarily
Whereas, the consignee, although
manufactured (e.g.
has the physical possession, does
special edition items),
not have legal ownership of the
the seller will include
goods.
the item.
● Goods on installment — The buyer is the
owner of goods while the seller recognizes 7. Installment Sales - Included (if buyer)
the sale.
- Excluded (if seller) Perpetual Inventory System
8. Goods in the hands - Included

of Sales Persons, Inventory xx
Customers for
Accounts Payable xx
approval, others for
storage, processing or
shipment 2. To record PRAs/PDs
9. Goods sold with - Included Periodic Inventory System

buyback arrangement
Accounts Payable xx
10. Goods subject to - If returns are
refund predictable, excluded. PRA xx
- If returns are
unpredictable, PD xx
included.
Perpetual Inventory System

INVENTORY SYSTEMS
Accounts Payable xx
PERIODIC PERPETUAL Inventory xx
INVENTORY INVENTORY
SYSTEM SYSTEM
3. To record Sales
Also known as the Maintains a
Periodic Inventory System
physical system. continuous record of
inventory – Stock
Cards. Accounts Receivable/Cash xx
Does not keep a Used to items with Sales xx

continuous record of small quantities but
inventory. high unit costs (e.g.
jewelries, cars) – more Perpetual Inventory System
effective management
Uses nominal - Accounts Receivable/Cash xx

accounts such as
Sales xx
Purchases, PRAs, and
PDs.
Inventories – small -
peso investments (e.g. COS xx
groceries)
Inventory xx
PRO FORMA ENTRIES
Transaction 4. To record SRAs/SDs
1. Record Purchases Periodic Inventory System
Periodic Inventory System
SRA xx
Purchases xx
SD xx
Freight-In xx
Accounts Receivable xx
Accounts Payable xx

● For items which are not ordinarily
Perpetual Inventory System
interchangeable.
● The only inventory costing that follows the
SRA xx physical flow of goods.
● Proper matching of Sales and CGS is
SD xx achieved.
Accounts Receivable xx FIFO
● Assumes that the goods first purchased are
the ones first sold.
● CGS is based on OLDER COSTS while
Inventory xx Ending Inventory is based on RECENT
COSTS.
COS xx ● No proper matching of Sales with CGS
because current Sales are matched with
old CGS.
5. AJE at year-end to close nominal accounts
● In periods of rising prices: (1) Ending
Periodic Inventory System inventory is high; (2) CGS is low and; (3) NI
and GP are high.
● In periods of declining prices: (1) Ending
Inventory, ending xx
inventory is low; (2) CGS is high and; (3) NI
COS xx and GP are low.
PRA xx SIMPLE AVERAGE

● CGS and EI is determined by an average
PD xx cost per unit.
● TGAS in Pesos / TGAS in units = Ave. Unit
Inventory, beginning xx Cost
● Has a stabilizing effect on NI and GP.
Freight-In xx ● Ave. Unit cost x Number of sold units =
CGS
Purchases xx ● Ave. Unit Cost x Number of unsold units =
Ending Inventory
Perpetual Inventory System WEIGHTED AVERAGE
● Require re-computation of unit cost after
NONE every purchase.
● Unit cost is unaffected by Sales.
● Has a stabilizing effect on NI and GP.
COST FORMULAS/INVENTORY COST-FLOW SUBSEQUENT MEASUREMENT AFTER

ASSUMPTIONS INITIAL RECOGNITION
A) Specific Identification Inventories are subsequently measured at the
B) FIFO (First-in, First-out) LOWER OF COST and NRV (NET REALIZABLE
C) Simple Average (Periodic) VALUE).
D) Moving Average (Perpetual)
COST NET REALIZABLE
Under inventory cost flow assumptions, the VALUE
determination of which should be expensed (Cost
of Goods Sold) and which should be considered as Applying any of the Defined as selling
asset (Ending Inventory), is necessary. The Total cost formulas such as price less cost to sell
Goods Available for Sale (Beginning Inventory + (1) Specific and cost to complete.
Net Purchases) is split between CGS and EI. Identification; (2)
FIFO; (3) Weighted
Inventory cost formulas are also known as COST Average and; (4)
FLOW ASSUMPTION. Moving Average.
SPECIFIC IDENTIFICATION

● According to IAS 2, inventories may not be errors that correct themselves even without
recoverable if: the entity doing anything at all.
➔ Inventories are damaged.
➔ Wholly/Partially obsolete. THE RELATIONSHIP OF THE FF. ITEMS WITH
➔ If selling prices have declined. REGARD TO CGS, GP, AND NI:
➔ If related costs to sell and costs to
complete have increased. ITEM CGS GP NI
● Writing down of inventories to the lower of
cost and NRV is consistent with the view Beg. Direct Inverse Inverse
that assets should not be carried in the Inventory
books in excess of amounts expected to be
realized from the asset through sale or use. Net Direct Inverse Inverse
● Inventories are written down to NRV on an Purchase
item-by-item basis, in some circumstances, s
it is appropriate to group similar or related
items. End. Inverse Direct Direct
● Not appropriate to write down inventories Inventory
based on their classifications (e.g. Finished
Net Sales Inverse Direct Direct
goods inventory, Work-in-process
inventory, Raw materials inventory) or
based on particular industry or ● If the beginning inventory (or purchases) is
geographical segment. overstated, the effect is that the cost of
● NRV estimates are based on the most goods sold will be overstated (direct
reliable evidence at the time of estimation. relationship). Consequently. gross profit
Usually price fluctuations and purpose for and net income will be understated (inverse
which inventory is held are taken into relationship).
consideration for NRV estimates.
PURCHASE COMMITMENTS
There are 2 methods to account for inventory write- ● Purchase commitments are contracts
downs: between the company and its supplier to
purchase inventories in a future period at
an agreed-upon unit price and quantity.
DIRECT METHOD ALLOWANCE
● The purpose of entering into a purchase
METHOD
commitment contract is to (1) lock-in prices
Also known as CGS Also known as the and; (2) ensure sufficient quantities for
method “Loss Method”. delivery.
● A purchase commitment can be
Any effects of loss or Inventories are CANCELABLE OR NON-CANCELABLE.
recovery from recorded at COST.
inventory write-downs CANCELABLE NON-CANCELABLE
are included in the
CGS. No loss or recovery is Loss from purchase
recognized in the commitment is
Inventories are directly Any effects of loss and books for purchase recognized in the
recorded at the recovery from commitments and no books if it is probable,
LCNRV. inventory write-downs required journal entries material and can be
are accounted for except for the actual reasonably estimated.
separately. purchase of A loss (loss from
inventories. Purchase
Beginning Inventory Uses a valuation commitment) and a
and Ending Inventory account “Allowance for liability account
are directly at the lower Inventory Write-down” (Estimated Liability for
of cost and NRV. Purchase
Commitment) is
CORRECTION OF INVENTORY ERRORS recognized.
● Corrections of inventory errors are ● Loss from Purchase Commitments is
classified as counter-balancing errors - reported as Other Expenses while
Estimated Liability for Purchase
Commitments is reported as Current bring the new selling price below
Liability. the original selling price; and
● Any reversal of loss or recovery from cancellation of increase of selling
purchase commitment is limited only up to price.
the amount of loss previously recognized. ➔ Mark-down – decrease in selling
price.
INVENTORY ESTIMATION METHODS ➔ Mark-down cancellations –
● When inventories are not possible to increase in selling price, which
physically count because: does not bring the new selling price
➔ In-transit above the original selling price.
➔ Damaged by catastrophes (flood, ➔ Net mark-up – mark-up less mark-
fire, theft). up cancellations
➔ To present CGS and Ending ➔ Net mark-down – mark-down less
Inventory in interim financial mark-down cancellations
statements where physical count is
not an option or cannot be
completed or validate inventory There are 3 approaches to the Retail Inventory
figures presented in interim Method:
financial statements. 1. Conservative/Conventional/LCNRV
There are 2 inventory estimation methods: approach – Mark-downs and Mark-down
cancellations are ignored in the
GROSS PROFIT RETAIL INVENTORY computation of COST-TO-RETAIL RATIO.
METHOD METHOD 2. Average Cost approach – mark-ups,
mark-up cancellations, mark-down and
Based on the Used in the retail mark-down cancellations are taken into
assumed relationship industry for measuring consideration
of Gross Profit and large quantities of 3. FIFO cost – same with average cost but
Sales or Gross Profit rapidly changing beginning inventor is ignored in the
and CGS. items. computation of COST-TO-RETAIL RATIO.
Depends heavily on Used if the gross profit The only difference of the 3 approaches with each
the accuracy of the method becomes other is the computation of COST-TO-RETAIL
GP percentage. impractical. RATIO.
Cost Retail
GROSS PROFIT METHOD
● Important points in Gross Profit Method: Beginning inventory xx xx
➔ PRAs and PDs are taken into
Purchases xx xx
consideration.
➔ Only Sales returns are taken into Purchase returns (xx) (xx)
consideration. Sales DIscount and
Sales Allowance are excluded Purchase allowances (xx)
because they do not represent the
physical flow of goods. THey are Purchase discounts (xx)
only taken into consideration if: (1)
they become significant in amount Freight-in xx
and; (2) thay are incorporated in
setting the selling price. Mark-ups xx
RETAIL INVENTORY METHOD Mark-up cancellation (xx)

● Important points in Retail Inventory
Mark-downs (xx)
Method:
➔ Retail Price – original selling price Mark-down cancellation xx
at which goods are sold.
➔ Mark-up – increase in selling price. Dept. Transfer-In xx xx
➔ Mark-up cancellations – decrease
in selling price, which does not Dept. Transfer-out (xx) (xx)

Abnormal losses (xx) (xx) Employee Discounts (xx)
TGAS xx xx Ending Inventory at xx

retail
Less:
x Cost-to-retail ratio xx
Sales (xx)
Ending inventory at cost xx
Sales Allowances/ DC
(Ignored)
COST-TO-RETAIL RATIO = TGAS at cost
Normal Losses (xx)
MODULE 3 6. Professional fees.

PROPERTY, PLANT AND EQUIPMENT ● Not part of the cost of PPE:
1. Costs of opening a new facility.
NATURE AND DEFINITION 2. Costs of introducing new
● According to IAS 16, PPE are: products/services.
➔ Tangible assets held by the entity 3. Conducting business in a new
for the production of goods and location with a new customer.
services, for rental to others or for 4. Administrative and general
administrative purposes. overhead costs.
➔ Expected to be used for more than
SPECIFIC ITEMS OF PPE
12 months.
● LAND
● This includes:
➔ Every cost NECESSARY to acquire
➔ Properties not subject to
the land is capitalizable.
depreciation (such as land).
➔ Every PERMANENT enhancement
➔ Properties subject to depreciation
is considered part of the cost of
(such as building, machinery or
Land.
equipment).
● LAND IMPROVEMENT
➔ Properties subject to depletion
➔ Temporary enhancements to the
(such as wasting assets like oil
land or within the land.
deposits, minerals).
➔ Landscaping, fountains, sidewalks,
RECOGNITION CRITERIA AND INITIAL parking lots and others are
MEASUREMENT examples of land improvements,
● Initially measured at COST: thus requiring maintenance and
1. Purchase price, import duties and must be replaced.
other non-refundable taxes, LESS ● BUILDINGS
any trade and cash discounts ➔ Every cost NECESSARY to bring or
applicable. acquire the building and to prepare
2. Directly attributable to costs (which it for its intended use.
are necessary to bring the PPE to ➔ Immovable expenditures are
its present location and condition). considered as part of building
3. Dismantling costs (cost of removing accounts.
the item of PPE, DISCOUNTED at ➔ Movable expenditures will be part of
its present value using applicable “building improvements”.
interest rate). ● LEASEHOLD IMPROVEMENT
● Directly attributable costs include: ➔ Improvements to the leased asset.
1. Cost of employee benefits arising ● EQUIPMENT
directly from ➔ Includes delivery equipment, office
construction/acquisition of PPE. equipment and furniture and
2. Cost of site preparation (E.g. land fixtures.
with old dilapidated buildings to be ● NATURAL RESOURCES
removed). ➔ Also called “WASTING ASSETS”.
3. Initial delivery and handling costs.
➔ Costs include the price paid to
4. Installation and assembly costs.
acquire the rights to explore and
5. Cost of testing.
extract resources.
● BEARER PLANTS
Cash AN
➔ A living plant that is used in the
production or supply of agricultural Equipment DC
produce.
➔ It is expected to bear produce for
more than one period, and with a NET METHOD
remote likelihood of being sold as
agricultural produce except for
incidental scrap sales. A/P AN
Cash AN
ACQUISITION METHODS OF PPE
1. CASH BASIS/LUMP SUM/BASKET
PRICE 3. To record payment outside the discount
➔ Acquisition of items of PPE in a period.
single price or “basket” price. GROSS METHOD
➔ Lump Sum price - relatively lower
compared to acquiring the same
PPE one by one. A/P AG
➔ Relative fair value method - to PD Lost DC
allocate the lump sum price to the
different items of PPE. Cash AG
➔ Directly attributable cost - allocated
in full to the PPE without the need Equipment DC
to use the relative fair value
method.
2. ON ACCOUNT WITH AVAILABLE CASH NET METHOD
DISCOUNTS
➔ The cost of PPE is the CASH A/P AN
PRICE EQUIVALENT - Purchase
price less available cash discount PD Lost DC
(whether taken or not).
➔ GROSS METHOD or NET Cash AG
METHOD
3. INSTALLMENT BASIS/DEFERRED
PRO-FORMA ENTRIES PAYMENT PLANS
1. To record purchase of PPE.
➔ The cost of PPE under deferred
GROSS METHOD payment basis the CASH PRICE
EQUIVALENT.
Equipment AG ➔ If the cash price equivalent is not
available, the cost of PPE shall be
A/P AG the present value of all future cash
flows discounted at the prevailing
interest rate.
NET METHOD ➔ If the PPE is offered at cash price
and installment price, the initial cost
is the cash price. Any difference
Equipment AN would be interest expense
amortized over the period.
A/P AN
4. ISSUANCE OF EQUITY/DEBT
SECURITIES
2. To record payment within the discount ➔ Acquisition of PPE through
period. issuance of equity securities are
GROSS METHOD under IFRS
5. DONATION
➔ If PPE is acquired through
A/P AG donation, the cost of the PPE shall
be the FV at the time of donation.
➔ May come from: - “Income/Gain from
1. SHAREHOLDERS Donation”.
a. If shareholders donate an
item of PPE, the cost of the If there are no conditions for
item shall be recorded at its the donation
fair value at the time of
donation and there will be a PPE xx
corresponding increase in (Building/Land/Equ
the share premium - ipment)
donation.
b. If there are necessary Gain/Income xx
expenses in connection to from Donation
the donated PPE item, the
share premium - donation
account shall be decreased. If there are conditions for
Any excess shall be the donation
recorded as expense.
PPE xx
(Building/Land/Equ
Upon donation from ipment)
shareholders.
Unearned xx
PPE xx Income Donation
(Building/Land/Equ
ipment)
After the conditions are met
SP - Donation xx
Unearned Income xx
Payment of necessary Donation
expenses.
Gain/Income xx
SP - Donation xx from Donation
Cash xx
3. GOVERNMENT
a. Accounting for donation
2. NON- from governmental units is
SHAREHOLDERS/NGOS within the scope of IAS 20
a. If NGOs or non- Government Grants.
shareholders donate an b. The item of PPE shall be
item of PPE and there is no recorded at the fair value at
condition or restriction to the time of donation.
observe, the item of PPE c. Grants relating to
shall be recorded at its fair depreciable assets are
value with a corresponding recognized as income over
increase in an income the periods benefited and in
account “Income/Gain from proportion in which
Donation”. depreciation expense on
b. If there is a condition or those assets were
restriction, the item of PPE recognized.
shall be recorded at its fair d. Grants relating to non-
value, and the entity shall depreciable assets, such as
recognize a liability account Land, usually entail a
- “Unearned Income from condition to construct.
Donation”. Once the Income will be recognized
condition or restriction has over the periods, which bear
been observed, an income the cost of meeting the
account shall be recognized obligation.

e. FS disclosures related to extent that it is regarded as an
IAS 20 - Government Grant: adjustment to the interest cost.
● Accounting policy 4. Qualifying assets - An asset
adopted for that takes a substantial period
government grant, of time to get ready for the
including the method of intended use or sale.
presentation adopted Examples include:
in the FS (deferred ● Manufacturing plants.
income or deduction in ● Power generation
the cost of asset). facilities.
● The nature and extent ● Intangible assets.
of government grant ● Investment properties.
recognized in the FS ➔ If the borrowing is directly
and an indication of attributable to the acquisition,
other forms of construction or production of the
government assistance qualifying asset - borrowing cost
from which the entity shall be capitalized as cost of the
benefited. asset.
● Unfulfilled conditions ➔ All other borrowing costs shall be
and other expensed as incurred (borrowings
contingencies are not directly attributable to the
attaching to qualifying asset).
government assistance ➔ A qualifying asset can be financed
that has been by:
recognized. 1. Specific borrowings
6. SELF-CONSTRUCTION 2. General borrowings
➔ Cost of a self-constructed asset is 3. Combination
determined using the same ➔ IAS 23 provides that if funds are
principles as for an acquired asset. borrowed specifically for the
➔ Constructing for own use rather purpose of acquiring a qualifying
than buying one that is ready for asset, the amount of capitalizable
use. borrowing costs is the actual
➔ Any internal profits are eliminated in borrowings less any investment
arriving at the cost of the asset. income from the temporary
➔ Abnormal wastage of materials, placement of those borrowings.
labors or overhead - not part of the ➔ IAS 23 provides that if funds are
cost of asset. borrowed generally and used partly
➔ Cost includes: for acquiring the qualifying asset,
a. Direct materials; the amount of capitalizable
b. Direct labor; and borrowing cost is the lower of:
c. Indirect cost and incremental 1. Weighted ave. accumulated
overhead specifically expenditure (WAAE) x
identifiable or traceable to the weighted ave. interest rate
construction. (WAIR)
➔ Borrowing costs is also another 2. Actual interest expense
issue in self-constructed assets. ➔ WAIR = Annual borrowing cost /
➔ Borrowing costs (IAS 23) - Interest Total General Borrowings
and other costs that an entity incurs ➔ Interest income - not deducted.
in connection with borrowing of ➔ Commencement of Capitalization:
funds which includesL 1. When the entity incurs
1. Interest Expenses calculated expenditures for the asset.
using the effective interest 2. When the entity incurs
method. borrowing costs.
2. Finance charge with respect to 3. When the entity undertakes
a finance lease. activities necessary to prepare
3. Exchange difference arising the asset for the intended use
from FC borrowing to the or sale.
➔ Activities necessary to prepare:
1. Encompass more than determinable, the asset is
physical recognized at its CARRYING
preparation/construction of the VALUE.
asset. ➔ An exchange is said to be with
2. Technical, administrative, commercial substance if:
drawing plans, obtaining 1. The configuration of the cash
building permit - activities flows (risk, timing and amount)
necessary. of the asset received differs
3. Merely holding the assets - not from the configuration of the
qualified for capitalization. cash flows of the asset
➔ Suspension of capitalization: transferred.
1. Suspended during extended 2. The entity-specific value of the
periods where there is not entity’s operations affected by
active development of the the transaction changes as a
qualifying asset. result of the exchange.
2. Temporary delay - not 3. Difference of (1) and (2) is
suspended. significant relative to the FV of
➔ Cessation of capitalization: the assets exchanged.
1. All activities to prepare the ➔ Deemed to ALWAYS HAVE A FAIR
qualifying asset are TRANSACTION
substantially complete. ➔ Commercial substance - event or
2. Ready for intended use or sale. transaction causing the cash flows
3. Physical construction of assets of the entity to change significantly
is complete. by reason of the exchange.
➔ FS Disclosures related to ➔ Entity-specific value - the PV of the
Borrowing Costs: cash flows an entity expects to arise
1. The amount of borrowing costs from the continuing use of an asset
capitalized. and from the disposal at the end of
2. The capitalization rate used to it
determine the amount of
borrowing costs eligible for DEPRECIATION
capitalization. ● It is the process of allocating the
7. FINANCE LEASE depreciable amount of an asset over its
➔ Assets are leased from a lessor useful life in a systematic and rational
under a lease contract. manner.
➔ Leases (IFRS 16) - A contract or a ● Not valuation but cost allocation
part of a contract that conveys the ● It may be part of COGM or Operating
right to use the underlying asset for Expense
a period of time in exchange for a ● Each part of an item of property, plant, and
consideration. equipment with a cost that is significant in
➔ Lessee recognizes the Right-of-use relation to the total cost of the item shall be
- which is part of PPE. depreciated separately.
8. EXCHANGE OF NON-MONETARY
ASSET FACTORS INVOLVED IN THE DEPRECIATION
➔ Items of PPE can be acquired by: PROCESS
1. Exchange of Non-monetary 1. DEPRECIABLE COST
assets or; ➔ Cost of the asset (or any amount
2. Exchange of both Non- substituted for cost), less the
Monetary and Monetary residual value.
Assets 2. RESIDUAL VALUE OR SALVAGE
➔ IAS 16 says that the cost of PPE in VALUE OR SCRAP VALUE
exchange for a non-monetary or a ➔ is the amount that an entity would
combination of monetary and non- currently obtain from disposal of
monetary shall be measured at the asset, after deducting the
FAIR VALUE. estimated costs of disposals, if the
➔ If the exchange lacks commercial asset were already of the age and
substance or the FV of the asset in the condition expected at the
given or received is not end of its useful life.
3. ESTIMATED USEFUL LIFE ➔ Annual Rate = UL / 100%
➔ the period over which an asset is ➔ Depreciation: passage of time
expected to be available for use rather than function of usage
by an entity or the number of ➔ Most widely used because of
production or similar units expected simplicity
to be obtained from the asset by an
entity. 𝐶𝑜𝑠𝑡 (𝑜𝑟 𝑅𝑒𝑣𝑎𝑙𝑢𝑒𝑑 𝐴𝑚𝑜𝑢𝑛𝑡) − 𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑉𝑎𝑙𝑢𝑒
➔ may be expressed as time periods, 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑈𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒
units of output or production, and
service hours/working hours. b. Composite/Group Method
➔ large entities with many depreciable
THE FOLLOWING FACTORS TO BE assets, grouping them together as if
CONSIDERED IN DETERMINING THE they are a single asset
USEFUL LIFE OF AN ASSET
➔ Composite Method: dissimilar
1. Physical Factors
assets
➔ the expected usage of the
➔ Group Method: similar assets
asset by the enterprise
➔ same accounting procedures
➔ the expected physical wear
and tear ➔ composite life and composite rate
are the basis of depreciation
➔ passage of time
2. Functional or Economic Factor
➔ technical obsolescence Composite life:
➔ inadequacy
𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
➔ legal or similar limits on the 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡
use of the asset
4. THE ASSET’S PATTERN OF USE Composite rate:
𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛
RECOGNITION OF DEPRECIATION
● An item of property, plant, and equipment
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡𝑠
is depreciated over a useful life and such
depreciation is recognized as an expense, Depreciation Expense:
unless included in the carrying amount of 𝐶𝑜𝑚𝑝𝑜𝑠𝑖𝑡𝑒 𝑟𝑎𝑡𝑒 𝑥 𝑡𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡𝑠
another asset, as in inventories.
● The depreciation of an asset begins when Accounting Procedures:
it is available for use. 1. Depreciation - reported in a
● The depreciation of an asset ceases when single AD account
an asset is derecognized or reclassified 2. DepEx = Composite rate x
as held for sale. total cost of the assets in a
● Depreciation is recognized even if the fair group
value of the asset exceeds its carrying 3. Retirement - no gain or loss
amount, as long as the residual value does (cannot be specifically
not exceed the carrying amount. attributed to any asset in the
group
DEPRECIATION METHODS 4. Replacement - recorded by
● reflects the expected pattern in which the debiting the asset and
future economic benefits from the asset will crediting other appropriate
flow to the entity. account
● Methods, useful life, and residual value are
reviewed at least year-end if expectation 2. Accelerated Method
changes. a. Sum-of-the-years’ digits method
● Changes in methods, useful life, and
𝐸𝑈𝐿,𝑏𝑒𝑔 𝑦𝑒𝑎𝑟
residual value are changes in accounting 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝐴𝑚𝑜𝑢𝑛𝑡 𝑥
𝑆𝑌𝐷
estimates. 𝑛 𝑥 (𝑛+1)
𝑆𝑢𝑚 𝑜𝑓 𝑡ℎ𝑒 𝑦𝑒𝑎𝑟𝑠′ 𝑑𝑖𝑔𝑖𝑡 =
● Carrying value at time of change 2
TIME FACTOR METHODS where:

1. Uniform Charge Method n = life in years
a. Straight Line Method
b. Double-declining balance method ➔ increase in the capacity of the asset
➔ extension of useful life
2 ➔ improvement of the quality of the
𝑅𝑎𝑡𝑒 = output; and
𝑛
𝐷𝑒𝑝𝐸𝑥 = 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 𝑥 𝑅𝑎𝑡𝑒 ➔ increase in the asset’s efficiency
● In certain circumstances, an entity
c. 150% declining balance method recognizes in the carrying amount of an
item of property, plant, and equipment the
1.5 cost of a replacement of a major part of the
𝑅𝑎𝑡𝑒 = item, when such is a case:
𝑛
𝐷𝑒𝑝𝐸𝑥 = 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑣𝑎𝑙𝑢𝑒 𝑥 𝑅𝑎𝑡𝑒 ➔ the entity recognizes first the
carrying amount of the replaced
part, whether or not such part is
NOTE: depreciated separately.
➔ higher depreciation on the earlier years, ➔ if it is not practicable for an entity to
lowest depreciation in the later years determine the carrying amount of
➔ newer assets provide more revenue in the the replaced part, it may use the
earlier years than in later years cost of the replacement.
➔ repairs should be allocated over the useful ● The entity will derecognize the major part
life of an asset on a systematic basis, replaced and:
repairs and depreciation tend to equalize ➔ if the entity can separately identify
each other the cost of the replaced part, it will
be derecognized using its related
ACTIVITY- OR USE-FACTOR METHOD acquisition cost alongside with its
1. Service-hours method accumulated depreciation.
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝑎𝑚𝑜𝑢𝑛𝑡 ➔ if the entity finds it impractical to
𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑒 ℎ𝑜𝑢𝑟𝑠 separately identify the cost of the
replaced part, the cost of the new
part will be used as basis for
2. Units-of-output method
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑏𝑙𝑒 𝑎𝑚𝑜𝑢𝑛𝑡 derecognizing the old part and as
𝑇𝑜𝑡𝑎𝑙 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 well as the related accumulated
NOTE: depreciation
➔ activity method uses function of use rather NOTE:
than passage of time ➔ Expenditures that result from accidents,
➔ depreciation is based on usage neglect, intentional abuse, and theft are
➔ may be difficult to estimate the total number recognized as losses
of units or hours ➔ Normal repairs and maintenance merely
restore and maintain the asset to a fit
condition and are, therefore. recognized as
EXPENDITURES AFTER INITIAL
an expense when incurred.
RECOGNITION
● Expenditures incurred subsequent to
acquisition of property, plant, and CAPITAL OUTRIGHT
equipment are treated as capital EXPENDITURES EXPENSE
expenditures, only when the recognition
criteria for an asset are met. Otherwise, the Probable future No future benefit
expenditure shall be charged to expense. economic benefits will foreseen from the
● Subsequent expenditures on property, flow to the in enterprise expenditure
plant, and equipment are only recognized
as an asset when it is probable that future Improves the condition
economic benefits associated with the item of the asset (increased Does not increase the
will flow to the enterprise and the the future economic future benefits
expenditures significantly improves the benefit) produced by the asset
condition of the asset beyond its original
assessed standard of performance. Maintains only the
● Expenditures that would result to any of the existing level of
following increase in economic benefits are performance of the
capitalized:
asset
ACCOUNTING PROCEDURES FOR
REVALUATION
MEASUREMENT AFTER INITIAL ➔ an INCREASE in the carrying
RECOGNITION amount of the asset as a result of
COST MODEL revaluation is credited to the OCI
● A class of property, plant and equipment and accumulated in equity under
shall be carried in the statement of financial the heading of REVALUATION
position at: SURPLUS
➔ Cost less accumulated ◆ The increase shall be
depreciation and any accumulated recognized in profit or loss
impairment losses to the extent that it reverses
a revelation decrease of the
same asset previously
REVALUATION MODEL recognized in the profit or
● A class of property, plant and equipment loss
whose fair value can be measured reliably ◆ Ang ibig nitong sabihin ay
shall be carried in the statement of financial kung may balance pa ang
position at: REVALUATION SURPLUS,
➔ Revalued amount (being the fair at nagkaroon ng decrease,
value at the date of revaluation) dapat unahin muna na
less any subsequent accumulated tanggalin ang Unrealized
depreciation and subsequent Revenue Surplus.
accumulated impairment loss. ➔ a DECREASE in the carrying
● Revelation shall be made with sufficient amount of the asset as a result of
regularity to ensure that the carrying revelation is recognized in profit or
amount does not differ materiality from that loss.
which would be determined using fair ◆ The decrease shall be
market value at the reporting date. debited to other
➔ Some assets may have volatile and comprehensive income to
significant changes which the extent of any credit
necessary for annual revaluation balance existing in the
➔ Some assets may have insignificant revaluation surplus in
changes in fair value which is not respect of the asset.
necessary for annual revaluation ◆ Ang ibig nitong sabihin ay
● When PPE is revalued, the entire class of kung mayroon namang
PPE should be revalued. Avoid selective balance ang
revaluation. REVALUATION LOSS (or
● Some classes of assets may be revalued impairment loss), at
on a rolling basis provided revaluation is nagkaroon ng increase,
completed within a short period and dapat unahin muna na
revaluations are kept up to date. irecover ang unrecovered
revaluation loss.
BASIS
1. Fair Market Value Carrying < Revalued Credit to
➔ the price that would be Value Amount Revaluation
received to sell an asset in Surplus
an orderly transaction
Carrying > Revalued Debit to
between market Value Amount Revaluation
participants at the Loss
measurement date
2. Depreciated Replacement Cost
➔ if the market value is not When an item of property, plant and
available. The cost or equipment is revalued, any accumulated
current purchase price of deprecetiaon at the date of the revaluation
the asset less the is treated in one of the following ways:
corresponding AD (Sound
Value)
1. Proportional Method 5. Historical cost, CV of each class of
➔ restated proportionally with revalued PPe.
the change in the gross 6. RS, indicating the movement for the period
income carrying amount of and any restrictions on the distribution of
the asset so that the the balance to shareholders.
carrying amount of the asset
after revaluation equals its IMPAIRMENT OF ASSET VALUE
revalued amount ● An enterprise should write down the
2. Elimination Method carrying value of an asset to its recoverable
➔ eliminated against the gross amount if the asset has suffered an
carrying amount of the asset impairment in value.
and the asset account is
restated to the revalued
amount of the asset
● The revaluation surplus included in equity
may be transferred directly to retained IMPAIRMENT LOSS
earnings only when the asset is ● It is the amount by which the carrying
derecognized. amount of an asset exceeds its recoverable
➔ Piecemeal Realization - where the amount.
revaluation surplus is allocated or
realized over the remaining UL and IDENTIFYING AN ASSET THAT MAY BE
reclassified to retained earnings IMPAIRED
➔ Whole Surplus Realization - EXTERNAL SOURCES OF INFORMATION
where the whole revalued surplus is 1. Significant changes in the asset’s market
realized on retirement of disposal of value during the period
the asset 2. Significant changes in the technological,
● Some of the surplus may be transferred as market, economic or legal environment
the asset is being used by an entity. In such 3. Increase in market rates or other market
a case, the amount of the surplus rates of return on investments that is likely
transferred be: to affect the discount rate used in
➔ Depreciation based on the revalued calculating an asset’s value in use and the
carrying amount less depreciation asset’s recoverable amount
based on original cost. 4. Excess of the carrying amount of the net
assets of the reporting enterprise over its
COST MODEL REVALUATION market capitalization
MODEL
INTERNAL SOURCES OF INFORMATION
Carried in the books at Carried in the books at 1. Evidences of obsolescence or physical
COST less REVALUED AMOUNT damage of an asset
ACCUMULATED less ACCUMULATED 2. Significant changes in the extent or manner
DEPRECIATION less DEPRECIATION less in which are asset is used or is expected to
ACCUMULATED ACCUMULATED be used with adverse effect on the
IMPAIRMENT IMPAIRMENT enterprise
LOSSES. LOSSES. 3. Evidence indicating that the economic
performance of an asset is, or will be,
worse than expected
FINANCIAL STATEMENT DISCLOSURES IN MEASURABLE OF RECOVERABLE
REVALUATION MODEL
AMOUNT
1. The effective date of revaluation
HIGHER VALUE BETWEEN:
2. Whether independent valuer was involved
1. Asset’s fair value less cost to sell
3. Method and assumptions applied in
2. Asset’s value in use
estimating FV
4. Whether FV was determined directly by ➔ measured as the present value or
reference to observable prices in an active discounted value of estimated
market or recent market transactions using future cash inflows (inflows minus
other valuation techniques outflows) expected to rise from the
continuing use of an asset and from

its exposal at the end of its useful ● Any further increase in the recoverable
life amount is credited to Revaluation Surplus.
➔ Estimating value in use involves:
◆ estimating the future cash ACCOUNTING CHANGES AND ERRORS
inflows and outflows from AFFECTING PROPERTY, PLANT, AND
the continuing use of an EQUIPMENT
asset and from its ultimate CHANGES IN ACCOUNTING ESTIMATES
disposal ● A change in accounting estimate is an
◆ applying the appropriate adjustment of the carrying amount of an
discount rate asset or a liability, or the amount of the
NOTE: periodic consumption of an asset, that
➔ Discount rate shall be a pre-tax rate that results from the assessment of the present
reflects current market assessments of the status of, and expected future benefits and
time value of money and the risks. obligation associated with, assets and
liabilities.
RECOGNITION AND MEASUREMENT OF ● Changes in accounting estimates result
IMPAIRMENT LOSS from new information or new developments
● If the recoverable amount of an asset is and, accordingly, are not correction of
less than the carrying amount, the carrying errors.
amount of the asset should be reduced to
its recoverable amount. The reduction is an CHANGE IN ACCOUNTING ESTIMATES
impairment loss. 1. Depreciation method
● An impairment loss is recognized 2. Residual Value
immediately as an expense in the 3. Useful Life
statement of comprehensive income.
● An asset carried at a revalued amount, the CHANGE IN ESTIMATED USEFUL LIFE
impairment loss is treated as a revaluation AND RESIDUAL VALUE
decrease in OCI to the extent of the ● The residual value and the life of the asset
balance of its revaluation surplus, and any used in computing the amount of
excess should be recognized in profit or depreciation are merely based on
loss. estimates.
● After the recognition of an impairment loss, ● The useful life of an item of PPE should be
the depreciation charge for the asset reviewed periodically and, if expectations
should be adjusted in future periods to are significantly different from previous
allocate the asset’s revised carrying estimates, the depreciation charge for the
amount, less its residual value, if any, on a current and future periods should be
systematic basis over its remaining useful adjusted.
life. ● The remaining carrying value of the asset
at the beginning of the year change is
IMPAIRMENT OF AN ASSET CARRIED AT depreciated over its revised remaining life.
REVALUED AMOUNT
● Any impairment loss of an asset carried at CHANGE IN DEPRECIATION METHOD
revalued amount shall be treated as a ● The depreciation methods should be
revelation decrease, to the extent of any reviewed periodically and, if there has been
credit balance existing in the revaluation a significant change in the expected pattern
surplus pertaining to that asset. of economic benefits from the asset, the
● Any further impairment is recognized as a method should be changed to suit this
loss in the statement of comprehensive changed pattern.
income. ● When such a change in depreciation
methods takes place, the change should be
REVERSAL OF IMPAIRMENT OF AN accounted for as a change in accounting
ASSET CARRIED AT REVALUED AMOUNT estimate and the depreciation charge for
● Any reversal of an impairment loss of a the current and future periods should be
revalued asset shall be treated in profit or adjusted.
loss to the extent that it reverses as
unrecovered impairment loss pertaining to CORRECTION OF ERRORS IN DEPRECIATION
that asset. ● Similar to other errors affecting profit or
loss determination, an error in depreciation
is treated as a prior-period adjustment and with accumulated impairment losses) at the
is reported as an adjustment to the opening beginning and end of the period.
balance of retained earnings. ● a reconciliation of the carrying amount at
● Comparative information should be the beginning and end of the period.
restated, unless it is impracticable to do so.
DERECOGNITION OF PROPERTY, PLANT,

AND EQUIPMENT
● The carrying amount of an item of PPE
shall be derecognized on disposal or when
no future economic benefits are expected
from its use or disposal.
● When the disposal of the asset resulted
from a sale, the difference between the
asset’s carrying value and its selling price
is recognized as a gain or loss.
● If payment for the item is deferred, the
consideration received is recognized
initially at the cash price equivalent.
● The difference between the nominal
amount of the consideration and the cash
price equivalent is recognized as interest
revenue over the collection period.
● When the asset is retired from use
without any salvage value or when it is
simply abandoned, a loss is recognized
equal to the asset’s carrying value.
RECLASSIFICATION FROM PROPERTY,

PLANT, AND EQUIPMENT
● A change in use of an asset may warrant
reclassification from and into property,
plant, and equipment.
● Items of PPE that were rented and
subsequently held for sale on a routine
basis are transferred to inventories at their
carrying amount, which includes any
adjustment for impairment in value.
● Pro-forma entry for reclassification:
Inventories (at carrying amount) xx
Accumulated Depreciation xx
Property, Plant, and Equipment xx
● Thereafter, these items are measured in

accordance with IAS 2, Inventories.
Disposal proceeds are recorded as sales
revenue.
DISCLOSURE REQUIREMENTS: IAS 16

● The measurement bases used for
determining the gross carrying amount
● The depreciation methods used
● The useful lives or the depreciation rates
used
● The gross carrying amount and the
accumulated depreciation (aggregated

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INTERMEDIATE ACCOUNTING 2

2 diamla, foronda, gan

The purchase took place on November 2, 2019. A/P 196,000

Purch. disc. lost 6,000

3 diamla, foronda, gan

INITIAL MEASUREMENT NOTE ISSUED SOLELY FOR CASH

● Furthermore, in the absence of fair value,

SUBSEQUENT MEASUREMENT Discount on N/P 120,000

Interest expense 99,000

INITIAL COST OF 2,591,760

Face value, 1/1/17 P900,000 10/1/19 - - 2,591,760

9/30/20 800,000 233,258 566,742 2,025,018

3,200,0 608,240 2, 591,760

ILLUSTRATION ACCRUED INTEREST, 12/31/19

CV OF N/P, BS DATE 2,591,760 9. How much is the carrying value of N/P on

INTEREST EXPENSE (2020)

PAYMENT, 9/30/20 Present value, of P2,591,760

Interest payable 566,742 Payment of Principal / 720,960

Cash 800,000 PV OF NOTE 1,855,760

ACCRUED INTEREST, 12/31/20

Interest expense 45,563

6/30/21 200,000 222,691 22,691 1,878,451

1. How much is the initial carrying value of N/P?

TOTAL 1,867,106 Interest expense 100,000

AMORTIZATION 7/1/20 - 12,707 NON-INTEREST BEARING NOTE

⬋ ⬊ Discount on N/P 1,152,800

9 diamla, foronda, gan

12/31/20 341,664 3,188,864

12/31/22 428,472 4,000,000 AMORTIZATION OF DISCOUNT (1/1/20 TO

Face value, 12/31/20 4,000,000 N/P 400,000

DEC 31, 2020

Interest expense 341,664 DEC 31, 2020

12/31/22 81,834 - 900,000

11 diamla, foronda, gan

INITIAL CV OF N/P 2,591,760

FACE VALUE OF NOTE (1/1/21 TO 3/31/21) 58,314

⬋ ⬊ 4/1/21 TO 12/31/21 136,689

608,240 Face value, 12/31/20 P3,200,000

12 diamla, foronda, gan

FV, 3,200,000 800,000 2,400,000 FV, 2,400,000 800,000 1,600,000

DNP, (433,296) (58,314) (374,982) DNP, (238,292) (45,562) (192,730)

2,776,704 741,696 2,025,018 2,161,708 754,438 1,407,270

6. How much is the carrying value of N/P on BONDS PAYABLE

13 diamla, foronda, gan

14 diamla, foronda, gan

Without accrued RETIREMENT PRICE xx xx

DISCOUNT Premium on B/P xx

With accrued interest Cash xx

Cash (Issue xx Gain on retirement of bonds xx

ILLUSTRATION (Balance sheet date is in

16 diamla, foronda, gan

3. How much is the carrying value of the bonds

CARRYING VALUE BEFORE RETIREMENT,

CV, 9/1/21 3,131,699 CV, 12/31/21 5,819,904

AMORTIZATION (16,049) AMORTIZATION (4,503)

6. How much is the carrying value of bonds PREMIUM DISCOUNT

CV of REMAINING BONDS, 12/31/22 Carrying value, end = Carrying value, end =

EFFECTIVE INTEREST METHOD CARRYING VALUE OF BONDS

18 diamla, foronda, gan