CHAPTER 2 STATEMENT OF FINAN CIAL POSITION TECHNICAL KNOWLEDGE To know the nature of a statement of financial position. To understand the current and noncurrent classifications of assets and liabilities, To understand refinancing of a currently maturing debt. To identify the components of equity in a corporation, To identify the minimum line items in a statement of financial position. To be able to prepare a statement of financial position using Philippine format and IFRS format,STATEMENT OF FINANCIAL POSITION A statement of financial position is a formal statement showing the three elements comprising financial position, namely assets, liabilities ‘and equity. Investors, creditors and other statement users analyze the statement of financial position to evaluate such factors ag liquidity, solvency and the need of the entity for additional financing. Liquidity is the ability of the entity to meet currently maturing obligations. Solvency is the availability of cash over the longer term to mect maturing obligations. Information about liquidity and solvency is useful in predicting the ability of the entity to comply with future financial commitments and to pay dividends to shareholders Current and noncurrent distinction PAS 1, paragraph 60, provides that an entity shall present current and noncurrent assets, and current and noncurrent liabilities, as separate classifications in the statement of financial position. When an entity supplies goods or services within a clearly identifiable operating cycle the separate classification of current and noncurrent assets and liabilities is a useful information. It highlights assets that are expected to be realized within the current operating cycle, and liabilitics that are due for settlement within the same period. ror some entities, such as financial institutions, @ presentation of assets and liabilities in increasing or decreasing liquidity provides information that is faithfully represented and more relevant. 30Assets The Revised Conceptual Framework defines an asset asa present economic resour : vente. Ource controlled by the entity as a result of past An economic resource is a ri ht that, enti esonosnic! babes 8 has the potential to produce In layman's language and in short, assets are properties cwned. The essential characteristics of an asset are: a. The asset is controlled by the entity. b. The asset is the result of a past event. c. The asset has the potential to produce economic benefits, Current assets PAS 1, paragraph 66, provides that an.entity shall classify an asset as current when: a. The asset is cash or a cash equivalent unless the asset is restricted to settle a liability for more than twelve months after the reporting period. b. The entity holds the asset primarily for the purpose of trading. c. The entity expects to realize the asset within twelve months after the reporting period. d. The entity expects to realize the asset or intends to sell or consume it within the entity's normal operating cycle. 31Cash and cash equivalents This category includes cash on hand, petty cash fund, cash jn bank and any cash equivalent. and cash equivalent shall he unrestricted e cash However, the oe ble anytime for the payment of current in use, meaning availal obligations. PAS 7, paragraph 6, defines cash equivalents as short-term, highly’ liquid investments that are readily convertible into known amount of cash and which are subject to an insignificant risk of changes in value. For an investment to qualify as a cash equivalent, it must be readily convertible into a known amount of cash and be subject to an insignificant risk of changes in value. ‘Therefore, an investment normally qualifies as a cash equivalent only when it has a short maturity of three months ar less from the date of acquisition. Examples of cash equivalents a. Three-month BSP treasury bill b, Three-year BSP treasury bill purchased three months before date of maturity c. Three-month time deposit d. Three-month money market instrument Note that what is important is the date of purchase which should be three monthe or less before maturity. Thus, a BSP treasury bill that was purchased three years ago cannot qualify as cash equivalent even if the re ‘maining maturity is three months or less. Equity securities canaot qualify as cash equivalent ‘- shares do not have a date of maturity. ot Bevause However, preference shares with specified redemption date and acquired three months before redemmti r as cash equivalents mption date can qualify 82So ane arora reer ras NS Held for trading Appendix A of PFRS 9 prov: i classified as held for mde ee sf finansial goes a. It is acquired principally for the pu ang it in the near term. ly for the purpose of selling i b. On initial recognition, it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking. c. Itisa derivative,.except for a derivative that is a financial guarantee contract or a designated and an effective hedging instrument. Simply stated, financial assets held for trading or “trading securities" are debt and equity securities that ar purchased with the intent of selling them in the "near tern" or v rv soon in order to generate short-term gains or profits. Expected to he realized within twelve « mths This category refers to short-icrm nontrade receivables. ims arising from sources other than the ss idise or services in the ordinary course of busine Nontrade receivables are classified as current assets if collectible wiih.n one * froin the end of reporting period, the length of the operating cycle notwithstanding. Otherwise, the noatrade veceivables are classified as noneurrent assets. Realized, sold or consumed This current asset category refers to trade receivables, inventories and prepayments. These assets ave classified as current assets because they ave expected to be realized, sold or consumed within the normal whichever is longer. operating cycle or one year, 33Operating cycle The operating cycle of an entity is the time between the acquisition of assets for processing and their realization in cash or cash equivalents. When the normal operating cycle is not clearly identifiable, the duration is assumed to be twelve months. ity is the average the merchandise s and ultimately The operating cycle of a trading enti period of time that it takes to acquire inventory, sell the inventory to customer! collect cash from the sale. ‘The operating cycle of a manufacturing entity is defined as the period of time between acquisition of materials entering into a process and their realization in cash or an instrument that is readily convertible into cash. ficant as it is the basis of The normal operating cycle is sign f assets into either determining the proper classification 0! current or noncurrent. Presentation of current assets Current assets are usually listed in the statement of financial position in the order of liquidity. PAS 1, paragraph 54, provides that as a minimum the line items under current assets are: a. Cash and cash equivalents b. Financial assets at fair value through profit or loss, such as trading securities and other investments in quoted equity instruments Trade and other receivables Inventories Prepaid expenses 620 34eS ee Noncurrent assets The caption noncurrent assets is a residual definition. PAS 1, paragraph 66, simply states that “ an entity shall glassy all other assets not classified as current as noncurrent assets”. In other words, what is not included in the definition of current assets is deemed excluded. All others are classified as noncurrent assets. Accordingly, noncurrent assets include the following: a. Property, plant and equipment b. Long-term investments c. Intangible assets d. Other noncurrent assets PAS 1, paragraph 56, provides that deferred tax asset is classified as noncurrent asset. Property, plant and equipment PAS 16, paragraph 6, defines property, plant and equipment as tangible assets which are held by an entity for use in production or supply of goods and services, for rental to others, or for administrative purposes, and are expected to be used during more than one period. The major characteristics of the definition of property, plant and equipment are: a. The property, plant and equipment are tangible assets, meaning with physical substance. b. The property, plant and equipment are used in business, meaning used in production or supply of goods and ces, for rental purposes and for administrative ser purposes. Assets that are held for sale, including land, or held for investment are not included in property, plant and equipment. The property, plant and equipment are expected to be used over a period of more than one year. 35Examples of property, plant and equipment a. Land 8. Motor vehicle b. Land improvement h. Furniture and fixtures c. Building i. Office equipment d. Machinery j. Patterns, molds and dies e. Ship k. Tools f. Aircraft L Bearer plants The old term for property, plant and equipment is fixed assets. Long-term investments The International Accounting Standards Committee defines investment as an asset held by an entity for the accretion of wealth through capital distribution, such as interest, royalties, dividends and rentals, for capital appreciation or for other benefits fo the investing entity such as those obtained through trading relationship. A current investment is an investment that is by nature readily realizable and is intended to be held for not mote than one year. A noncurrent or long-term investment is an investment other than a current investment or investment intended to be held tor more than one year. Examples of long-term investments Investments in shares and bonds b Investments in subsidiaries c. Investments in associates d. Investments in funds such ag sinking fund, plant expansion fund and preference share redemption fund e. Investinent property c Cash surrender value of life insurance policy g. Investment in joint venture P 36eT sme, Intangible assets PAS 38, paragraph 8, simply defines an intangible asset as an, identifiable nonmonetary asset without physical substance. Paragraph 8 further states that "the intangible asset must be controlled by the entity as a result of past event and from which future economic benefits are expected to flow to the entity”. Intangible assets do not have physical substance but are expected to provide future economic benefits to the entity. The essence of intangible assets is the future economic benefits that will flow to the entity. PAS 38, paragraph 12, provides that an intangible asset is identifiable: a. When it is separable or capable of being sold, transferred. licensed, rented or exchanged separate from the entity. b. When it arises from contractual or other legal right. The common examples of identifiable intangible assets include patent, franchise, copyright, teademark and computer software Anexample of an unidentifiable intangible asset is goodwill. Other noncurrent assets Other noncurrent assets are those assets that do not fit into the definition of the previously mentioned noncurrent assets. Examples of other noncurrent assets include long-term advances to officers, directors, shareholders and employees, or abandoned property and long-term refundable deposit. 37Liab m tual Framework, a liability |, fs the Revised Concep work, aed as a present obligation of an entity 10 transfer ap economic resource a8 a resull of past events. The essential characteristics of u liability are: The entity has a present obligation The entity hable must be identified. Ww. It is not necessary that the payee or the entity to whom the obligation is owed be identified. ree. The obligation is to iransfer an economic resour i ility. This is the very heart of the definition of a liability ih, transfer Specifically, the obligation must be to pes ia Bay fe noncash asset or provide service at some ful The liability arises from past event. This means that the liability is not recognized until it is incurred. Current liabilities PAS 1, paragraph 69, provides that an entity shall classify a liability as current when: a. ‘The entity expects to settle the liability within the entity's normal operating cycle, ‘The entity holds the liability Primarily for the purpose of trading. The liability is due wo be settled wit! after the reporting period. ‘The entity does not have an uncondi settlement of the liability for at le the reporting period. hin twelve months tional right to defer ast twelve months after 38Examples of current liabilities a. Trade payables and accruals for employee and other operuting. costa are part of the working capital used in the entity's normal operating cycle. Such operating items are classified as current liabilities even if they are settled more than twelve months after the end of reporting period. b. Obligations that are not settled as part of the normal operating cycle but are due for setilement within twelve months after the end of reporting period. Examples of such current obligations are bank overdraft, dividends payable, income taxes, other nontrade payable and current portion of noncurrent financial liabilities. Financial liabilities held for trading are financial liabilities that are incurred with an intention to repurchase them in the near term. ‘An example of a financial liability held for trading is a quoted debt instrument that the issuer may buy back in the near term depending on changes in fair valuc. Long-term debt currently maturing PAS 1, paragraph 72, provides that a liability which is due to be settled within twelve months after the end of reporting period is classified as current, even if: ‘The original term was for a period longer than twelve months. a. to reschedule payment on after the end of reporting ts are authorized b. An agreement to refinance or a long-term basis is completed period and before the financial statement i for issue. However, if the refinancing on a long-term basis is completed on or before the end of the reporting period, the refinancing is an adjusting event and therefore the obligation is classified as noncurrent. 394 Discretion to refinance PAS 1, paragraph 73, provides that if the entity has th discretion to refinance or roll over an obligation for at leag twelve months after the reporting period under aN existip, loan facility, the obligation is classified as nopcUrTent ever if it would otherwise be due within a shorter period. Note that the refinancing or rolling over must be at the discretion of the entity. Otherwise, if the refinancing or rolling over i8 NOt at the discretion of the entity, the obligation is classified as g current liability. Covenants Covenants are often attached to borrowing agreements which represent undertakings by the borrower. s These covenants are actually restrictions on the borrower as to undertaking further borrowings, paying dividends, maintaining specified level of working capital and so forth. Under these covenants, if certain conditions relating to the borrower's financial situation are breached, the liability becomes payable on demand. PAS 1, paragraph 74, states that such a liability is classified as current even if the lender thas agreed, after the end of reporting period and before the statements are authorized for issue, not to demand payment as a consequence of the breach. However, Paragraph 75 states that the liability is classified as noneurrent if the lender has agrecd on or before the end of reporting period to provide a grace period ending at least twelve months after the end of reporting period. In this context, the gra iod ii i ithi hehe each period 48 a period within which e bee : ; lender cannot demand niteaine cae during which the 40ee ee Oe ee ne an Presentation of current liabilities PAS 1, paragraph 4, provides that as a minimum, the ‘ace of the statement of financial position shall include the following line items for current liabilities: a. Trade and other psyables b. Current provisions c. Short-term borrowing d. Current portion of long-term debt e. Current tax liability The term "trade and other payables" is a line item for | accounts payable, notes payable, accrued interest on note payable, dividends payable and accrued expenses. No objection can be raised if the trade accounts and notes | payable are separately presented. | Noncurrent liabilities The term noncurrent liabilities is a residual definition. PAS 1, paragraph 69, simply states that all liabilities not classified as current liabilities are classified as noncurrent liabilities. Examples of noncurrent liabilities Noncurrent portion of long-term debt Lease liability Deferred tax liability Long-term obligations to entity officers Long-term deferred revenue ease PAS 1, paragraph 56, provides that deferred tax liability is classified as noncurrent liability. 41Working capital The entity's liquidity is of primary concern to most stateme,, users and this can be properly evaluated through the Curren, and noncurrent classifications. For example, working capital is the excess of eurtent asset, over current liabilitics and the working capital ratio jg current assets divided by current, liabilities. Estimated liabilities * Estimated liabilities arc obligations which exist_at the end of reporting period although the amount is not definite. In many cases, the date whe it is due or payable is not als, definite and in some instances, the exact payee cannot be identified or determined. Common examples of estimated liabilities include estimated liability for premiums, estimated liability for warranties and estimated liability under customer loyalty program. Estimated liabilities may be classified either as current or noncurrent. Contingent liability PAS 37, paragraph LO, defines a contingent liability in two ways: A contingent liability is a possible obligalion that arises from past event and whose existence will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly within the control of the entity. A contingent Liability is a present obligation that arises from past event but is nol recognized because: a, It is not probable that an outflow of i y resources embodying economic benefits will be required to settle the cbligation q Brida The amount of the obligation cannot be measured reliably. 42ee Range of outcome The range of outcome of uncertainty relating to future event may be described as: a. Probable ‘The future event is likely to occur. As a rule of thumb, probable means more than 50% likely. b. Possible ‘The future event is less likely to occur. The occurrence is 50% or less. c. Remote ‘The future event is least likely to occur or the chance of the future event occurring is very slight. The occurrence is 10% or less. Treatment of contingent liability A contingent liability is not recognized in the financial statements. A contingent liability shall be disclosed only. The required disclosures are: a. Brief description of the nature of the contingent liability b. An estimate of the financial effects c, An indication of the uncertainties that exist d. Possiblity of any reimbursement If the contirigent liability is remote, no disclosure is necessary. If the present obligation is probable and the amount can be measured reliably, the obligation is not a contingent liability but shall be recognized as a provision. An expense and an estimated liability shall be recorded in recognizing a provision. Thus, a contingent liability is either probable or measurable but not both. 48y Contingent asset PAS 37, paragraph 10, defines contingent eee tener asset that arises from past event and sate currence often! be confirmed only by the occurrence or rect inthe il or more uncertain future events not wholly with tro] of the entity. Contingent assets usually arise from uaplannai oe gener unexpected events that give rise to the Pp n inflow of economic benefits to the entity. An example is a claim that an entity is pursuing through legal processes when the outcome is uncertain. Treatment of contingent asset A contingent asset shall not be recognized because this may result to recognition of income that may never be realized. However, when the realization of income is virtually certain, the related asset is no longer contingent asset and its recognition is appropriate. The outcome of a contingent asset is reported as follows: a. A contingent asset is recognized in the period when realized. b. Accontingent asset is only disclosed when it is probable. © If the contingent asset is po r ble, no disclosure is required. If the contingent asset is remote, no disclosure ig required. 44Equity The term equity is the resi 7 i esidual interest in the assets of the entity after deducting all of the liabilities Simply stated, equity means net assets or total assets minus liabilities. Equity is increased by profitable operations and contribution by owners. Conversely, equity is decreased by unprofitable operations and distribution to owners. ‘The terms used in reporting the equity of an entity dependin on the form of the entity are: ae ic a. Owner's equity in a proprietorship b. Partners’ equity in-a partnership c. Shareholders’ equity in a corporation However, the term equity may simply be used for all business entities. Shareholders’ equity Shareholders’ equity or stockholders’ equity is the residual interest of owners in the net assets of a corporation measured by the excess of assets over liabilities Generally, the elements constituting shareholders’ equity with their equivalent JAS term are: Philippine term JAS term Capital stock Share capital Subscribed capital stock Subscribed share capital Common stock Ordinary share capital 4 Preferred stock Preference share capital ‘Additional paid capital Shave premium Retained earnings (deficit) Accumulated profits (losses) Retained earnings appropriated Appropriation reserve Revaluation surplus Revaluation reserve ‘Treasury stock ‘Treasury share 454 ium ; hare premiums . Share capital and s ion ofthe paid in capital representing De ee the shares issued. tolal par or s the portion of the authorize, en eubscribed but not yet fully Paig as share capital tha issued. and therefore still un bly be reflected a i hall prefera i |Subserintons eee i specribed share capital. eduction : ae subscriptions receivable collectible within one Your Fert be ulaseified as current asset. inom, is the capital contributed by the shareholder, cess of the par or stated value of the shares subscribed 10 Xxce the and issued. Retained earnings Pacacatecmmings represent the cumulative balance of periodic ne ‘income or loss, dividend distributions, prior period errors, changes in accounting policy and other capital adjust nents. resent that portion which is free and can be declared as dividends to the shareholders. Appbitidlereteinedreomingy represent that portion which js restricted and therefore not available for any dividend declaration. A @@fiéiffis a debit balance in retained earnings. The deficit is not presented as an asset but as deduction from shareholders’ equity. Revaluation surplus is the excess of sound value over carrying amount of the revalued asset. is equal to the fair value or d i e is e is computed by dedu depreciation on cost from Mistared ieducting accumulated 46i a Morne eee Treasury shares Resins are an entity's own shares that have been reacquired but not canceled. D are usually recorded at cost and are not recognized as an asset. The cost of treasury shares shall be reported as a deduction from the shareholders’ equity. When treasury shares are acquired, the retained earnings must be appropriated to the extent of the cost of the treasury shares. Reserves The ‘orn ESE '° not officially defined in any accounting standard or in the Conceptual Framework. Under international accounting standard, the use of equity reserves is based on whether a reserve is part of distributable equity or nondistributable equity. Distributable equity is that portion that can be distributed to sharcholders as dividends without impairing the legal capital of the entity. This squarely pertains to unappropriated retained earnings. Nondistributable equity is that portion that cannot be distributed to the shareholders in any form during the lifetime of the entity. Gencrally, nondistributable equity reserves represent those items of equity other than the aggregate par or stated value of share capital and retained earnings unappropriated. Examples of reserves a. Share premium reserve or additional paid in capital b. Appropriation reserve or technically known as retained earnings appropriated c. Asset revaluation reserve or revaluation surplus d. Other comprehensive income reserve 47ae ae os Line items - Statement of Financial Position agraph 54, states that asa minimum, the statemey, 1, par’ : * Ee | position shall include the following line items. of financia 1. Cash and cash equivalents 2. Financial assets (other than 1, 3 and 6) 3. Trade and other receivables 4. Taventones 5. Property, plant and equipment 6. Investment in socal usin the equity method 7. Intangible assets 8. Investment property 9. Biological assets 0. Total of assets classifie: included in disposal group el 11. Trade and other payables 12. Current tax asset and liability 4 13. Deferred tax asset and deferred tax Liability 14. Provisions 5. Minancial liabilities (other than 11 and 14) 16. Liabilities included in disposal group held for sale 17. Noncontrolling interest 18. Share capital and reserves s held for sale and assets i Aaesified as held for sale The listing of the line items is not exclusive. Paragraph 54 simply provides a list of items that are sufficiently different in nature and function to warrant separate presentation on the face of the statement of financial position. Paragraph 55 provides that additional line items, headings and subtotals shall be presented on the face of the statement of financial position when such presentation is relevant to the understanding of the financial position of an entity. The judgment on whether additional line items , are pre: separately is based on the assessment of the ae re Nani ad liquidity of assets b. Function of assets within the enti it) c. Amount, nature and timing of liabilities 48ov ee—— Forms of statement of financial position ef sl ; iad re nels a : statement of financial position is not In practice, there are two customary forms in presenting the statement of financial position, namely: . ae thie form sets forth the three major sections in a lownward sequence of assets, liabilities and equity. b Avsount form As the title suggests, the presentation follows that of an account, meaning, the assets are shown on the left side and the liabilities and equity on the right side of the statement of financial position. Actually, the statement of financial position is an expansion of the accounting equation “asset equals liability plus equity”. PAS 1, paragraph 57, provides that the standard does not prescribe the order or format in which line items are to be presented. In the Philippines, the common practice is to present in the statement of financial position current assets before noncurrent assets, current liabilities before noncurrent liabilities, and equity after liabilities. Other formats may be equally appropriate provided the distinction is clear in accordance with paragraph 7 of the Preface to LAS 1. Note that the format of the statement of financial position as illustrated in the appendix to TAS | is in the following order: Noncurrent assets Current assets Equity Noncurrent liabilities Current liabilities This may be the practice in other jurisdiction, like the United Kingdom. 49Illustration - report form SAMPLAR COMPANY Statement of Financial Position December 31, 2019 ASSETS Note Current assets: Cash and cash equivalents (1) 500,000 Financial assets at fair value 200,000 Trade and other receivables (2) 700,000 Inventories @) 900,000 Prepaid expenses (4) __ 50,000 Total current assets 2,350,009 Noncurrent aeset Property, plant and equipment (5) 5,000,000 Investment m associate, at equity 1,000,000 Long-term investments 6) 5,100,000 Intangible assets (7) 2,000,000 Other noncurrent assets ® 10,000 Total noncurrent assets 13,200,000 Total assets 15,550,000 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Trade and other payables @) 750,000 Note payable - short-term debt 400,000 Current portion of bonds payable 200,000 Warranty liability __ 50.600 Total current liabilities 1,400,000 Noncurrent liabilities: Bonds payable - remaining portion 1,800,000 Note payable - due July 1, 2021 600,000 Deferred tax liability 100,000 Total noncurrent liabilities 2,500,000 Shareholders’ equity Share capital, P100 par 5,000,000 Reserves (10) 3,000,000 Retained earnings 3,650,000 Total shareholders’ equity 11,650,000 Total liabilities and shareholders’ equity 15,650,000 50amc a a aa re eS Note 1- Cash and cash equivalents Cash on hand Cash in bank Petty cash fund BSP Treasury bill, purchased on December 1, 2019 and due March 1, 2020 Total cash and cash equivalents Note 2 - Trade and other receivables Accounts receivable Allowance for doubtful accounts Notes receivable Accrued interest on notes receivable Advances to employces, collectible currently Total trade and other receivables Note 3 - Inventories Finished goods Goods in process Raw materials Manufacturing supplies Total inventories Note 4 - Prepaid expenses Office supplies unused Prepaid insurance Total prepaid expenses Note 5 - Property, plant and equipment Land Building Machinery and equipment f Furniture and fixtures : Patterns, molds, dies and tools, n Total Accumulated depreciation Carrying amount et 51 40,000 300,000 10,000 150,000 500,000 580,000 ( 20,000) 100,000 10,000 30,000 000 300,000 400,000 150,000 _50,000 x 30,000 20,000 50,000 1,500,000 4,500,000 1,000,000 300,000 100,000 7,400,000 (2,400,000) 5,006Accumulated depreciation: Building ‘ Machinery and equipment Furniture and fixtures Total accumulated depreciation Note 6 - Long-term investments Plant expansion fund Financial assets at amortized cost Cash surrender value Total other long-term investments Note 7 - Intangible assets Patent Trademark Total intangible assets Note 8 - Other noncurrent assets Long-term refundable deposit Long-term advances to officers Total other noncurrent assets Note 9 - Trade and other payables Accounts payable Notes payable Accrued interest on note payable Income tax payable Dividends payable Accrued expenses ‘Total trade and other payables Note 10- Reserves Share premium Retained earnings appropriated for contingencies Total reserves 52 20,000 50,000 100,000 Peau) 350,000 150,000 15,000 50,000 100,000 85,000 760,000 2,000,000 3,000,000Mlustration ~ account form State: SAMPLAR COMPANY ment of Financial Position ember 31, 2019 ASSETS Current assets: Cash and cash equivalents $00,000 Financial assets at fair value 200,000 ‘Trade and other receivables 700,000 Inventories 900,000 Prepaid expenses 50,000 Total current assets 2,350,000 Noneurrent assets: Property, plant and equipment 5,000,000 Investment in associates 1,000,000 Long-term investments 3,100,000 Intangible assets 2,000,000 Other noncurrent assets 100, ‘Total noncurrent assets 13,200,000 ‘Total assets LIABILITIES AND EQUITY Current liabilities: ‘Trade and other payables. 750,000 Note payable - short-term debt 400,000 Current portion of bouds payable 200,000 Warranty tiability 50,000 otal current labities 1,400,000 Noncurrent liabilities: Bonds payable-cemaining portion 1,800,000 Note pavatle-due July 1, 2021 600,000 Defevred tax liability _ 100,000 Total noneurrent Iiailities 2,500,000 Equity: oe Share capital, P200 par 5,000,000 Reserves Retained carnings ‘Total equity Total liabilities and equity 15,550.00Illustration - United Kingdom Style SAMPLAR COMPANY - Statement of Financial Position December 31, 2019 ASSETS Noricurrent assets: Property, plant and equipment 5,000,000 Investment in associates 1,000,000 Long-term investments 5,100,000 Intangible assets 2,000,000 Other noncurrent assets __ 100,000 Current assets: Cash and cash cquivalents 500,000 Financial assets at fair value 200,000 Trade and other receivables 700,000 Inventories 900,000 Prepaid expenses 50,000 Total assets EQUITY AND LIABILITIES Equity: Share capital 5,000,000 Reserves 3,000,000 3,650,000 Retained earnings Noncurrent liabilities: Bonds payable ~ remaining portion 1,800,000 Note payable - due July 1, 2021 600,000 Deferred tax liability 100,000 Current liabilities: ‘Trade and other payables 750,000 Note payable — short-term 400,000 Current portion ofbonds payable 200,000 Warranty liability 50,000 Total liabilities Total equity and liabilities 54 13,200,000 2,350,000 11,650,000 . 2,500,000 1,400,000 3,900,000 15,550,000QUESTIONS 1. Define a statement of financial position. 2. Explain the presentation of assets and liabilities in the statement of financial position. 3. Define assets. 4, What are the essential characteristics of assets? 5. Define current assets, 6. Explain briefly an operating cycle. hat should be shown under 7. What are the line items t the statement of financial current assets on the face of position? 8, Define noncurrent assets. 9, Define property, plant and equipment. 10, Define investments. 11. Define intangible assets. 12. Define other noncurrent assets. 13. Define liabilities. 44, What are the essential characteristics of liabilities? 15. Define current liabilities. 16. Explain fully the treatment of currently maturing long-term debt. : 17. What are covenants? 55ee a ee —— 18, i ; Explain the classification of a liability abe relat Ovenants are breached. e shown Unde, 19, What are the line items that should b ent of financig] Beauties on the face of the state™ 20. Define noncurrent liabilities. 21, What is working capital? 22. What are estimated liabilities? 23. Define a contingent. liability. 24. Explain the treatment of a contingent liability. 25. Define a contingent asset. 26. Explain the treatment of a contingent asset. 27. Define equity. 28. What are the components of shareholders’ equity? 29. Explain share capital, subscribed share capital and share premium. : 30, Explain treasury shares. 31. Explain retained earnings. 32. Explain revaluation surplus. 33. Discuss the meaning of the term reserves. 34, What are the line items that are required to be shown on the -face of the statement. of financial position? 85. Explain the forms of statement of financial position. 56PROBLEMS Problem 2-1 (IAA) Dilemm: . ecrihes spapany provided the following information on Cash Accounts receivable © OA Allowance for doubtful accounts ¢ “50,000 Prepaid expenses | _ 160,000 Inventory 1,000,000 Financial assets at fair value “690,000 Land 500,000 Building in process » 5,000,000 Patent 200,000 Machinery and equipment 1,500,000 Accumulated depreciation 300,000 Discount on bonds payable 200,000 Accounts payable 900,000 ‘Accrued expenses 150,000 Note payable due July 1, 2021 »+ + 250,000 Bonds payable 2,000,000 Share capital — 3,000,000 Retained earnings © 4,000,000 Retained earnings appropriated for contingencies 150,000 * ‘The financial assets at fair value include Dilemma Company shares acquired at cost of P256,000. + The bonds pay 10% interest semiannually on April 1 and October 1 and mature on April 1, 2022. No inferest has been accrued on the bonds. es, P100 par,.are authorized, of which sued including 2,000 shares in the * Forty thousand shar 30,000 shares are is treasury. * The retained earnings appropriated balance of P150,000 was created in anticipavon for the result of a pending Jawsuit. end of reporting period the suit was F after the Shortly afte d the entity paid P100,000, amicably settled an Required: t of financial position. 57 Prepare statemen!Problem 2-2 (IAA) Socorro Company provide December 31, 2019: viltos etn Current liabilities ,000, Ce 3p 000 Lone term liabilities 1,000,005 eer 7,000,005 d the following information ,, Other assets Cantal i y market 200,000 invested in money mi Cash Ginluding Freaen depot of P300.000) 3.000 00 Land held for undetermined use 500,000 and hel cceivable ‘nue allowance of P50,000 70.00 tories ; 000 Inventories. con share capital a cost _soa.ne Total current assets 3.100.000 s 50,000 Store supplies ae Building less allowance of P500,000 3,000,000 Equipment less allowance of P250,000 750,000 Financial assets at amortized cost 1,000,000 Trademark $300,000 Advances to officers-indefinite repayment 150,000 Patent 250.000 ia __ 400,000 Total other assets Accounts payable Note payable, due December 31, 2020 Income tax payable Share premium ‘Total current liabilities 1,000,000 Unearned leasehold income (five y : Uap ariel me (five years starting 2020) 350,000 Serial bonds payable (P100,000 maturing annually) Aan One ‘Total long-term liabilities 7000.00 000 Retained earnings Share cata, P100par 1,500,000 ained earnings appropriated for , 5,000,000 Total capital Plant sxpansion, 500,000 mies 7,000,000 Prepare sti atement of . notes and coupe eal Position with supporting 58Problem 2-3 (IAA) Magna Company re, ae ported the follow financial position on December 31 20 19. eon Current assets 2,000,000 = Cun iabiliti 000, rent liabilities 1,500,000 Investments _ 400,000 Long term liabilities 2,0007000 Tangible assets 7,150,000 Equity 6,450,000 Intangible assets 400,000 ad 9,960,000 50,000 * Equity has preference share capital, no par value, P5 stated value, authorized 300,000 shares, issued 150,000 shares for P 1,000,000, and ordinary share capital, P20 par value, authored 400,000 shares, issued 100,000 shares of P30 per share. * Tangible assets include building P5, depreciation P 1,600,000, equip accumulated depreciation P400,000, land land held for future plant site P1,500,000. * The current assets include: Cash P 400,000, accounts receivable P750,000 less P50,000 for allowance for doubtful accounts, inventories P800,000, and prepaid expenses P100,000. * The investments include the cash surrender value of a life insurance contract P50,000, investment in securities, short-term, P100,000, and long-term, P250,000. * Intangible assets include a franchise P100,000, goodwill 200,000 and discount on bonds payable P100,000. * (Current liabilities include accounts payable P400,000, notes payable - short-term debt P450,000, and long-term 300,000, taxes payable P150,000, and ap; propriation for contingencies P200,000. * Long-term lial payable due on 000,000 less accumulated ment P1,400,000 less P1,250,000, and mprised solely of 12% bonds bilities co 31, 2022. December Required: d form a properly classified statement of riate notes. Prepare in goo r ition with approP: financial positio 59Problem 2-4 (AICPA Adapted) Boracay Company prepared the following moet Statement of financial position on December 31, 4, Current assets 1 sont Current liabilities denen y, : " 2,500, Working capital 1.80000 Add other assets ia 4,300, Working capital plus other assets 100, oe Deduct other liabilities “a Net assets 50 Money market placement - three months ‘ oni Cash in bank 800,000 Accounts receivable 200,000 Notes receivable 400,000 Financial assets at fair value 1,300,000 Inventory ‘100,000 Goodwill man Total current assets 2000.00 The inventory account was found to include the cost of office supplies of P50,000 and office equipment acquired at the end of 2019 at a cost of P250,000. Other assets included land and building soguized on January 1, 2018 for P4,000,000, less mortgage of P2,000,000 and accrued interest on the mortgage of P200,000. At the time of purchase, the land was worth P1,000,000. The building on December 31, 2019 has a remaining life of 18 years, ‘urrent liabilities represented balances that were payable to trade Curfeors. Other liabilities consisted of withholding tax payable However, no recognition was given to accrued salaries of P250,000. ne entity was originally Organized j. ree nary shares. with par value of P100 w. exchange for assets with fair v: Required: alue of P3,200,000, or prepare a statement of financial Position,rT problem 2-5 (IAA) Dakak Company) provided the following statement of financial position on cember 31, 2019: Current assets 2,700,000 Current liabilities 2,500,000 Other assets 6,600,000 Other liabilities 2,000,000 eo Equity 4,800,000 2,800,000 9,300,000 Analysis of current assets discloses the following: Cash and cash equivalents 500,000 Financial assets held for trading 600,000 ‘Accounts receivable 750,000 Inventories _ 850.000 2,700,000 Other assets include: Property, plant and equipment, cost P6,000,000 4,000,000 ‘Advances to subsidiary 2,250,000 Goodwill recorded on the books to cancel losses sneurred by the entity in prior years __ 350,000 6,600,000 Current liabilities include: Accrued expenses 100,000 Customers’ deposit 400,000 ‘Advances from officer, not payable currently 200,000 ‘Accounts payable 1,000,000 Note payable-bank due December 31, 2021 "800,000 2,500,000 Other liabilities include: 100,000 Bonds payable in annual installment of P500,000 Share capital, 50,000 shares, P100 par, was originally issued and credited for a total consideration of P5,500,000 but the losses of the entity for past years were charged against the share capital balance. Required: Prepare a properly cli assified statement of financial position. 612-6 (IFRS) - / Problem ided the following information + Darwin Company prov! year-end: 1sto19 +200,0 Cash ssreceivable va theordinary 100, pa tory, including inventory expected in the otha Inventory ‘foperations to be sold beyond 12m ‘cy amounting to P700,000 300.00 Financial asset held for trading : Equity investment at fair value through obner fi op comprehensive income a Equipment held for sale ea Deferred tax asset What amount should be reported as total current assets ay year-end? 6,000,000 b. 4,000,000 c. 6,800,000 d. 4,800,000 > Problem 2-7 (AICPA Adapted) At year-end, the current asscts of Hazel Company revealed cash and cash equivalents of P700,000, accounts receivable of P 1,200,000 and inventories of P600,000. The examination of accounts receivable disclosed the following: Trade accounts 9 Allowance for doubtful accounts (ican 300) Claim against shipper for goods lost in transit 30,000 Selling price of unsold goods sent by Haccl is on consignment at 130% of cost included in ending inventory nn’ 2 2 Total accounts receivable Ta. .200,000 What total a i ee yearend? "nt should be reported as current assets at a. 2,412,000 b. 2,440,000 ©. 2,240,000 4. 2,500,000 ( Wa Problem 2-8 (AICPA Adapted) Peete ea ees the following current assets on Cash 5,000,000 ‘Accounts receivable 2,000,000 Inventory, including goods received on , consignment P200,000 800,000 Prepaid expenses, including a deposit of P60,000 made on inventory to be delivered in 18 months “150,000 Total current assets 150,000 Cash in general checking account 3,500,000 Cash fund to be used to retire bonds payable in 2021 1,000,000 Cash held to pay value added taxes 500,000 Total cash 5,000,000 What total amount of current‘assets should be reported on December 31, 2019? a. 6,750,000 b. 6,700,000 ec. 7,700,000 d. 7,750,000 Problem 2-9 (AICPA Adapted) Rice Company was incorporated on January 1, 2019 with P5,000,000 from the issuance of share capital and borrowed funds of P1,500,000. During the first year, net income was P2,500,000. On December 15, the entity paid a P500,000 cash dividend. On December 31, 2019, the liabilities had increased to P1,800,000. On December 31, 2019, what amount should be reported as total assets? a. 6,500,000 b. 9,300,000 ¢. 8,800,000 d. 6,800,000 63Problem 2-10 (AICPA Adapted) INSEL ae Company reported the following at year-end: as) Accounts receivable Notes r Inveneeen able, net of discounted note P500.000 An analysis disclosed that accounts recivable comprised the following: Trade accounts receivable Allowance for doubtful accounts Selling price of Arabian Company’s unsold goods sent to Tar Company on consignment at 150% of cost and excluded from Arabian’s ending inventory What amount should be reported as total current assets at year-end? a. 17,000,000 b. 17'500/000 e. 15,000,000 : d. 16,500,000 Problem 2-11 (AICPA Adapted) Mire Company was incorporated on January 1, 2019 with proceeds from the issuance of P7,500,000 in share capital and borrowed funds of P1,100,000. During the first year, revenue from sales and consulting amounted to P8,200,000, and operating costs and expenses totaled P6,400,000. On December 15, 2019, the entity declurcd a P300,000 dividend, payable to shareholders on January 15, 2020. The liabilities increased to P2,000,000 by December 31, 2019. On December 31, 2019, what amount should be reported as total assets? a. 11,000,000 pb, 11,300,000 ¢. 10,100,000 d, 12,100,000 64Problem 2-12 (AICPA Adapted) Gar Company re porte i December 31, 2019: d the following account balances on Accounts payable Bonds payable 1,900,000 Premium on bonds payable 3,400,000 Deferred tax liability e 200,000 Dividend payable 400,000 Income tax payable aT 600,000 Note payable, due January 31. 2020 * On December 31, 2019, what to » 2019, tal on owot liabilities? amount should be reported a. 7,100,000 b. 4,300,000 c. 3,900,000 d. 4,100,000 Problem 2-13 (PHILCPA Adapted) Burma Company disclosed the following liabilities: Accounts payable, after deducting debit balances in suppliers’ accounts amounting t0 100,000 4,000,000 Accrued expenses 1,500,000 Credit balances of customers’ accounts 500,000 Share dividend payable 1,000,000 Claims for increase 1m wages and allowance by edina pending lawsuit 400,000 600,000 employees, cover Estimated expenses i pons in redeeming prize cou) What total amount should be reported as current liabilities? 6,700,000 6,600,000 7,100,000 7,700,000 Boop 65Problem 2-14 (AICPA Adapted) Ronna Company provided the following information , December 31, 2019: ; Accounts payable, net of ereditors’ debit balances P200,000 nor ong Accrued expenses: 800,000 Bonds payable due December 31, 2021 45500099 Premium on bonds payable one Deferred tax liability 70 op Income tax payable de ee Cash dividend payable prea Share dividend payable a Note payable ~ 6%, due March 1, 2020 1,500,009 Note payable — 8%, due October 1, 2020 1.000.009 The financial statements for 2019 were issued on March 3), 2020. On December $1, 2019, the 6% note payable was refinanced on a long-term basis. Under the Joan agreement for the 8% note payable, the entity has the discretion to refinance the obligation for at least twelve months after December 31, 2019. 1. What amount should be reported as total current liabilities? 7,200,000 4,700,000 6,200,000 5,100,000 Boop 2. What amount should be reported as total noncurrent liabilities? a. 8,400,000 b. 5,500,000 ¢. 8,000,000 a. 7,500,000 66ee ee problem 2-15 (AICPA Adapted) Gold Company provided the following trial balance on June 30, 2019: Cash overdraft Accounts receivable 350,000 1 Inventory 580,000 Prepaid expenses 120,000 Land held for sale 1,000,000 Property, plant and equipment, net "950,000 ‘Accounts payable : 200,000 Accrued expenses 150,000 Share premium 250,000 Share capital 1,500,000 Retained earnings ” 300,000 3,000,000 Checks amounting to P300,000 were written to vendors and recorded on June 29, 2019 resulting in a cash overdraft of 100,000, The checks were mailed on July 9, 2019. Land held for sale was sold for cash on July 15, 2019. The entity issued the financial statements on July 31, 2019. 1, What total amount should be reported as current assets? a. 2,250,000 b. 2,050,000 c. 1,950,000 d. 1,250,000 2 What total amount should be reported as current liabilities? a. 460,000 b. 350,000 c. 650,000 d. 300,000 3, What total amount should be reported as shareholders’ equity? 2,550,000 1,750,000 1,500,000 2,300,000 Bere 67Be i Problem 2-16 (AICPA Adapted) Trey Company provided the follow; ial b December 31, 2019 which had been adjusts eee on tax expense: Nom, Cash 5 Accounts receivable, net ON TO Prepaid taxes 1/500,000 Inventory 6'000,000 Property, plant and equipment 17,000,000 Accounts payable ve 10,000, 09 Share capital 20.000'004 Retained earnings 8,000,009 Foreign currency translation adjustment 2,500,000 fi Revenue 15,000,009 Expenses 10,000,000 —_—. 50,000,000 50,000,000 During 2019, estimated tax payments of P1,500,000 were charged to prepaid taxes. The entity has not yet recorded income tax expense. The tax rate is 30%. The accounts receivable included P3,000,000 due from a customer. Special terms granted to this customer require payment in equal semiannual installments of P500,000 every April 1 and October 1. 1. On December 31, 2019, what total amount should be reported as current assets? 21,000,000 18,500,000 17,000,000 19,500,000 pore 2. On December 31, 2019, what amount should be reported as total retained earnings? a. 10,000,000 b. 8,500,000 c. 5,750,000 d. 6,000,000Problem 2-17 (AICPA Adapted) Mint Company provided the following account balances on income tax expense: ad been adjusted except for Cash Accounts receivable, net 3, $0 000 Cost in excess of billings on long-term contracts 1,600,000 Billings in excess of cost on long- Prepaid taxes long-term contracts Property, plant, and equipment Note payable - noneureedt oe i ° Share capital 000 Share premium 2,030,000 Retained earnings unappropriated "900,000 Retained carnings restricted for note payable 160,000 Earnings from long-term contracts 6,680,000 Costs and expenses 5,180.000 All receivables on long-term contracts are considered to be collectible within 12 months. During the year, estimated tax payments charged to prepaid taxes. The entity has nm tax expense. The tax rate is 30%. On December 31, 2019, what amount should be reported as P450,000 were ecorded income 1. Total retained earnings? a. 1,950,000 b. 2,110,000 400,000 c. 2,400, d. 2,560,000 2. Total noncurrent liabilities? a. 1,620,000 1, 000 3. Total current assets? gains 1 ¢. 5,700, d. 6,150,000 4. Total shareholders’ equity? 69Problem 2-18 (AICPA Adapted) : vided the following trial balance i Soa oe yan® which had been adjusted except te % income tax expense: Cash 600,000 ‘asl Accounts receivable eae Pope plant and equipment (net) —_ 10,500,000 Accounts payable and accrued liabilities 1,800, Income tax payable 1,500,044 Deferred tax liability 700,004 Share capital 2,500, 009 Share premium 3,000, 09) Retained earnings, January 1 3,500,009 Net sales and other revenue 15,000,009 Costs and expenses 10,000,000 Income tax expense 2,100,000 28,000,000 28,000,000 The accounts receivable included P1,000,000 due from a customer and payable in quarterly installments of P125,000. The last payment is due December 30, 2021. During the year, estimated tax ayment of P600,000 was charged to income tax expense. "The income tax rate is 30% On December 31, 2019, what amount should be reported as 1. Total current assets? a. 3,400,000 b. 4,400,000 e. 5,400,000 d. 4,800,000 . Total current liabilities? a. 2,700,000 b. 3,800,000 c. d. 3,450,000 . Retained earnings? . 8,500,000 b. 6,400,000 ©. 7,000,000 a. 3,500,000 a,eS Problem 2-19 (AICPA Adapted) Charice Company A SDE ST DOT et ee eo or * What total amo Accounts payable for goods and services purchased on et account amounted to P500,000 and accrued expenses totaled P300,000 on December 31, 2019. aarti 15, 2019, the entity declared a cash lividend of P7 per share, payable on January 15, 2020, to shareholders of record on December 31, 2019. The entity had 100,000 shares issued and outstanding throughout 2019. On July 1, 2019, the entity issued 5,000,000, 8% bonds for P4,400,000 to yield 10%. The bonds mature on June 30, 2024, and pay interest annually every June 30. On December 31, 2019, the bonds were trading in the open market at 86 to yield 12%. The entity used the effective interest method to amortize bond discount. The pretax financial income was P8,500,000 and taxable income was PG,000,000. The difference is due to P 1,000,000 permanent difference and P1,500,000 of taxable temporary difference which is expected to reverse In 2020. The entity 18 subject to income tax rate of 30% and made estimated income tax payments during the year of P 1,000,000. unt should be reported as current liabilities on December 31, 2019? pe oP 3,500,000 2,700,000 2,300,000 2,500,000* . ing liabilitieg a Problem 2-20 (IAA) Kaye Company reported the follow. Deceniber 31, 2019: Accounts payable 6,500, note payable ~ 10% 3,000,094 Henk cate bavable 2 Lite 5.000.090 Mortgage note payable ~ 10% 2.000.099 Bonds payable 4.000.009 * The P3,000,000, 10% Note was issued March 1, 2015 payable on demand, Ini terest is payable every six Monthy’ * The one-year P5.000,000, 11% note was issued January 15, 2019. On December 31, 2019, the entity negotiated a written agreement with the ba nk to replace the note With a 2-year, P5,000,000. 10% note to be issued January 15, 2020. The 10% Mortgage note was issued October 1, 2017 with a term of 10 years, Terms of the note give the holder the right to demand immediate payment if the entity fails tu make a monthly interest payment within 10 days from the date the payment is due. On December 31, 2019, the e: in paying the required inte) The bonds payable 30, 2010. Interest is December 31. ntity is three months behind rest payment. are ten-year, 8% bonds, issued June payable semiann: ually on June 30 and The entity has not prepared the adjustment for any accrued interest on the liabilities, What total amount ‘should be reported as current liabilities on December 31, 20199 joe a. 15,650,000 b. 11,650,000 ¢. 20,650,000 d. 13,650,000 72eo es problem 2-21 Multiple choice (IAA) 1. Which of the following is not a noncurrent investment? a. Cash surrender value of life insurance b. Franchise c. Land held for speculation d. Asinking fund 2. The term deficit refers to ‘An excess of current assets over current liabilities. ‘An excess of current liabilities over current assets. A debit balance in retained earnings. |. A loss reported as a prior period error. aove 3, Which should be classified as a noncurrent asset? a. Plant expansion fund pb. Prepaid rent c. Supplies d. Goods in process 4, Which of the following items would normally be excluded from the computation of working capital? a. Advances from customers b. The portion of long-term debt that matures within one year after the reporting period, | c. Prepaid insurance d, Goodwill statement 5. Accrued revenue would normally appear in the of financial position under Noncurrent assets C»yrent liabilities _eneurrent liabilities Current assets a b. c. d.6. For a liability to exist a. There must be a past event, b. The exact amount must be known. ¢c. The identity of the Party to whom the liability ig Oweg must be known. |. There must be an obligation to pay cash in the Future 7. Which statement best describes the term liability? a. An excess of equity over current assets b. Resources to meet financial commitments when dy, c. The residual interest in the assets of the entity afte, | deduction all of the liabilities A present obligation arising from past event d. . Which item is not a current liability? a. Unearned revenue b. Share dividend payable c. d The currently maturing portion of long-term debt . Trade accounts payable 9. Noncurrent liabilities include a. Bonds payable b. Short-term obligation refinanc: at the end of reporting period ¢c. Deferred tax liability d. All of these are noncurrent liabilities ed on a long-term basis 10. Which is not within the definition of a liability? a. The signing of a three-year employment contract at a fixed annual salary . An obligation to provide 800ds or services in the future ‘0 specified maturity date t is estimated in amount 74