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Chapter 22 Financial Reporting IN Hyperinflationary ECO

AFAR PART 2
Accountancy (General de Jesus College )

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Chapter 22

Financial Reporting in Hyperinflationary

Economies

PROBLEM 22-1: TRUE OR FALSE

1. TRUE 6. TRUE
2. FALSE 7. TRUE
3. FALSE 8. FALSE
4. TRUE 9. FALSE
5. FALSE 10. TRUE

PROBLEM 22-2: MULTIPLE CHOICE – THEORY

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

PROBLEM 22-3: THEORY & COMPUTATIONAL

1. B

2. B

3. Solution:

1,000,00 1,700,00
Cash Accounts payable
0 0
2,700,00
Accounts receivable Income tax payable 800,000
0
(250,000
Allowance for bad debts Accrued liabilities 60,000
)
Investment in bonds 2,000,00 Cash dividends
150,000
(amortized cost) 0 payable
3,000,00
Cash surrender value 800,000 Bonds payable
0
Discount on bonds (200,000

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)
6,250,00 5,510,00
Total monetary assets
0 Total monetary liab. 0

Net monetary assets = (6,250,000 – 5,510,000) = 740,000

4. Solution:
Hill Co.
Statement of financial position
As of December 31, 20x1
(Restated in terms of December 31, 20x1 current pesos)
Historic Restate
ASSETS al Fraction d
1,210,00
Cash
1,210,000 N/A 0
Accounts receivable 500,000 N/A 500,000
Allowance for bad debts (70,000) N/A (70,000)
Inventory (at cost) 400,000 120/115 417,391
2,181,81
Equipment (at cost)
2,000,000 120/110 8
Accumulated depreciation (100,000) 120/110 (109,091)
4,130,11
Total assets 3,940,000
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LIABILITIES AND EQUITY

Accounts payable 600,000 N/A 600,000
1,000,00
Bonds payable 1,000,000
N/A 0
Discount on bonds payable (180,000) N/A (180,000)
1,420,00
Total liabilities 1,420,000
0
2,400,00
Share capital
2,000,000 120/100 0
(bal.
Retained earnings
520,000 figure) 310,119
2,710,11
Total equity
2,520,000 9
4,130,11
Total liabilities and equity 3,940,000
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Hill Co.
Statement of profit or loss
For the year ended December 31, 20x1
(Restated in terms of December 31, 20x1 current pesos)
Fractio
Historical n Restated

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Sales 1,800,000 120/115 1,878,261

Cost of sales:
Inventory, January 1 100,000 120/110 109,091
Purchases 600,000 120/115 626,087
Total goods available for sale 700,000 735,178
Inventory, December 31 (400,000) 120/115 (417,391)
Cost of sales (300,000) (317,787)
Gross profit 1,500,000 1,560,474
Distribution costs (300,000) 120/115 (313,043)
Depreciation expense (100,000) 120/110 (109,091)
Bad debts expense (70,000) N/A (70,000)
Unrealized gain
Finance cost (120,000) 120/120 (120,000)
Loss on net monetary position
(a)
(18,300)
Profit before tax 910,000 930,040
Income tax expense (270,000) 120/115 (281,739)
Profit for the year 640,000 648,301

(a)
The loss on net monetary position is computed as follows:
Cash (historical) 1,210,000
Accounts receivable (historical)
500,000
Allowance for bad debts (historical)
(70,000)
Accounts payable (historical)
(600,000)
Bonds payable (historical)
(1,000,000)
Discount on bonds payable (historical)
180,000
Net monetary assets, Dec. 31, 20x1 - Historical: 220,000

Net monetary liabilities, Dec. 31, 20x0 - Restated

(given) (109,092)
Sales (restated) 1,878,261

Purchases (restated) (626,087)

Distribution costs (restated)
(313,043)
Bad debts expense (restated)
(70,000)
Finance cost (restated) (120,000 x 120/120)
(120,000)

Income tax expense (restated) (281,739)

Dividends (restated) (120,000 x 120/120) (120,000)

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Net monetary liabilities, Dec. 31, 20x1 - Restated: 238,300

(18,30
Loss on net monetary position
0)

RECONCILIATION:
Retained earnings
beg. - deficit (restated) 218,182
Dividends (restated) 120,000 648,301 Profit (restated)
end. (restated) 310,119

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PROBLEM 22-4: MULTIPLE CHOICE – COMPUTATIONAL

1. B

2. B (650,000 + 400,000) = 1,050,000

3. C

Solution:
Net proceeds 400,000
Restated carrying amt. (300K x 140/120) (350,000)
Gain on sale 50,000

4. D

Solution:
Net proceeds 200,000
Restated carrying amt. (300K x 140/100* x 6/10) (252,000)
Gain on sale 52,000
* The problems states that the general price indices are as of the end of each
year and that the equipment was purchased on January 1, 20x6. Thus, the
denominator used is 100 – the general price index on December 31, 20x5.

5. B

Solution:

Sales (nominal cost) 3,000,000

Multiply by: Current price index over Average price 1.009708
index in 20x7 {104 / [(102 + 104) ÷ 2]} 7
3,029,12
Sales (constant pesos) 6

6. C

Solution:

Land (120,000 x 110/100) 132,000

Investment 60,000
Long-term debt

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80,000

The investment is not restated because it is a monetary asset. It is

presumed that the investment in bonds is measured at amortized
cost because they are to be held until maturity date. The long-term
debt is also not restated because it is a monetary liability.

7. D

Solution:
1,000,00
Net monetary assets, end (Historical) (given) 0
(1,100,000
Net monetary assets, end (Restated) (1M x 220/200) )
(100,000
Purchasing power loss )

8. B

Solution:
3,000,00
Net monetary assets, end (Historical) (given) 0
(3,600,000
Net monetary assets, end (Restated) (3M x 150/125) )
(600,000
Purchasing power loss )

9. A (15,000 – 12,000) = 3,000

10. D

Solution:

Beginning inventory - units 8,000

Units purchased 31,000

Total goods available for sale - units 39,000

Units sold 30,000

Ending inventory in units

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9,000
Current cost per unit 71

Ending inventory - current cost 639,000

11. A

Solution:

Units sold 30,000

Average current cost [(71 + 57) ÷ 2] 64

Cost of sales - current cost 1,920,000

12. D

Solution:

Sales 1,000,000

Historical cost of portion sold (1,200,000 x 1/2) (600,000)

Realized gain 400,000
Current cost of unsold portion (1,400,000 x 1/2) 700,000

Historical cost of portion unsold (1,200,000 x 1/2) (600,000)

Unrealized gain 100,000
Total gain 500,000

13. D

Solution:
Replacement cost (another term for current cost) -
12/31/x8 10.00
Purchase price 8.00
Holding gain per unit 2.00

14. B

Solution:
Units sold 70,000
Average current cost [(72 + 58) ÷ 2] 65

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Cost of good sold - current cost 4,550,000

15. C

Solution:

Current cost at year-end 125,000

Historical cost 115,000

Total 240,000
Divide by: 2

Average current cost 120,000

Divide by: Useful life 5

Current cost depreciation 24,000

16. B

Solution:

Estimated Percent Accumulated Net carrying

current cost depreciated depreciation amount
(a) (b) (c) = (a) x (b) (d) = (a) - (c)
30%
280,000 84,000
20%
76,000 15,200
10%
88,000 8,800

444,000 108,000 336,000

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PROBLEM 22-5: EXERCISES – COMPUTATIONAL

1. Solution:
Cash 1,080,000 Accounts payable 2,550,000
Accounts receivable 1,800,000 Income tax payable 1,200,000
Allowance for bad debts (300,000) Accrued liabilities 108,000
Investment in bonds Cash dividends
840,000 225,000
(amortized cost) payable
Cash surrender value 300,000 Bonds payable 3,600,000
Discount on bonds (300,000)
Total monetary assets 3,720,000 Total monetary liab. 7,383,000

Net monetary liabilities = (3,720,000 – 7,383,000) = (3,663,000)

2. Solutions:

Requirement (a):

Skadden, Inc.
SCHEDULE TO ANALYZE EQUIPMENT FOR CONSTANT DOLLAR
RESTATEMENT
Dec. 31, 2000

Yr. Restate
acquired Amount Conversion d
(126.7/116.8
1998 490,000(a) 1.085 ) 531,650
(126.7/121.8
1999 10,000 1.040 ) 10,400
2000 150,000 1.000 150,000
650,000 692,050

(a)
(550,000 acquired in 1998 less 60,000 retired) = 490,000

Requirement (b):
Skadden, Inc.
SCHEDULE TO ANALYZE EQUIPMENT--ACCUMULATED
DEPRECIATION
(Historical cost) Dec. 31, 2000

Yr. acquired Amount Depreciated Balance

1998 490,000 3/10 147,000
1999 10,000 2/10 2,000
2000 150,000 1/10 15,000
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650,000 164,000
Requirement (c):
Skadden, Inc.
SCHEDULE TO ANALYZE EQUIPMENT--ACCUMULATED
DEPRECIATION
(Constant dollars) Dec. 31, 2000

Yr. Accum.
acquired Deprciation Conversion Restated
1998 147,000 1.085 (126.7/116.8) 159,495
1999 2,000 1.040 (126.7/121.8) 2,080
2000 15,000 1.000 15,000
164,000 176,575

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