Intermediate Accounting 3

Marylin A. Asumbra, CPA

Ishmael Y. Reyes, CPA
 Table of Contents

Module 1: Statement of Financial Position

Introduction 1
Learning Outcomes 1
Lesson 1. Objectives of PAS1 2
Lesson 2. Statement of Financial Position 8
Lesson 3. Application of concepts: Theory questions 10
Lesson 4. Application of concepts: Sample problem 12
Assessment Task 17
Summary 24
References 24

Module 2: Statement of Comprehensive Income

Introduction 25
Learning Outcomes 25
Lesson 1. Statement of profit or loss and other comprehensive income 26
Lesson 2. Application of concepts: Theory questions 27
Lesson 3. Application of concepts: Sample problem 29
Assessment Task 33
Summary 38
References 38

Module 3: Revenue from Contracts with Customers

Introduction 39
Learning Outcomes 39
Lesson 1. Income versus revenue 40
Lesson 2. Applicability of PFRS 15 40
Lesson 3. Contract costs 44
Lesson 4. Presentation 45
Lesson 5. Application of concepts: Theory questions and sample problem 45
Assessment Task 55
Summary 58
References 58

Module 4: Non-current Assets Held for Sale and Discontinued

Operations
Introduction 60
Learning Outcomes 60
Lesson 1. Introduction to non-current asset held for sale 61
Lesson 2. Discontinued operations 63
Lesson 3. FS Presentation 65
Lesson 4. Application of concepts: Theory questions 65
Lesson 5. Application of concepts: Sample problem 69
Assessment Task 73
Summary 76
References 76
Course Code: ACTG 5

Course Description: This course is the culmination of financial accounting

cluster. It deals with the preparation of general-purpose financial statements
in accordance with generally accepted Philippine standards on financial
reporting. It also covers reconstruction of accounts from incomplete records,
change from cash basis to accrual basis of accounting, accounting changes,
correction of errors, discounted operations and segment reporting.

Course Intended Learning Outcomes (CILO):

At the end of the course, students should be able to:

1. Prepare general-purpose financial statements that conform with the
provisions of PAS 1 Presentation of Financial Statements
2. Prepare financial statements from incomplete records / records from
single-entry system
3. Convert cash basis financial statements to accrual basis financial
statements
4. Apply the provisions of PAS 8 Accounting Policies, Changes in
accounting Estimates and Errors in accounting for the effects of
accounting changes and correction of errors
5. Explain accounting for discontinued operation as provided by relevant
Philippine standards on financial reporting
6. Identify reportable operating segments in accordance with PFrS 8
Operating Segments

Course Requirements:

*Components of Class Standing are reflected in the OBTLP

• Class Standing * - 60%

• Major Exams - 40%
Periodic Grade 100%

PRELIM GRADE : Total CS% + (40% of Prelim Exam)

MIDTERM GRADE : 30% of Prelim Grade + 70% (Total CS% + 40% of
Midterm exam)
FINAL GRADE : 30% Midterm Grade) + 70 % (Total CS% + 40% of
Final exam
 MODULE 1
STATEMENT OF FINANCIAL POSITION

Introduction

Financial statements are the structured representation of an entity’s financial position and
results of its operations.
Financial statements are the end product of the financial reporting process and the means by
which the information gathered and processed is periodically communicated to users.
In this module, we will have an introduction of financial statements: the purpose andgeneral
features, and the discussion of the statement of financial position and its line items.

Learning Outcomes

After completing the module, the student should be able to:

1. Enumerate and describe the components of a complete set of financial statements.

2. Classify assets and liabilities into current and noncurrent.
3. Prepare a statement of financial position.

1
Lesson 1. Objectives of PAS 1 (Millan, 2019)

PAS 1 prescribes the basis for presentation of general purpose financial statements to
improve comparability both with the entity's financial statements of previous periods and with the
financial statements of other entities.
General purpose financial statements are those intended to serve users who do not have the
authority to demand financial reports tailored for their own needs. General purpose financial
statements are those statements that cater to most of the common needs of a wide range of external
users. General purpose financial statements are the subject matter of the Conceptual Framework and
the PFRSs.

Complete set of financial statements

1. Statement of financial position
2. Statement of profit or loss and other comprehensive income
3. Statement of changes in equity
4. Statement of cash flows
5. Notes
(5a) comparative information in respect of the preceding period; and
6. A statement of financial position as at the beginning of the preceding period when an entity
applies an accounting policy retrospectively or makes a retrospective restatement of items in its
financial statements, or when it reclassifies items in its financial statements.

General features of financial statements

1. Fair Presentation and Compliance with PFRSs - The application of PFRSs, with additional
disclosure when necessary, is presumed to result in financial statements that achieve a fair
presentation.
2. Going concern - An entity is not a going concern if, as of financial reporting date or prior to the
date of authorization of financial statements for issue, management either
a) Intends to liquidate the entity or to cease trading, or
b) Has no realistic alternative but to do so.
 The assessment of going concern is at least 12 months.
3. Accrual Basis of Accounting - An entity shall prepare its financial statements, except for cash
flow information, using the accrual basis of accounting.

4. Materiality & Aggregation - Each material class of similar items must be presented separately in
the financial statements.
6
5. Offsetting - Assets and liabilities, and income and expenses, shall not be offset unless required or
permitted by a PFRS.
 Measuring assets net of valuation allowances, for example, obsolescence allowances on
inventories, allowances for doubtful accounts on receivables, and accumulated depreciation on
property, plant, and equipment are not offsetting.
6. Frequency of reporting – An entity shall present a complete set of financial statements
(including comparative information) at least annually.
 When an entity changes the end of its reporting period and presents financial statements for a
period longer or shorter than one year, an entity shall disclose the following,
a) The period covered by the financial statements:
b) The reason for using a longer or shorter period, and
c) The fact that amounts presented in the financial statements are not entirely comparable.
7. Comparative Information - An entity shall present comparative information in respect of the
preceding period for all amounts reported in the current period’s financial statements, unless other
standards permit or require otherwise.
8. Consistency of presentation - An entity shall retain the presentation and classification of items in
the financial statements from one period to the next unless:
a) it is apparent that another presentation or classification would be more appropriate following
a significant change in the nature of the entity’s operations or a review of its financial
statements; or
b) a PFRS requires a change in presentation.

Additional Statement of Financial Position

A statement of financial position as at the beginning of the preceding period shall bepresented
when an entity
1. Applies an accounting policy retrospectively or
2. Makes a retrospective restatement of items in its financial statements, or
3. When it reclassifies items in its financial statements and the effect of the event to the statement
of financial position as at the beginning of the preceding period is material.

Lesson 2. Statement of Financial Position (Millan, 2019)

A statement of financial position may be presented as either

1. Classified (current/non-current distinction) – showing current and noncurrent assets and
liabilities, or
2. Unclassified (based on liquidity) – showing no distinction between current and noncurrentitems
7
 Current Assets
An entity shall classify an asset as current when:
1. it expects to realize the asset or intends to sell or consume it, in its normal operatingcycle;
2. it holds the asset primarily for the purpose of trading;
3. it expects to realize the asset within twelve months after the reporting period; or
4. the asset is cash or a cash equivalent unless the asset is restricted from being exchangedor used to
settle a liability for at least twelve months after the reporting period.

Current Liabilities
An entity shall classify a liability as current when:
1. the asset is cash or a cash equivalent unless the asset is restricted from being exchangedor used to
settle a liability for at least twelve months after the reporting period.
2. it expects to settle the liability in its normal operating cycle;
3. it holds the liability primarily for the purpose of trading;
4. the liability is due to be settled within twelve months after the reporting period; or
5. the entity does not have an unconditional right to defer settlement of the liability for atleast
twelve months after the reporting period.

Currently Maturing Long-term Liabilities

 General rule: Currently maturing long term liabilities are presented as current liabilities.
 Exceptions:
1. Refinancing agreement fully completed on or before the balance sheet date – non-currentliability

Minimum line items in the statement of financial position

a) Property, plant and equipment;
b) Investment property;
c) Intangible assets;
d) Financial assets (excluding amounts shown under (e), (h) and (i));
e) Investments accounted for using the equity method;
f) Biological assets;
g) Inventories;
h) Trade and other receivables;
8
i) Cash and cash equivalents;
j) Assets classified as held for sale (Groups classified as held for sale) in accordance withPFRS 5;
k) Trade and other payables;
l) Provisions;
m) Financial liabilities (excluding amounts shown under (k) and (l));
n) Liabilities and assets for current tax, as defined in PAS 12 Income Taxes;
o) Deferred tax liabilities and deferred tax assets, as defined in PAS 12;
p) Liabilities included in disposal groups classified as held for sale in accordance with PFRS5;

q) Non-controlling interests, presented within equity; and

r) Issued capital and reserves attributable to owners of the parent

Order/ Format of Presentation

PAS 1 does not prescribe the order or format in which an

Lesson 3. Application of concepts: Theory questions

(Millan, 2019)

1. General purpose financial statements cater to what type if needs if users?

a) Common needs
b) Specific needs
c) A and b
d) Loving and caring needs
2. A complete set of financial statements does not include
a) Statement of financial position
b) Statement of profit or loss and OCI
c) Statement of retained earnings
d) Notes
3. ABC Co.'s depreciation expense for the period is overstated. Which of the following
statements is incorrect?
a) ABC Co.'s financial statements provide relevant information but that information is not
faithfully represented
b) ABC Co. cannot rectify the error by simply making appropriate disclosures in the notes.
c) ABC Co. can rectify the error by simply making appropriate disclosures in the notes.
d) ABC Co.'s financial statements do not comply with the general feature of fair presentation.

4. According to PAS 1, this general feature of financial statements requires the presentation of the
9
 last year's financial statements together with the current year's financial statements.
a) Frequency of reporting
b) Comparability
c) Comparative information
d) Two-statement presentation
5. Which of the following is an example of offsetting under PAS 1?
a) Deducting the accumulated depreciation of an item of property, plant and equipment and
presenting only the net amount on the face of the statement of financial position.
b) Deducting allowance for bad debts from the related receivable and presenting only the net
amount on the face of the statement of financial position.
c) Deducting the related selling costs from the sale price when computing for the gain or loss on
the sale of an item of property, plant and equipment.
d) Adding the debit balance in "Fair value adjustments" to the initial measurement of held for
trading securities when determining the investment's carrying amount.
6. When is an entity not required to present an additional balance sheet dated as of thebeginning
of the preceding period?
a) The entity changes an accounting policy.
b) The entity makes a correction of a prior period error.
c) The makes a reclassification adjustment.
d) The entity changes the frequency of its reporting.

Answers / Solutions:
1. A
2. C
3. C
4. C
5. C
6. D

Lesson 4. Application of concepts: Sample problem

(Millan, 2019)

The trial balance of Morning Co. prepared as of December 31, 20x1 is shown below:
Debits Credits
Cash on hand 60,000
Cash in bank 1,000,000
Accounts receivable 2,000,000

10
 Allowance for doubtful accounts 300,000
Advances to employees 40,000
Inventories 1,200,000
Advances to suppliers 30,000
Held for trading securities 800,000
Investment in equity securities - FVOCI 300,000
Investment property 900,000
Land 2,200,000
Building 3,400,000
Accumulated depreciation - Bldg. 700,000
Accounts payable 720,000
Accrued liabilities 80,000
Income tax payable 500,000
Deferred tax liability 300,000
Loans payable (due in 20x3) 3,000,000
Discount on loan payable 740,000
Interest payable (due in 20x2) 340,000
Provision for probable loss on lawsuit 430,000
Ordinary share capital 4,000,000
Share premium 600,000
Retained earnings 1,640,000
Revaluation surplus 90,000
Translation loss on foreign operation 30,000
Total 12,700,000 12,700,000

Totals Requirements:
a) Prepare the statement of financial position of Morning Co. Make a proper heading for the
financial statement. Apply the general feature of "materiality and aggregation."
b) Prepare notes showing the breakdown of line items in the financial statement. Makeproper
cross-referencing of those notes; use "Note 6" as your first cross-reference.

Answers / Solutions:

Requirement (a):

11
 Morning Co.
Statement of financial positionAs
of December 31, 20x1

Notes
ASSETS
Current assets:
Cash and cash equivalents 6 ₱ 1,060,000
Trade and other receivables 7 1,770,000
Inventories 1,200,000
Held for trading securities 800,000
Total current assets 4,830,000

Noncurrent assets:
Investment in FVOCI securities 300,000
Investment property 900,000
Property, plant and equipment 8 4,900,000
Total noncurrent assets 6,100,000

TOTAL ASSETS ₱ 10,930,000

LIABILITIES AND EQUITY

Current liabilities:
Trade and other payables 9 ₱ 1,140,000
Income tax payable 500,000
Provisions 430,000
Total current liabilities 2,070,000

Noncurrent liabilities:
Loans payable - net 10 2,260,000
Deferred tax liability 300,000
Total noncurrent liabilities 2,560,000

12
 TOTAL LIABILTIES 4,630,000

Equity:
Ordinary share capital 4,000,000
Share premium 600,000
Retained earnings 1,640,000
Other components of equity 11 60,000
TOTAL EQUITY 6,300,000

TOTAL LIABILITIES & EQUITY ₱ 10,930,000

Requirement (b):

Note 6: Cash and cash equivalents This

line item consists of the following:
Cash on hand 60,000
Cash in bank 1,000,000
Cash and cash equivalents 1,060,000

Note 7: Trade and other receivables This

line item consists of the following:
Accounts receivable 2,000,000
Allowance for doubtful accounts (300,000)
Advances to employees 40,000
Advances to suppliers 30,000
Trade and other receivables 1,770,000

Note 8: Property, plant and equipmentThis

line item consists of the following:

13
 Land 2,200,000
Building 3,400,000
Accumulated depreciation - Bldg. (700,000)
Property, plant and equipment 4,900,000
Note 9: Trade and other payables
This line item consists of the following:
Accounts payable 720,000
Accrued liabilities 80,000
Interest payable 340,000
Trade and other payables 1,140,000

Note 10: Loans payable - net

This line item consists of the following:
Loans payable 3,000,000
Discount on loan payable (740,000)
Loans payable - net 2,260,000

Note 11: Other components of equity This

line item consists of the following:
Revaluation surplus 90,000
Translation loss on foreign operation (30,000)
Other components of equity 60,000

14
Assessment Task

Problem 1. Below are the account balances prepared by the bookkeeper for SQUELCH TOSILENCE
Company as of December 31, 20x1:
Assets Liabilities
Cash 30,000 Accounts payable 40,000
Accounts receivable, net 88,000 Notes payable 200,000
Inventory 80,000
Prepaid income tax 16,000
Prepaid assets 10,000
Investment in subsidiary 20,000
Land held for sale 56,000
Property, plant and equipment 100,000
Totals 400,000 240,000

Additional information:
 Cash consists of the following:
Petty cash fund (unreplenished petty cash expenses, ₱ 3,000) 4,000
Cash in bank (20,000)
Payroll fund 28,000
Tax fund 14,000

Cash to be contributed to a sinking fund set up for the retirement

of bonds maturing on December 31, 20x3 4,000
Total Cash 30,000

 Checks amounting to ₱ 61,000 were written to suppliers and recorded on December 30, 20x1,
resulting to a bank overdraft of ₱ 20,000. The checks were mailed on January 5, 20x2.

 Accounts receivable consists of the following:

Accounts receivable 80,000
Allowance for uncollectability ( 10,000)
Credit balance in customers’ accounts ( 6,000)

15
Selling price of unsold goods sent on consignment to QUELL, Inc.
at 120% of cost and excluded from SQUELCH’s inventory 24,000
Accounts receivable, net 88,000

 The inventory includes cost of goods amounting to ₱ 20,000 that are expected to be soldbeyond 12
months but within the ordinary course of business. Also, the inventory includes cost of consigned
goods received on consignment from Alpha-Numerix Co. amounting to
₱ 10,000.
 Prepaid income tax represents excess of payments for quarterly corporate income taxes during
20x1 over the actual annual corporate income tax as of December 31, 20x1.

 Prepaid assets includes a ₱ 4,000 security deposit on an operating lease which is expected to
expire on March 31, 20x3. The security deposit will be received on lease expiration.
 The land qualified for classification as “asset held for sale” under PFRS 5 Non-current Assets
Held for Sale and Discontinued Operations as of December 31, 20x1
 Accounts payable is net of ₱ 12,000 debit balance in suppliers’ accounts. Accounts payable
includes the cost of goods held on consignment from Alpha-Numerix Co. which were included in
inventory.
 The notes payable are dated July 1, 20x1 and are due on July 1, 20x4. The notes payable bears an
annual interest rate of 10%. Interest is payable annually.

16
How much is the adjusted working capital?
a) 334,000
b) 289,000
c) 264,000
d) 215,000

Problem 2. The ledger of INFIRM SICK Co. as of December 31, 20x1 includes the following:

10% Note payable 80,000

12% Note payable 120,000
14% Mortgage note payable 60,000
Interest payable -

Additional information:
 INFIRM Co.’s financial statements were authorized for issue on April 15, 20x2.
 The 10% note payable is due on July 1, 20x2 and pays semi-annual interest every July 1 and
December 31. On January 28, 20x2, INFIRM Co. entered into a refinancing agreement with a
bank to refinance the entire note by issuing a long-term obligation.
 The 12% note payable is due on March 31, 20x2 and pays annual interest every March 31. On
January 31, 20x2, INFIRM Co. extended the maturity of the note to March 31,20x3 under
the existing loan agreement. The extension of maturity date is at the optionof INFIRM.

 The 14% mortgage note is due on December 31, 20x9. Per agreement with the creditor, INFIRM
is to pay quarterly interests on the note, failure to do so will render the note payable on demand.
INFIRM failed to pay the 3rd and 4th quarterly interests on the noteduring 20x1.

How much is the total current liabilities?

a) 119,000
b) 155,000
c) 172,000
d) 189,000

Problem 3. Use the following information for the next three questions:
17
The ledger of COLTISH UNDISCIPLINED Co. in 20x1 includes the following:
Jan. 1, 20x1 Dec. 31, 20x1
Current assets 1,200,000 ?
Noncurrent assets 4,000,000 ?
Current liabilities 900,000 1,000,000
Noncurrent liabilities ? 3,000,000

Additional information:
 COLTISH’s working capital as of December 31, 20x1 is twice as much as the workingcapital
as of January 1, 20x1.
 Total equity as of January 1, 20x1 is ₱ 1,700,000. Profit for the year is ₱ 2,400,000 while
dividends declared amounted to ₱ 1,000,000. There were no other changes in equityduring the
year.

1. How much is the total noncurrent liabilities as of January 1, 20x1?

a) 2,600,000
b) 2,800,000
c) 3,200,000
d) 3,400,000

18
 2. How much is the total current assets as of December 31, 20x1?

a) 1,600,000
b) 800,000
c) 300,000
d) 2,200,000

3. How much is the total noncurrent assets as of December 31, 20x1?

a) 4,500,000
b) 6,500,000
c) 5,800,000
d) 5,500,000

Problem 4. HARANGUE INFLATED SPEECH Co. had the following information for 20x1:
Accounts receivable turnover 10:1
Total assets turnover 2:1
Average receivables during the year ₱ 400,000
Total assets, January 1, 20x1 800,000

How much is the total assets as of December 31, 20x1?

a) 4,000,000
b) 3,800,000
c) 3,200,000
d) 2,800,000

Problem 5. Preparation of statement of financial position

The general ledger summarized trial balance of Cams Corporation, a manufacturing company,
includes the following accounts at Dec. 31, 2021:
19
 Debit Credit
Acc. depreciation – buildings P 120,000
Acc. depreciation - leased assets 310,000
Acc. depreciation - equipment 3,726,000
Allowance for doubtful debts 80,000
Bank loans 2,215,000
Bank overdrafts 350,000
Buildings, at cost P1,030,000
Cash 175,000
Debentures 675,000
Deferred tax 420,000
Deposits, at call 36,000
Equipment 8,275,000
Finished goods 1,042,000
Goodwill 2,530,000
Income tax payable 152,000
Investments in listed companies (FVTOCI) 52,000
Investments revaluation reserve 25,000
Land, at valuation 250,000
Land revaluation reserve 81,000
Lease liabilities 350,000
Leased assets 775,000
Other loans 575,000
Patents 110,000
Prepayments 141,000
Provision for employment benefits 275,000
Provision for restructuring 412,000
Provision for warranty 42,000
Raw materials 490,000
Retained earnings 1,481,000
Share capital 3 ,500,000
Sundry creditors and accruals 715,000
Sundry debtors 320,000
Trade creditors 1,617,000
20
 Trade debtors 1,744,000
Work In progress 151,000
P17,121,000 P17,121,000

Additional information:

a. Bank loans and other loans are all repayable beyond one year.
b. P300,000 of the debentures is repayable within one year.
c. Lease liabilities include P125,000 repayable within one year.
d. Provision for employment benefits includes P192,000 payable within one year.
e. The planned restructuring is intended to be completed within one year.
f. Provision for warranty includes P20,000 estimated to be incurred beyond one year.

Required:

Prepare a statement of financial position in accordance with PAS 1.

21
 Summary

 General purpose financial statements are those statements that cater to the commonneeds of a
wide range of primary (external) users.

 The purpose of general purpose financial statements is to provide information about the financial
position, financial performance, and cash flows of an entity that is useful to a wide range of users
in making economic decisions.
 A complete set of financial statements consists of the following: (1) statement of financial
position, (2) statement of profit or loss and other comprehensive income, (3) statement of changes
in equity, (4) statement of cash flows, (5) notes, (5a) comparative information, and (6) additional
statement of financial position when an entity makes a retrospective application, retrospective
restatement, or reclassifies items with material effect.
 The statement of financial position may be presented either showing current/non-current
distinction (classified) or based on liquidity (unclassified). PAS 1 encourages the classified
presentation
 Current assets are those that are expected to be realized within 1 year. All other assets are
noncurrent.
 Current liabilities are those that are expected to be settled within 1 year. All other liabilities are
noncurrent.
 Deferred tax assets and deferred tax liabilities are presented as noncurrent items in a classified
statement of financial position.
 PAS 1 does not prescribe the order or format in which an entity presents items.

Reference

Millan, Z. (2019). Intermediate Accounting 3. 21 Paramount Vill. Sto. Tomas, Baguio City,
Philippines. Bandolin Enterprise.

MODULE 2
STATEMENT OF COMPREHENSIVE INCOME

22
 Introduction

The statement of comprehensive income should be presented immediately after the income
statement. (However, it could be combined with the income statement.)

The term comprehensive income consists of a corporation's net income and a few additional
items which make up what is known as other comprehensive income.

In this module, we will prepare a statement of profit or loss and other comprehensive income,
give examples of items of other comprehensive income, and state the acceptable methods of
presenting items of income and expenses.

Learning Outcomes

After completing the module, the student should be able to:

1. Prepare a statement of profit or loss and other comprehensive income.

2. Give examples of items of other comprehensive income.
3. State the acceptable methods of presenting items of income and expenses

23
Lesson 1. Statement of profit or loss and other comprehens ive
income (Millan, 2019)

An entity shall present all items of income and expense recognized in a period:
1. in a single statement of profit or loss and other comprehensive income; or
2. in two statements: (1) a statement displaying the profit or loss section only (separate ‘statement
of profit or loss’ or ‘income statement’) and (2) a second statement beginning with profit or loss
and displaying components of other comprehensive income.

Extraordinary items
PAS 1 prohibits the presentation of any items of income or expense as extraordinary items in
the in the statement(s) presenting profit or loss and other comprehensive income or in the notes.

Other comprehensive income for the period

1. Changes in revaluation surplus
2. Unrealized gains and losses on investments in FVOCI securities
3. Remeasurements of the net defined benefit liability (asset)
4. Gains and losses arising from translating the financial statements of a foreign operation
5. Effective portion of gains and losses on hedging instruments in a cash flow hedge

 OCI may be presented either (a) net of tax or (b) gross of tax.

Reclassification adjustments
Reclassification adjustments are amounts reclassified to profit or loss in the current period
that were recognized in other comprehensive income in the current or previous periods.

Total comprehensive income

Total comprehensive income comprises all components of
1. Profit or loss; and
2. Other comprehensive income.

Presentation of Expenses
1. Nature of expense method
2. Function of expense method

 If an entity classifies expenses by function, it shall disclose additional information on thenature

of expenses

Disclosure of dividends
24
 Dividends declared by an entity are disclosed either in the (a) notes or (b) statementof changes
in equity.

Order of presentation of disclosures in the Notes

1. Statement of compliance with PFRSs;
2. Summary of significant accounting policies applied;
3. Supporting information for items presented in the other financial statements; and
4. Other disclosures.

Lesson 2. Application of concepts: Theory questions

(Millan, 2019)

1. PAS 1 does not require the presentation of which of the following financial statements?
a) Balance sheet
b) Notes
c) Income statement
d) All of these are required
2. Which of the following statements correctly relate to the provisions of PAS 1?
a) According to PAS 1, "cash and cash equivalents" shall always be presented as the first line
item in the balance sheet.
b) The term "balance sheet" may be used in lieu of the "statement of financial position"and the
term "income statement" may be used in lieu of the "statement of profit or loss and other
comprehensive income."

c) An entity is prohibited from presenting extraordinary items in the financial statements but
may disclose those items in the notes.
d) An entity may present its income and expenses in a single statement or in two statements
3. Which of the following is not a component of other comprehensive income?
a) A revaluation increase in an item of property, plant and equipment during the period
b) The difference between the return on plan assets and the interest on the plan assets.
c) A decrease in the fair value of investment in FVOCI securities.
d) The ineffective portion of a cash flow hedge
4. In which of the following instances may an entity make a reclassification adjustment?
a) A revalued property is sold at a gain.
b) The entity amends its retirement benefit plan resulting to a decrease in the present value of
defined benefit obligation.
25
 c) An entity sells its investment in equity securities measured at FVOCI.
d) A hedging relationship ceases and the entity transfers the related cumulative fairvalue
changes accumulated in equity to profit or loss.
5. Total comprehensive income includes which of the following?
a) Unrealized loss on FVOCI securities
b) Unrealized loss on FVPL securities
c) Profit or loss during the period
d) All of these
6. An entity is required to present additional disclosures if the entity presents its expensesusing the
a) Nature of expense method
b) Function of expense method
c) Either a or b
d) Neither a nor b

Answers / Solutions:
1. C
2. D
3. D
4. D
5. D

Lesson 3. Application of concepts: Sample problem

(Millan, 2019)

The records of Lunch Co. on December 31, 20x1 show the following information:
Debits Credits
Sales 22,000,000
Beginning inventory 1,700,000
Purchases 5,600,000
Purchase returns 500,000
Freight in 400,000
Salaries of sales personnel 670,000

26
Interest expense 340,000
Advertising expense 320,000
Research and development expense 180,000
Directors remuneration 2,000,000
Salaries of administrative personnel 520,000
Rent expense 280,000
Depreciation expense 160,000
Commission expense 1,100,000
Impairment loss on financial assets 190,000
Insurance expense 50,000
Income tax expense 2,000,000
Unrealized gain on equity securities- FVOCI 200,000
Gain on change in fair value - Cash flow hedge 30,000
Totals 15,510,000 15,510,000

27
Additional information:
 Ending inventory amounts to P1,200,000.
 One-half of the rent expense pertains to the sales department.
 The impairment loss on financial assets pertains to impairment of receivables recognizedon
contracts with Customers.
 The items of other comprehensive income are net of tax
 The gain on change in fair value on the cash flow hedge represents the effective portion.

Requirements:
a) Prepare the statement of comprehensive income of Lunch Co. using the single statement
presentation and the function of expense method. Make a proper heading for the financial
statement. Apply the general feature of "materiality and aggregation."
b) Make the additional disclosures for the breakdown of line items in the financial statement. Make
proper cross- profit loss and or referencing of those notes; use "Note 12" as your first cross-
reference.

Answers / Solutions:

Requirement (a):

28
 Lunch Co.
Statement of profit or loss and other comprehensive incomeFor
the year ended December 31, 20x1

Notes
Sales 22,000,000
Cost of goods sold 12 (6,000,000)
Gross profit 16,000,000
Distribution costs 13 (2,230,000)
Administrative expenses 14 (3,050,000)
Impairment loss on financial assets (190,000)
Finance costs (340,000)
Profit before tax 10,190,000
Income tax expense (2,000,000)
Profit for the year 8,190,000
Other comprehensive income
Items that will not be reclassified subsequently:
Investments in equity instruments 200,000
Items that may be reclassified subsequently to profit or loss:
Cash flow hedges 30,000

Other comprehensive income for the yr., net of tax 230,000

TOTAL COMPREHENSIVE INCOME FOR THE YR. 8,420,000

Requirement (b):

29
Note 12: Cost of goods sold
This line item consists of the following:

Beginning inventory 1,700,000

Purchases 5,600,000
Purchase returns (500,000)
Freight in 400,000 .
Total goods available for sale 7,200,000
Ending inventory (1,200,000)
Cost of goods sold 6,000,000

Note 13: Distribution costs

This line item consists of the following:

Salaries of sales personnel 670,000

Advertising expense 320,000
Rent expense (280,000 x ½) 140,000
Commission expense 1,100,000
Distribution costs 2,230,000

Note 14: Administrative expenses This line item consists of the following:

Research and development expense 180,000

Directors' remuneration 2,000,000
Salaries of administrative personnel 520,000

Rent expense 140,000

Depreciation expense 160,000
Insurance expense 50,000
Administrative expenses 3,050,000

30
 Assessment Task

Problem 1. Use the following information for the next two questions:

The following items were presented for the purpose of determining comprehensive income.

Profit for the year 2,000

Increase in revaluation surplus 1,000
Remeasurements of the net defined benefit liability (asset) - loss (200)
Net change in translation of foreign operation (400)
Dividends declared (100)
Stock rights 300

1. How much is the other comprehensive income?

a) 400
b) 600
c) 800
d) 2,000

2. How much is the total comprehensive income?

a) 1,800
b) 2,200
c) 2,400
d) 2,800

31
Problem 2. Use the following information for the next two questions:

The records of Afternoon Sun Co. show the following information:

Interest expense ₱ 24,000

Cost of inventories sold 600,000
Insurance expense 100,000
Advertising expense 20,000
Freight-out 10,000
Freight-in 4,000
Loss on sale of equipment 2,000
Legal and other professional fees 12,000
Rent expense (one-half occupied by sales department) 8,000
Sales commission expense 14,000
Doubtful accounts expense 16,000

1. How much is the total distribution (selling) costs?

a) 48,000
b) 56,000
c) 64,000
d) 108,000
2. How much is the total administrative expenses?

a) 24,000
b) 132,000
c) 226,000
d) 668,000

Problem 3. The records of SOIREE EVENING PARTY Co. showed the following information:

32
Increase in accounts receivable 100,000
Collections on accounts 800,000
Cash sales 120,000
Increase in inventory 40,000
Freight-in 14,000
Freight-out 13,000
Decrease in accounts payable 60,000
Disbursements for purchases 480,000
Purchase discounts 4,000

How much is the gross profit for the year?

a) 662,000
b) 656,000
c) 648,000
d) 626,000

Problem 4. The records of BRACKISH SALTY Co. showed the following information:
Accounts receivable, net, Jan. 1, 20x1 40,000
Accounts receivable, net, Dec. 31, 20x1 160,000
Accounts receivable turnover 4:1
Inventory, Jan. 1, 20x1 120,000
Inventory, Dec. 31, 20x1 60,000
Inventory turnover 3:1

How much is the gross profit for the year?

a) 120,000
b) 130,000
c) 132,000
d) 146,000

33
Problem 5. The records of SURLY BAD TEMPERED Co. showed the following information:
Decrease in accounts payable 60,000
Disbursements for purchases 440,000
Increase in raw materials 100,000
Direct labor is 50% of raw materials used in production
Manufacturing overhead is 20% of prime costs
Increase in work-in-process inventory 40,000
Decrease in finished goods inventory 50,000

How much is the cost of goods sold?

a) 380,000
b) 464,000
c) 514,000
d) 546,000

Problem 6. PRENTICE A LEARNER Co. reported profit after tax of ₱ 210,000. PRENTICE’s income
tax rate is 30%. Operating expenses for the year is 15% of sales and 25% of cost of sales. Other
expenses were 10% of sales.

How much is the total sales?

a) 1,800,000
b) 2,000,000
c) 2,200,000
d) 2,240,00

34
Problem 7. The records of HACK TO CHOP Co. on December 31, 20x1 showed the following
information:
Sales 2,000,000
Sales discounts 20,000
Cost of sales 800,000
Distribution costs 96,000
Administrative costs 240,000
Casualty loss on typhoon 40,000
Dividends received from investments in FVPL 24,000
Dividends received from investment in associate 48,000
Share in the profit of an associate 72,000
Dividends declared and paid 28,000
Interest expense 44,000
Unrealized gain on investments in FVPL 30,000
Unrealized gain on investments in FVOCI 38,000
Income tax expense 300,000
Loss on revaluation 26,000
Remeasurements of the net defined benefit liability (asset) - gain 22,000
Correction of understatement in depreciation in prior year 32,000
Translation adjustment of foreign operation - loss 8,000
How much is the profit for the year?
a) 886,000
b) 586,000
c) 612,000
d) 626,000

Problem 8. WASHY PALE Co. has the following information on December 31, 20x1:
 Cost of sales is ₱ 260,000.
 Operating expenses are 13% of sales and 20% of cost of sales.
 Interest expense is 5% of sales.
 Income tax rate is 30%. There were no temporary differences during the year.

How much is the profit for the year?

a) 65,000
35
b) 140,000
c) 38,600
d) 47,600

Summary

 Income and expenses may be presented: (a) in a single statement of profit or loss and other
comprehensive income, or (b) in two statements an income statement and a statement presenting
comprehensive income

 Other comprehensive income (OCI) comprises items of income and expense (including
reclassification adjustments) that are not recognized in profit or loss as required or permitted by
other PFRSs. OCI include: (a) changes in revaluation surplus, (b) remeasurements of the net
defined benefit liability (asset), (c)unrealized gains and losses on FVOCI investments, (d)
translation gains and losses on foreign operation, and (e) effective portion of gains and losses on
hedging instruments in a cash flow hedge.
 Reclassification adjustments are amounts reclassified from OCI to profit or loss.
 OCl may be presented net or gross of related taxes. Total comprehensive income includes all
non-owner changes in equity. It comprises profit or loss and other comprehensive income.
 Presenting extraordinary items in the financial statements, including the notes, is prohibited.
 Expenses may be presented using either the Nature of expense or the Function of expense
method. Additional disclosure is required when the function of expense methodis used.

Reference

Millan, Z. (2019). Intermediate Accounting 3. 21 Paramount Vill. Sto. Tomas, Baguio City,
Philippines. Bandolin Enterprise.

36
 MODULE 3
REVENUE FROM CONTRACTS WITH
CUSTOMERS

Introduction

PFRS 15 provides the principles in reporting the nature, amount, timing and uncertainty of
revenue and cash flows arising from an entity’s contracts with customers.
An entity recognizes revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods or services.
In this module, we will state the steps in the recognition of revenue, describe how
performance obligations are identified in contract, how the transaction price is allocated to the
performance obligations, state the timing of revenue recognition and its measurement and the
presentation of contracts with customers in the SFP.

Learning Outcomes

After completing the module, the student should be able to:

1. State the five steps in the recognition of revenue.

2. Describe how performance obligations are identified in a contract.
3. Describe how the transaction price is determined and how it is allocated to the
performance obligations.
4. State the timing of revenue recognition and its measurement.
5. State the presentation of contracts with customers in the statement of financial position.

37
Lesson 1. Income versus revenue (Millan, 2019)

The Conceptual Framework provides the following definitions:

 Income – increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity, other than
those relating to contributions from equity participants. Income encompasses both revenue and
gains.

 Revenue – income arising in the course of an entity’s ordinary activities.

Lesson 2. Applicability of PFRS 15 (Millan, 2019)

PFRS 15 shall be applied to contracts wherein the counterparty is a customer.

 Contract – An agreement between two or more parties that creates enforceable rights and
obligations. A contract can be written, oral, or implied by an entity’s customary business
practice.
 Customer – A party that has contracted with an entity to obtain goods or services that arean output
of the entity’s ordinary activities in exchange for consideration.

PFRS 15 shall not be applied to the following:

 Lease contracts (PAS 17 Leases);
 Insurance contracts (PFRS 4 Insurance Contracts);
 Financial instruments; and
 Non-monetary exchanges between entities in the same line of business to facilitate sales to
customers. For example, PFRS 15 is not applicable to a contract between two oil companies that
agree to exchange oil to fulfil customer demands in different locations ona timely basis.

Steps in the recognition of revenue

1. Identify the contract with the customer
2. Identify the performance obligations in the contract
3. Determine the transaction price
4. Allocate the transaction price to the performance obligations in the contract
38
5. Recognize revenue when (or as) the entity satisfies a performance obligation

Step 1: Identify the contract with the customer

Requirements before a contract with a customer is accounted for under PFRS 15:
a) The contract must be approved and the contracting parties are committed to it;
b) rights and payment terms are identifiable;
c) The contract has commercial substance; and
 No revenue is recognized if the contract does not meet the criteria above. Any consideration
received is recognized as liability.

Step 2: Identify the performance obligations in the contract

Each promise in a contract to transfer a distinct good or service is treated as a separateperformance
obligation.

Identifying distinct goods or services

A good or service is distinct if:
a) the customer can benefit from it, either on its own or together with other resources that
are readily available to the customer (e.g., the good or service is regularly sold
separately); and
b) the good or service is separately identifiable (i.e., not an input to a combined output,
does not significantly modify the other promises, or not highly interrelated with the
other promises).
c) A good or service that is not distinct shall be combined with the other promises in the
contract. Combined promises are treated as a single performance obligation.
d) he consideration is probable of collection.

39
Step 3: Determine the transaction price
 The entity shall determine the transaction price because this is the amount at which revenue will
be measured.
 Transaction price is “the amount of consideration to which an entity expects to be entitled in
exchange for transferring promised goods or services to a customer, excludingamounts collected
on behalf of third parties (e.g., some sales taxes).” The consideration may include fixed amounts,
variable amounts, or both.

Step 4: Allocate the transaction price to the performance obligations

 The transaction price shall be allocated to each performance obligation identified in a contract
based on the relative stand-alone prices of the distinct goods or services promised to be
transferred.

 The stand-alone selling price is the price at which a promised good or service can be sold
separately to a customer.

Estimating the stand-alone selling price

 If the stand-alone selling price is not directly observable, the entity shall estimateit using
one or a combination of the following methods:
 Adjusted market assessment approach – the entity evaluates the market in which it
sells goods or services and estimates the price that a customer in that market would be
willing to pay for those goods or services.
 Expected cost plus a margin approach – the entity forecasts its expected costs of
satisfying a performance obligation and then add an appropriate margin for that good
or service.
 Residual approach – the entity estimates the stand-alone selling price as the total
transaction price less the sum of the observable stand-alone selling prices of other
goods or services promised in the contract.

40
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation
 A performance obligation is satisfied when the control over a promised good or service is
transferred to the customer.
 Revenue is measured at the amount of the transaction price allocated to the satisfied
performance obligation.
 Performance obligations are classified into the following:
a) Performance obligation that is satisfied over time
b) Performance obligation that is satisfied at a point in time
Performance obligations satisfied over time
For a performance obligation that is satisfied over time, revenue is recognized overtime AS
the entity progresses towards the complete satisfaction of the obligation.

A performance obligation is satisfied over time if one of the following criteria is met:
a) The customer simultaneously receives and consumes the benefits provided by the
entity’s performance as the entity performs.

b) The entity’s performance creates or enhances an asset that the customer controls as the
asset is created or enhanced.
c) The entity’s performance does not create an asset with an alternative use to the entity
and the entity has an enforceable right to payment for performance completed to date.

Measuring progress towards complete satisfaction of a performance obligation

For each performance obligation satisfied over time, an entity shall recognize revenue
over time by measuring the progress towards complete satisfaction of that performance
obligation.

41
 Examples of acceptable measurement methods:
1. Output methods (e.g., surveys of work performed)
2. Input methods (e.g., relationship between costs incurred to date and total
expected costs)
If efforts or inputs are expended evenly throughout the performance period,revenue
may be recognized on a straight-line basis.

Cost-recovery Approach
If the outcome of a performance obligation cannot be reasonably measured, revenue
shall be recognized only to the extent of costs incurred that are expected to be recovered.

Performance obligations satisfied at a point in time

A performance obligation that is not satisfied over time is presumed to be
satisfied at a point in time.
For a performance obligation that is satisfied at a point in time, revenue is
recognized WHEN the performance obligation is satisfied.

Lesson 3. Contract costs (Millan, 2019)

Contract costs include the following:

a) Incremental costs of obtaining a contract – recognized as asset if they are recoverable and
avoidable. As a practical expedient, the costs are recognized as expense if their expected
amortization period is 1 year or less.
b) Costs to fulfill a contract –if within the scope of PFRS 15, they are recognized as asset ifthey are:
(a) directly related to a contract, (b) generate or enhance resources, and (c) recoverable.

42
Lesson 4. Presentation (Millan, 2019)

A contract where either party has performed is presented in the statement of financial position as a
contract liability, contract asset or receivable.
 Contract liability – is an entity’s obligation to transfer goods or services to a customer for which
the entity has received consideration (or the amount is due) from the customer.
 Contract asset – is an entity’s right to consideration in exchange for goods or services that the
entity has transferred to a customer when that right is conditioned on something other than the
passage of time.
 Receivable – is an entity’s right to consideration that is unconditional.

Lesson 5. Application of concepts: Theory questions and

sample problems (Millan, 2019)

1. An entity, a real estate developer, enters into a contract with a customer for the sale of a building
for P1 million. The customer intends to open a restaurant in the building. The building is located in an
area where new restaurants face high levels of competition and the customer has little experience in the
restaurant industry. The customer pays a non-refundable deposit of P50,000 at inception of the
contract and enters into a long-term financing agreement with the entity for the remaining 95 per
cent of the promised consideration. The financing arrangement is provided on a non-recourse basis,
which means that if the customer defaults, the entity can repossess the building, but cannot seek further
compensation from the customer, even if the collateral does not cover the full value of the amount owed.
The entity's cost of the building is P600,000. The customer obtains control of the building at contract
inception

Requirement: Does the contract qualify for revenue recognition on contract inception? State the
reason for your answer.

For items 2 to 4: An entity, a manufacturer, sells a product to a distributor (ie, is customer) who
will then resell it to an end customer.

43
 2. Scenario A
In the contract with the distributor, the entity promises to provide maintenance services for no
additional consideration (ie, "free") to any party (i.e., the end customer) that purchases the product
from the distributor. The entity outsources the performance of the maintenance services to the
distributor and pays the distributor an agreed-upon amount for providing those services on the entity's
behalf. If the end customer does not use the maintenance services, the entity is not obliged to pay the
distributor

Requirement: Is the maintenance service a performance obligation? If yes, is it an explicit promise or

an implicit promise?

3. Scenario B
The entity does not promise maintenance services during negotiations with the distributor and
the final contract between the entity and the distributor does not specify terms or conditions for those
services. The entity has historically provided maintenance services for no additional consideration (ie,
'free') to end customers that purchase the entity's product from the distributor, based on its customary
business practice.

Requirement: Is the maintenance service a performance obligation? If yes, is it an explicit promise or

an implicit promise?

4. Scenario C
In the contract with the distributor, the entity does not promise to provide any maintenance
services. In addition, the entity typically does not provide maintenance services and, therefore, the
entity's customary business practices, published policies and specific statements at the time of
entering into then contract have not created an implicit promise to provide goods or services to its
customers. The entity transfers control of the product to the distributor and therefore, the contract is
completed. However, before the sale to the end customer, the entity makes an offer to provide
maintenance services to any party that purchases the product from the distributor for no additional
promised consideration

Requirement: Is the maintenance service a performance obligation? yes, is it an explicit promise or an

implicit promise?

5. An entity enters into a contract with a customer to sell Products A, B and C in exchange for P100. The
entity will satisfy the performance obligations for each of the products at different points in time. The
entity regularly sells Product A separately at P50. The stand-alone sellingprices of Products B and C
are not directly observable. The entity evaluates the market in which it sells Product B and estimates
that a customer in that market would be willing to pay
$25 for Product B. The entity's cost for Product is 150. The entity regularly marks-up its goods at 50%
above cost.

Requirement: Allocate the transaction price to the performance obligations

44
6. An entity enters into a contract with a customer to provide a consulting service that results in the
entity providing a professional opinion to the customer. The professional opinion relates to facts and
circumstances that are specific to the customer. If the customer were to terminate the consulting
contract for reasons other than the entity's failure to perform as promised, the contract requires the
customer to compensate the entity for its costs incurred plus a 15 per cent margin. The 15 per cent
margin approximates the profit margin that the entity ears fromsimilar contracts

Requirement: Identify if the performance obligation is satisfied over time or at a point in time. State
how the entity recognizes revenue,
7. In 20x1, an entity enters into a service contract to manage a Chapter 3 190 customer's information
technology data center for five years. The contract is renewable for subsequent one-year periods. The
average customer term is seven years. The entity pays an employee a P10,000 sales commission upon
the customer signing the contract. Before providing the services, the entity designs and builds a
technology platform for the entity's internal use that interfaces with the customer's systems. That
platform is not transferred to the customer, but will be used to deliver services to the customer.

The initial costs incurred to set up the technology platform are as follows:
Design services 40,000
Hardware 120,000
Software 90,000
Migration and testing of data center 100,000

45
Additional information:
 The design services and migration and testing of data center enhance resources that willbe used in
providing the services.
 ABC Co. uses the straight-line method of depreciation) amortization for its PPE and intangible
assets. A full-year's depreciation is recognized in the year of acquisition and none in the period
of disposal. Items of PPE and intangible assets are depreciated/ amortized over 5 years.
 In addition to the initial costs to set up the technology platform, the entity also assigns two
employees who are primarily responsible for providing the service to the customer. Although the
costs for these two employees incurred as part of providing the service to the customer, the entity
concludes that the costs do not generate or enhance are resources of the entity. The salaries of these
employees during the period totaled P30,000.

Requirements:
a) How much is the total year-end carrying amount of the assets recognized from the contract?
b) How much is the total expense recognized in 20x1?

8. On 1 January 20X8, an entity enters into a contract to transfer Products A and B to a customer in
exchange for P1,000. The contract requires Product A to be delivered first and states that payment for
the delivery of Product A is conditional on the delivery of Product B. The stand-alone selling prices of
Products A and B are P480 and P720, respectively. Product A is delivered on January 3, 20X8 while
Product B is delivered on March 31, 20X8. The customer pays on April 8, 20X8.

Requirement: Provide the journal entries.

46
9. Use the facts in the immediately preceding problem. In addition, the contract also includes a
promise to transfer Product D. Total consideration in the contract is P130. The stand-alone selling
price for Product D is highly variable because the entity sells Product D to different customers for a
broad range of amounts (P15 - P45).

Requirement: Allocate the transaction price to the performance obligations in the contract.

10. An entity enters into 100 contracts with customers. Each contract includes the sale of one product
for P100 (100 total products * P100 = P10,000 total consideration). Cash is received when control of a
product transfers. The entity's customary business practice is to allow a customer to return any unused
product within 30 days and receive a full refund. The entity's cost of each product is P60. The entity
applies the requirements in PFRS 15 to the portfolio of 100 contracts because it reasonably expects
that the effects on the financial statements from applying requirements of PFRS 15 to the portfolio
would not differ materially from applying the requirements to the individual contracts within the
portfolio. Because the contract allows a customer to return the products, the consideration received
from the customer is variable. To estimate the variable consideration to which the entity will be
entitled, the entity decides to use the expected value method because it is the method that the entity
expects to better predict the amount of consideration to which it will be entitled. Using the expected
value method, the entity estimates that 97 products will not be returned. The entity also considers the
requirements in PFRS 15 on constraining estimates of variable consideration to determine whether the
estimated amount of variable consideration can be included in the transaction price. The entity
considers the factors in PFRS 15 and determines that although the returns are outside the entity's
influence, it has significant experience in estimating returns for this product and customer class. In
addition, the uncertainty will be resolved within a short time frame (i.e., the 30-day return period).
Thus, the entity concludes that it is highly probable thata significant reversal in the cumulative amount
of revenue recognized will not occur as the uncertainty is resolved (i.e., over the return period). The
entity estimates that the costs of recovering the products will be immaterial and expects that the
returned products can be resold at a profit

Requirement: Provide the journal entries on contract inception.

47
11. An entity enters into a contract with a customer to sell an asset. Control of the asset will transfer
to the customer in two years (i.e., the performance obligation will be satisfied at a point in time). The
contract includes two alternative payment options: payment of P5,000 in two years when the
customer obtains control of the asset or payment of P4,000 when the contract is signed. The customer
elects to pay P4,000 when the contract is signed. The entity concludes that the contract contains a
significant financing component because of the length of time between when the customer pays for the
asset and when the entity transfers the assetto the customer, as well as the prevailing interest rates in the
market. The interest rate implicit in the transaction is 11.8 per cent, which is the interest rate necessary
to make the two alternative payment options economically equivalent. However, the entity determines
that, inaccordance with PFRS 15, the rate that should be used in adjusting the promised consideration
is six per cent, which is the entity's incremental borrowing rate.

Requirement: Provide all the journal entries during the contractual period.

Answers / Solutions:

1. Answer: No. The “probable of collection” criterion under PFRS 15 is not met because the
customer’s ability and intention to pay may be in doubt. This is evidenced by the following:
a) the customer intends to repay the loan (which has a significant balance) primarily from
income derived from its restaurant business (which is a business facing significant risks
because of high competition in the industry and the customer ’s limited experience);
b) the customer lacks other income or assets that could be used to repay the loan; and
c) the customer’s liability under the loan is limited because the loan is non-recourse.

The entity accounts for the non-refundable ₱ 50,000 payment as a deposit liability. The entitycontinues
to account for the initial deposit, as well as any future payments of principal and interest, as a deposit
liability, until such time that the entity is able to conclude that it is probable that the entity will collect
the consideration or one of the following events has occurred.

48
 a) the entity has no remaining obligations to transfer goods or services to the customer and all,
or substantially all, of the consideration promised by the customer has been received by the
entity and is non-refundable; or
b) the contract has been terminated and the consideration received from the customer is non-
refundable.

The entity continues to assess the contract to determine whether the “probable of collection” criterion
is subsequently met or whether the events above (‘a’ or ‘b’) have occurred.

2. Answer: Yes, it is a performance obligation. Explicit.

Because the promise of maintenance services is a promise to transfer goods or services in the future
and is part of the negotiated exchange between the entity and the distributor, the entity determines
that the promise to provide maintenance services is a performance obligation. The entity concludes
that the promise would represent a performance obligation regardless of whether the entity, the
distributor, or a third party provides the service. Consequently, the entity allocates a portion of the
transaction price to the promise to providemaintenance services.

3. Answer: Yes, it is a performance obligation. Implicit.

4. Answer: No, it is not a performance obligation. The maintenance services shall be

accounted for under PAS 37 Provisions, Contingent Liabilities and Contingent Assets.

5. Solution:
Estimated
stand-alone As allocated
Product Estimation method selling prices Allocation
X N/A (Stand-alone price) 50 (100 x 50/150) 33
Y Adjusted market assessment 25 (100 x 25/150) 17
Expected cost plus a margin
Z (50 x 150%) 75 (100 x 75/150) 50
Total 150 100

49
 6. Answer: The performance obligation is satisfied over time because of the following reasons:
a) The development of the professional opinion does not create an asset with alternativeuse to the
entity because the professional opinion relates to facts and circumstances that are specific to
the customer. Therefore, there is a practical limitation on the entity ’s ability to readily direct
the asset to another customer.
b) The entity has an enforceable right to payment for its performance completed to date for its
costs plus a reasonable margin, which approximates the profit margin in other contracts.

The entity recognizes revenue over time by measuring the progress towards completesatisfaction
of the performance obligation.

7. Solution:
Asset Expense
Design services - PFRS 15 (40,000 x 6/7) 34,286
Amortization of design services (40,000 ÷ 7) 5,714

Hardware - PAS 16 (120,000 x 4/5) Depreciation 96,000

of hardware (120,000 ÷ 5) 24,000

Software - PAS 38 (90,000 x 4/5) Amortization of 72,000

software (90,000 ÷ 5) 18,000

Migration and testing - PFRS 15 (100,000 x 6/7) Amortization 85,714

of migration & testing (100,000 ÷ 7) 14,286

Employee benefits 30,000

Totals 288,000 92,000

Jan. 1, 20x8
No entry
Jan. 3, 20x8 Contract asset (₱ 1,000 x 480/1,200a) 400
20x8 Revenue 400

50
Mar.31, Receivable 1,000
20x8 Contract asset 400
Revenue (₱ 1,000 x 720/1,200a) 600
Apr. 8, Cash 1,000
20x8 Receivable 1,000
8. Solution:

aSum of relative stand-alone selling prices: (480 + 720) = 1,200

9. Solution:
Product Stand-alone prices Allocation As allocated Discount
A 40 N/A 40 -
B 55 (60 x 55/100) 33 22
C 45 (60 x 45/100) 27 18
Residual
approach
D N/A -
(130K - 40K - 30
33K - 27K)
Total 140 130 40

The use of the residual approach is appropriate because the ₱ 30 allocated to Product D iswithin the
range of its observable selling prices (₱ 15 - ₱ 45).

10. Solution:
Date Cash 10,000
Revenue (₱ 10,000 x 97%) 9,700
Refund liability (₱ 10,000 x 3%) 300
Date Cost of goods sold (97 x ₱ 60) 5,820

51
 Asset for right to recover product to be returned (3 x
180
₱ 60)
6,000
Inventory (100 x ₱ 60)

11. Solution:
(a) Contract inception:
Jan. 1, 20x1
Cash 4,000
Contract liability 4,000

(b) During the two years from contract inception until the transfer of the asset, the entity adjusts the
promised amount of consideration (in accordance with paragraph 65 of IFRS 15) and accretes the
contract liability by recognizing interest on ₱ 4,000 at six per cent for two years:

Dec. 31, 20x1

Interest expense (4,000 x 6%) 240
Contract liability 240

Dec. 31, 20x2

Interest expense [(4,000 + 240) x 6%] 254.4
Contract liability 254.4

(c) Transfer of the asset:

Jan. 1, 20x3
Contract liability (4,000 + 240 + 254.4) 4,494.4
Revenue 4,494.4

Assessment Task

Problem 1. On 1 July 20X7, The Pyretus Company, a manufacturer of office furniture, suppliedgoods to
The Natiso Company for ₱ 120,000 on condition that this amount was paid in full on 1 July 20X8.
Natiso had earlier rejected an alternative offer from Pyretus whereby they could have bought the same
goods by paying cash of ₱ 108,000 on 1 July 20X7. Under PFRS 15, how much relating to this
52
transaction should Pyretus recognize in profit or loss in respect ofrevenue and interest income for the
year ended 30 June 20X8?
Revenue Interest Income
a) 108,000 12,000
b) 120,000 Nil
c) 108,000 Nil
d) 120,000 12,000

Problem 2. On 1 July 20X7 The Otakamiro Company handed over to a client a new computer system.
The contract price for the supply of the system and after sales support for 12 months was ₱ 800,000.
Otakamiro estimates the cost of the after-sales support at ₱ 120,000 and it normally marks up such
costs by 50% when tendering for support contracts. Under PFRS 15, the revenue Otakamiro should
recognize in its financial year ended 31 December 20X7 is
a) 620,000
b) 800,000
c) 710,000
d) Nil

Problem 3. On October 1, 20x3, Acme Fuel Co. sold 100,000 gallons of heating oil to Karn Co. at ₱ 3
per gallon. Fifty thousand gallons were delivered on December 15, 20x3, and the remaining 50,000
gallons were delivered on January 15, 20x4. Payment terms were: 50% dueon October 1, 20x3, 25% due
on first delivery, and the remaining 25% due on second delivery.What amount of revenue should Acme
recognize from this sale during 20x3?
a) 75,000
b) 150,000
c) 225,000
d) 300,000

Problem 4. In 20x2, Super Comics Corp. sold a comic strip to Fantasy, Inc. and will receive royalties
of 20% of future revenues associated with the comic strip. At December 31, 20x3, Super reported
royalties receivable of ₱ 75,000 from Fantasy. During 20x4, Super received royalty payments of ₱
200,000. Fantasy reported revenues of ₱ 1,500,000 in 20x4 from the comic strip. In its 20x4 income
statement, what amount should Super report as royalty revenue?

a) 125,000
b) 175,000
c) 200,000

53
d) 300,000

Problem 5. Lin Co., a distributor of machinery, bought a machine from the manufacturer in
November 20x3 for ₱ 10,000. On December 30, 20x3, Lin sold this machine to Zee Hardware for ₱
15,000, under the following terms: 2% discount if paid within thirty days, 1% discount if paid after
thirty days but within sixty days, or payable in full within ninety days if not paid within the discount
periods. However, Zee had the right to return this machine to Lin if Zee was unable to resell the
machine before expiration of the ninety-day payment period, in which case
Zee’s obligation to Lin would be canceled. In Lin’s net sales for the year ended December 31, 20x3,
how much should be included for the sale of this machine to Zee?

a) 0
b) 14,700
c) 14,850
d) 15,000

Problem 6. Use the following information for the next two questions:
DISCALCED BAREFOOTED NAKASAKASAKA Supermarket, Inc. awards customers loyalty
points for their purchases. A customer is entitled to one point for every ₱ 400 purchase. The points
accumulated may be redeemed for awards in the form of appliances, electronics, groceries and other
household items. DISCALCED estimates the stand-alone selling price of each point at ₱ 4.00. During
the period, DISCALCED made total sales of ₱ 40M to cardholders.

1. How much sales revenue is recognized?

a) 400,000
b) 40,000,000
c) 39,600,000
d) 0

2. How much is the deferred revenue from loyalty points?

3. a)400,000
b) 40,000,000
c) 39,600,000
d) 0

Problem 7. Wren Corp.’s trademark was licensed to Mont Co. for royalties of 15% of sales of the
trademarked items. Royalties are payable semiannually on March 15 for sales in July through
December of the prior year, and on September 15 for sales in January through June of the same year.
Wren received the following royalties from Mont:
March 15 September 15
20x2 10,000 15,000

54
20x3 12,000 17,000

Mont estimated that sales of the trademarked items would total ₱ 60,000 for July throughDecember
20x3. In Wren’s 20x3 income statement, the royalty revenue should be
a) 26,000
b) 29,000
c) 38,000
d) 41,000

Problem 8. Rill Co. owns a 20% royalty interest in an oil well. Rill receives royalty payments on
January 31 for the oil sold between the previous June 1 and November 30, and on July 31 for oil sold
between December 1 and May 31. Production reports show the following oil sales:

June 1, 20x2 - November 30, 20x2 300,000

December 1, 20x2 - December 31, 20x2 50,000
December 1, 20x2 - May 31, 20x3 400,000
June 1, 20x3 - November 30, 20x3 325,000
December 1, 20x3 - December 31, 20x3 70,000

What amount should Rill report as royalty revenue for 20x3?

a) 140,000

b) 144,000
c) 149,000
d) 159,000

Summary

 PFRS 15 requires the following steps in recognizing revenue:Step

1: Identify the contract with the customer
Step 2: Identify the performance obligations in the contractStep 3:
Determine the transaction price
Step 4: Allocate the transaction price to the performance obligations in the contract Step 5:
Recognize revenue when (or as) the entity satisfies a performance obligation
 Contract costs include (a) incremental costs of obtaining a contract and (b) costs to fulfilla
contract.
55
 Incremental costs of obtaining a contract are recognized as asset if they are recoverable. Costs that
would have been incurred regardless of whether the contract was obtained are recognized as
expense, except when they are chargeable to the customer even if the contract is not obtained. As
a practical expedient, he costs are recognized as expense if their expected amortization period is 1
year or less.
Costs incurred in fulfilling a contract that are outside the scope of other standards are recognized
as asset if they are (a) directly related to a contract, (b) generate or enhance resources, and (c )
recoverable.
 Presentation: a contract where either party has performed is presented in the SFP as a contract
liability, contract asset or receivable.

Reference

Millan, Z. (2019). Intermediate Accounting 3. 21 Paramount Vill. Sto. Tomas, Baguio City,
Philippines. Bandolin Enterprise

56
 MODULE 4
NON-CURRENT ASSETS HELD FOR SALE AND
DISCONTINUED OPERATIONS

Introduction

Assets classified as non-current in accordance with PAS 1 are classified as currentassets only
if they meet the criteria to be classified as held for sale under PFRS 5.

PFRS 5 prescribes the accounting for assets held for sale, including disposal groups, and the
presentation and disclosure of discontinued operations.

In this module, we will describe the requirements for classifying assets as held for sale, state the
initial and subsequent measurement of held for sale assets, differentiate non-current asset held for sale,
disposal group and discontinued operations and state the presentation requirements of a discontinued
operation.

Learning Outcomes

After completing the module, the student should be able to:

1. .Describe the requirements for classifying assets as “held for sale.”

2. State the initial and subsequent measurement of “held for sale” assets.
3. Differentiate the following: (1) Non-current asset held for sale, (2) Disposal group, and (3)
Discontinued operations.
4. State the presentation requirements of a discontinued operation

57
 Lesson 1. Introduction to non-current asset held for sale (Milan,
2019)

Core principle
A non-current asset is presented in the classified statement of financial position as current
asset only when it qualifies to be classified as “held for sale” in accordance with PFRS5.

Scope
PFRS 5 applies to the following non-current assets:
1. Property, plant and equipment
2. Investment property measured under the Cost model
3. Investments in associate or subsidiary or joint venture
4. Intangible assets

Classification of non-current assets (or disposal groups) as Held for Sale

A non-current asset (or disposal group) is classified as held for sale or held for distribution to
owners if its carrying amount will be recovered principally through a sale transaction rather than
through continuing use.

Conditions for classification as held for sale

A non-current asset (or disposal group) is classified as “held for sale” if all of thefollowing
conditions are met:
1. The asset or disposal group is available for immediate sale in its present condition subjectonly to
terms that are usual and customary; and
2. The sale is highly probable (i.e., significantly more likely than not).
i. Management is committed to a plan to sell the asset;
ii. An active program to locate a buyer has been initiated;
iii. The sale price is reasonable in relation to its current fair value;
iv. The sale is expected to be completed within one year; and
v. It is unlikely that the plan of sale will be withdrawn.
Exception to the one-year requirement
An extension of the period required to complete a sale does not preclude an asset (ordisposal
group) from being classified as held for sale if:
1. the delay is attributable to events or circumstances beyond the entity’s control; and

58
2. there is sufficient evidence that the entity remains committed to its plan to sell the asset(or
disposal group)

Event after reporting period

If the criteria for classification as held for sale are met after the reporting period, an entity
shall not classify a non-current asset (or disposal group) as held for sale in those financial statements
when issued.

Non-current assets that are to be abandoned

An entity shall not classify as held for sale a non-current asset (or disposal group) that is to be
abandoned since the asset’s carrying amount will be recovered through continuing use rather than
principally through a sale.
An entity shall not account for a non-current asset that has been temporarily taken out of use as
if it had been abandoned.

Initial and subsequent measurement

 Lower of carrying amount and fair value less cost to sell.
 A write-down to fair value less cost to sell, and related reversal thereof, is recognized inprofit or
loss.
 Reversal of impairment is recognized as gain to the extent of cumulative impairment lossthat has
been recognized.
 Depreciation (amortization) ceases during the period an asset is classified as held forsale.

59
Changes to a plan of sale
A non-current asset that ceases to be classified as held for sale shall be measured at the lower
of the asset’s:
1. Carrying amount before it was classified as held for sale, adjusted for any depreciation,
amortization or revaluation that would have been recognized had the asset not been classified as
held for sale, and
2. Recoverable amount at the date of subsequent decision not to sell.

Lesson 2. Discontinued operations (Millan, 2019)

A discontinued operation is a component of an entity that either has been disposed ofor is
classified as held for sale, and
1. Represents a major line of business or geographical area of operations;
2. Is part of a single coordinated plan to dispose of a separate major line of business or
geographical area of operations; or
3. Is a subsidiary acquired exclusively with a view to resale

Component of an entity
A component of an entity comprises operations and cash flows that can be clearly
distinguished, operationally and for financial reporting purposes, from the rest of the entity. It can be
cash generating unit or group of cash generating units.

Classification and Presentation

1. Non-current asset held for sale
 Asset being sold: a single non-current asset
 Presentation: SFP
2. Disposal group held for sale
 Asset being sold: a group of assets
 Presentation: SFP
3. Discontinued operation
 Asset being sold: a component of an entity
 Presentation: SFP and P/L and OCI

60
Presentation of discontinued operations
The results of operations of the discontinued operations, including impairment losses and
actual gain on disposal, is presented as a single amount, net of tax, after profit or loss from continuing
operations.
If a component of an entity qualified as discontinued operation during the year, all of its
results of operations, before and after classification date, shall be classified as discontinuedoperations.

Direct costs associated to decision to dispose a component

Costs or adjustments directly associated with the decision to dispose a component should be
recognized and shown as part of discontinued operations. Examples of such costsinclude:
1. such items as severance pay or employee termination costs,
2. additional pension costs,
3. employee relocation expenses, and
4. future rentals on long-term leases

Comparative information
If, in the current year, a component of an entity is classified as discontinued operation, an entity
shall re-present the disclosures for prior periods presented in the financial statements so that the
disclosures relate to all operations that have been discontinued by the reporting period for the latest
period presented.

Events after the reporting period

If the criteria for classification as discontinued operation are met after the reporting period
but before the financial statements are authorized for issue, the entity shall disclose the information in
the notes as non-adjusting event after the reporting period.

61
Cessation of classification as held for sale: Effect on comparative statement of financial position
The cessation of classification as discontinued operation is accounted for retrospectively;
while the cessation of classification as held for sale (non-current assets and disposal groups that are
not components of an entity) is accounted for prospectively.

Lesson 3. FS Presentation

Non-current assets held for sale and assets and liabilities of disposal groups are presented as
current assets (current liabilities) but separately from the other assets and liabilities in the statement of
financial position.
An entity shall not offset the assets and liabilities of a disposal group.

Lesson 4. Application of concepts: Theory questions

(Milan, 2019)

1. A noncurrent asset is presented in the classified statement of

a) if the noncurrent asset is actually sold after the end of reporting period but before the financial
statements are quality as financial position as current asset period. authorized for issue.
b) only when it qualifies to be classified as "held for sale" in accordance with PFRS 5 as of the end
of the reporting

62
c) only when it qualifies to be classified as "held for sale" in accordance with PFRS 5 after the end
of the reporting period but before the financial statements are authorized for issue.
d) in any of these circumstances.

2. PFRS 5 Non-current Assets Held for Sale and Discontinued Operations does not apply towhich of
the following assets
a) Investment property measured under the cost model
b) Investments in associate or subsidiary or joint venture
c) Intangible assets
d) Inventories and accounts receivable

3. According to PFRS 5, a non-current asset (or disposal group) is classified as held for sale
a) if its carrying amount will be recovered principally rather than through a sale
b) if its carrying amount will be recovered principally through a sale transaction rather thanthrough
continuing use
c) if the asset is sold after the end of the reporting period but before the financial statementsare
authorized for issue
d) whenever management decides to sell that asset. through continuing use transaction

4. A non-current asset (or disposal group) is classified as "held for sale" if

1. The asset or disposal group is available for immediate sale in its present conditionsubject
only to terms that are usual and customary
2. The sale is highly probable.
a) True, True
b) b. True, False
c) False, True
d) False, False

5. The criteria under PFRS 5 for classifying an asset as "held for sale" are most likely met inwhich of
the following instances?
a) ABC Co. plans to sell its office building. However, the sale will not take place until ABCCo.
finishes constructing its new office building.

63
b) DEF Co. plans to sell its machinery. However, the sale will not take place until after DEF
completes its production backlog.
c) XYZ, Inc. plans to sell its delivery truck. However, the sale will not take place until afterXYZ,
Inc. finishes a major overhaul on the truck's engine.
d) UVW Co. plans to sell its building, classified as investment property measured under thecost
model, as is and without any renovations.

6. Noncurrent assets classified as held for sale are measured at

a) Fair value
b) Fair value less costs to sell
c) Fair value through other comprehensive income
d) Lower of carrying amount and fair value less costs to sell

7. An entity makes a formal plan to sell its building that has no value in use. The building has a
carrying amount of P1.000.000 and a fair value less costs to sell of P800,000. The building is currently
being marketed at its current condition at a price of P1,000,000. The entity's management believes
that it is significantly more likely than not that the sale will be consummated within 12 months after
the end of the reporting period. How should the entity present the building in its current statement of
financial position?
a) As property, plant and equipment measured at P1.000.000
b) As noncurrent asset held for sale measured at P1.000.000
c) As property, plant and equipment measured at P500.000
d) As noncurrent asset held for sale measured at P800.000

8. Which of the following is not one of the criteria for classifying an asset as held for sale in
accordance with PFRS 5?
a) The sale is probable to occur within one year from the end of the reporting period
b) The asset or disposal group is available for immediate sale in its present condition
c) An appropriate level of management is committed to a plan to sell the asset.
d) An active program to locate a buyer has been initiated.

9. ABC Co. classified a land as "held for sale in its December 31 2020 financial statements in
accordance with PFRS 5. On December 31, 20x1, the land remains unsold. Which of the
following instances would not provide a valid reason for ABC Co. to continue to classify the land as
held for sale in its 20x1 financial statements?
a) The failure to sell the land is beyond the control of ABC Co.
b) As of December 31 20x1, ABC Co. has decreased the sale price of the land.
c) ABC Co. has increased its effort on selling the land by engaging more brokers and makingmore
64
 advertisements
d) ABC Co. has not changed the sale price of the land.

10. On December 31, 20x1, ABC Co. has no intention of selling a land classified as investmentproperty
measured at cost However, on January 2, 20x2, because of an unanticipated opportunity, ABC Co.
sold the land at a very high profit. How should ABC Co. classify the land in its December 31, 20x1
statement of financial position?
a) As investment property measured at the sale price on January 2, 20x2.
b) As investment property measured at cost.
c) As held for sale asset measured at the sale price on January 2, 20x2.
d) The land shall not be included in the December 31, 20x1 statement of financial positionbecause
it is already considered sold.

Answers / Solutions:
1. B
2. D
3. B
4. A
5. D
6. D
7. C
8. A
9. D
10. B

Lesson 5. Application of concepts: Sample problems

(Millan, 2019)

Use the following information for the next four questions:

On December 31, 20x1, an entity classifies machinery with historical cost of P3,000,000,
accumulated depreciation of P2,000,000 and remaining useful life of 5 years as held for sale. The
entity depreciates its machinery using the straight line method with no residual value. The fair value
of the machinery December 31, 20x1 is P800,000 while costs to sell are estimated at P50,000. The
sale price of the machinery is P800,000.
1. Which of the following shall be recognized by the entity in its 20x1 financial statements?
Held for sale asset Impairment loss
65
a. P800,000 P150,000
b. P750,000 P200,000
c. P750,000 P250,000
d. P0 P250,000

2. Requirement: Provide the journal entry on December 31, 20x1

3. On December 31, 20x2, the machinery remains unsold. The fair value of the machinery on
December 31, 2022 is P700,000 while costs to sell are estimated at P50,000. The entity decreased the
sale price to P650,000. Which of the following shall be recognized by the entity in its 20x2 financial
statements?
Held for sale asset Impairment loss
a. P700,000 P100,000
b. P650,000 P100,000
c. P650,000 P150,000
d. P0 P100,000

4. Requirement: Provide the journal entry on December 31, 20x2.

66
5. On December 31, 20x3, the machinery remains unsold. The fair value of the machinery on
December 31, 20x3 is P1,100,000 while costs to sell are estimated at P50,000. The failure to locate a
buyer and complete the sale is beyond the entity's control. The entity further decreased the sale price
to P600,000. Which of the following shall be recognized by the entityin its 20x3 financial statements?

Held for sale asset Impairment loss

a. P1,100,000 P450,000
b. P1,00,000 P350,000
c. P750,000 P250,000
d. P0 P350,000

6. Requirement: Provide the journal entry on December 31, 20x3.

7. On December 31, 20x4, the machinery remains unsold. The fair value of the machinery on
December 31, 20x4 is P1,000,000 while costs to sell are estimated at P50,000. The entity didnot further
decrease the sale price. Which of the following shall be recognized by the entity in its 20x4 financial
statements?
a) Property, plant and equipment for P400,000
b) Property, plant and equipment for P1,000,000
c) Noncurrent asset held for sale for P950,000.
d) Noncurrent asset held for sale for P1,000,000

8. Requirement: Provide the journal entry on December 31, 20x4.

9. On April 1, 20x1, an entity decides to dispose a major product line. All the conditions for held for
sale classification under PFRS 5 are met. On this date, the carrying amount of the netassets of the major
product line is P1,000,000. The entity expects gross proceeds of P600,000 from the disposal. Direct
costs associated to the decision to dispose the major product line amount to P50,000.
From January 1 to March 31, the profit from the product line is P200,000, while from April 1
to December 31, the loss from the product line is P120,000. The entity is subject to anincome tax rate
of 30%. Assume there are no temporary differences.

67
 In relation to the product line, how much profit (loss) will the entity recognize in its 20x1
financial statements?

Continuing operations Discontinued operations

a) 200,000 399,000
b) 140,000 399,000
c) (250,000) (84,000)
d) 0 (259,000)

Answers / Solutions:

1. C [1M CA - (800K FV - 50K cost to sell)] = 250K Impairment loss

2. Solution:
Dec. Impairment loss Machinery 250,000
31, – held for sale Accumulated
750,000
20x1 depreciation
Machinery 2,000,000
3,000,000

3. B [750K C.A. – (700K FV – 50K costs to sell)] = 100K Impairment loss

4. Solution:
Dec. Impairment loss 100,000
31,
Machinery – held for sale 100,000
20x2

5. B Gain is recognized only up to the cumulative losses recognized (i.e., 250K + 100K =350K).
(650K C.A. + 350K gain = 1M new C.A.).

6. Solution:
Dec. Machinery – held for sale 350,000
31,
Gain on impairment recovery 350,000
20x3

7. A Solution:
C.A. adjusted for depreciation not recognized:

68
 (1M C.A. on Dec. 31, 20x1 x 2/5*) = 400,000
Recoverable amount: (1M FV – 50K costs to sell) = 950,000
Lower amount = 400,000

*(5-yr. total life less 3 yrs. that have passed from 20x2 to 20x4) = 2 yrs.

8. Solution:
Dec. Machinery 400,000
31, Loss on reclassification
600,000
20x4 Machinery – held for sale
1,000,000

9. D
Solution:
Impairment loss [1M - (600K - 50K)] (450,000)
Profit from Jan. to Mar. 200,000
Loss from Apr. to Dec. (120,000)
Total (370,000)
Multiply by: (100% - 30%) 70%
Results of discontinued operations (259,000)

Assessment Task

1. Non-current assets are presented as current items in the statement of financial position

69
a) only when they are expected to be sold within 12 months from the end of reporting period.
b) only if they are actually sold after the reporting period but before the date of authorizationof the
financial statements for issue.
c) only when they qualify as held for sale assets under PFRS 5.
d) never presented as current items.

2. A noncurrent asset classified as held for sale in accordance with PFRS 5 has not been soldafter a
year. The asset shall continue to be presented as held for sale under PFRS 5 if
a) the delay is due to events beyond the entity’s control
b) the entity remains committed to its plan to sell the asset
c) the noncurrent asset is actually sold after the reporting period but before the financial
statements were authorized for issue.
d) a and b

3. Which of the following statements is true regarding the accounting treatment of costs to sellunder
PFRS 5?
a) Costs to sell are added to the fair value when determining the measurement basis for anasset held
for sale
b) Costs to sell are never discounted because held for sale assets should be sold within oneyear
c) Costs to sell are discounted if it is expected that the sale will be made beyond one year.
d) a and c

4. According to PFRS 5, gains and losses on remeasurement of assets held for sale are
a) recognized in profit or loss
b) recognized in other comprehensive income
c) recognized only for impairment losses
d) not recognized
5. Which of the following is included in profit from continuing operations?
a) extraordinary items
b) discontinued operations
c) other comprehensive income
d) income tax expense

Use the following information for the next two questions:

VISAGE APPEARANCE Co. is committed to a plan to sell its headquarters building and hasinitiated
actions to locate a buyer. As of this date, the building has a carrying amount of ₱ 5,000,000, a fair
value of ₱ 6,000,000 and estimated costs to sell of ₱ 200,000.

6. VISAGE Co. has an intention to transfer ownership of a building to a buyer after it vacates the
building. How should VISAGE Co. classify the headquarters building?
70
a) Included under property, plant and equipment at ₱ 5,000,000.
b) Included under property, plant and equipment at ₱ 5,800,000.
c) Classified as held for sale at ₱ 5,000,000
d) Classified as held for sale at ₱ 5,800,000

7. VISAGE Co. will continue to use the building until the construction of a new headquartersis
completed. How should VISAGE Co. classify the headquarters building?
a) Included under property, plant and equipment at ₱ 5,000,000.
b) Included under property, plant and equipment at ₱ 5,800,000.
c) Classified as held for sale at ₱ 5,000,000
d) Classified as held for sale at ₱ 5,800,000

8. PERAMBULATE STROLL Co. is a commercial leasing and finance company. As of year- end,
PERAMBULATE holds equipment that is available either for sale or lease. PERAMBULATE is not
yet decided whether to sell or to lease the equipment. The equipment has a carrying amount of ₱
1,000,000, fair value of ₱ 1,200,000 and costs to sell of ₱ 50,000. How should PERAMBULATE Co.
classify the equipment?
a) Inventory, ₱ 1,000,000
b) Investment property, ₱ 1,250,000
c) Held for sale, ₱ 1,150,000
d) Held for sale, ₱ 1,000,000

9. In Baer Food Co.’s 20x3 single-step income statement, the section titled “Revenues” consisted of
the following:

Net sales revenue 187,000

Results from discontinued operations:
Loss from discontinued component Z including loss on
disposal of ₱ 1,200 16,400
Less: Tax benefit 4,000 (12,400)
Interest revenue 10,200
Gain on sale of equipment 4,700
Cumulative change in 20x1 and 20x2 income due to change in
depreciation method (net of ₱ 750 tax effect) 1,500
Total revenues 191,000

In the revenues section of the 20x3 income statement, Baer Food should have reported total revenues
of
71
a) 197,200
b) 215,400
c) 203,700
d) 201,900

10. During 20x4, Lopez Corporation disposed of Pine Division, a major component of its business.
Lopez realized a gain of ₱ 500,000, net of taxes, on the sale of Pine's assets. Pine's operating losses,
net of taxes, were ₱ 600,000 in 2004. How should these facts be reported in Lopez's income statement
for 2004?

Total Amount to be Included in

Income from Results of
Continuing Operations Discontinued Operations a)
600,000 loss 500,000 gain
b) 100,000 loss 0
c) 0 100,000 loss
d) 500,000 gain 600,000 loss

Summary

 Noncurrent assets are presented as current assets in the statement of financial position only when
they qualify as held for sale assets.
 Held for sale classification is permitted when the noncurrent asset or disposal group is (a)available
for immediate sale in its present condition and (b) the sale is highly probable.
 If the criteria for classification as held for sale are met after the reporting period but before the
financial statement are authorized for issue, that event is treated as a non-adjusting event after
reporting period.
 Held for sale assets are measured at the lower of carrying amount and fair value less costs to sell.
Held for sale assets are not depreciated.
 Gains and losses on remeasurement of held for sale assets are recognized in profit or loss. Gain
on impairment reversal is recognized only to the extent of cumulative impairment losses
previously recognized
 A disposal group may qualify as discontinued operation if it is a component of an entity and
meets the other requirements under PFRS 5.
 The results of discontinued operations are presented separately in the statement of
comprehensive income as a post-tax single amount.
 The assets and liabilities of a disposal group are presented Separately on the face of thestatement
of financial position. Offsetting is prohibited.

Reference

72
 Millan, Z. (2019). Intermediate Accounting 3. 21 Paramount Vill. Sto. Tomas, Baguio City,
Philippines. Bandolin Enterprise

73
74