Colegio de San Gabriel Arcangel Area E, City of San Jose del Monte, Bulacan Lesson Module Course Title: Intermediate Accounting 3 Course Code: AE17 Level: Second Year Lesson No.: 1 Lesson Hours: 3 Objectives: At the end of this Module, the student will be able to: 1. Know the nature of statement of financial position 2. Understand the current and noncurrent classification of assets and liabilities 3. Understand the refinancing of currently maturing debt 4. Identify the components of equity in corporation 5. Identify the minimum line items in the statement of financial position 6. Be able to prepare a statement of financial position using Philippine format and IFRS format Subject Matter: Statement of Financial Position Procedures: A. Motivation B. Lesson Presentation Definition A statement of financial position is a formal statement showing the three elements comprising financial position, namely assets, liabilities and equity. Investors, creditors and other statement users analyze the statement of financial position to evaluate such factors as liquidity, solvency and the need of the entity for additional financing. Classification PAS 1, paragraph 60 provides that an entity shall present current and noncurrent assets and liabilities as separate classifications in the statement of financial position. Assets is a present economic resource controlled by the entity as a result of past events. Current Assets PAS 1, paragraph 66, provides that an entity shall classify an asset as current when: 1. The asset is cash or cash equivalent unless the asset is restricted to settle a liability for more than 12 months after the reporting period. 2. The entity holds the asset primarily for the purpose of trading 3. The entity expects to realize the asset within 12 months after the reporting period 4. The entity expects to realize the asset or intends to sell or consume it within the entity’s normal operating cycle Presentation: Current assets are usually listed in the statement of financial position in the order of liquidity. As a minimum the line item under the current assets are: 1. Cash and cash equivalents 2. Financial assets at fair value through profit or loss 3. Trade and other receivables 4. Inventories 5. Prepaid expenses Noncurrent Assets The caption noncurrent assets is a residual definition. An entity shall classify all other assets not classified as current as noncurrent assets. Accordingly, noncurrent assets include the following: 1. Property, plant and equipment 2. Long-term investments 3. Intangible assets 4. Other noncurrent assets Liabilities a present obligation of an entity to transfer an economic resource as a result of past events. Current liabilities An entity shall classify a liability as current when: 1. The entity expects to settle the liability within the entity’s normal operating cycle 2. The entity holds the liability primarily for the purpose of trading 3. The liability is due to be settled within 12 months after the reporting period 4. The entity does not have an unconditional right to defer settlement of the liability for at least 12 months after the reporting period Presentation: The face of the statement of financial position shall include the following line items for current liabilities 1. Trade and other payables 2. Current provisions 3. Short-term borrowing 4. Current portion of long-term debt 5. Current tax liability Long-term debt currently maturing A liability which is due to be settled within 12 months after the end of reporting period is classified as current, even if: 1. The original term was for a period longer than 12 months 2. An agreement to refinance or to schedule payment on a long-term basis is completed after the end of the reporting period and before the financial statements are authorized for issue. However, if the refinancing on a long-term basis is completed on or before the end of the reporting period, the refinancing is an adjusting event and therefore the obligation is classified as noncurrent. Discretion to refinance If the entity has the discretion to refinance or roll over an obligation for at least 12 months after the reporting period under an existing loan facility, the obligation is classified as noncurrent even if it would otherwise be due within a shorter period. Covenants Covenants are often attached to borrowing agreements which represent undertakings by the borrower. These covenants are actually restrictions on the borrower as to undertaking further borrowings, paying dividends, maintaining specified level of working capital and so forth. Under these covenants, if certain conditions relating to the borrower’s financial situation are breached, the liability becomes payable on demand. PAS 1, paragraph 74, states that such liability is classified as current even if the lender has agreed, after the end of the reporting period and before the statements are authorized for issue, not to demand payment as a consequence of the breach. However, paragraph 75, states that the liability is classified as noncurrent is the lender has agreed on or before the end of the reporting period to provide a grace period ending at least 12 months after the end of the reporting period. Noncurrent liabilities The term noncurrent liabilities is a residual definition. All liabilities not classified as current liabilities are classified as noncurrent liabilities. Examples of noncurrent liabilities 1. Noncurrent portion of long-term debt 2. Lease liability 3. Deferred tax liability 4. Long-term obligations to entity officers 5. Long-term deferred revenue Estimated Liabilities Estimated liabilities are obligations which exist at the end of reporting period although the amount is not definite. In many cases, the date when it is due or payable is not also definite and in some instances, the exact payee cannot be identified or determined. Common examples of estimated liabilities include estimated liability for premiums, estimated liability for warranties and estimated liability under customer loyalty program. Estimated liabilities may be classified as either current or noncurrent. Contingent Liability A contingent liability is a possible obligation that arises from past event and whose existence will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events not wholly within the control of the entity. A contingent liability is a present obligation that arises from past event but is not recognized because: a) It is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation b) The amount of the obligation cannot be measured reliably. Range of outcome The range of outcome of uncertainty relating to future event may be described as: a) Probable – the future event is likely to occur. As a rule of thumb probable means more than 50% likely b) Possible – the future event is less likely to occur. The occurrence is 50% or less c) Remote – The future event is least like to occur or the chance of the future event occurring is very slight. Treatment of Contingent liability A contingent liability is not recognized in the financial statements. A contingent liability shall be disclosed only. The required disclosure are: a) Brief description of the nature of the contingent liability b) An estimate of the financial effects c) An indication of the uncertainties that exist d) Possibility of any reimbursement If the contingent liability is remote, no disclosure is necessary. If the present obligation is probable and the amount can be measured reliably, the obligation is not a contingent liability but shall be recognized as a provision An expense and an estimated liability shall be recorded in recognizing a provision. Thus, a contingent liability is either probable or measurable but not both. Contingent asset A possible asset that arises from past event and whose existence will be confirmed only by the occurrence or nonoccurrence of one or more uncertain events not wholly within the control of the entity. Contingent asset usually arise from unplanned or other unexpected events that give rise to the possibility of an inflow of economic benefits to the entity. An example is a claim that an entity is pursuing through legal processes when the outcome is uncertain. Treatment of contingent asset a) A contingent asset is recognized in the period when realized b) A contingent asset is only disclosed when it is probable c) If the contingent asset is possible, no disclosure is required d) If the contingent asset is remote, no disclosure is required Equity The term equity is the residual interest in the assets of the entity after deducting all of the liabilities. Simply stated, equity means net assets or total assets minus total liabilities Equity is increased by profitable operations and contribution by owners. It is decreased by unprofitable operations and distribution to owners. Shareholder’s Equity Generally the elements constituting shareholder’s equity with their equivalent IAS term are: Philippine Term Capital stock Subscribed capital stock Common stock Preferred stock Additional paid-in capital Retained earnings (deficit) Retained earnings appropriated Revaluation surplus Treasury stock IAS Term Share capital Subscribed share capital Ordinary share capital Preference share capital Share premium Accumulated profits (losses) Appropriation reserve Revaluation reserve Treasury shares C. Application EXERCISE 1-1 Apple Company provided the following information on December 31, 2020: Cash 800,000 Accounts receivable 750,000 Allowance for doubtful accounts 50,000 Prepaid expenses 160,000 Inventory 1,000,000 Financial assets at fair value 690,000 Land 500,000 Building in process 5,000,000 Patent 200,000 Machinery and equipment 1,500,000 Accumulated depreciation 300,000 Discount on bonds payable 200,000 Accounts payable 900,000 Accrued expenses 150,000 Note payable due July 1, 2022 250,000 Bonds payable 2,000,000 Share capital 3,000,000 Retained earnings 4,000,000 Retained earnings appropriated for contingencies 150,000 a) The financial assets at fair value include Apple Company shares acquired at cost of 250,000 b) The bonds pay 10% interest semiannually on April 1 and October 1 and mature on April 1, 2023. No interest has been accrued on the bonds c) Forty thousand shares P100 par are authorized, of which 30,000 shares are issued including 2,000 shares in the treasury. d) The retained earnings appropriated balance of P150,000 was created in anticipation for the result of a pending lawsuit. Shortly after the end of the reporting period, the suit was amicably settled and the entity paid P100,000 Required: Prepare a statement of financial position EXERCISE 2 Banana Company provided the following information on December 31, 2020 Current assets Other assets 3,100,000 5,900,000 Current liabilities Long-term liabilities Capital 1,000,000 1,000,000 7,000,000 Cash (including P200,000 invested in money market and restricted foreign deposit of P300,000 Land held for undetermined use Accounts receivable less allowance of P50,000 Inventories Banana Corporation share capital at cost Total current assets 1,000,000 Store supplies Building less allowance of P500,000 Equipment less allowance of P250,000 Financial asset at amortized cost Trademark Advances to officers – indefinite payment Patent Land Total other assets 50,000 3,000,000 750,000 1,000,000 300,000 150,000 250,000 400,000 5,900,000 Accounts payable Note payable, due December 31, 2021 Income tax payable Share premium Total current liabilities 500,000 100,000 150,000 250,000 1,000,000 Unearned leasehold income (5 years starting 2021) Stock dividend payable Serial bond payable (P100,000 maturing annually) Total long-term liabilities 350,000 150,000 500,000 1,000,000 Retained earnings Share capital, P100 par Retained earnings appropriated for plant expansion Total Capital 1,500,000 5,000,000 500,000 7,000,000 500,000 700,000 600,000 300,000 3,100,000 Required Prepare a statement of financial position with supporting notes and computations. EXERCISE 3 Chico Company reported the following statement of financial position on December 31, 2020: Current assets Investments Tangible assets Intangible assets 2,000,000 Current liabilities 400,000 Long-term liabilities 7,150,000 Equity 400,000 9,950,000 1,500,000 2,000,000 6,450,000 9,950,000 a) Equity has preference share capital, no par value, P5 stated value, authorized 300,000 shares, issued 150,000 shares for P1,000,000 and ordinary share capital, P20 par value, authorized 400,000 shares, issued 100,000 shares of P30 per share. b) Tangible assets include building P5,000,000 less accumulated depreciation P1,600,000, equipment P1,400,000 less accumulated depreciation P400,000, Land P1,250,000, and land held for future plant site P1,500,000 c) The current assets include: Cash P400,000, accounts receivable P750,000 less P50,000 for allowance for doubtful accounts, Inventories P800,000, and prepaid expenses P100,000 d) The investments include cash surrender value of life insurance contract P50,000, Investment in securities- short-term P100,000 and long-term P250,000 e) Intangible assets include a franchise P100,000, goodwill P200,000 and discount on bonds payable P100,000 f) Current liabilities include accounts payable P400,000 notes payable short-term P450,000, and long-term P300,000, taxes payable P150,000, and appropriation for contingencies P200,000 g) Long-term liabilities comprised solely of 12% bonds payable due on December 31, 2023 Required Prepare in goods form a properly classified statement of financial position with appropriate notes EXERCISE 4 Durian Corporation prepared the following condensed statement of financial position on December 31, 2020 Current assets Current liabilities Working capital Add other assets Working capital plus other assets Deduct other liabilities Net assets 4,000,000 1,500,000 2,500,000 1,800,000 4,300,000 100,000 4,200,000 Money market placement – three months Cash in bank Accounts receivable Notes receivable Financial assets at fair value Inventory Goodwill Total current assets 500,000 700,000 800,000 200,000 400,000 1,300,000 100,000 4,000,000 The inventory account was found to include the cost of office supplies of P50,000 and office equipment acquired at the end of 2020 at a cost of P250,000 Other assets included land and building acquired on January 1, 2019 for P4,000,000 less mortgage of P200,000. At the time of purchase, land was worth P1,000,000 . The building on December 31, 2020 has a remaining life of 18 years. Current liabilities represented balances that were payable to trade creditors. Other liabilities consisted of withholding tax payable. However, no recognition was given to accrued salaries of P250,000. The entity was originally organized in 2019 when 30,000 ordinary shares with par value of P100 were issued in exchange for assets with fair value of P3,200,000 Required Prepare a statement of financial position EXERCISE 5 Eggplant Company provided the following statement of financial position on December 31, 2020: Current assets Other assets 2,700,000 6,600,000 Current liabilities Other liabilities Equity 9,300,000 a) b) Analysis of current assets discloses the following: Cash and cash equivalents Financial assets held for trading Accounts receivable Inventories Other assets include: Property, plant and equipment at cost P6,000,000 Advances to subsidiary Goodwill recorded on the books to cancel losses incurred by the entity in prior years 2,500,000 2,000,000 4,800,000 9,300,000 500,000 600,000 750,000 850,000 2,700,000 4,000,000 2,250,000 350,000 6,600,000 c) d) e) Current liabilities include: Accrued expenses Customer’s deposit Advances from officer, not payable currently Accounts payable Note payable-bank due December 31, 2022 Other liabilities include: Bonds payable in installment of P500,000 100,000 400,000 200,000 1,000,000 800,000 2,500,000 2,000,000 Share capital, 50,000 shares, P100 par, was originally issued and credited for a total consideration of P5,500,000 but the losses of the entity for past years were charged against the share capital balance. Required Prepare a properly classified statement of financial position.
