c3 Notes To Financial Statements [PDF]

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C3 Notes to Financial Statements BS Accountancy (De La Salle-College of Saint Benilde)



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CHAPTER 3: NOTES TO FINANCIAL STATEMENTS Notes to Financial Statements Notes to financial statements provide narrative description or disaggregation of items presented in the financial statements and information about items that do not qualify for recognition. Order of Presenting the Notes Under PAS 1, paragraph 114: a. b. c. d.



Statement of compliance with PFRS Summary of significant accounting policies used Supporting information or computation for line items presented in the financial statements Other disclosures, such contingent liabilities, unrecognized contractual commitments and nonfinancial disclosures.



Compliance with PFRS PAS 1, paragraph 16, provides that an entity whose financial statements comply with Philippine Financial Reporting Standards shall make an explicit and unreserved statement of such compliance in the notes. Accounting Policies Accounting policies are defined as the specific principles, methods, practices, rules, bases and conventions adopted by an entity in preparing and presenting financial statements. Significant Accounting Policies The summary of significant accounting policies shall disclose the following: a. The measurement basis used b. The accounting policies used Disclosure of Measurement Basis It is important for an entity to inform users of the measurement basis used in the financial statements because the basis on which the entity prepare the financial statements significantly affects the users’ analysis. Under the Revised Conceptual Framework, the measurement bases are historical cost and current value. Current value includes fair value, value in use, fulfillment value and current cost. Disclosure of Accounting Policies In deciding whether a particular accounting policy should be disclosed, management shall consider whether the disclosure would assist users in understanding how transactions, other events and conditions are reflected in the financial statements. Disclosure of particular accounting policies is especially useful to users when those policies are selected from alternatives allowed in Philippine Financial Reporting Standards.



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Disclosure of Judgement PAS 1, paragraph 122, provides that an entity shall disclose in the summary of significant accounting policies the judgements that management has made in the process of applying accounting policies and that have a significant effect on the amounts recognized in the financial statements. For example, management makes judgment in determining the following: a. Whether financial assets are to be measured at fair value or at amortized cost. b. Whether in substance particular sales of goods are product financing arrangement and therefore do not give rise to revenue. Disclosure of Estimation Uncertainty PAS 1, paragraph 125, provides that an entity shall disclose information about the assumptions it makes about the future, and other major sources of uncertainty at the end of reporting period that have a significant risk of resulting in a material adjustment to the carrying amount of assets and liabilities within the next financial year. With respect to those assets and liabilities, the notes shall include the nature and carrying amount of the assets and liabilities at the end of reporting period. Other Disclosures PAS 1, paragraph 138, provides that an entity shall disclose the following: a. The domicile and legal form of the entity, its country of incorporation and the address of the registered office or principal place of business. b. A description of the nature of the entity’s operations and its principal activities. c. The name of the parent and the ultimate parent of the group. Paragraph 137 provides that an entity shall disclose the following: a. The amount of dividends proposed or declared before the financial statements were authorized for issue but not recognized as distribution during the period and the related amount per share. b. The amount of any cumulative preference dividends not recognized.



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CHAPTER 3: NOTES TO FINANCIAL STATEMENTS PROBLEMS



Problem 1 The audit of Anne Company for the year ended December 31, 2018 was completed on March 1, 2019. The financial statements were signed by the managing director on March 15, 2019 and approved by the shareholders on March 31, 2019. 



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On January 15, 2019, a customer owing P900,000 to Anne Company filed for bankruptcy. The financial statements included an allowance for doubtful accounts pertaining to this customer of P100,000. Anne Company’s issued share capital comprised 100,000 ordinary shares with P100 par value. The entity issued additional 25,000 shares on March 1, 2019 at par value. Equipment with carrying amount of P525,000 was destroyed by fire on December 15, 2018. Anne Company has booked a receivable of P400,000 from the insurance entity on December 31, 2018. After the insurance entity completed an investigation on February 1, 2019, it was discovered that the fire took place due to negligence of the machine operator. As a result, the insurer’s liability was zero on this claim.



What total amount should be reported as “adjusting events” on December 31, 2018? a. 1,300,000



b. 1,200,000



c. 3,800,000



d. 3,700,000



Solution: Answer B Doubtful accounts (900,000 minus allowance 100,000) Loss on claim receivable Total adjusting entries



800,000 400,000 1,200,000



Problem 2 The end of reporting period of Norway Company is December 31, 2018 and the financial statements for 2018 are authorized for issue on March 15, 2019. 







On December 31, 2018, Norway Company had a receivable of P400,000 from a customer that is due 60 days after the end of reporting period. On January 15, 2019, a receiver was appointed for the said customer. The receiver informed Norway that the P400,000 would be paid in full by June 30, 2019. Norway Company had equity investments held for trading. On December 31, 2018, these investments were recorded at the fair value of P5,000,000. During the period up to February 15, 2019, there was a steady decline in the fair value of all the shares in the portfolio, and on February 15, 2019, the fair value had fallen to P2,000,000.



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







Norway Company had reported a contingent liability on December 31, 2018 related to a court case un which Norway Company was the defendant. The case was not heard until the first week of February 2019. On February 11, 2019, the judge handed down a decision against Norway Company. The judge determined that Norway Company was liable to pay damages and costs totaling P3,000,000. On December 31, 2019, Norway Company had a receivable from a large customer in the amount of P3,500,000. On January 31, 2019, Norway Company was advised in writing by the liquidator of the said customer that the customer was insolvent and that only 10% of the receivable will be paid on April 30, 2019.



What total amount should be reported as “adjusting events” on December 31, 2018? a. 6,150,000



b. 9,150,000



c. 9,550,000



d. 6,500,000



Solution: Answer A Litigation loss Bad debt expense (3,500,000 x 90%)



3,000,000 3,150,000



Total amount of adjusting events



6,150,000



The financial assets held for trading are measured at fair value which must be determined at the end of each reporting period.



Problem 3 Ginger Company is completing the preparation of the financial statements for the year ended December 31, 2018. The financial statements are authorized for issue on March 31, 2019. 



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On March 15, 2019, a dividend of P1,750,000 was declared and a contractual profit share payment of P350,000 was made, both based on the profit for the year ended December 31, 2018. On February 1, 2019, a customer went into liquidation having owed the entity P340,000 for the past 5 months. No allowance had been made against this debt in the financial statements. On March 20, 2019, a manufacturing plant was destroyed by fire resulting in a financial loss of P2,600,000.



What total amount should be recognized in profit or loss for the year ended December 31, 2018 to reflect adjusting events after the end of reporting period? a. 1,750,000



b. 3,290,000



c. 2,600,000



d. 690,000



Solution: Answer D Contractual profit share payment Bad debt loss



350,000 340,000



Total adjusting events



690,000



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The dividend declaration is not recognized in profit and loss but a deduction from retained earnings on March 15, 2019. The manufacturing plant destroyed by fire on March 20, 2019 is a Nonadjusting event requiring disclosure only.



Problem 4 During 2018, Marian Company was sued by a competitor for P5,000,000 for infringement of patent. Based on the advice of the legal counsel, the entity accrued the sum of P3,000,000 as a provision on December 31, 2018. Subsequently, on March 15, 2019, the Supreme Court decided in favor of the party alleging infringement of the patent and ordered the defendant to pay the aggrieved party a sum of P3,500,000. The financial statements were prepared by management on February 15, 2019 and approved by the board of directors on March 31, 2019. 1. What amount should be recognized as accrued liability on December 31, 2018? a. 5,000,000



b. 3,500,000



c. 3,000,000



d. 1,500,000



2. What amount should be adjusted on December 31, 2018 in relation to this event? a. 1,500,000



b. 3,000,000



c. 500,000



d. -0-



Solution: Question 1: Answer B Accrued liability – December 31, 2018



3,500,000



The actual amount of P3,500,000 should be accrued as liability because the suit was decided on March 15, 2019 which is prior the issuance of the financial statements on March 31, 2019. Question 2: Answer C Accrued liability – December 31, 2018 Provision already recognized Increase in provision



3,500,000 3,000,000 500,000



Problem 5 Caroline Company provided the following events that occurred after December 31, 2018: Jan. 15, 2019



P3,000,000 of accounts receivable was written off due to the bankruptcy of a major customer



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Feb. 15, 2019



A shipping vessel of the entity with carrying amount of P5,000,000 was completely lost at sea because of a hurricane.



Mar. 10, 2019 A court case involving the entity as the defendant was settled and the entity was obligated to pay the plaintiff P1,500,000. The entity previously has not recognized a liability for the suit because management deemed it possible that the entity would lose the case. Mar. 15, 2019 A factory with a carrying amount of P4,000,000 was completely razed by forest fire that erupted in the vicinity. The management completed the draft of the financial statement for 2018 on February 10, 2019. On March 31, 2019, the board of directors authorized the financial statements for issue. The entity announced the profit and other selected information on March 22, 2019. The financial statements were approved by shareholders on April 2, 2019 and filed with the regulatory agency the very next day. What total amount should be reported as adjusting events on December 31, 2018? a. 9,500,000



b. 8,500,000



c. 9,000,000



d. 4,500,000



Solution: Answer D Accounts written off Provision for lawsuit



3,000,000 1,500,000



Total adjusting events



4,500,000



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