Chapter 12

Chapter 12 Interim Financial Reporting

Problem 12-1 Vim Company has estimated that total depreciation expense for the year ended December 31, 2019 will amount to P500,000, and that 2019 year-end bonuses to employees will total P1,200,000. In the interim income statement for the six months ended June 30, 2019 what total of these expenses should be reported? a. 1,700,000 b. 1,100,000 c. 500,000 d. 850,000 Answer: Depreciation (500,000 x 6/12) Bonuses (1,200,000 x 6/12) Total

250,000 600,000 850,000

Problem 12-2 The terms and conditions of employment with Pauline Company include entitlement to share in the staff bonus system, under which 5% of the profit for the year before charging the bonus is allocated to the bonus pool, provided the annual profit exceeds P50,000,000. The profit before accrual of any bonus for the first half of the current year amounts to P40,000,000 and the latest estimate of the profit before accrual of any bonus for the year as a whole is P60,000,000. What amount should be recognized as bonus expense for the first half of the current year? a. 1,500,000 b. 3,000,000 c. 2,000,000 d. 0

Answer: 5% x P40,000,000

2,000,000

Problem 12-3 On March 15, 2019, Rex Company paid property taxes of P600,000 on the factory building for calendar year 2019. On April 1, 2019, the entity made P900,000 in unanticipated ordinary repairs to equipment. What total amount of these expenses should be included in the quarterly income statement ending June 30, 2019? a. 1,050,000 b. 1,500,000 c. 450,000 d. 900,000 Answer: Property taxes (600,000 / 4) Repairs Expense for second quarter

150,000 900,000 1,050,000

Problem 12-4 Bell Company reported P950,000 net income for the quarter ended September 30, 2019 which included the following after-tax items:  A P600,000 gain from expropriation realized on April 30, 2019 was allocated equally to the second, third and fourth quarters of 2019. A P150,000 loss resulting from a change in inventory valuation method was recognized on August 1, 2019.  In addition, the entity paid P480,000 on February 1, 2019 for 2019 calendar-year property taxes. Of this amount, P120,000 was allocated to the third quarter of 2019. For the quarter ended September 30, 2019, what amount should be reported as net income?

a. 1,200,000 b. 1,400,000 c. 950,000 d. 900,000 Answer: Net income Gain from expropriation (600,000 / 3) Change in accounting policy deducted from income Total net income

950,000 (200,000) 150,000 900,000

Problem 12-5 Apucao Company operates in the travel industry and incurs costs unevenly through the financial year. Advertising costs of P2,000,000 were incurred on March 1, 2019, and staff bonuses are paid at year-end based on sales. Staff bonuses are expected to be around P20,000,000 for the year. Of that sum, P3,000,000 would relate to the period ending March 31, 2019. What total amount of expenses should be included in the quarterly financial report ending March 31, 2019? a. b. c. d.

7,000,000 5,500,000 5,000,000 3,500,000 Answer:

Advertising cost Bonuses Total

2,000,000 3,000,000 5,000,000

Problem 12-6 Davao Company prepares quarterly interim financial reports. The entity sells electrical goods and normally 5% of customers claim on their warranty. The provision in the first quarter was calculated at 5% of sales to date which amounted to P10,000,000. However, in the second quarter, a design fault was found and warranty claims were expected to be 10% for the whole year. Sales for the second quarter amounted to P15,000,000. What would be the provision charged in the interim income statement for the second quarter? a. 2,000,000 b. 1,250,000 c. 1,500,000 d. 750,000 Answer: Total warranty (10% x 25,000,000) Warranty recognition in first quarter (5% x 10,000,000) Warranty expense for second quarter

2,500,000 500,000 2,000,000

Problem 12-7 Verna Company reported profit before tax for the first six months ended June 30, 2019 at P5,000,000. However, the business is seasonal and profit before tax for the last six months ended December 31, 2019 is almost certain to be P9,000,000. Profit before tax equals taxable profit for this entity. The entity operates in a country where income tax on entities is at rate of 30% if annual profit is below P11,000,000 and a rate of 35% where annual profit exceeds P11,000,000. These tax rate apply to the entire profit for the year. What amount should be reported as income tax expense in the interim financial statements for the half year ended June 30, 2019? a. b. c. d.

1,750,000 2,100,000 1,500,000 2,450,000

Answer: 35% x 5,000,000

1,750,000

Problem 12-8 Bailan Company, a calendar-year entity, had the following income before tax provision and effective annual tax rate for the first three quarters of the current year. First quarter Second quarter Third quarter

Income before tax 6,000,000 7,000,000 8,000,000

tax rate 30% 30% 25%

What is the income tax provision in the interim income statement for the third quarter? a. b. c. d.

5,250,000 1,350,000 2,400,000 2,000,000 Answer:

First quarter (30% x 6,000,000) Second quarter (30% x 7,000,000) Total

1,800,000 2,100,000 3,900,000

Cumulative for three quarters (25% x 21,000,000) Total tax first two quarters Total

5,250,000 (3,900,000) 1,350,000

Problem 12-9 Sigma Company has a financial reporting year that begins July 1, 2019 and ends on June 30, 2020. The tax year ends every December 31. The entity reports quarterly for interim purposes and the quarterly income is P1,000,000 for the first quarter, P1,500,000 for the second quarter, P2,500,000 for the third quarter and P4,000,000 for the fourth quarter.

The income tax rate is 30% for 2019 and 25% for 2020. What is the total income tax expense for the year ended June 30, 2020? a. b. c. d.

2,375,000 2,700,000 2,250,000 1,625,000 Answer:

First quarter (30% x 1,000,000) Second quarter (30% x 1,500,000) Third quarter (25% x 2,500,000) Fourth quarter (25% x 4,000,000) Total income tax expense

300,000 450,000 625,000 1,000,000 2,375,000

Problem 12-10 Everest Company has historically reported bad debt expense of 5% of sales in each quarter. For the current year, the entity followed the same procedure in the three quarters of the year. However, in the fourth quarter, the entity determined that bad debt expense for the entire year should be P450,000. Sales in each quarter of the year were first quarter P2,000,000, second quarter P1,500,000, third quarter P2,500,000 and fourth quarter P4,000,000. What amount should be recognized as bad debt expense for the fourth quarter? a. b. c. d.

200,000 150,000 300,000 400,000 Answer:

Bad debt expense for the year Bad debt expense: First quarter (5% x 2,000,000) Second quarter (5% x 1,500,000) Third quarter (5% x 2,500,000) Bad debt expense for fourth quarter

450,000 100,000 75,000 125,000

300,000 150,000

Problem 12-11 Snider Company is preparing the interim financial statements for the first quarter ended March 31, 2019. Expenses in the first quarter totaled P4,000,000 of which 25% was variable The fixed expense included television advertising expense of P1,500,000 representing air time to be incurred evenly during 2019, and depreciation expense of P600,000 for 2019 for an equipment that was available for use on March 1, 2019. What amount should be reported as total expenses in the first quarter ended March 31, 2019? a. b. c. d.

4,000,000 2,875,000 2,325,000 2,335,000 Answer:

Variable expense (25% x 4,000,000) Fixed expense, excluding depreciation (1,500,000 – 600,000) Advertising allocated to the first quarter (1,500,000 / 4) Depreciation from March 1 to March 31 (600,000 x 1/10) Total expense in the first quarter

1,000,000 900,000 375,000 60,000 2,335,000

Problem 12-12 At the beginning of the current year, Cambridge Company entered into a P20,000,000 long-term fixed price contract to construct a factory building. The entity accounted for this contract under the percentage of completion at the end of each quarter. Quarter 1 2 3 4

Percentage of completion 10% 10% 25% 25%

No work was performed in the second and fourth quarters.

Estimated cost 15,000,000 15,000,000 19,200,000 19,200,000

1. What amount of income should be reported in the first quarter? a. 2,000,000 b. 200,000 c. 500,000 d. 0 Answer: First quarter – gross income (20,000,000 – 15,000,000) Percentage of completion Income earned

5,000,000 10% 500,000

2. What amount of income should be reported in the second quarter? a. 500,000 b. 250,000 c. 750,000 d. 0 Answer: No work performed 3. What amount of income or loss should be reported in the third quarter? a. b. c. d.

200,000 income 200,000 loss 300,000 income 300,000 loss

Answer: Third quarter – gross income (20,000,000 – 19,200,000) Percentage of completion Cumulative income Income earned – first quarter Loss in third quarter 4. What amount of income should be reported in the fourth quarter? a. 800,000 b. 400,000 c. 200,000 d. 0 Answer: no work performed

800,000 25% 200,000 ( 500,000) 300,000

Problem 12-13 Chairmaine Company prepared the following condensed trail balance on March 31, 2019: Cash Accounts receivable Inventory Prepaid insurance Note receivable Land Buildings and equipment Accounts payable Share capital Share premium Retained earnings Sales Purchases Distribution costs Administrative expenses

1,000,000 2,000,000 1,500,000 400,000 5,000,000 1,500,000 18,000,000 8,500,000 5,000,000 4,000,000 9,500,000 25,000,000 17,000,000 3,200,000 2,400,000 52,000,000

52,000,000

1. Uncollectible accounts typically average 1% of net sales. 2. On January 1, 2019, buildings and equipment have an account balance consists of assets related to selling activities. The entity uses the straight line method. 3. The note receivable is dated January 1, 2019, matures on January 1, 2021, and carries a 12% interest rate. Interest will be collected annually starting January 1, 2020. 4. On January 1, 2019, the entity had purchased a one-year insurance policy debiting the payment to prepaid insurance. 5. The gross profit method is used to determine the interim inventory. Gross profit has averaged 40% of net sales. 6. The income tax rate is 30% and the income tax will be paid on or before April 15, 2019. Required: Prepare an income statement for the first quarter and a statement of financial position on March 31, 2019.

Answer: Charmaine Company Income statement March 31, 2019 Sales Cost of sales (60%) Gross income Interest income (5,000,000 x 12% x 3/12) Total income Selling expenses Administrative expenses Income before tax Income tax (30%) Net income

25,000,000 15,000,000 10,000,000 150,000 10,150,000 ( 3,350,000) ( 3,050,000) 3,750,000 ( 1,125,000) 2,625,000

Distribution cost Depreciation (450,000 x 1/3) Total

3,200,000 150,000 3,350,000

Administrative expenses Depreciation (450,000 x 2/3) Insurance (400,000 / 4) Doubtful accounts (25,000,000 x 1%) Total

2,400,000 300,000 100,000 250,000 3,050,000

Charmaine Company Statement of Financial Position March 31, 2019 Assets Current assets: Cash Trade and other receivables Inventory Prepaid insurance Noncurrent assets: Note receivable Property, plant and equipment Total assets

1,000,000 1,900,000 3,500,000 300,000 5,000,000 19,050,000

6,700,000

24,050,000 30,750,000

Liabilities and Equity Current liabilities: Accounts payable Income tax payable Shareholders’ equity Share capital Share premium Retained earnings Total liabilities and equity Accounts receivable Allowance for doubtful accounts Accrued interest on Note receivable Total trade and other receivables

8,500,000 1,125,000 5,000,000 4,000,000 12,125,000

9,625,000

21,175,000 30,750,000 2,000,000 ( 250,000) 150,000 1,900,000

Inventory - 1/1 1,500,000 Purchases GAS Cost of sales Inventory – 12/31

17,000,000 18,500,000 (15,000,000) 3,500,000

Land Buildings and equipment Accumulated depreciation Net carrying amount

1,500,000 18,000,000 ( 450,000) 19,050,000

Retained earnings – 1/1 Net income Total

9,500,000 2,625,000 12,125,000

Problem 12-14 Dunhill Company prepares quarterly and year to date interim reports. The entity provided the following interim income statement for the quarter ended March 31, 2019 Sales Costs of sales

7,500,000 (4,500,000)

Gross income Dividend revenue

3,000,000 300,000

Total income Distribution costs General expenses Depreciation Interest expense Income tax Net income

( ( ( ( (

3,300,000 900,000) 500,000) 400,000) 100,000) 400,000) 1,000,000

On June 30, 2019, the accountant completed a worksheet in preparing the year to date income statement. The worksheet showed the following income statement accounts: Sales Interest revenue Dividend revenue Costs of sales Distribution costs General expenses Depreciation Interest expense Income tax expense

20,000,000 250,000 500,000 11,500,000 2,500,000 1,100,000 700,000 300,000 1,300,000

Required: 1. Prepare an income statement for the first six months of 2019. 2. Prepare an interim income statement for the second quarter of 2019.

Answer: Dunhill Company Income statement Six months ended June 30, 2019 Sales Cost of sales Gross income Interest revenue Dividend revenue Total income Distribution costs General expenses Depreciation Interest expense Income before tax Income tax expense Net income

20,000,000 (11,500,000) 8,500,000 250,000 500,000 9,250,000 ( 2,500,000) ( 1,100,000) ( 700,000) ( 300,000) 4,650,000 ( 1,300,000) 3,350,000 Dunhill Company Income statement three months ended June 30, 2019

Sales Cost of sales Gross income Interest revenue Dividend revenue Total income Distribution costs General expenses Depreciation Interest expense Income before tax Income tax expense Net income

12,500,000 ( 7,000,000) 5,500,000 250,000 200,000 5,950,000 ( 1,600,000) ( 600,000) ( 300,000) ( 200,000) 3,250,000 ( 900,000) 2,350,000

Problem 12-15 Dakak Company encountered the following product costs situation as part of the quarterly financial reporting:  The entity conducted inventory count at the end of the second quarter and end of the fiscal year.  Typical gross profit rate 30% Actual gross profit rate at the end of the second quarter 35% Actual gross profit rate at the end of the year 25%  Quarterly sales: First quarter Second quarter Third quarter Fourth quarter

10,000,000 8,000,000 7,000,000 15,000,000

 There was a temporary decline in inventory value of P100,000 in the first quarter which was recovered fully in the second quarter.  There was a net realizable value adjustment of P150,000 in the third quarter. The inventory value increased by P200,000 at the end of the fourth quarter. Required: 1. Compute the cost of goods for each quarter. 2. Compute the gross income for each quarter. Answer: 1. First quarter (70% x 10,000,000) Loss on inventory writedown Cost of goods sold after inventory writedown

7,000,000 100,000 7,100,000

First and second quarters (65% x 18,000,000) 11,700,000 Cost of goods sold for first quarter before inventory writedown ( 7,000,000) Cost of goods sold before reversal of writedown – second quarter 4,700,000 Gain on reversal of writedown ( 100,000) Cost of goods sold after reversal of writedown 4,600,000 Third quarter (70% x 7,000,000) Loss on inventory writedown Cost of goods sold after inventory writedown

4,900,000 150,000 5,050,000

Cost of goods sold for entire year (45% x 40,000,000) Cost of goods sold before writedown and reversal: First quarter Second quarter Third quarter Cost of goods sold before reversal of writedown – fourth quarter Gain on reversal of writedown Cost of goods sold after reversal of writedown – fourth quarter

30,000,000 ( 7,000,000) ( 4,700,000) ( 4,900,000) 13,400,000 ( 150,000) 13,250,000

2. Sales First quarter Second quarter Third quarter Fourth quarter Total

10,000,000 8,000,000 7,000,000 15,000,000 40,000,000

Cost of goods sold 7,100,000 4,600,000 5,050,000 13,250,000 30,000,000

Gross income 2,900,000 3,400,000 1,950,000 1,750,000 10,000,000

Problem 12-16 1. Which statement is true regarding interim reporting? a. b. c. d.

The independent view is required for interim financial statements. Interim reports are required on a quarterly basis. Interim reports are not required. Interim reports require the preparation of only a statement of comprehensive income and a statement of financial position.

2. Which statement about an interim financial report is true? a. An interim financial report must consist of a complete set of financial statements. b. An interim financial report must consist of a condensed set of financial statements. c. An interim financial report may consist of a condensed set or complete set of financial statements. d. All of these statements are true 3. Interim financial reports shall include as a minimum a. b. c. d.

A complete set of financial statements. A condensed set of financial statements and selected notes. A statement of financial position and an income statement A condensed statement of financial position, income statement and statement of cash flows.

4. An interim financial report shall include as a minimum all of the following components, except a. b. c. d.

Condensed statement of financial position Condensed statement of cash flows Condensed statement of changes in equity Accounting policies and explanatory notes

5. Which statement is true about interim reporting? a. All entities that issue an annual report must issue interim financial report. b. The integral view is the more appropriate approach in preparing interim financial report. c. A complete set of financial statements must be presented for an interim period. d. The same accounting principles used for the annual report should be employed for the interim report. 6. Which statement is incorrect about interim reporting? a. A complete set of financial statements is required. b. Interim amount like advertising that could benefit later interim periods is expensed immediately. c. The integral view and the independent view are the two approaches of interim financial reporting. d. No accrual or deferral in anticipation of future events during the year should be reported. 7. Interim financial reporting should be viewed a. b. c. d.

As useful if activity is spread evenly through the year As if the interim period were an annual accounting period As reporting for an integral part of an annual period As special type of reporting that need not follow GAAP

8. Interim financial statements are usually presented on a a. b. c. d.

Monthly basis Quarterly basis Semiannual basis Nine-month basis

9. When the business is seasonal, what does the standard suggest for interim reporting? a. Additional notes be written in the interim reports about seasonal nature of the business b. Disclosure of financial information for the latest and comparative 12 –month period in addition to the interim report c. Additional disclosure in the accounting policy note d. No additional disclosure 10. For interim financial reporting, the income tax expense for the second quarter should be computed by using the a. b. c. d.

Statutory tax rate for the year. Effective tax rate expected for the second quarter. Effective tax rate expected for the full year. Average tax rate for the full.