Intermediate Accounting, I|| Module Content || Prelim

Course Intermediate Accounting Volume 1, deals with the accounting of all the assets
Description (CD) account for Statement of Financial Positions.
Course Learning At the end of the course, BSA students should be able to:
Outcomes (CLO)
1. Understand the concept of assets

2. Understand the classification and measurement of all the asset accounts.

3. Identify the items considered as assets

Evidence of To assess the students acquired competencies and/or learning outcomes, the
Learning/ teacher will facilitate the following assessment:
Assessment
Tools 1. Problem solving
2. Socratic questioning
3. Quiz
Module All activities must be written in a separate paper and to be submitted upon the
requirements collection of the modular learning sheets. You may also opt to submit your output
submission via email or messenger if you will have the chance to access the internet (please
instructions check your timeline for guidance).

Topics For the course/subject following are the topics to be discussed:

(Coverage)
1. Assets considered as current
2. Assets considered as non current
This course is offered to the first year students taking up Bachelor of Science in
Target Accountancy and Bachelor of Science in Accounting Information System.
Participants
Learning time refers to the duration of the course being taken by the students.
Learning Time:
Academic Year 2020-2021, Second Semester
February - June 2021

Means for
Learner Support

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This learning part of the module where the acquired competency and knowledge will be evaluated
through different assessment activities (may be graded or not)

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This part of the module provided other additional reading materials and/or references for the
student to use in their self-paced learning.

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Chapter 14 – Retail Inventory Method

Week 9

 Let’s activate your prior knowledge!

(Time allotted: 10 minutes)

Introduction
The retail inventory method is the other method of estimating the value of inventory.

PAS 2, paragraph 22, provides that this method is often used in the retail industry for measuring
inventory of large number of rapidly changing items with similar margin for which it is impracticable to
use other costing method.

In other words, the retail inventory method is generally employed by department stores, supermarkets
and other retail concerns where there is a wide variety of goods.

This is so because keeping track of unit cost at all times is difficult.

The retail inventory method came to its name because the selling price or retail price is tagged to each
item.

The term "retail" simply means selling price.

Information required

The use of the retail inventory method requires that records be kept which must show the following
data:
a. Beginning inventory at cost and at retail price
b. Purchases during the period at cost and at retail price c. Adjustments to the original retail price such
as additional markup, markup cancelation, markdown and markdown cancelation
d. Other adjustments such as departmental transfer, breakage, shrinkage, theft, damaged goods and
employee discount

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Treatment of items
a. Purchase discount - deducted from purchases at cost only.

b. Purchase return - deducted from purchases at cost and at retail.

c. Purchase allowance - deducted from purchases at cost only.

d. Freight in - addition to purchases at cost only.

e Departmental transfer in or debit - addition to purchases at cost and at retail.

f. Departmental transfer out or credit - deduction from purchases at cost and retail.

g. Sales discount and sales allowance - disregarded, meaning, not deducted from sales.

h. Sales return - deducted from sales. If the account is "sales return and allowance", the same should
be deducted from sales.

i. Employee discounts - added to sales.

Employee discounts are special discounts usually not recorded because they are directly deducted from
the sales price.

Only the net sales price is recorded. Consequently, the amount of sales is understated. Thus, the
employee discounts are added back to sales.

J Normal shortage, shrinkage, spoilage, breakage — This is deducted from goods available for sale at
retail. Any normal shortage is usually absorbed or included in cost of goods sold.

k. Abnormal shortage, shrinkage, spoilage, breakage

This is deducted from goods available for sale at both cost and retail so as not to distort the cost ratio.

Any abnormal amount is reported separately as loss.

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Items related to retail method

Accordingly, in the determination of the inventory at retail and for purposes of computing the cost
ratio, the following items should be considered:

The original sales price is frequently raised or lowered particularly at the end of the selling season
where replacement costs are changing.

a. Initial markup — original markup on the cost of goods.

b. Original retail — the sales price at which the goods are first offered for sale.

c. Additional markup — increase in sales price above the original sales price.

d. Markup cancelation. — decrease in sales price that does not decrease the sales price below the
original sales price.

e. Net additional markup or net marleup — markup minus markup cancelation.

f. Markdown — decrease in sales price below the original sales price.

g. Markdown cancelation — increase in sales price that does not increase the sales price above the
original sales price.

h. Net markdown — markdown minus markdown cancelation.

i. Maintained markup — difference between cost and sales price after adjustment for all of the above
items. Sometimes, maintained markup is referred to as "markon".

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Chapter 15 – Investments

Definition of investments

The International Accounting Standards Board defines investments as follows:

Investments are assets held by an entity for the accretion of wealth through distribution such as
interest, royalties, dividends and rentals, for capital appreciation or for other benefits to the investing
entity such as those obtained through trading relationships.

Actually, investments are assets not directly identified with the operating activities of an entity and
occupy only an auxiliary relationship to the central revenue producing activities of the entity.

Purposes of investments

Investments are held for diverse reasons such as:

a. For accretion of wealth or regular income through interest, dividends, royalties and rentals.

b. Fot capital appreciation as in the case of investments in land and real estate held for appreciation
and direct investments in gold, diamonds and other precious commodities.

c. For ownership control as in the case of investments in subsidiaries and associates.

d. For meeting business requirements as in the case of sinking fund, preference share redemption
fund, plant expansion fund and other noncurrent fund.

e. For protection as in the case of interest in life insurance contract in the form of cash surrender value.

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Examples of investments

Specifically, investments include the following:

1. Trading securities or financial asset at fair value through profit or loss

2. Financial asset at fair value through other comprehensive income
3. Investment in nontrading equity securities
4. Investment in bonds or financial asset at amortized cost
5. Investment in associate
6. Investment in subsidiary
7. Investment property
8. Investment in fund
9. Investment in joint venture

Statement classification

Investments are classified either as current or noncurrent assets.

Current investments are investments that are by their very nature readily realizable and are intended
to be held for not more than one year.

For example, trading securities are normally classified as current assets because these investments are
expected to be realized within twelve months after the end of reporting period.

Noncurrent or long-term investments are investments other than current investments.

This residual definition means that the noncurrent investments are intended to be held for more than
one year or are not expected to be realized within twelve months after the end of the reporting period.

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Definition of financial asset

A financial asset is any asset that is:

a. Cash
b. A contractual right to receive cash or another financial asset from another entity.
c. A contractual right to exchange financial instrument with. another entity under conditions that are
potentially favorable.
d. An equity instrument of another entity.

Examples of financial assets

Cash or currency is a financial asset because it represents the medium of exchange and is therefore
the basis on which all transactions are measured and recognized in financial statements.

A deposit of cash with a bank or similar financial institution is a financial asset because it represents
the contractual right of the depositor to obtain cash from the bank or to draw a check against the
balance in favor of a creditor in payment of a financial liability.

But a gold bullion deposited in bank is not a financial asset because although it is very precious the
gold is a commodity.

Financial assets representing a contractual right to receive cash in the future include trade accounts
receivable, notes receivable and loans receivable.

In case of exchanges of financial instruments with another entity, conditions are potentially favorable
when such exchanges will result to gain or additional cash inflow to the entity.

An example of a favorable condition is an option held by the holder to purchase shares of another
entity at less than market price.

Investments in shares or other equity instruments such as trading securities can be classified as
financial assets.

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Not considered financial assets Intangible assets are not financial assets. Physical assets, such as
inventory and property, plant and equipment are not also financial assets. Control of such physical and
intangible assets creates an opportunity to generate an inflow of cash or another financial asset but it
does not give rise to a present right to receive cash or another financial asset.
Prepaid expenses for which the future economic benefit is the receipt of goods or services rather than
the right to receive cash or another financial asset are not also financial assets.
Leased assets are not also financial assets because control of such assets does not give rise to a present
right to receive cash or another financial asset.

Classification of financial assets

Under PFRS 9, paragraph 4.1.1, financial assets are classified into three, namely:
1. Financial assets at fair value through profit or loss — include both equity securities and debt
securities.
2. Financial assets at fair value through other comprehensive income — include both equity securities
and debt securities.
3. Financial assets at amortized cost — include only debt securities.

The classification depends on the business model for managing financial assets which may be:
a. To hold investments in order to realize fair value changes.
b. To hold investments in order to collect contractual cash flows.
c. To hold investments in order to collect contractual cash flows and sell the investment.

What is an equity security? The term "equity security" encompasses any instrument representing
ownership shares and right, warrants or options to acquire or dispose of ownership shares at a fixed
or determinable price.

In simple language, equity securities represent an ownership interest in an entity.

Ownership shares include ordinary shares, preference shares and rights or options to acquire ownership
shares.

The owners of equity securities are legally known as shareholders.

A share is the ownership interest or right of a shareholder in an entity. The share is evidenced by an
instrument called share cerificate.

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This right pertains to the share in earnings, election of directors, subscription for additional shares and
share in net assets upon liquidation
Equity securities do not include redeemable preference shares, treasury shares and convertible debt.

What is a debt security?

A debt security is any security that represents a creditor relationship with an entity.

A debt security has a maturity date and a maturity value.

Examples of debt securities include the following:

a. Corporate bonds
b. BSP treasury bills
c. Government securities
d. Commercial papers
e. Preference shares with mandatory redemption date or are redeemable at the option of the holder

Initial measurement of financial asset

PFRS 9, paragraph 5.1.1, provides that at initial recognition, an entity shall measure a financial asset
at fair value plus, in the case of financial asset not at fair value through profit or loss, transaction costs
that are directly attributable to the acquisition of the financial asset.

The fair value of a financial asset at initial recognition is normally the transaction price, meaning, the
fair value of the consideration given.

In other words, a financial asset is recognized initially at fair value.

As a rule, transaction costs that are directly attributable to the acquisition of the financial asset shall
be capitalized as cost of the financial asset.

However, if the financial asset is held for trading or if the financial asset is measured at fair value
through profit or loss, transaction costs are expensed outright.

Transaction costs include fees and commissions paid to agents, advisers, brokers and dealers, levies
by regulatory agencies and securities exchanges, and transfer taxes and duties.

Transaction costs do not include debt premiums or discounts, financing costs and internal
administrative or holding costs.

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Subsequent measurement PFRS 9, paragraph 5.2.1, provides that after initial recognition, an entity
shall measure a financial asset at:
a. Fair value through profit or loss (FVPL)
b. Fair value through other comprehensive income (FVOCI)
c. Amortized cost

Financial assets at fair value through profit or loss

The following financial assets shall be measured at "fair value through profit or loss":

1. Financial assets held for trading or popularly known as "trading securities".

These financial assets are measured at fair value through profit or loss "by requirement," meaning,
required by the standard.

2. All other investments in quoted equity instruments.

These financial assets are measured at fair value through profit or loss "by consequence" in accordance
with Application Guidance B5.1.14 of PFRS 9.

3. Financial assets that are irrevocably designated on initial recognition as at fair value through profit
or loss.

These financial assets are measured at fair value through profit or loss "by irrevocable designation" or
"by option".

This fair value option is applicable to investments in bonds and other debt instruments which can be
irrevocably designated as at fair value through profit or loss even if the financial assets satisfy the
amortized cost or fair value through other comprehensive income measurement.

This irrevocable designation is the fair value option allowed in accordance with Paragraph 4.1.5 of PFRS
9.

4 All debt investments that do not satisfy the requirements for measurement at amortized cost and at
fair value through other comprehensive income.

These financial assets are measured at fair value through profit or loss "by default" in accordance with
PFRS 9, paragraph 4.1.4.

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Financial asset held for trading

PFRS 9 provides that a financial asset is held trading if:

a It is acquired principally for the purpose of selling or repurchasing it in the near term.
b. On initial recognition, it is part of a portfolio of identified financial assets that are managed together
and for which there is evidence of a recent actual pattern of short-term profit taking.
c. It is a derivative, except for a derivative that is a financial guarantee contract or a designated and
an effective hedging instrument.

In other words, trading securities are debt and equity securities that are purchased with the intent of
selling them in the "near term" or very soon.

Trading securities are normally classified as current assets.

Equity investment at fair value through OCI

At initial recognition, PFRS 9, paragraph 5.7.5, provides that an entity may make an irrevocable election
to present in other comprehensive income or OCI subsequent changes in fair value of an investment
in equity instrument that is not held for trading.

This irrevocable approach is designed to impose discipline in accounting for nontrading equity
investment. The amount recognized in other comprehensive income is not reclassified to profit or loss
under any circumstances.

However, on derecognition, the amount may be transferred to equity or retained earnings.

If the investment in equity instrument is "held for trading", the election to present gain and loss in
other comprehensive income is not allowed.

If the investment in equity instrument is held for trading, subsequent changes in fair value are always
included in profit or loss.

Debt investment at amortized cost

PFRS 9, paragraph 4.1.2, provides that a financial asset shall be measured at amortized cost if both of
the following conditions are met:
a. The business model is to hold the financial asset in order to collect contractual cash flows on specified
date.

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b. The contractual cash flows are solely payments of principal and interest on the principal amount
outstanding. In other words, the business model is to collect contractual cash flows if the contractual
cash flows are solely payments of principal and interest. In such a case, the financial asset shall be
measured at amortized cost.

Debt investment at fair value through OCI PFRS 9, paragraph 4.1.2A, provides that a financial asset
shall be measured at fair value through other comprehensive income if both of the following conditions
are met:
a. The business model is achieved both by collecting contractual cash flows and by selling the financial
asset.
b. The contractual cash flows are solely payments of principal and interest on the principal outstanding.

Note that the business model includes selling the financial asset in addition to collecting contractual
cash flows.

In this case, interest income is recognized using the effective interest method as in amortized cost
measurement.

On derecognition, the cumulative gain and loss recognized in other comprehensive income shall be
reclassified to profit or loss.

The measurement of debt investment at amortized cost or at fair value through other comprehensive
income is discussed extensively in Chapter 20.

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Fair value

Appendix A of PFRS 9 in conjunction with PFRS 13 provides a new definition of fair value.

Fair value of an asset is the price that would be received to sell an asset in an orderly transaction
between market participants at the measurement date.

The best evidence of fair value in descending hierarchy is the quoted price of identical asset in an active
market, the quoted price of similar asset in an active market and the quoted price of identical and
similar asset in an inactive market.

An active market is a market in which transactions take place with sufficient regularity and volume to
provide pricing information on an ongoing basis.

Simply stated, fair value is the price agreed upon by a buyer and a seller in an arm's length or orderly
transaction.

The buyer and seller who are the market participants must be independent, knowledgeable and willing,
meaning net forced or not compelled to enter into the transaction.

Quoted price

Most often, the fair value of securities is the quoted price in the securities market, for example, the
Philippine Stock Exchange.

If the quoted price pertains to a share or equity security, it means pesos per share.

For example, if the investment in 10,000 shares of an entity costing P800,000 is quoted at 90, the
market value thereof is P900,000, computed by multiplying 10,000 shares by P90 per share.

If the quoted price pertains to a bond or debt security, it means percent of the face amount of the
bond.

For example, if the investment in bond with face amount of P2,000,000 costing P1,700,000 is quoted
at 90, the market value is P1,800,000, computed by multiplying the face amount of P2,000,000 by
90%.

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Gain and loss - Financial asset at fair value

Under PFRS 9, paragraph 5.7.1, gain and loss on financial asset measured at fair value shall be
presented in profit or loss, except:

a. When the financial asset is an investment in nontrading equity instrument and the entity has
irrevocably elected to present unrealized gain and loss in other comprehensive income
b. When the financial asset is a debt investment that is measured at fair value through other
comprehensive income

In other words, unrealized gain and loss on financial asset held for trading and other financial asset
measured at fair value are reported in the income statement.

Unrealized gain and loss arise from investments that are reported at fair value.

In determining fair value, no deduction is made for transaction costs that may be incurred on disposal
of the financial asset.

If the fair value is higher than carrying amount, the difference is an unrealized gain.

If the fair value is lower than carrying amount, the difference is an unrealized loss.

Gain and loss that result from actually selling the investments are known as realized gain and realized
loss.

Gain and loss - Financial asset at amortized cost

Unrealized gain and loss on financial asset at amortized cost are not recognized simply because such
investments are not reported at fair value.

PFRS 9, paragraph 5.7.2, provides that gain and loss on financial asset measured at amortized cost
shall be recognized in profit or loss when the financial asset is derecognized, sold, impaired or
reclassified, and through the amortization process.

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Chapter 19 – Financial Asset at Amortized Cost- Bond Investment

Week 9

Definition of a bond

A bond is a formal unconditional promise made under seal to pay a specified sum of money at a
determinable future date, and to make periodic interest payments at a stated rate until the principal
sum is paid.

In simple language, a bond is a contract of debt whereby one party called the issuer borrows fund
from another party called the investor.

Thus, a bond is a debt security because the bondholder is a creditor and the issuer is a debtor.

A bond is evidenced by a certificate and the contractual agreement between the issuer and investor
is contained in another document known as "bond indenture".

A bond is issued in small denomination of P100, P1,000 or P10,000 to enable more investors to
purchase the bond issue.

For example, a P50,000,000 bond issue may be issued in denomination of P1,000. Thus, there shall
50,000 bonds with face of P1,000 each.

An investor acquires a bond either as a temporary or permanent investment and derives regular
income in the form of interest.

Interest payment date

The interest on the bond investment is usually paid semiannually or every six months as follows:
a. January 1 and July 1 d. April 1 and October 1
b. February 1 and August 1 e. May 1 and November 1
c. March 1 and September 1 f. June 1 and December 1

Of course, there are certain bonds that pay interest annually or at the end of the bond year.

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Classification of bond investments

Bonds may be acquired as current or noncurrent investment depending on the business model of
managing financial assets.

Accordingly, bond investments are classified and accounted for as follows:

a. Financial asset held for trading
b. Financial asset at amortized cost
c Financial asset at fair value through other comprehensive income
d. Financial asset at fair value through profit or loss by irrevocable designation or by fair value option

Initial measurement
In accordance with PFRS 9, paragraph 5.1.1, bond investments are recognized initially at fair value
plus transaction costs that are directly attributable to the acquisition.

However, transaction costs attributable to the acquisition of bond investments held for trading or at
fair value through profit or loss are expensed immediately.

Subsequent measurement
Subsequent to initial recognition, bond investments are measured and accounted for as follows:
A At fair value through profit or loss.
B At amortized cost
C At fair value through other comprehensive income

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