CHAPTER 31

Statement of Financial Position

Questions

Q31-1 Three elements, as defined by the PASB, are contained in a statement of

financial position: assets, liabilities, and equity. These elements mea-sure the
worth of an enterprise at a given point in time. The statement of financial
position thus reports what resources an enterprise has and who has claim against
those resources. Two other elements, investments by owners and distribution to
owners, are related to the equity element. Information concerning the change in
equity is often contained in a separate statement that supplements the statement
of financial position.

Q31-2 In order to meet the definition of an asset, an item need not be associated with
certain future benefit. To acknowledge the uncertainty inherent in business, the
definition of an asset stipulates that the future benefit need be only probable.

Q31-3 Some liabilities, such as accounts payable and long-term debt, are denominated
in precise monetary terms. However, the amounts of many liabilities must be
estimated based on expectations about future events.

Q31-4 a. Assets are classified as current if

(1) the asset will be realized in cash during the normal operating cycle of
the business or 1 year, whichever is longer, or
(2) the asset will be sold or consumed within a normal operating cycle or 1
year, whichever is longer.
b. Liabilities are classified as current if liquidation of the liability is expected
to require
(1) the use of current assets or
(2) the creation of other current liabilities.

Q31-5 a. Cash is classified as noncurrent when it is a part of a fund that will be used
to discharge noncurrent obligations. Such funds include bond retirement
funds, pension funds, and preferred stock redemption funds. Cash to be
used for the acquisition of land, buildings, and equipment or cash received
on long-term deposits from customers would also be reported as
noncurrent.
b. Receivables not reportable as current assets include those arising from
unusual transactions, such as the sale of land, buildings, and equipment or
advances to affiliates or employees that would not be collectible within 12
31-2 Solutions Manual to Accompany Financial Accounting and Reporting (Volume III)
months.
Q31-6 If a short-term loan is expected to be refinanced or paid back with the proceeds
of a replacement loan, the existing short-term loan is not classified as current.
This is true as long as the intent of the company is to refinance the loan on a
long-term basis and the company’s intent is evidenced by an actual refinancing
after the statement of financial position or by the existence of an explicit
refinancing agreement.

Q31-7 Contingent liabilities could or could not give rise to actual obligations;
estimated liabilities are known to exist but the amount is not definitely known.
A company could, for example, win or lose a lawsuit, but it is actually liable for
income tax. The exact amount of the income tax is unknown until the final tax
return is completed. The tax liability could have to be estimated at the time
financial statements are prepared.

Q31-8 Offset balances are used to adjust the gross amount of statement of financial
position items to arrive at proper valuations. For example, allowance for bad
debts is properly offset against the gross amount of accounts receivable to show
the net amount estimated collectible. It is generally not proper to offset an asset
account against a liability or owners’ equity account because such an offset
would not be for the purpose of correctly valuing either account but rather to
condense financial data at the expense of adequate disclosure.

Q31-9 Assets are usually presented in the order of their liquidity, with the most liquid
items listed first.

Q31-10 There are at least four types of notes used by management to support the
financial statements and provide users with additional relevant information.
They can be classified as follows:
(a) Summary of significant accounting policies
(b) Additional information, both numerical and descriptive, to support
summary totals included in the financial statements
(c) Information about items that does not meet the recognition criteria but
that is still useful to decision makers
(d) Supplementary schedules required by the PASB or the SEC to fulfill the
full disclosure principle

Q31-11 Many assets are reported at historical cost, which is usually less than market
value, and other assets (such as homegrown goodwill) are not included in the
statement of financial position at all. Accordingly, the statement of financial
position numbers are often a very poor reflection of what a company is worth.
Typically, a going concern is worth significantly more than the reported book
value of equity.
 Statement of Financial Position 31-3
Q31-12 The statement of financial position provides information about the nature and
amounts of investments in enterprise resources, obligations to enterprise
creditors, and the owners’ equity in net enterprise resources. That information
not only complements information about the components
of income, but also contributes to financial reporting by providing a basis for (1)
computing rates of return, (2) evaluating the capital structure of the enterprise,
and (3) assessing the liquidity and financial flexibility of the enterprise.

Q31-13 Financial flexibility is the ability of an enterprise to take effective actions to

alter the amounts and timing of cash flows so it can respond to unexpected
needs and opportunities. An enterprise with a high degree of financial flexibility
is better able to survive bad times, to recover from unexpected setbacks, and to
take advantage of profitable and unexpected investment opportunities.
Generally, the greater the financial flexibility, the lower the risk of enterprise
failure.

Q31-14 Some situations in which estimates affect amounts reported in the statement of
financial position include:
(a) allowance for doubtful accounts.
(b) depreciable lives and estimated salvage values for plant and equipment.
(c) warranty returns.
(d) determining the amount of revenues that should be recorded as
unearned.

Q31-15 Liquidity describes the amount of time that is expected to elapse until an asset is
converted into cash or until a liability has to be paid. The ranking of the assets
given in order of liquidity is:
(1) (d) Short-term investments.
(2) (e) Accounts receivable.
(3) (b) Inventories.
(4) (c) Buildings.
(5) (a) Goodwill.

Q31-16 The major limitations of the statement of financial position are:

(a) The values stated are generally historical and not at fair value.
(b) Estimates have to be used in many instances, such as in the determination
of collectibility of receivables or finding the approximate useful life of
long-term tangible and intangible assets.
(c) Many items, even though they have financial value to the business,
presently are not recorded. One example is the value of a company’s
human resources.
31-4 Solutions Manual to Accompany Financial Accounting and Reporting (Volume III)
Q31-17 (a) Trade accounts receivable should be stated at their estimated amount
collectible, often referred to as net realizable value. The method most
generally followed is to deduct from the total accounts receivable the
amount of the allowance for doubtful accounts.
(b) Land is generally stated in the statement of financial position at cost.
(c) Inventories are generally stated at the lower of cost or net realizable
value.
(d) Trading securities (consisting of ordinary shares of other companies) are
stated at fair value.
(e) Prepaid expenses should be stated at cost less the amount apportioned to
the previous accounting periods.

Q31-18 Battle is incorrect. Retained earnings are a source of assets, but are not an asset
itself. For example, even though the funds obtained from issuing a note payable
are invested in the business, the note payable is not reported as an asset. It is a
source of assets, but it is reported as a liability because the company has an
obligation to repay the note in the future. Similarly, even though the earnings
are invested in the business, retained earnings is not reported as an asset. It is
reported as part of equity because it is, in effect, an investment by owners which
increases the ownership interest in the assets of an entity.

Q31-19 The notes should appear as non-current liabilities with full disclosure as to their
terms. Each year, as the profit is determined, notes of an amount equal to two-
thirds of the year’s profits should be transferred from the non-current liabilities
to current liabilities until all of the notes have been liquidated.

Q31-20 (a) Allowance for doubtful accounts receivable should be deducted from
accounts receivable in current assets.
(b) Merchandise held on consignment should not appear on the consignee’s
statement of financial position except possibly as a note to the financial
statements.
(c) Advances received on sales contract are normally a current liability and
should be shown as such in the statement of financial position.
(d) Accumulated other comprehensive income should be shown as part of
equity.
(e) Land should be reported in property, plant, and equipment unless held for
investment.
(f) Merchandise out on consignment should be shown among current assets
under the heading of inventories.
(g) Franchises should be itemized in a section for intangible assets.
(h) Accumulated depreciation of plant and equipment should be deducted from
the plant and equipment accounts.
(i) Materials in transit should not be shown on the statement of financial
 Statement of Financial Position 31-5
position of the buyer, if purchased f.o.b. destination.

Exercises

E31-1 Cash Inflow

Operating (Outflow)
(d) Cash collected from customers P13,400
(b) Cash paid for interest (600)
(f) Cash paid for income taxes (1,850)
Total P10,950
Investing
(a) Cash received from sale of a building P4,200
Financing
(c) Cash paid to repurchase shares of stock (treasury
stock) P(1,100)
(e) Cash paid for dividends (930)
Total P(2,030)

E31-2 Company A start-up, high-growth

Company B cash cow
Company C steady state

E31-3 Noncash
Investing Financing (Disclose only)
(a) P(40,000) P 0 P 80,000
(b) 0 0 67,000
(c) 0 0 100,000
(d) 0 56,000
(30,000)
Total P(40,000) P26,000

E31-4 (a) Not cash equivalent because it is an equity investment; no maturity date.
(b) Cash equivalent of $5,700 because time to maturity at date of purchase was less
than three months.
(c) Cash of $3,400.
(d) Not cash equivalent because time to maturity at date of purchase was greater
than three months.
P5,700 + P3,400 = P9,100
31-6 Solutions Manual to Accompany Financial Accounting and Reporting (Volume III)

E31-5 Cash flow from operating activities P6,200

Cash flow from investing activities (9,400)
Cash flow from financing activities 5,000
Net decrease in cash P1,800
Cash balance, beginning of year 2,800
Cash balance, end of year P4,600

E31-6 1. Accounts Receivable 750

Service Revenue 750
2. Utilities Expense 520
Utilities Payable 520
3. Depreciation Expense 400
Accumulated Depreciation—Dental Equipment 400
Interest Expense 500
Interest Payable 500
4. Insurance Expense (P15,000 X 1/12) 1,250
Prepaid Insurance 1,250
5. Supplies Expense (P1,600 – P400) 1,200
Supplies 1,200

E31-7 (a) Ending balance of supplies P 900

Add: Adjusting entry 950
Deduct: Purchases 850
Beginning balance of supplies 1,000
(b) Total prepaid insurance 4,800 (P400 X 12)
Amount used (6 X P400) 2,400
Present balance 2,400
The policy was purchased six months ago (August 1, 2014)

(c) The entry in January to record salaries paid was

Salaries Expense 1,800
Salaries Payable 900
Cash 2,700
The “T” account for salaries payable is
Salaries Payable
Paid 900 Beg. Bal. ?
January
 Statement of Financial Position 31-7

End Bal. 800

The beginning balance is therefore
Ending balance of salaries payable P 800
Plus: Reduction of salaries payable 900
Beginning balance of salaries payable P1,700

(d) Service revenue P2,000

Cash received 1,600
Unearned revenue reduced P 400

Ending unearned revenue January 31, 2015 P 750

Plus: Unearned revenue reduced 400
Beginning unearned revenue December 31, 2014 P1,150

E31-8 (a) Wages Expense 2,900

Wages Payable 2,900
(b) Utilities Expense 600
Accounts Payable 600
(c) Interest Expense (P60,000 X 8% X 400
1/12)
Interest Payable 400
(d) Telephone Expense 117
Accounts Payable 117

E31-9 (a) LIGAYA CORP.

Statement of Profit or Loss and Other Comprehensive Income
(Cash Basis)
For the Year Ended December 31,
2014 2015
Sales P290,000 P515,000
Expenses 225,000 282,000
Net income P 65,000 P233,000
(b) LIGAYA CORP.
Statement of Profit or Loss and Other Comprehensive Income
(Accrual Basis)
For the Year Ended December 31,
2014 2015
Sales* P480,000 P445,000
Expenses** 277,000 265,000
31-8 Solutions Manual to Accompany Financial Accounting and Reporting (Volume III)

Net income P203,000 P180,000

*2014: P290,000 + P160,000 + P30,000 = P480,000

2015: P355,000 + P90,000 = P445,000
**2014: P185,000 + P67,000 + P25,000 = P277,000
2015: P40,000 + P170,000 + P55,000 = P265,000

E31-10 1. Depreciation Expense (P250 X 3) 750

Accumulated Depreciation—
Equipment 750
2. Unearned Rent Revenue (P6,300 X 1/3) 2,100
Rent Revenue 2,100
3. Interest Expense 500
Interest Payable 500
4. Supplies Expense 2,150
Supplies (P2,800 – P650) 2,150
5. Insurance Expense (P300 X 3) 900
Prepaid Insurance 900

Problems

P31-1 JOHANN COMPANY

Statement of Financial Position
December 31, 2015
Assets
Non-current assets
Long-term investments
Land held for future use P175,000
Property, plant, and equipment
Building P730,000
Less: Accum. depr.—building
160,000 P570,000
Office equipment 265,000
Less: Accum. depr.—office 105,000 160,000 730,000
equipment
Intangible assets
Goodwill 80,000
Other identifiable assets 90,000 170,000
Total non-current assets 1,075,000
Current assets
Inventories, at lower of 401,000
average
 Statement of Financial Position 31-9
cost or net realizable value
Accounts receivable 357,000
Less: Allowance for doubtful
accounts 17,000 340,000
Prepaid expenses 12,000
Trading securities—at fair 120,000
value
Cash 260,000
Total current assets 1,133,000
Total assets P2,208,000
Equity and Liabilities
Equity
Share capital—ordinary, P1
par, authorized 400,000
shares, issued 290,000 P290,000
shares
Share premium—ordinary 180,000 P470,000
Retained earnings 794,000*
Total equity P1,264,000
Non-current liabilities
Bonds payable 500,000
Add: Premium on bonds
payable 53,000 553,000
Pension obligation 82,000
Total non-current P635,000
liabilities
Current liabilities
Notes payable (due next year) 125,000
Accounts payable 135,000
Rent payable 49,000
Total current liabilities 309,000
Total liabilities 944,000
Total equity and liabilities P2,208,000
*P2,208,000 – P944,000 – P470,000

P31-2 Current assets

Inventories at lower-of-cost (determined
using FIFO) or net-realizable-value
Finished goods P 52,000
Work-in-process 34,000
Raw materials 187,000 P273,000
Accounts receivable (of which P50,000 is 161,000
pledged as collateral on a bank loan)
Less: Allowance for doubtful accounts 12,000 149,000
31-10 Solutions Manual to Accompany Financial Accounting and Reporting (Volume III)
Interest receivable [(P40,000 X 6%) X 8/12] 1,600
Trading securities at fair value 29,000
(cost, P31,000)
Cash 92,000*
Less: Cash restricted for plant expansion (50,000) 42,000
Total current assets P494,600
*An acceptable alternative is to report cash at P42,000 and simply report the
cash restricted for plant expansion in the investments section.
P31-3 (a) AGNES COMPANY
Statement of Financial Position (Partial)
December 31, 2015
Current assets
Inventories P161,000*
Accounts receivable P91,300**
Less: Allowance for doubtful
accounts 7,000 84,300
Prepaid expenses 9,000
Cash 30,476***
Total current assets P284,776

* Inventories P171,000
Less: Inventory received on consignment 10,000
Adjusted inventory P161,000
** Accounts receivable balance P89,000
Add: Accounts reduced from January collection
(P23,324 ÷ 98%) 23,800
112,800
Deduct: Accounts receivable in January 21,500
Adjusted accounts receivable P91,300

*** Cash balance P40,000

Add: Cash disbursement after discount
[(P35,000 X 98%)] 34,300
74,300
Less: Cash sales in January (P30,000 – P21,500) 8,500
Cash collected on account 23,324
Bank loan proceeds (P35,324 – P23,324) 12,000
Adjusted cash P30,476

Current liabilities
Notes payable P55,000a
Accounts payable 113,000b
Total current liabilities P168,000
a
Notes payable balance P67,000
 Statement of Financial Position 31-11
Less: Proceeds of bank loan 12,000
Adjusted notes payable P55,000
b
Accounts payable balance P61,000
Add: Cash disbursements P35,000
Purchase invoice omitted (P27,000 – P10,000) 17,000 52,000
Adjusted accounts payable P113,000

(b) Adjustment to retained earnings balance:

Add: January sales discounts
[(P23,324 ÷ 98%) X .02] P476
Deduct: January sales P30,000
January purchase discounts (P35,000 X 2%) 700
December purchases 17,000
Consignment inventory 10,000 (57,700)
Change (decrease) to retained earnings P(57,224)

P31-4 WALTER CORPORATION

Statement of Financial Position
December 31, 2015
Assets
Non-current assets
Long-term investments
Investments in bonds P299,000
Investments in capital shares 277,000
Total long-term investments P576,000

Property, plant, and equipment

Land 260,000
Buildings P1,040,000
Less: Accum. Depreciation 352,000 688,000
Equipment 600,000
Less: Accum. Depreciation 60,000 540,000
Total property, plant, and
equipment 1,488,000

Intangible assets
Franchise 160,000
Patent 195,000
Total intangible assets 355,000
Total non-current assets 2,419,000

Current assets
Inventories 597,000
Accounts receivable 435,000
31-12 Solutions Manual to Accompany Financial Accounting and Reporting (Volume III)
Less: Allowance for doubtful
accounts 25,000 410,000
Trading securities 153,000
Cash 197,000
Total current assets 1,357,000
Total assets P3,776,000

Equity and Liabilities

Equity
Share capital—ordinary P1,000,000
(P5par)
Retained earnings* 130,000
Accumulated other
comprehensive income 80,000
Less: Treasury shares 191,000
Total equity P1,019,000

Non-current liabilities
Bonds payable P1,000,000
Long-term notes payable 900,000
Provision for pensions 80,000
Total non-current liabilities 1,980,000

Current liabilities
Short-term notes payable P90,000
Accounts payable 455,000
Dividends payable 136,000
Accrued liabilities 96,000
Total current liabilities 777,000
Total liabilities 2,757,000
Total equity and liabilities P3,776,000

* Computation of Retained Earnings:

Sales P7,900,000
Investment revenue 63,000
Cost of goods sold (4,800,000)
Selling expenses (2,000,000)
Administrative expenses (900,000)
Interest expense (211,000)
Net income P52,000

Beginning retained earnings P78,000

Net income 52,000
Ending retained earnings P130,000
Or ending retained earnings can be computed as follows:
 Statement of Financial Position 31-13

Total equity (P3,776,000 – P2,757,000) P1,019,000

Add: Treasury shares 191,000
Less: Share capital and Accum. other 1,080,000
comprehensive income
Ending retained earnings P130,000
Note to instructor: There is no dividends account. Thus, the 12/31/15 retained
earnings balance already reflects any dividends declared.

P31-5 MJ Corporation
Statement of Financial Position
December 31, 2016
Assets Liabilities
Current assets: Current liabilities:
Cash P8,500 Accounts payable P3,400
Investment securities 5,250 Current portion of
Accounts receivable, bonds payable 2,500
net 21,350 Loan due on demand
Inventory 31,000 7,000
Land held for resale 8,000 Dividends payable 15,000
Other current assets 10,200 Other 2,000
Total current assets P84,300 Total current
liabilities P29,900
Noncurrent assets: Long-term liabilities:
Investments P2,750 Bonds payable P7,500
Property, plant, and Other liabilities 15,750
equipment, net 56,800 Total long-term
Restricted cash: liabilities 23,250
For preferred stock 19,000 Total liabilities 53,150
For equipment 4,000 Owners’ Equity
Advance to company Preferred stock 19,000
president 4,000 Common stock 50,000
Other noncurrent Retained earnings 66,800
assets 13,600 Less treasury stock (4,500)
Total noncurrent Total owners’ equity P131,300
assets P100,150 Total liabilities and
Total assets P184,450 owners’ equity P184,450

COMPUTATIONS:
Cash: P12,500  P4,000 (a)
Investment securities: P8,000  P2,750 (b)
Land held for resale: P8,000 (h)
Other current assets: P14,200  P4,000 (c)
Property, plant, and equipment: P64,800  P8,000 (h)
Restricted cash: P19,000 (g)
31-14 Solutions Manual to Accompany Financial Accounting and Reporting (Volume III)
P4,000 (a)
Investments: P2,750 (b)
Advance to company president: P4,000 (c)
Current portion of bonds payable: P2,500 (d)
Loan due on demand: P7,000 (e)
Dividends payable: P15,000 (f)
Bonds payable (long-term): P10,000  P2,500 (d)
Other long-term liabilities: P32,750  P2,500 (d)  P7,500(d)  P7,000 (e)
Preferred stock: P19,000 (g)
Retained earnings: P81,800  P15,000 (f)
Treasury stock: formerly shown incorrectly as a noncurrent asset

Q31-6 (a) 22,642 (f) 145,372 (k) 78,145

(b) 129,515 (g) 159,991 (l) 468,770
(c) 380,465 (h) 21,842 (m) 441,732
(d) 295,772 (i) 43,911 (n) 792,514
(e) 88,484 (j) 65,753

Q31-7 (a) Report the amount as a subtraction in the Equity section of the statement of
financial position.
(b) Note disclosure.
(c) Report the detail in the statement of profit or loss and other comprehensive
income or as a note disclosure.
(d) Report the amount in the statement of financial position as Allowance for
Bad Debts.
(e) Contingent liability mentioned in the body of the statement of financial
position, but no amount recognized because the contingency is not described
as being probable. Note description of the potential liability.
(f) Report the amount in the statement of profit or loss and other comprehensive
income.
(g) Report the amount as a long-term asset.
(h) Note disclosure.
(i) No financial statement disclosure.
(j) Note disclosure.
(k) No financial statement disclosure.
No financial statement disclosure.

Q31-8 Note 1. Summary of Significant Accounting Policies

Receivables. An allowance account is provided for the estimated uncollectible
 Statement of Financial Position 31-15
accounts.
Inventories. Inventory is valued using the LIFO method. If the Company had
used the FIFO inventory method, the ending inventory would be
reduced by P50,000 and net income for the year would be reduced
by P35,000 after taxes. Consignment inventory is carried as an asset
by Delta until it is sold by the consignee.
Equipment. The Company depreciates its equipment using the straight-line
method. The current value of the equipment is P525,000.

Note 2. Receivables
The receivables amount of P126,000 includes the following balances:

Customers’ accounts P70,000

Customers’ notes 30,000
Advances to sales representatives 10,000
Advance to president of company 25,000
Total P135,000
Less allowance for bad debts 9,000
Net receivables P126,000

Note 3. Anticipated Merger

The Board of Directors is discussing a merger with another chemical company.
No final decision has been made as of the date these statements are being
issued; however, it is anticipated that additional shares of stock will be issued as
part of any merger.
Note 4. Notes Payable
The Company borrowed P350,000 on a 10-year note at 14% interest. The note is
due on July 1, 2023. Equipment has been pledged as collateral for the loan. The
terms of the note prohibit any additional long-term borrowing without the
express permission of the note holders. Because of a need for additional
financing next year, management is planning to make such a
request.