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) 250,000

Bonuses (1,200,000 x 6/12) 600,000
Total 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) 150,000

Repairs 900,000
Expense for second quarter 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 950,000

Gain from expropriation (600,000 / 3) (200,000)
Change in accounting policy deducted from income 150,000
Total net income 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. 7,000,000
b. 5,500,000
c. 5,000,000
d. 3,500,000

Answer:

Advertising cost 2,000,000

Bonuses 3,000,000
Total 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) 2,500,000

Warranty recognition in first quarter (5% x 10,000,000) 500,000
Warranty expense for second quarter 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. 1,750,000
b. 2,100,000
c. 1,500,000
d. 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.

Income before tax tax rate

First quarter 6,000,000 30%
Second quarter 7,000,000 30%
Third quarter 8,000,000 25%

What is the income tax provision in the interim income statement for the third quarter?

a. 5,250,000
b. 1,350,000
c. 2,400,000
d. 2,000,000

Answer:

First quarter (30% x 6,000,000) 1,800,000

Second quarter (30% x 7,000,000) 2,100,000
Total 3,900,000

Cumulative for three quarters (25% x 21,000,000) 5,250,000

Total tax first two quarters (3,900,000)
Total 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. 2,375,000
b. 2,700,000
c. 2,250,000
d. 1,625,000

Answer:

First quarter (30% x 1,000,000) 300,000

Second quarter (30% x 1,500,000) 450,000
Third quarter (25% x 2,500,000) 625,000
Fourth quarter (25% x 4,000,000) 1,000,000
Total income tax expense 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. 200,000
b. 150,000
c. 300,000
d. 400,000

Answer:

Bad debt expense for the year 450,000

Bad debt expense:
First quarter (5% x 2,000,000) 100,000
Second quarter (5% x 1,500,000) 75,000
Third quarter (5% x 2,500,000) 125,000 300,000
Bad debt expense for fourth quarter 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. 4,000,000
b. 2,875,000
c. 2,325,000
d. 2,335,000

Answer:

Variable expense (25% x 4,000,000) 1,000,000

Fixed expense, excluding depreciation (1,500,000 – 600,000) 900,000
Advertising allocated to the first quarter (1,500,000 / 4) 375,000
Depreciation from March 1 to March 31 (600,000 x 1/10) 60,000
Total expense in the first quarter 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 Percentage of completion Estimated cost

1 10% 15,000,000
2 10% 15,000,000
3 25% 19,200,000
4 25% 19,200,000

No work was performed in the second and fourth quarters.

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) 5,000,000

Percentage of completion 10%
Income earned 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. 200,000 income
b. 200,000 loss
c. 300,000 income
d. 300,000 loss

Answer:

Third quarter – gross income (20,000,000 – 19,200,000) 800,000

Percentage of completion 25%
Cumulative income 200,000
Income earned – first quarter ( 500,000)
Loss in third quarter 300,000

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

Problem 12-13

Chairmaine Company prepared the following condensed trail balance on March 31,
2019:

Cash 1,000,000
Accounts receivable 2,000,000
Inventory 1,500,000
Prepaid insurance 400,000
Note receivable 5,000,000
Land 1,500,000
Buildings and equipment 18,000,000
Accounts payable 8,500,000
Share capital 5,000,000
Share premium 4,000,000
Retained earnings 9,500,000
Sales 25,000,000
Purchases 17,000,000
Distribution costs 3,200,000
Administrative expenses 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 25,000,000
Cost of sales (60%) 15,000,000
Gross income 10,000,000
Interest income (5,000,000 x 12% x 3/12) 150,000
Total income 10,150,000
Selling expenses ( 3,350,000)
Administrative expenses ( 3,050,000)
Income before tax 3,750,000
Income tax (30%) ( 1,125,000)
Net income 2,625,000

Distribution cost 3,200,000

Depreciation (450,000 x 1/3) 150,000
Total 3,350,000

Administrative expenses 2,400,000

Depreciation (450,000 x 2/3) 300,000
Insurance (400,000 / 4) 100,000
Doubtful accounts (25,000,000 x 1%) 250,000
Total 3,050,000

Charmaine Company
Statement of Financial Position
March 31, 2019

Assets

Current assets:
Cash 1,000,000
Trade and other receivables 1,900,000
Inventory 3,500,000
Prepaid insurance 300,000 6,700,000

Noncurrent assets:
Note receivable 5,000,000
Property, plant and equipment 19,050,000 24,050,000
Total assets 30,750,000
 Liabilities and Equity

Current liabilities:
Accounts payable 8,500,000
Income tax payable 1,125,000 9,625,000

Shareholders’ equity
Share capital 5,000,000
Share premium 4,000,000
Retained earnings 12,125,000 21,175,000
Total liabilities and equity 30,750,000

Accounts receivable 2,000,000

Allowance for doubtful accounts ( 250,000)
Accrued interest on Note receivable 150,000
Total trade and other receivables 1,900,000

Inventory - 1/1
1,500,000
Purchases 17,000,000
GAS 18,500,000
Cost of sales (15,000,000)
Inventory – 12/31 3,500,000

Land 1,500,000
Buildings and equipment 18,000,000
Accumulated depreciation ( 450,000)
Net carrying amount 19,050,000

Retained earnings – 1/1 9,500,000

Net income 2,625,000
Total 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 7,500,000
Costs of sales (4,500,000)

Gross income 3,000,000

Dividend revenue 300,000

Total income 3,300,000

Distribution costs ( 900,000)
General expenses ( 500,000)
Depreciation ( 400,000)
Interest expense ( 100,000)
Income tax ( 400,000)
Net income 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 20,000,000
Interest revenue 250,000
Dividend revenue 500,000
Costs of sales 11,500,000
Distribution costs 2,500,000
General expenses 1,100,000
Depreciation 700,000
Interest expense 300,000
Income tax expense 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 20,000,000
Cost of sales (11,500,000)
Gross income 8,500,000
Interest revenue 250,000
Dividend revenue 500,000
Total income 9,250,000
Distribution costs ( 2,500,000)
General expenses ( 1,100,000)
Depreciation ( 700,000)
Interest expense ( 300,000)
Income before tax 4,650,000
Income tax expense ( 1,300,000)
Net income 3,350,000

Dunhill Company
Income statement
three months ended June 30, 2019

Sales 12,500,000
Cost of sales ( 7,000,000)
Gross income 5,500,000
Interest revenue 250,000
Dividend revenue 200,000
Total income 5,950,000
Distribution costs ( 1,600,000)
General expenses ( 600,000)
Depreciation ( 300,000)
Interest expense ( 200,000)
Income before tax 3,250,000
Income tax expense ( 900,000)
Net income 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 10,000,000

Second quarter 8,000,000
Third quarter 7,000,000
Fourth quarter 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) 7,000,000
Loss on inventory writedown 100,000
Cost of goods sold after inventory writedown 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) 4,900,000

Loss on inventory writedown 150,000
Cost of goods sold after inventory writedown 5,050,000
Cost of goods sold for entire year (45% x 40,000,000) 30,000,000
Cost of goods sold before writedown and reversal:
First quarter ( 7,000,000)
Second quarter ( 4,700,000)
Third quarter ( 4,900,000)
Cost of goods sold before reversal of writedown – fourth quarter 13,400,000
Gain on reversal of writedown ( 150,000)
Cost of goods sold after reversal of writedown – fourth quarter 13,250,000

2.
Sales Cost of goods sold Gross income

First quarter 10,000,000 7,100,000 2,900,000

Second quarter 8,000,000 4,600,000 3,400,000
Third quarter 7,000,000 5,050,000 1,950,000
Fourth quarter 15,000,000 13,250,000 1,750,000
Total 40,000,000 30,000,000 10,000,000

Problem 12-16

1. Which statement is true regarding interim reporting?

a. The independent view is required for interim financial statements.

b. Interim reports are required on a quarterly basis.
c. Interim reports are not required.
d. 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. A complete set of financial statements.

b. A condensed set of financial statements and selected notes.
c. A statement of financial position and an income statement
d. 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. Condensed statement of financial position

b. Condensed statement of cash flows
c. Condensed statement of changes in equity
d. 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. As useful if activity is spread evenly through the year

b. As if the interim period were an annual accounting period
c. As reporting for an integral part of an annual period
d. As special type of reporting that need not follow GAAP

8. Interim financial statements are usually presented on a

a. Monthly basis
b. Quarterly basis
c. Semiannual basis
d. 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. Statutory tax rate for the year.

b. Effective tax rate expected for the second quarter.
c. Effective tax rate expected for the full year.
d. Average tax rate for the full.