INTERIM FINANCIAL REPORTING

1. BIR CORP. 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 amount
of provision should be charged in the second quarter's interim income statement?
A. 750,000 C. 1,500,000
B. 1,250,000 D. 2,000,000
SOLUTION:
Total warranty expense - first and second quarter (10% x 25,000,000) P2,500,000
Warranty expense recognized in first quarter (5% x 10,000,000) 500,000
Warranty expense - second quarter P2,000,000

2. DOJ CORP. reported P950,000 net income for the quarter ended September 30, 2014 which included the
following after-tax items:
• A P600,000 gain from expropriation realized on April 30, 2014 was allocated equally to the second, third
and fourth quarters of 2014.
• A P150,000 loss resulting from a change in inventory valuation method was recognized on August 1,
2014.
In addition, the entity paid P480,000 on February 1, 2014 for 2014 calendar-year property taxes. Of this amount,
P120,000 was allocated to the third quarter of 2014.
For the quarter ended September 30, 2014, what amount should be reported as net income?
A. 750,000 C. 1,000,000
B. 900,000 D. 1,100,000
SOLUTION:
Net income per book P950,000
Gain from expropriation incorrectly allocated (600,000 / 3) (200,000)
Change in accounting policy incorrectly deducted from income 150,000
Corrected net income P900,000

3. COA CORP. reports profit before tax of ₱200,000 in its 2nd quarter interim financial statements before
consideration for the following:
a. Inventory with a carrying amount ₱10,000 has a net realizable value of ₱12,000. It is expected that the
change in value will reverse in the 3rd quarter. There have been no write-downs of inventory recognized
in previous periods.
b. An investment property measured under the cost model has a carrying amount of ₱150,000 but its
recoverable amount is ₱140,000.
c. An investment in FVPL measured at acquisition cost of ₱20,000 has a fair value of ₱38,000 as at the
end of 2nd the quarter. However, the increase in fair value is expected to be only temporary.
d. No depreciation is recognized during the 2nd quarter. The annual straight-line depreciation of items of
PPE is ₱60,000.
e. COA CORP. has a policy of providing 12 days paid vacation leaves for its employees. The vacation
leaves are vesting and accumulating. Total paid vacation leaves eligibility of employees for the full year
is ₱140,000. However, only ₱20,000 worth of paid vacation leaves have been availed of during the
quarter.
f. It was discovered that depreciation in the previous year was overstated by ₱7,000.
A. 150,000 C. 193,000
B. 158,000 D. 215,000
 SOLUTION:
Unadjusted profit before tax P200,000
Write-down of inventory -
Impairment of asset (150,000 – 140,000) (10,000)
Unrealized gain (38,000 – 20,000) 18,000
Depreciation (60,000 x 1/4) (15,000)
Employee benefits (140,000 x 1/4) (35,000)
Adjusted profit before tax P158,000

Use the following information in answering the next item(s):

DEPED CORP. expects to earn ₱200,000 pre-tax profit each quarter. DEPED has tax rates of 20% on the first
₱400,000 of annual earnings and 30% on all additional earnings. Actual earnings match expectations.

4. What is the weighted average annual income tax rate?

A. 30% C. 35%
B. 40% D. 25%
SOLUTION:
Pre-tax profit (first P400,000) 400,000
Multiply by: Tax rate applicable for the first P200,000 profit 20%
Income tax expense on the first P200,000 profit 80,000

Pre-tax profit (in excess of P400,000)

(200,000 per qtr. x 4 qtrs.) minus 400,000 500,000
Multiply by: Tax rate applicable for additional earnings 30%
Income tax expense on additional earnings 120,000

Total income tax expense for the year 200,000

Divide by: Total profit for the year (200,000 per qtr. x 4 qtrs.) 800,000
Weighted average annual income tax rate 25%

5. How much is the quarterly income tax expense of the entity?

A. P60,000 C. P80,000
B. P50,000 D. P70,000
SOLUTION:
Quarterly income tax expenses are computed as follows:
1st qtr. 2nd qtr. 3rd qtr. 4th qtr. Annual
Pretax profit 200,000 200,000 200,000 200,000 800,000
Ave. income tax rate 25% 25% 25% 25% 25%
Income tax expense50,000 50,000 50,000 50,000 200,000

OPERATING SEGMENT

1. CAREBEAR CORP. has three lines of business, each of which was determined to be reportable segment. The
entity sales aggregated P 7,500,000 in the current year, of which Segment No. 1 contributed 40% traceable
costs were P 1,750,000 for Segment No. 1 out of a total of P 5,000,000 for entity as a whole external reporting,
the entity allocated common costs of P 1,500,000 based on the ratio of a segment's income before common
costs to the total income before common costs. In the financial statements for the current year, what amount
should be reported as profit for Segment No. 1?
A. 1,250,000 C. 650,000
B. 1,000,000 D. 500,000
 SOLUTION:
Sales (P7,500,000 x 40%) P3,000,000
Traceable costs (1,750,000)
Income before common costs 1,250,000
Common costs (P1,500,000 x 50%) (750,000)
Segment profit P500,000
The 50% percentage is computed as P1,250,000/P2,500,000.

2. Operating profit and loss figures for the seven segments of Mobile Company are as follows:
Segments Operating Profit Operating Loss
K 14,000,000
L 2,000,000
M 8,000,000
N 2,500,000
O 800,000
P 900,000
Q _________ 2,000,000
Total 24,900,000 5,300,000
Using the quantitative threshold, which of the above operating segments are reportable based on the operating
profit or loss criterion?
A. segments K, L, M and P C. segments K, M, and N
B. segments N, O and Q D. none is reportable
SOLUTION:
The reportable segments are K, M and N since they are the ones who passed the profit or loss test. Under the
profit or loss test, the absolute amount of profit or loss is 10% or more of the greater in absolute amount of:
a. Combined profit of all operating segments that reported a profit.
b. Combined loss of all operating segments that reported a loss.
Based from this, the absolute amount of profit or loss of a segment should be at least P2,490,000 (P24,900,000
x 10%).

Use the following information for the next item(s):

An entity and its divisions are engaged solely in manufacturing. The following data pertain to the segment
operations during the year 2019:

Operating Segment Internal Revenue External Revenue

A 1,000,000 5,000,000
B 1,500,000 3,000,000
C 4,000,000 8,000,000
D 500,000 1,300,000
E 2,000,000 2,800,000
F __200,000 __900,000
Totals 9,200,000 21,000,000

3. How many are the reportable segments?

A. Six C. Four
B. Five D. Three
SOLUTION:
Minimum segment revenue (30,200,000 x 10%) 3,020,000

4. What is the minimum revenue to be considered a major customer?

 A. 3,020,000 C. 920,000
B. 2,100,000 D. 15,750,000
SOLUTION:
Minimum revenue for major customer (21,000,000 x 10%) 2,100,000

5. BEARY BEAR CORP. provided the following information related to operating segments:
Segment Sales to customers Intersegment sales Total revenue

One 5,000,000 3,000,000 8,000,000

Two 8,000,000 4,000,000 12,000,000
Three 4,000,000 - 4,000,000
Four 43,000,000 16,000,000 59,000,000
Combined 60,000,000 23,000,000 83,000,000
Elimination - (23,000,000) (23,000,000)
Consolidated 60,000,000 - 60,000,000
What is the total revenue that should be disclosed for the reportable segment?
A. 71,000,000 C. 79,000,000
B. 51,000,000 D. 56,000,000
SOLUTION:
Following the rule on revenue test, to be reportable , a segment should have a total revenue of at least
P8,300,000 (P83,000,000 x 10%). Based from this, the reportable segments are SEGMENTS TWO & FOUR
with a combined total revenue of (P12,000,000 + 59,000,000) P71,000,000.