Intermediate Accounting 3 Chapter 8 - Notes Part 2 PDF

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Chapter 8Notes – Part 2 Which of the following statements is incorrect? a. Related party transactions and outstanding balances with other entities in a group aredisclosed in an entity’s financial statements. b. Intragroup related party transactions and outstanding balances are not eliminated in thep...

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Chapter 8 Notes – Part 2 1. Which of the following statements is incorrect? a. Related party transactions and outstanding balances with other entities in a group are disclosed in an entity’s financial statements. b. Intragroup related party transactions and outstanding balances are not eliminated in the preparation of consolidated financial statements of the group. c. Related party relationships are a normal feature of commerce and business. d. A related party relationship could have an effect on the profit or loss and financial position of an entity. e. Knowledge of related party transactions, outstanding balances and relationships may affect assessments of an entity’s operations by users of financial statements, including assessments of the risks and opportunities facing the entity. 2. An entity’s ability to affect the financial and operating policies of an investee is through the presence of I. Control II. Joint control III. Significant influence a. I only b. I or III c. Any of I, II, or III d. I, II and III 3. Which of the following statements is correct? I. The profit or loss and financial position of an entity may be affected by a related party relationship even if related party transactions do not occur. II. The mere existence of the relationship may be sufficient to affect the transactions of the entity with other parties. a. True, true b. True, false c. False, false d. False, true 4. All of the parties enumerated are related to an entity , except a. the entity is a subsidiary, an associate, or a venture in a joint venture. b. the party is a member of the key management personnel of the entity or its parent. c. the party is a close member of the family of an individual having control, significant influence, or joint control over the entity or a member of the key management personnel of the entity or its parent. d. the party is a post-employment benefit plan for the benefit of employees of the entity, or of any entity that is a related party of the entity. e. two entities simply because they have a director or other member of key management personnel in common 5. The following relates to the transactions of MISCELLANY MIXTURE Company during 20x1: Directors' and officers' remuneration 4,000,000 Post-employment benefits of officers 400,000 Fringe benefits in the form of housing assistance to directors and officers 10,000,000 Share options granted to officers 600,000

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Officers' expenses on travels, representation and entertainment subject to liquidation and reimbursement Loans to directors and officers Sales to related entities

200,000 6,000,000 20,000,000

Requirements: Determine the amount of related party disclosures on MISCELLANY’s (a) separate financial statements and (b) the group’s consolidated financial statements.

“So do not fear, for I am with you; do not be dismayed, for I am your God. I will strengthen you and help you; I will uphold you with my righteous right hand.” (Isaiah 41:10)

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ANSWERS 1. B 2. C 3. A 4. E

5. Solutions: (a) Separate financial statements Key management personnel compensation:

Directors' and officers' remuneration Post-employment benefits of officers Fringe benefits in the form of housing assistance to directors and officers Share options granted to officers Related party transactions and outstanding balances: Loans to directors and officers Sales to related entities Total

4,000,000 400,000 10,000,000 600,000 15,000,000 6,000,000 20,000,000 26,000,000 20,500,000

Advances to officers for necessary expenses of the entity and subject to liquidation are not treated as key management personnel compensation. (b) Consolidated financial statements Key management personnel compensation: Directors' and officers' remuneration Post-employment benefits of officers Fringe benefits in the form of housing assistance to directors and officers Share options granted to officers Related party transactions and outstanding balances: Loans to directors and officers Total

4,000,000 400,000 10,000,000 600,000 15,000,000 6,000,000 6,000,000 10,500,000

Intercompany transactions and outstanding balances are eliminated in the consolidated financial statements.

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1. MISCREANT UNBELIEVING Co. is preparing its year-end financial statements and has identified the following operating segments: Segment s Revenues Profit (loss) Assets A 2,000,000 400,000 28,000,000 B 2,400,000 280,000 36,000,000 C 540,000 (140,000) 24,000,000 D 480,000 (1,400,000) 2,000,000 E 580,000 100,000 2,800,000 Totals 6,000,000 (760,000) 92,800,000 Requirement: Identify the reportable segments. 2. LIMPID CLEAR Company engages in five diversified operations namely, operations A, B, C, D, and E. Information on these segments are shown below: Segments A B C D E Totals

Revenues 1,600 1,600 100 300 400 4,000

Profit (loss) 400 200 20 40 140 800

Assets 20,000 4,000 2,000 4,000 14,000 44,000

Additional information: a. For internal reporting purposes, segments A and B are considered as one operating segment. b. Segment E is considered as an operating segment for internal decision making purposes. c. Segments C and D have similar economic characteristics and share a majority of the aggregation criteria. Requirement: Identify the reportable segments. 3. TACITURN SILENT Co. is preparing its year-end financial statements and has identified the following operating segments: External Inter-segment Total Segments revenues revenues revenues Profit Assets A 2,400,000 1,200,000 3,600,000 1,400,000 24,000,000 B 800,000 200,000 1,000,000 800,000 14,000,000 C 500,000 500,000 200,000 2,000,000 D 400,000 400,000 160,000 1,600,000 E 300,000 300,000 140,000 1,400,000 F 200,000 200,000 100,000 1,000,000 Totals 4,600,000 1,400,000 6,000,000 2,800,000 44,000,000

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Management believes that between segments C, D, E and F, segment C is most relevant to external users of financial statements. Requirement: Identify the reportable segments. 4. FIDELITY LOYALTY Co. has the following information on its operating segments. External Inter-segment Total Segments revenues revenues revenues Profit Assets A 2,400,000 1,200,000 3,600,000 1,400,000 24,000,000 B 800,000 200,000 1,000,000 800,000 14,000,000 C 500,000 500,000 200,000 2,000,000 D 400,000 400,000 160,000 1,600,000 E 300,000 300,000 140,000 1,400,000 F 200,000 200,000 100,000 1,000,000 Totals 4,600,000 1,400,000 6,000,000 2,800,000 44,000,000 Question: FIDELITY Co. shall provide disclosure for major customers if revenues from transactions with a single external customer amount to how much?

“Let us therefore come boldly to the throne of grace, that we may obtain mercy and find grace in time of need.” (Hebrews 4:16)

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SOLUTIONS 1. Answer: The reportable segments are segments A, B, C and D. Solutions: Revenue test

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The threshold under the revenue test is P600,000 or (P6,000,000 x 10%). Segments A and B are reportable because each of their revenues is at least P600,000 or 10% of the total revenues. Asset test The threshold under the revenue test is P9,800,000 or (P92,800,000 x 10%). Segments A, B, and C are reportable because each of their total assets is at least P9,800,000 or 10% of the total assets. Profit or loss test Segments

Profit

A B C D E

400,000 280,000

Totals

780,000

Loss

(140,000) (1,400,000) 100,000 (1,540,000)

Based on the table above, the aggregate losses of P1,540,000 is higher than the aggregate profits. Therefore, the 10% limit of profit or loss is P154,000 or (P1,540,000 x 10%). Segments A, B and D are reportable under this test since each of their reported profits or loss is at least P154,000 or 10% of P1,540,000. Based on the tests performed, the reportable segments to be disclosed in ABC’s notes to financial statements are segments A, B, C, and D. 2. Answer: LIMPID Co. shall disclose three reportable segments in its notes to financial statements, namely, “A/B,” “E” and “C/D.”

Solution: Under the “management approach,” segments A and B (aggregated as one segment) and segment E are reportable operating segments because these segments are used by ABC Co. in its internal reporting. Segments C and D are subjected to the quantitative thresholds as shown below: Segments

Revenues

Revenue test

Profit

Profit test

Assets

Asset test

A

1,600

N/A

400

N/A

20,000

N/A

Totals

B

1,600

N/A

200

N/A

4,000

N/A

C D

100 300

3% 8%

20 40

3% 5%

2,000 4,000

5% 9%

E

400

N/A

140

N/A

14,000

N/A

4,000

800

44,000

Segments C and D do not individually meet any of the quantitative thresholds. However, since the problem states that segments C and D have similar economic characteristics and share a majority of the aggregation criteria, they are aggregated and tested if their combined results qualify under the quantitative thresholds. The combined revenue of C and D of P400 (100 + 300) is equal to the revenue threshold of P400 (4,000 x 10%). Therefore, C and D shall be disclosed as one reportable segment. ABC Co. shall disclose three reportable segments in its notes to financial statements, namely, “A/B,” “E” and “C/D.” 3. Answer: The three reportable segments are segments A, B, and C. The other segments are combined and disclosed as “all other segments.”

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Solution: Under the revenue test, segments A and B are reportable because they each have total revenues (external and internal) exceeding the threshold of P600,000 or (6,000,000 x 10%). Under the profit or loss test, segments A and B are reportable because they each have profit exceeding the threshold of P280,000 (2,800,000 x 10%). Under the total assets test, segments A and B are reportable because they each have total assets exceeding the threshold of P4,400,000 (44,000,000 x 10%). However, the sum of the external revenues of segments A and B does not meet the 75% limit as shown below: Segments A B

External revenues 2,400,000 800,000

Total external revenues of A and B

3,200,000

Total entity's external revenues Multiply by: Limit on external revenues of reportable segments

4,600,000 75% 3,450,000

Since management believes that of the other segments (i.e., C, D, E, and F), information on segment C is most relevant to users, segment C shall be disclosed as a reportable segment even if it does not meet any of the quantitative thresholds in order for the “75% limit” to be met. If segment C is included as reportable segment, the total external revenues of reportable segments A, B, and C is P3,700,000 (2,400,000 + 800,000 + 500,000) which meets the “75% limit” of P1,725,000. 4. Answer: at least P460,000 or (10% x P4,600,000 total external revenues)...