COST ACCTG.

STANDARDS
1. IMA
2. SMA
3. CASB (legally
binding)

COST OBJECT
TMC = DM+DL+FOH
PC = DM+DL
CC = DL+FOH
Abnormal data points = outliers
METHODS OF SEPARATING SEMI-VARIABLE COST INTO THEIR FIXED & VARIABLE
ELEMENT
A. HIGH-LOW METHOD

=

C. METHOD OF LEAST SQUARE

METHOD

()()
2 ()2

=
=
= + ( )
= + ()

= + ()

B. SCATTERGRAPH (SCATTERPLOT)
METHOD
=

= + ()

Cost Acctg.

Acctg. 7

Acctg.11

Job order
Process Costing
Joint & By Products
Activity Based Costing
Backflush Costing

COST ACCOUNTING:

Installment Sales
Franchise Acctg.
Construction Contract
Home Office & Branch
FOREX
Derivative
Corporate Liquidation

Business Combination
Joint Venture
NPO

(MANUFACTURING (COST))

Applied FOH
=

=
Direct Costing = or Variable Costing
Absorption Costing = or Conventional or
Full Costing
Responsibility Accounting:

Activity Level to Use:

1.
2.
3.
4.

Normal Capacity
Expected Capacity
Practical Capacity
Theoretical Capacity

Plant Wide/Blanket Rate= (Only

one rate)
Departmentalized Rates= (Many
rates)

JOB ORDER COSTING SYSTEM

Accounting for Production Losses in a Job Order Cost System

Accounting for Scrap Sales

1. Scrap Sale or Other Income
2. Cost of Goods Sold (credited)
3. FOH Control (credited)
4. WIP-materials (credited)
-if traceable to the job.

Accounting for Spoiled Goods

Estimated Loss

xxx
2

Recoverable Cost(x10)

(xxx)

Unrecoverable Cost

xxx

Fault of Customer

Fault of Management

FG
xxx
Spoiled Good Invty. X10
WIP #
xxx

Cash inflow

FOH Control
xxx
Spoiled Goods Invty. x10
WIP #
Loss on Spoilage
xxx
Spoiled Goods Invty. x10
WIP #

Recoverable
Cost

xxx

xxx

Accounting for Rework

Fault of the Customer

WIP #

xxx
Materials
Accrued Payroll
Applied FOH

FG

Fault of Management
FOH Control
xxx
Materials
Accrued Payroll
Applied FOH

xxx
xxx
xxx

xxx
WIP #

FG
xxx

xxx
xxx
xxx

xxx
WIP

xxx

NOTE: When it is fault of the

customer it is chargeable to WIP, if
not it is chargeable to FOH Control.

PROCESS COSTING SYSTEM

P- Physical Units:
E- Equivalent Units of Production:
C- Cost to Account for:
U- Unit Cost:
A- Assign Cost to:

Assign Cost to:

Units started & completed & Ending Inventory

Normal Spoilage
Abnormal Spoilage

Accounting for Production Losses & or Spoilages

CONTINUOUS

DISCRETE

0 If only normal loss is present, it will

be absorbed by the remaining units
by using the Method of Neglect.

0 If only normal loss is present,

it should be absorbed by the
remaining units, if or for the
condition that the units
remaining are good units. If
the ending are not, the cost
should be allocated to the
units started & completed &
transferred to the next
department.

0 However when normal & abnormal

spoilage existed in the process that
were recognized, we have to put
an EUP to the whole numberof units
considered as abnormal in order for
us to separate cost to this product.
(-FOH)

Method of Neglect also can be

used in this scenario.
NOTE: Good Units are goods
considered as good quantity & passed
the inspection point.
4

Methods of Accounting Joint Cost

ACCOUNTING for JOINT PRODUCT COST &

BY PRODUCTS

1. Market or Sales Value Method

A. 1. Sales Value at Split-Off - Note: to use this method, all
joint product must be marketable @ split-off point.
A. 2. Hypothetical Market Value Approximate Net Realizable Value
at split-off point. Hypothetical MV is equal to selling
price minus cost to complete and cost to sell.
2. Average Unit Cost Method (Uniform [more or less])

Average Unit Cost =

Joint Cost
Total Units

Allocated Joint Cost = average Unit Cost x Units

3. Predetermined Index of Production Method
(differ in terms of manufacturing requirement)
Units
Produce
Product
X
Product
Y
Product Z

# Points Per
Unit

Weighted
Units

xxx

xx

xxx

xxx

xx

xxx

xxx

xx

4. Quantitative Method
Units
S
Produce
U
N
Product X
xxx
K
Product Y
xxx
C
Product Z
xxx
O
S
T

Ratio x Joint
Cost

Allocated
JC
=

xxx

xxx

xxx

xxx

___

xxx

xxx

xxx

Total
Pounds

Pounds
Per
Unit
xx

xxx

xxx

xx

xxx

xxx

xx

xxx
xxx

Ratio x JC

xxx

______

Allocated
JC

xxx

xxx

xxx

SUNK & JOINT COST

ACCOUNTING FOR BY-PRODUCTS

A. Methods that do not allocate joint cost to by-products

Method 1: Revenue from by-products is treated as:
A.
B.
C.
D.

Other Income
Additional Sale Revenue
Deduction from CGS of the Main Product
Deduction from the total production cost of Main Product

Method 2: Revenue from sales reduced by additional processing cost & cost to sell is
shown on the as indicated in method 1 above. Net Revenue Method
Method 3: Replacement Cost Method
B. Methods that allocates joint cost to by-products
Method 4: Market Value or Reversal Cost Method
Sales
Further Process Cost
Est. Cost to Sell
Est. Profit

xxx
(xxx)
(xxx)
(xxx)

Allocated Joint Cost

xxx

ACTIVITY BASED-COSTING (ABC)

Cost Allocation Rate for Activity = Estimated total Indirect Cost of Activity
Estimated total Quantity of Cost Alloc. Base

Allocated Activity Cost = Cost Allocation Rate

for Activity

X ACTUAL quantity of
Cost Allocation based
used by cost object

RIP (to FG)

BACKFLUSH COSTING

u CGS

beg.

end.

Material

amount backflushed from xxx

RIP to FG

FG

u RIP & CC Accts

from suppliers
Note: Raw Materials Cost Backflush from
RIP to Finished Goods & from FG to Cost of
Goods Sold.

FG (to CGS)
end.

beg.

Common Journal Entries:

Purchase of Raw Materials
RIP
xxx
A/P
xxx
Record Closed of Indirect Material
FOH Control
xxx
Supplies
xxx
Factory OH Cost
FOH Control xxx
Cash
xxx
Acc. Dep.
xxx
Direct and Indirect Labor
CGS
xxx
FOH Control xxx
Accrued Payroll xxx
OH to CGS
CGS
xxx
FOH Control
xxx
Material Cost from RIP to FG
FG
xxx
RIP
xxx

material backflush from

RIP

Amount backflush from FG to

CGS

CGS
RM [Backflush] xxx
Direct Labor

xxx

FOH Control

xxx
xxx

FOH Control
Indirect Labor xxx

Conversion Cost by and Changes

RIP
xxx
xxx
F/G
xxx
xxx

RIP xxx
CGS xxx

FG xxx
CGS xxx
CGS xxx
FG xxx
7

Installment Sales-Revenue Recognition

Record Installment Sales
Cash

xxx

Installment Contract Receivable

Installment Sales

xxx
xxx

Record the Cost of Installment Sales

COS IS*
Merchandise Inventory

xxx
xxx

Collection of Installment Contract Receivable

Cash

xxx

Installment Contract Receivable

Interest Income

xxx
xxx

Adjusting Entry
Accrued Interest Receivable
Interest Income

xxx

Installment Sales
Cost of Installment Sales

xxx

xxx

xxx

Realized Gross Profit

Deferred Gross Profit
Realized Gross Profit

xxx

Realized Gross Profit

Income and Expense Summary

xxx

xxx

xxx

Formula:
Installment Sales
Less: COS
Gross Profit
Installment Accounts Receivable
Beg.
xxx
Ending
xxx
Sales xxx
Collection
xxx
Repossession xxx

xxx
xxx
xxx
Deferred Gross Profit
Ending
Write-off

xxx
xxx

Beg.
DGP

xxx
xxx

Repossessions: (Defaults)
Unrecorded Cost = (NRV or MV) whichever is lower.
Unrecovered Cost = equal to defaulted amount of Accounts Receivable multiplied by the
cost percentage
Defaulted Accounts Receivable
Market Value (NRV)
X Cost ratio
Estimated resale price
xxx
Unrecovered
Cost
Less: Reconditioning Cost xxx
Cost to sell
xxx
MV or NRV(date of repossession)

(xxx)
xxx
Unrecovered Cost
Market Value of
Asset Recovered
Loss on Repossession

Journal Entry
MI- repossessions
xxx
DGP
xxx
Loss on Repossession
xxx
Installment Accounts Receivable

xxx

TRADE IN:

(NRV) Market Value is greater then Allowed Trade-In

Under allowance in Trade In & Added to SP (Selling Price)
Over allowance of the MV & Deducted to SP (Selling Price) if MV is lesser than
Allow. Trade-In
9

xxx
xx%
xxx

xxx
xxx
xxx

Notes: Trade In should be recorded at their Market Value

a) Instalment Receivable
Mdse. Inventory Trade In
Instalment Sales

xxx
xxx

b) Mdse. Inventory Trade In

Cash

xxx

xxx

Allowed Trade In Value

xxx

MV or NRV of Trade In

(xxx)

xxx

Unde allowance or
Overallowance

xxx

FRANCHISE ACCOUNTING
Note: It is assumed that substantial performance occur when the franchisee actually commence
the operation of the Franchise.
Note:

Down Payment - Non Refundable is recognized as revenue.

Direct Cost is deferred.
Indirect is outright expense.

10

Methods of Accounting of Initial Franchise Fee

ACCRUAL (Reasonably Assured)

INSTALMENT (uncertain w/ regards to

Collectability)

1. Cash
xxx
NR
xxx
Deferred Franchise Fee Revenue xxx

Cash

xxx

NR

xxx
Deferred Franchise Fee Revenue

xxx

2. Direct Cost and Indirect

Deferred Cost of Franchise Fee xxx
Franchise Expense
xxx
Cash
xxx

Deferred Cost of Franchise Fee

xxx

Franchise Expense

xxx

Cash

3. Upon Substantial Performance DC

Deferred Franchise Fee Revenue xxx
Franchise Fee Revenue
xxx
Collection
Cash
N/R

xxx
xxx

4. Direct Cost of Franchise Fee

Cost of Franchise Fee
Cash

xxx
xxx

11

xxx

ADJUSTING ENTRY INSTALLMENT METHOD

[Close Revenue, Cost of Revenue, & Set up DGP]
Franchise Fee Revenue
xxx
Cost of Franchise Fee Revenue
Deferred Gross Profit

xxx
xxx

Deferred Gross Profit

Realized Gross Profit

xxx

xxx

COMPUTATIONS:
DP
Add: Collection
Total Collection
Multiplied by GP
Restricted RGP
Cash

xxx
xxx
xxx
%
xxx
xxx

Deferred FF Rev.
Equipment/Assets
Deferred FFC
Gain on Sale

xxx
xxx
xxx
xxx

Tangible Assets Included in the Initial Franchise Fee

Note: The portion of Initial Franchise Fee must be allocated to such property (Income right away) at its
Fair Market Value. Recognized as revenue when title to such property passes to the franchisee even
though substantial performance has not occurred.
Options to Purchase: [present]
Note: Initial Franchise Fee is not taken up as revenue but is deferred (until the property is purchased
Investment) upon the exercise of the option it is treated as the reduction in the Franchisor Investment in
the acquired outlet.
Bargain Purchase:
Note: The portion of Initial Franchise Fee should be deferred and accounted for as an adjustment of
selling price of the equipment/supplies. Amount to be deferred is equal to:
The difference between the SP to other customer and the bargain price granted to customer
(franchise)
Regular Price/MP
Less: Bargain Purchase Price
Deferred Amount

xxx
xxx
xxx

12

CONSTRUCTION CONTRACT (PAS 11)

1. Cost Recovery
2. Percentage of Completion Method
a. Different Ways of Determining the Stage of Completion
i. Cost to Cost Method
Accountant
ii. Efforts Expended Method
Engineer
iii. Output Measures
Accountant
Note:
1. CR - Contract Revenue for the year/CP Contract Price is equal to percentage of completion
current year
2. Contract Cost Incurred to Date
Total Estimated Contract Cost
Account Title:
CIP Construction in Progress
Construction Cost

xxx

Income Recognized

xxx
Accounts Receivable for Progress Billings
Debited

Periodic Billings to Customers

Progress Billings
Credited

Contract Retention

Journal Entries
1. Cost Incurred:
CIP (Construction In Progress)
Cash (Materials, FOH, Payroll, etc.)
2. Record Billings
A/R from PB
Progress Billings
3. Collections
Cash
A/R from PB
13

xxx
xxx
xxx
xxx
xxx
xxx

4. GP Earned
CIP (Construction In Progress GP earned)
xxx
Construction Cost (Actual Cost)
xxx
Contract Revenue (Percentage of Completion x CP)
5. Anticipated Loss
Construction Cost (Actual Cost)
xxx
CIP (Construction In Progress Loss Total)
Contract Revenue (% Completed x CP)

xxx

xxx
xxx

Note: This Journal Entry is prepared upon completion of the product.

ANTICIPTED LOSS ON LONGTERM CONSTRUCTION CONTRACT

Cost Incurred to Date

xxx

Contract Revenue

xxx

Add: Est. Cost to Complete

xxx

Less: Contract Cost / Total

xxx

xxx

(Loss) Estimated Loss

xxx

Less: Prior Period Profit

xxx

Total Est. Cost

Total Loss to be Credited to CIP xxx

Cost Incurred to Date

%

Total Estimated Cost

14

Contract Revenue

xxx

Less: Total Estimated Cost

xxx

Price during the Construction Period is

Gross Profit

xxx

treated as change in Accounting

Multiply: % of Completion

Note: Modification on the Original Contract

Gross Profit to Date

xxx

Less: Previous Profit End

xxx

Current EP End

xxx

Estimates. (affect only the amount of

future periods)

HOME OFFICE & BRANCH ACCOUNTING

Investment in branch

Shipments to branch (Merchandise)

Dr.

Cr.

Home Office Current

Shipments from Home Office

Cr.

Dr.

HOME OFFICE BOOK

Investment in Branch xxx

Shipments to Branch
At Cost

BRANCH BOOK

Shipments from Home Office

Home Office Current

xxx

Investment in Branch xxx

Shipment to Branch
xxx
Allow. For Mark-up on BI xxx
Above Cost

Shipments from Home Office

Home Office Current

*To adjust the allowance to its correct ending

balance:
Allowance for Mark-up on BI
Branch Net Proceeds

xxx
xxx

15

xxx
xxx

xxx
xxx

*Balance of Allowance is deducted in

Investment in Branch account in the Home
Office Balance Sheet.
1. Branch Inventory Acquired from Home Office:
Mdse. At billed price
Divided by billing price
Add: Invty. Acquired fr. Outsiders
Branch Inventory at Cost
2. Computation of Current Branch Profit:
Branch Profit (loss) as reported
Add: Realized Mark-up on BI
True Branch Profit (NI)

xxx
%

xxx
xxx
xxx

Allow. For Mark-Up

xxx
xxx
xxx

INTERBRANCH TRANSFER OF MERCHANDISE

HOME OFFICE

ANOTHER BRANCH (TAC)

1.

Branch Current Tac

xxx

Shipments to Branch

xxx

Cash

xxx

Shipment fr. H.O.

xxx

Freight In

xxx

Home Office Current

16

xxx

BRANCH (CEBU)

Home Office Current

xxx

Shipments fr. H.O.

xxx

Freight In

xxx

Shipments fr. H.O.

xxx

Freight In

xxx

Home Office Current xxx

Cash

xxx

Note:

1. Informed the H.O.

Other Expense:
1.Branch Current-Cebu xxx
Excess of Freight in
Shipment
xxx
Branch Current-Tac xxx

Expense on the part of the

Home Office based on the
concept of (logic) efficiency
and effectiveness of
administration since it is an
obligation of an administration.

2.Shipment to Branch-Tac xxx

Shipment to BranchCebu

xxx

FOREIGN EXCHANGE RATES (PAS 21)

Exchange Rate (Income Statement) Difference
1. Direct Quotation ($1 = P?) 1 dollar to peso equivalent
2. Indirect Quotation ($? = P1) 1 peso to dollar equivalent
FOREIGN CURRENCY FINANCIAL STATEMENTS TRANSLATION
Method known as Current Rate Method, Net Investment Method or more popularly recognized
in IAS as Closing Rate Method.

17

 Assets and Liabilities Closing Rate

Income and Expenses - Exchange Rates at the date of transactions or Average
Exchange Rates
SHE Historical Cost
Note: Differences shall be recognized at a separate component of [entity] equity section.
Foreign Currency Transaction is a transaction that is denominated or requires ______________ foreign
currency
Foreign Transaction transaction between countries or between enterprises in different countries

Notes:
Transaction Date

B/S

Settlement Date

Spot Rate

Spot Rate

Spot Rate

FOREX Difference

FOREX Difference

(gain/loss)

(gain/loss)

Historical Cost HS (PAS 29) For Reporting Hyperinflationary Economy

1. Monetary Items are not restated
2. Assets and Liabilities linked by agreement to changes in prices should be adjusted in
accordance with the agreement
3. Assets and Liabilities NRV or MV
Non-monetary Assets and Liabilities restated

Derivative Instrument - (PAS 39) Financial Instrument

Types of Derivatives
1. Option Based Derivatives (One-sided Expense) options and caps and flows
2. Forward Based Derivatives (____________________) Two-sided Expense
Forward - produce or sell specific quality of a financial instrument, commodity, of
foreign currency at a specified price determined at the outset, with the delivery or
settlement at a specified (ratio) future date

18

Accounting for FOREIGN Currency Derivatives and Hedging Activities

Hedging Operations Forward Contract (the usual way of avoiding risks)
Hedging (Accounting) designating a derivative forward instrument as an offset in the net profit a loss in
whole or in part, to the change in Fair Value or cash flow of hedged item (__________________)
hedge effectiveness.
Categories of Hedges
1. Fair Value Hedge (P & L)
2. Cash Flow Hedge (OCI)
Measurement
SWAPS

MEASUREMENT

1. Completion of Contract

=0

2. Reporting Date

= Difference in MR of Interest

Reported at Equity Component Other Revenue

Derivative Instrument - (PAS 39) Financial Instrument
Types of Derivatives
3. Option Based Derivatives (One-sided Expense) options and caps and flows
4. Forward Based Derivatives (____________________) Two-sided Expense
Forward - produce or sell specific quality of a financial instrument, commodity, of
foreign currency at a specified price determined at the outset, with the delivery or
settlement at a specified (ratio) future date
Accounting for FOREIGN Currency Derivatives and Hedging Activities
Hedging Operations Forward Contract (the usual way of avoiding risks)
Hedging (Accounting) designating a derivative forward instrument as an offset in the net profit a loss in
whole or in part, to the change in Fair Value or cash flow of hedged item (__________________)
hedge effectiveness.
Categories of Hedges
3. Fair Value Hedge (P & L)
4. Cash Flow Hedge (OCI)

19

Measurement
SWAPS

MEASUREMENT

3. Completion of Contract

=0

4. Reporting Date

= Difference in MR of Interest

Reported at Equity Component Other Revenue

FORWARD CONTRACT
1. Completion or Date of Contract = - 0 2. On Financial Reporting Date = _____________
3. On Settlement Date = Difference
Reported in Profit/Loss
Options
Written received/payment/consideration
Purchase payment to purchase
1. On Initial Recognition = FV of _____________
2. Financial Reporting Date = ______________ @ FV (Differences Reported at Profit/Loss)
3. On Settlement Date = FV of Option P/L

FORWARD CONTRACT
4. Completion or Date of Contract = - 0 5. On Financial Reporting Date = _____________
6. On Settlement Date = Difference
Reported in Profit/Loss
Options
Written received/payment/consideration
Purchase payment to purchase
4. On Initial Recognition = FV of _____________
5. Financial Reporting Date = ______________ @ FV (Differences Reported at Profit/Loss)
6. On Settlement Date = FV of Option P/L

20

FORWARD CONTRACTS

Transaction

B/S

Settlement

Foreign
Currency
Transaction

Import
Export

Spot

Spot

Spot
The future sale or
purchase of foreign
currency at a specified
rate

Transaction
(Transact
Settlement
Date)

B/S

Settlement

(B/S
Settlement
Spot Rate
Date)

Forward
Contracts

(period of
FC)

Forward Contracts are entered into for the following purposes:

1. To speculate in foreign currency exchange price movements.
2. To designate as a Fair Value Hedge
a. To hedge an expense foreign currency Asset or Liability.
b. To hedge an unrecognized firm commitment.
c. To hedge a net investment in Foreign Currency
To designate as a Cash Flow Hedge: to hedge foreign currency Forecasted Transaction

FORWARD CONTRACT FOR SPECULATION

1. Acquire premium or discount
2. Value the contract to market value
3. Foreign exchange gain/losses the income statement

21

Hedging
Options

Transaction Date:
Forward contract receivable
Forward Contract Payable
Budget Date:
Forward Contract Receivable
Foreign exchange gain
Foreign Exchange Gain
Forward Contract Payable

xxx
xxx

xxx
xxx
xxx
xxx

Settlement Date:
Received of Cash:
Cash($)
xxx
Forward Contract of Receivable
xxx
Forward Contract Payable
xxx
Cash (P)
xxx
Foreign Exchange Gain/loss
xxx

DERIVATIVES
Is a contract
1. Forward- To buy or to sell
Buy- LONG POSITION- Obligated to buy
Sell- SHORT POSITION- Obligated to sell
2. Filters- Exchange Market (Stock exchange), liquidity
3. Option
a. Call Option(Option Based Derivatives)
-Right to buy, no obligation to buy
-Option Price

b. Put Option(one sided expensed)

-Right to sell, no obligation to sell
4. Swaps- Interest Rate Swap
22

SWAPS- INTEREST RATE SWAP

National Amount

Variable Rate

Fixed Rate

Contract

5M

5M

A. Does no want to pay Variable Rate however want to pay fixed.

B. Does not want to pay fixed rather wants to pay variable.
RECEIVE VARIABLE, PAY FIXED
IR%
VR%
Net Excess
xxx%
Multiply by FV xxx
FV Amount of xxx
Multiply by PV xxx%
xxx%

- Fixed Rate
- Current Rate
- Advantage/Disadvantage
- Disadvantage/Advantage
- Derivative Asset/ Liability

fixed- IR
CR
Net Advantage/Disadvantage
Multiply by Fair Value
Multiply by Present Value
Asset or Liability

xxx - the day or the current rate upon the contract of interest rate
(xxx%) - rate for the year
xxx
xxx
xxx%
xxx -Derivative asset or liability for the period

DERIVATIVES continuation P1 & P2

INTEREST RATE SWAP AGREEMENT
(Received variable, pay fixed)
(Cash flow hedge)
Entity on Obligation on loan
Cash
xxx
Loans Payable xxx
23

Payment of Interest
Interest expense xxx
Cash
xxx
Entity into Agreement of Interest Rate SWAP (Disclose/memo entry)
First year
UL ON IRS
xxx
IRS Payable xxx
IRS Receivable xxx
UG on IRS
xxx
Payment of interest
Second Year
Interest expense xxx
Cash
xxx
Base on variable current rate
Interest rate swap payable xxx
IRS
xxx
Cash
xxx
Interest expense
UL on IRS

xxx
xxx

2 year

500

Company
Variable
interest rate

Fixed rate

B1 5,000

B2

24

FUTURE CONTRACT
Strike Price
xxx
Market price
(xxx)
Advantage/disadvantage xxx
Multiply by
xxx Quantity to be purchased
UL/UG on FC
xxx

Entry: UL on FC
xxx
Accounts Payable xxx
Accounts receivable
UG on FC

xxx
xxx

OPTIONS
To buy option
Call option
xxx
Cash
xxx
Call option
xxx
UG on Call option
xxx
RISK (DERIVATIVES &HEDGING ACTIVITIES)
Underlings
Hedging Activities

Foreign currency
Commodity
interest

Financial
instrument

Hedging Instrument
Exposed asset/Investment
liabilityfor trading
- Not a hedge account - IS
Commitment

- hedge account

FC - IS
CFA - OCI

Forecasted

- hedging activities CFH- OCI

Speculation

- not a hedging activities - IS

AFS

Net Investment

- CFH OCI

25

National amount

FORWARD CONTRACT TO EXPOSED ASSET OR LIABILITY

Foreign Currency Transaction

Forward Contract

T/S - ( Transaction Date)

T/S - (Transaction Date)

Purchases xxx
A/R
xxx
A/R
xxx
Sales
xxx

* Forward Contract Receivable xxx

Forward Contract Payable
xxx

B/S

B/S
* Foreign exchange Rec. xxx
Forward contract Rec.
xxx

A/P
xxx
Foreign exchange Gain
xxx
S/P

S/P
* Cash
xxx
Forward contract Rec.
xxx
* Forward Contract Pay xxx
Cash
xxx

A/P
xxx
Cash
xxx
Foreign exchange Gain
xxx

FORWARD CONTRACT TO HEDGE AN UNRECOGNIZED FIRM COMMITMENT

1.

* Forward Contract Rec. xxx

Forward Contract Pay
xxx

2. Forex Firm Commitment

Forex Gain
3. Purchases
Cash

xxx
xxx

* Forex Loss
xxx
Forward Contract Receivable xxx

xxx

* Forward Contract Payable

Cash

xxx

26

xxx
xxx

Purchases
xxx
Forex Firm Commitment

* Cash
ForEx Loss
Forward Contract Rec.

xxx

xxx
xxx
xxx

Forward Contract to Hedge of Foreign Currency Denominated Forecasted Transaction

(Cash Flow Hedge)
Foreign Currency Transaction
1.
-02. 12/31/201X

Forward Contract
Forward Contract Receivable ($) xxx
Forward Contract Payable
xxx
Deferred Forex Loss
xxx
Forward Contract Receivable ($) xxx

-0-

3. ( Actual Purchase Transaction Took Place)

Purchases
xxx
Cash ($)
xxx

Forward Contract Payable

xxx
Cash
xxx
Cash ($)
xxx
Deferred ForEx Loss
xxx
Forward Contract Receivable
xxx

4. Cash/ Accounts Receivable xxx

Sales
xxx
COS
xxx
Inventory
xxx
Deferred Forex Loss
xxx

Change to CGS it to the related

industry or equipment is sold or
depreciated

Corporate Liquidation
1. Statements of Affairs
Assets
o Asset Pledge with fully secured creditors
o Asset Pledge with partly secured creditors
o Free Assets
Liabilities
o Unsecured creditors with priority
o Fully secured creditors
o Partly secured creditors
27

o Unsecured creditors without priority

SHE
o All the SHE Accounts
2. Statement of Realization and Liquidation
Assets (Non-cash)

Liabilities

Revenue and Expenses

(Note: supporting Schedule of Cash and Owners Equity/SHE)

Cash

SHE

Forms of Business Combination

A. Acquisition of Net Assets ( Purchase Method)
1. Merger
2. Consolidation
B. Stock Acquisition ( Cost Method or Equity Method)

Business Integration Forms

1. Horizontal
2. Vertical
3. Conglomerates
Accounting Method

Ownership Interest

Amount Used

Fair Value / Cost Method

1%- 19%

-0-

28

Equity Method

20%-50%

Investments in Associates

Equity Method & Consolidation

Procedures

50%-100%

Investment in Subsidiaries

Consolidated F/S
Subsequent to Date of Acquisition
Equity Method
1. E, Income for Subsidiary
Dividend Subsidiary
Investment in Subsidiary
2. E, O/S Subsidiary Beg
S/P - Sub.
Beg
R.E Sub.
Beg
Investment in Subsidiary
MINA

xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx

3. Allocate the difference to the specific assets

assets & liabilities of the subsidiary. (Unamortized balance)
4. Amortized the allocated difference.
5. Recognize the share of the minority or non-controlling interest in the net income or loss of
subsidiary & dividends for the current year.
6. Eliminate other reciprocal accounts such as intercompany payables & receivables.
7. Combined non reciprocal accounts on a line by line basis.
Cost Method
1. Adjust the carrying amount of investment account to the equity method balance at the beginning
of the current year.
2. E. Dividend Income
xxx
Dividend Subsidiary xxx
3. E, O/S Subsidiary Beg
S/P - Sub.
Beg
R.E Sub.
Beg
Investment in Subsidiary
MINA

xxx
xxx
xxx
xxx
xxx

4. Allocate the difference to the specific assets & liabilities of the subsidiary. (Unamortized
Balance).
29

5. Amortized the allocated difference.

6. Recognized the share of the minority interest on net income or loss of subsidiary & dividends for
the current year.
7. Eliminate other reciprocal accounts such as intercompany payables & receivables.
8. Combined nonreciprocal accounts on a line by line basis.

Intercompany Sale of Inventory

Additional consolidation procedures are as follows:
a. Recognized the intercompany profit or beg. Inventory.
Downstream
1. Investment in Subsidiary
COS

xxx
xxx

Upstream
1. Investment in Subsidiary
MINA
COS

xxx
xxx
xxx

b. Intercompany Sales & Purchases

Sales
xxx
COS
xxx
c. Eliminate unrealized profit in ending inventory
COS
xxx
Inventories
xxx

Downstream Sales
a. Net Income of Subsidiary
Amortization of Allocated Excess
Adjusted Net Income
% of an Ownership Interest
Share in NI of Subsidiary
Realized Profit on Beg. Invty.
Unrealized Profit in Ending Invty
Income for Subsidiary

xxx
(xxx)
xxx x %MI= MINI
_%_
xxx
xxx
(xxx)
xxx

30

b. SHE ( Unadjusted) end of the year

Unamortized balance of
Adjusted SHE
% Minority interest
MINA, end of the year

xxx
xxx
xxx
_%_
xxx

Upstream Sales
a. Net Income of Subsidiary
Amortization of Allocated Excess
Realized Profit in Beg. Invty.
Unrealized Profit in Ending Invty.
Adjusted NI Subsidiary
% of Ownership
Income from Subsidiary

xxx
(xxx)
xxx
(xxx)
xxx % MI= MINI
_%__
xxx

b. SHE ( Unadjusted) end of the year

Unamortized balance of
Unrealized profit on Ending
Adjusted SHE
% Minority interest
MINA, end of the year

xxx
xxx
(xxx)
xxx
_%_
xxx

Intercompany Sale of Non- Depreciable Assets

1. Year of Sale
Gain on Sale
xxx
Land / Building
2. Subsequent Year
Downstream
a. Investment in Sub. xxx
Acc. Depn
Land / Building
b. Acc. Depn
Depn

xxx

xxx
xxx

xxx
xxx

Upstream
a. Investment in Sub. xxx
MINA
xxx
Acc. Depn
xxx
Land

xxx

b. Acc. Depn
Depn

xxx

xxx

31

Additional Elimination
a. Refuse the carrying value of the asset to its original book value at the beginning of the gain &
eliminate the unrealized gain or less in the sale of interest.
b. Recognize realized gain by reducing the depreciation expense & the realized accumulated
depreciation to reflect the original book value of the asset.

Year & Subsequent Sale of PPE & Inventory

Downstream
Net Income of Subsidiary
Amortization of allocated excess
Adjusted NI
% Parents Ownership
NI
Realized Profit on Beg. Inventory
Unrealized Profit on Ending Inventory
Gain on Sale of Land & PPE
Piecemeal Realization of Gain on Sale PPE
Income from Subsidiary

xxx
(xxx)
xxx % MI = MINI
%
xxx
xxx
(xxx)
(xxx)
xxx
xxx

Upstream
Net Income of Subsidiary
Amortization of allocated excess
Realized Profit in Beg. Inventory
Unrealized Profit in End. Inventory
Gain on Sale of PPE & Land
Piecemeal Realization of Gain on Sale of PPE
Adjusted NI of Subsidiary
Parents Ownership Interest
Income from Subsidiary

xxx
(xxx)
xxx
(xxx)
(xxx)
xxx
xxx
%
xxx

MINA
Shee of the Subsidiary, end of the year
Unamortized Balance of Undervalued Assets
Adjusted SHE
% Minority Interest Percentage
MINA, end of the year

xxx (Unadjusted)
xxx
xxx
%
xxx

She of the Subsidiary, end of the year

Unamortized Balance of Undervalued Assets
Unrealized Profit on End. Inventory
Unrealized gain on Sale of PPE

xxx
xxx
(xxx)
(xxx)
32

* MI% = MINI

Adjusted SHE
% MINA,
MINA, end of the year

xxx
%
xxx
INTEREST AND JOINT VENTURE
Forms of joint venture
1. Jointly Controlled Operations
2. Jointly Controlled Assets
3. Jointly Controlled Entities

A.

Separate Set of Books is Maintained for the Joint venture:

Investment Joint Venture
1 beg
xxx
2. additional investment xxx
3. services rendered
xxx
4. share in JV profits
xxx

B.

xxx
xxx
xxx

withdrawals 5.
share in losses 6.
end cash settlement 7.

JOINT VENTURE
1 Merchandise Contribution Merchandise withdrawals
8
2 Purchase
Merchandise return
9
3 Freight-In
Purchase return & allowances
10
4 Sales Return & Allowances
Purchase Discount
11
5 Sales Discount
Sales
12
6 Expenses
Other Income
13
NL ?

Types of Derivatives
1. Option based derivatives
Options contracts
Interest rate
Interest rate floors
2. Forward base derivatives
Forward
Future
Swap
Hedging means of minimizing risks
33

NI ?

PAS 39 : Types of hedge

Fair value hedge
Cash flow hedge
Hedge of net investment
Forward contracts
a. Hedge
Foreign currency transactions
Unrecognized firm commitment
3. Foreign Currency Denominated
- Forecasted transaction (cash flow hedge)
- Highly probable
4. Net investment in foreign operations (translation adjustment)

b. Speculation

Discount/premium the difference between the two rates is referred to as a discount/premium if forward
rate is less (greater then) the spot rate.

Options Contracts:
Right

Option contract
Buyer

Seller

Foreign Currency Option Contract

Contractual agreement giving the holder the right to buy or sell a given amount among at a
specified price (the exercise price or strike price) for a period of time or a point in time.

Call (buy)

SMP = ESP

SMP > ESP

SMP < ESP

5=5

6>5

5<6

At the money

In the money

Out the money

34

Put (sell)

At the money

Out the money

In the money

Call option to buy

Put option to sell
Holder party who has the right to buy or sell
Purchased Option
Written

grants

the holder this contractual right

written option perspective of the seller

ACCOUNTING FOR FOREIGN CURRENCY OPTION PREMIUMS

Time value (the entire premium) Prepaid Insurance Premium

Intrinsic Value [inception] Foreign Currency Option in the money

Spot Market Price

Exercise Strike Price

Intrinsic Value

XXX
XXX
_________
XXX

*Note: It depends on what positions

you holding whether you and me
BUYER or SELLER.

FUTURE CONTRACT
Is the same thing with forward contract excepts that instead of being negotiated between two
parties, the contract is a standard one that is sponsored by an organized exchange. With and future
contract, the exchange handles the cash settlements between the two parties to the contract. ( Never
directly contact me another)

35