COURSE: AE 13 FINANCIAL ACCOUNTING & REPORTING

MODULE NO. 5
TITLE: INTERIM AND SEGMENT REPORTING
FACULTY: MINERVA O. CRUZ

A Interim Financial Reporting Defined: A financial reporting that covers a period shorter
than a full financial year is called interim financial reporting. An interim financial report
may cover a quarter, a month or other intervals.

B Who are required/mandated by the IAS board to file/publish interim financial reports?
IAS board does not mandate which enterprises should be required to publish interim
financial reports. IAS 34 shall only apply if enterprises are required by regulatory
authorities (like SEC and PSE) or elect to issue interim financial reports.

C Minimum components and contents of an interim financial report:

Interim financial report shall include, at a minimum the ff. components:
• A condensed statement of financial position
• A condensed statement of comprehensive income either:
A condensed single statement or
A condensed separate statement of profit or loss and a condensed statement of
comprehensive income
• A condensed statement of changes in equity
• A condensed statement of cash flows and
• Selected explanatory notes to Financial Statements

However, IAS 34 does not prevent an enterprise to publish a complete set of financial
statements instead of condensed financial statements as its interim financial reports.
Basic and diluted earnings per share should be presented on the face of the statement
of comprehensive income whether condensed or complete.

D Periods covered by Interim financial statements:

Interim financial reports whether condensed or complete should include financial
statements as follows:
1. Statement of financial position-SFP as of the end of the current interim period and
as of immediately preceding year end
2. Statement of comprehensive income-SCI of the current interim period and
cumulative current financial year to date and comparative SCI for the same interim
period and cumulative for the preceding financial year to date.
3. Statement of changes in equity-SCE of the cumulative current year to date and for
the year to date period of the preceding financial year.
4. Statement of cash flows-SCF of the cumulative current year to date and for the year
to date period of the preceding financial year.
 Example: Interim report for the second quarter ended June 30,2021:
1. SFP-SFP as of June 30, 2021 and as of December 31, 2020.
2. SCI-SCI for the quarter ended June 30, 2021 and for the six months ended June 30,
2021 and comparative SCI for the quarter ended June 30, 2020 and for the six
months ended June 30, 2020.
3. SCE-SCE for the six months ended June 30,2021 and for the six months ended June
30, 2020
4. SCF-SCF for the six months ended June 30, 2021 and for the six months ended June
30, 2020.

F Selected explanatory notes and other disclosures:

Based on IAS 34, the following events and transactions must accompany the entity’s
financial reports:
• Write-down of inventory to net realizable value
• Asset impairment loss and impairment reversal
• Reversal of provisions for restructuring costs
• Acquisitions, disposals as well as commitment to purchase items of PPE
• Litigation settlements
• Correction of prior periods
• Changes in circumstances affecting the fair value of financial assets and financial
liabilities
• Related party transactions
• Unremedied loan default and breach of loan agreement
• Changes in classification of financial assets
• Changes in contingent liabilities and contingent assets

G Recognition and measurement of current year revenues and expenses in interim

financial reports:

Revenues from sale of products and from services are recognized for interim financial
report on the same basis as annual financial reports.

Revenues should be recognized as earned during an interim period on the same basis as
the recognition of income for the full year.

Costs and Expenses associated directly with products sold or services rendered for
annual reporting should be similarly treated for interim reporting purposes:

• For companies using periodic inventory system, the gross profit method or other
estimation method may be used to determine cost of goods sold instead of taking an
actual physical inventory.
• Principles for recognition and measurement of losses from inventory write-downs,
restructuring, or impairment in an interim period are the same as those followed if only
annual financial reports are prepared.

Costs and expenses other than product costs should be charged to profit or loss in
interim report as incurred or allocated among interim periods based on an estimate of
time expired, benefit received or activity associated with the periods.

Treatment of the following costs and expenses:

1. Major planned periodic maintenance or overhaul:
Costs of such that is expected to occur late in the year should not be anticipated in
interim financial reports unless an event has caused the enterprise to have a legal
and a constructive obligation.
2. Year-end bonuses:
A bonus is anticipated and thus recognized in interim reporting purposes if, and only
if the bonus is a legal obligation or constructive obligation and a reliable estimate
can be made
3. Pensions:
Pension cost for an interim period is calculated on a year-to date basis by using the
actuarially determined pension cost rate at the end of the financial year, adjusted
for significant market fluctuations.
4. Other planned or irregularly occurring costs:
Costs of these nature are usually discretionary hence recognized in the interim
period that they are actually incurred.
5. Interim income tax expense:
Interim period income tax expense is accrued using the tax rate that would be
applicable to expected total annual earnings.
6. Foreign currency translation gains and losses:
Translation adjustments should be recognized as income or as expense in the
interim period in which they arise.
7. Contractual or purchase price changes:
Volume discounts and other contractual changes in prices of raw materials, labor or
other purchased goods and services are anticipated in interim periods if it is
probable that they have been carried or will take effect.
8. Interim period manufacturing cost variances
Price, efficiency, spending and volume variances are recognized in profit or loss at
interim reporting dates to the same extent as those variances are recognized in
profit or loss at financial year-end.
 Preparation of Interim Financial Report:

Activity A: The profit or loss section of the statement of comprehensive income of

Ace Company for the year ended December 31, 2021 shows the following:

Sales P18,000,000
Cost of goods sold (10,800,000)
Gross profit on sales 7,200,000
Operating expenses (1,800,000)
Operating profit 5,400,000
Gain on sale of equipment 200,000
Profit before income taxes 5,600,000
Income tax (1,680,000)
Profit after tax P 3,920,000

Income tax rate is 30%.

Third quarter sales were 30% of total/annual sales. For interim reporting purposes a
gross profit rate of 40 can be justified. Of the total operating expenses, P1,200,000 are
variable. Variable operating expenses are directly related to sales revenue, while fixed
operating expenses are allocated based on the expiration of time.

The equipment was sold on August 1, 2021.

Required:
1. Reconstruct the profit or loss portion of the statement of comprehensive income for
the third quarter.

Suggested answers;
Requirement-an interim financial for the quarter ended September 30,2021:
Supporting computations:
1. Sales=30%x18,000,000=5.400,000
2. CGS-=60%x5,400,000=3,240,000
3. GP on Sales=40%x5,400,000=2,160,000
4. OE
Variable=5,400,000/18,000,000=30%x1,200,000= 360,000
Fixed=600,000x3/12= =150,000
Total OE 510,000
5. Gain on sale to be reported in the quarterly interim report-the whole amount
recognized in the period of sale-August.=200,000
 6. Profit before tax=2,160,000-510,000+200,000=1,850,000
7. Income tax=30%x1,850,000=555,000
8. Profit after tax=1,850,000-555,000=1,295,000

A formal interim SCI for the quarter ended September 30,2021 is thus prepared:

Ace Company
Statement of Comprehensive Income-Profit or Loss
For the Quarter Ended September 30, 2021
Sales P5,400,000
Less: Cost of Goods Sold 3,240,000
Gross Profit on Sales 2,160,000
Less: Operating Expenses 510,000
Operating Profit 1,650,000
Add: Gain on Sale of Equipment 200,000
Profit before Income Tax 1,850,000
Less: Income Tax 555,000
Profit after Tax P1,295,000

Activity B: The ff. information was taken from the records of Gale Company:

To August 31 To September 30
Net Sales P1,234,500 P1,473,600
Cost of goods sold
Merchandise Inventory, Jan 1 300,000 300,000
Purchases 920,000 1,135,000
Goods available for sale 1,220,000 1,435,000
Merchandise inventory, Aug 31/Sept 30 280,000 372,600
Cost of sales 940,000 1,062,400
Gross profit on sales 294,500 411,200
Selling expenses (142,500) (197,200)
General and administrative expenses (53,000) (72,000)
Profit P99,000 P142,000

Required:
1. Prepare the profit or loss section of the statement of comprehensive income for the
Gale Company for the month of September, 2021 from the above cumulative data:

Suggested answers:
Requirement-preparation of interim SCI for the month ended September 30,2021:
1. Net Sales =1,473,600-1,234,500=239,100
2. MI, beg of Sept 1 (end of Aug )=280,000
 3. Mi, end as of Sept 30=372,600
4. Purchases=1,135,000-920,000=215,000
5. Cost of Sales=280,000+215,000-372,600=122,400
6. GP on Sales=239,100-122,400=116,700
7. SE=197,200-142,500=54,700
8. Gen and AE=72,000-53,000=19,000
9. Profit before tax=116,700-54,700-19,000=43,000

A formal interim SCI for the month ended Sept 30,2021 is thus prepared as follows:
Gale Company
Statement of Comprehensive Income-Profit or Loss
For The Month Ended September 30,2021

Net Sales P239,100

Cost of Goods Sold
Merchandise Inventory, Beg 280,000
Purchases 215,000
Goods Available for Sale 495,000
Merchandise Inventory, End 372,600
Cost of Goods Sold 122,400
Gross Profit on Sales 116,700
Selling Expenses (54,700)
General and Administrative (19,000)
Profit Before Tax P43,000

H Treatment of Change in Accounting Policy in interim financial reporting:

A change in accounting policy should be reflected by restating the financial statements
of prior interim periods of the current financial year and the comparative interim
periods of prior years.

I Reporting by Operating Segments:

The initial discussion was focused on interim reporting whereby the entire financial year
is broken down into shorter interim periods thus providing an additional and updated
information about an enterprise operations.

Reporting by enterprise components called operating segments (IFRS 8 provides the

requirements for reporting financial statements by segments) also provide additional
information about the enterprise operations. Reporting by segment would help users
better understand the company’s operations and at the same help them assess the
company’s risks and returns.
 Reporting by segments is required only for enterprises whose equity and debt securities
are publicly traded and for enterprises that are in the process of issuing equity and debt
securities in public markets.

I When is an entity’s component an operating segment?

• Engages in business activities from which it may earn revenues and incur expenses
• Operating results are reviewed by the entity’s chief operating decision maker for the
purpose of assessing the component’s performance and allocating the enterprise
resources
• Discrete financial information is available

J Identifying Operating Segments:

An operating segment is one whose performance is being monitored by a manager who
is directly accountable to a chief operating decision maker (which is a function rather
than a specific title thus this could be assumed by the chief executive officer, chief
operating officer, or a group of executive directors or officers) . It is not necessary that
each segment has a separate segment manager. One manager could be accountable for
two or more operating segments.

K Aggregation of operating segments:

IFRS 8 allows aggregation of two or more segments, if the segments are similar in each
of the following respects:
• Nature of the products or services
• Nature of production processes
• Type or class of customers for the products or services
• Methods used to distribute the products or provide the services
• Nature of the regulatory environment

L Identifying reporting operating segments:

A reportable operating segment is an operating segment for which segment information
is required to be disclosed.

Quantitative Threshold:
An entity is considered a reportable operating segment if it meets any of the following
10% thresholds:
• Revenues from sales to external customers and transactions with other segments is
10% or more of the total revenue, external and internal, of all the segments
(Revenue Test)
• Segment result, whether profit or loss, is 10% or more of the combined result of all
segments in profit or loss, or the combined result of all segments in loss, whichever
is the greater in absolute amount (Operating Result Test)
• Assets are 10% or more of the total assets of all segments (Asset Test)
 Exceptions to the 10% threshold:
1. An entity may combine segments not meeting any of the 10% thresholds if the
segments have similar characteristics hence these combined segments may be
considered a reportable segment.
2. If the operating segment identified in the immediately preceding period is of
continuing significance based on the judgement of the management, the segment is
considered to be reportable in the current year.

Things to remember :Minimum set-75% of the aggregate external revenues of identified

reportable segments:.
The aggregate external revenues of identified reportable segments, shall be at least
75% of total external revenues of the enterprise. If the total external revenues
attributable to reportable segments is less than 75% of the total consolidated/external
revenues of the enterprise, additional segments shall be taken in as reportable even if
they do not meet any of the 10% threshold until the minimum 75% is met.

Identifying reportable operating segment illustrated:

Activity A: B Company operates in different geographical areas since 2020. The
following information pertains to B Company’s operations for the year 2021:

Geographical Identifiable External Internal Total Segment profit or

Segment Assets Revenues Revenues Revenues (loss)
A 5,000,000 12,500,000 2,500,000 15,000,000 4,000,000
B 2,000,000 4,000,000 1,000,000 5,000,000 (1,500,000)
C 2,500,000 3,000,000 500,000 3,500,000 500,000
D 10,000,000 2,500,000 4,000,000 6,500,000 (2,000,000)
E 5,500,000 11,000,000 2,000,000 13,000,000 5,500,000
Total 25,000,000 33,000,000 10,000,000 43,000,000 10M/(3.5M)

Required:
1. What segments are deemed reportable?

Based on IFRS 8-to be reportable a segment must at least meet any of the three thresholds:
Identifying reportable segments applying the quantitative thresholds:
Asset Test Threshold=10%x25,000,000=2,500,000
Revenue Test Threshold=10%xTR,43,000,000=4,300,000
Segment Result Test Threshold=10% x10M-OP=1,000,000-whether profit or loss
 Geographical Identifiable External Internal Total Segment profit or
Segment Assets Revenues Revenues Revenues (loss)
A 5,000,000R 12,500,000 2,500,000 15,000,000R 4,000,000R
B 2,000,000NR 4,000,000 1,000,000 5,000,000R (1,500,000)R
C 2,500,000R 3,000,000 500,000 3,500,000NR 500,000NR
D 10,000,000R 2,500,000 4,000,000 6,500,000R (2,000,000)R
E 5,500,000R 11,000,000 2,000,000 13,000,000R 5,500,000R
Total 25,000,000 33,000,000 10,000,000 43,000,000 10M/(3.5M)
Conclusion: Segments A, B, C, D and E are reportable
No need to check whether the 75% requirement for external revenue of identified reportable
segments is met since all segments are reportable:

Activity B: The Capri Company and its divisions are engaged solely in manufacturing
operation. The ff. data (consistent with prior years’ data ) pertains to the industries in
which operations were considered for the year end December 31, 2021:

Identifiable Assets
Segment Total Revenue Operating Profit at 12/32/21
A P5,000,000 P875,000 P10,000,000
B 4,000,000 700,000 8,750,000
C 3,000,000 600,000 6,250,000
D 1,500,000 275,000 3,750,000
E 2,125,000 337,500 3,750,000
F 750,000 112,500 1,500,000
Total P16,375,000 P2,900,000 P34,000,000

Required:
1. Determine which of the company’s operating segments are considered reportable
business segments?

Suggested answers:
Quantitative Thresholds to identify which segments are reportable”
1. Asset test threshold=10%xTA,34,000,000=3,400,000
2. Revenue test threshold=10%xTR,16,375,000=1,637,500
3. Segment Result test threshold=10%x2,900,000=290,000

Identifiable Assets
Segment Total Revenue/Ext Operating Profit at 12/32/21
A P5,000,000R P875,000R P10,000,000R
B 4,000,000R 700,000R 8,750,000R
C 3,000,000R 600,000R 6,250,000R
D 1,500,000NR 275,000NR 3,750,000R
 E 2,125,000R 337,500R 3,750,000R
F 750,000NR 112,500NR 1,500,000NR
Total P16,375,000 P2,900,000 P34,000,000

Conclusion: Segments A, B, C, D and E are reportable

Minimum Requirement for External Revenue of identified reportable segments:
External revenue of identified reportable segments must at least 75% of the total
external revenue:
Proportion=A,5,000,000+B,4,000,000+C,3,000,000+D1,500,000+
E,2,125,000=15,625,000Ext revenue of identified reportable segment/Text
revenue of all segments,16,375,000=95%-met

What if in the above, the identified reportable segments are B, C , D and F only:
Check whether the minimum set for external revenue of 75% is met;
Proportion=4,000+3,000,000+1,500,000+750,000=9,250,000 ext revenue of
identified reportable segments/total ext revenue of all segments,
16,375,000=57%-not met
That means they have to take 1 or more segments to be reported in order to
meet the 75% requirement;

M Financial information that shall be provided for each identified reportable operating
segment:
• General information such as the type of products and services from which reportable
segments derive its revenue
• Basis for aggregation of segments
• Information about profit or loss and total assets
• Information on liabilities if such information is provided to the chief operating decision
maker

N Measurement of profit or loss of identified reportable operating segment:

IFRS 8 does not specify the types of revenues and expenses included in the
measurement of the segment profit or loss hence the management approach is adopted
which implies that those revenues and expenses that are monitored for the segment
constitute the items included in the measurement of the segment’s profit or loss.

Pro-Forma Segment Profit or Loss:

Segment revenue (external and internal) Pxxx
Directly attributable costs and expenses/Traceable costs (xxx)
Common costs that are charged to segment (using rational basis) (xxx)
Segment profit or loss Pxxx
O Based on the above discussion, do the following activities:

INTERIM REPORTING ACTIVITIES:

Activity 1 A Company prepares quarterly interim financial reports. The company sells its
products through sales agents who are paid a fixed monthly salary and a commission of
8% that is paid at year-end. Sales for the first quarter were P12,500,000. However, in
the second quarter, the employees union negotiated that agent’s commissions be
increased to 12% and be applied as of the beginning of the current year. Sales in the
second quarter is P15,000,000.

Required:
1. What would be the sales commission expense of the A Company reported in the
second quarter’s interim financial reports?

Suggested answers:
1. Amount of sales commission expense to be reported in the second quarter interim
financial report:
Given:
Sales for the first quarter,12,500,000
Old rate applicable to the first quarter -commission rate, 8% of sales
Sales for the second quarter,15,000,000
New rate applicable as of the beg of the year=commission rate,12%
Commission Expense for the second quarter:
Second quarter=12%x15,000,000 2nd quarter sales=1,800,000
Adjustment of the 1st quarter commission
12%-8%=4%x12,500,000= 500,000
Total commission expense 2,300,000

Change in commission rate is considered as change in estimate-hence treated currently

and prospectively meaning only the second quarter commission expense will be
adjusted.

Activity 2 On March 31, 2021, the end of the first quarter, G Inc. estimated its year- end
bonus to executives would be P150,000 for 2021. The actual obligation paid for year-end
bonus for 2020 was P125,000. The estimate for 2021 is subject to year-end adjustment.

Required:
1. What amount of expense-compensation expense, if any should be reflected in G’s
quarterly statement of comprehensive income for three months ended March 31,
2021?
Suggested answers:
1. Amount of compensation expense for three months ended March 31,2021:
Annual bonus, 150,000x3/12= 37,500

Note: A bonus is anticipated and thus recognized for interim reporting purposes if and
only if a bonus is a legal/constructive obligation and reliable estimate of the obligation
can be made.

Activity 3 In January, 2021, Valle, Inc paid property taxes on its factory building for the
calendar year 2021 in the amount of P120,0000. In the first week of April, 2021, Valle
made advertising campaign and paid P300,000. These advertisements are expected to
benefit operations for the remainder of the calendar year.

Required:
1. What amount of expenses are recognized/reflected in the interim quarterly
financial report for the first, second, third and fourth quarter, respectively?

Suggested answers:
1. Amount of total expenses in the form of property taxes and advertising cost to be
reported quarterly for 2021:
First Quarter Second Quarter Third Quarter Fourth Quarter
Property Taxes 30,000 30,000 30,000 30,000
Advertising cost 300,000
Total 30,000 330,000 30,000 30,000
Computations:
1. Property taxes -period costs to be allocated=120,000/4=30,000 per quarter
2. Advertising-recognized in the quarter the advertising costs was incurred

Activity 4 In 2021, M Company started operations with an inventory of P100,000.

For the first quarter of 2021, the purchases and sales were as follows:

January February March Total

Purchases 25,000 190,000 352,000 567,000
Sales 120,000 255,000 377,500 752,500

Goods are sold at a gross profit of 20% of sales.

Required:
1. For interim statement purposes, the inventory at the end of January, February, and
March, respectively are:
Suggested answers:
1. Inventory at the end of January, February and March to be reported in the interim
report:
January February March
Inventory, beg 100,000 29,000 15,000
Purchases 25,000 190,000 352,000
TGAS 125,000 219,000 367,000
Less Est CGS 96,000 204,000 302,000
Inventory, end 29,000 15,000 65,000
Supporting computations:
CGS for January=80%x120,000=96,000
CGS for February=80%x255,000=204,000
CGS for March=80%c377,500=302,000

Start of the gmeet

Activity 5 Neil Company has calculated total depreciation expense for the year ended
December 31, 2021 will amount to P300,000, and that 2021 year-end bonuses to
employees will total P750,000.

Required:
1. In Neil’s interim statement of comprehensive income for the six months ended June
30, 2021, what amount of expenses relating to the above should be reported?
Suggested answers:
1. Amount of expenses-to be reported in interim SCI for six months ended:
Depreciation expense=allocation=300,000x6/12= 150,000
Bonus/compensation expense=allocation=750,000x6/12= 375,000
Total amount of expense 525,000

Suggested answers:
1. Amount of expenses in the form of depreciation and bonus to employees to be reported
in the interim financial report for six months ended:
Depreciation expense-allocation=300,00x6/12=150,000
Bonus to employees-allocation=750,000x6/12= 375,000
Total expenses 525,000

Activity 6 During the second quarter of 2021, S Company sold a piece of equipment with
a carrying amount of P450,000 for P390,000.

Required:
1. What amount of loss should S report on its statement of comprehensive for the
quarter ended June 30, 2021?
Suggested answers:
1. Amount o floss to be reported in the interim SCI for the quarter ended June 30,2021;
 Loss on sale of equipment-as incurred=390,000Procceds-450,000CA=(60,000)-
the whole amount to be reported in the second quarter since happened also in
the second quarter.

Suggested answers:
1. Amount of loss to be reported in the interim SCI for the quarter ended June 30,2021:
Loss on sale-390,000-450,000=(60,000)-to be reported for the quarter ended
June 30,2021(reported as incurred)

Activity 7 R Company incurs costs unevenly throughout the financial year. Advertising
costs of P1 million were incurred in March 25, 2021 and staff bonuses are paid at year-
end based on sales. Staff bonuses are expected to be around P15 million for the year ,
based on sales of P150 million. Total sales for the quarter ending March 31,2021 were
P35 million.

Required:
1. What amount of advertising costs and staff bonuses would be reported in the
interim statement of comprehensive income for the quarter ended March 31, 2021?
Suggested answers:
1. Amount of advertising costs and staff bonus to be reported in the interim SCI for the
first quarter of 2021:
Advertising costs-as incurred -whole amount of 1,000,000
Staff bonuses-allocation=35,000,000/150,000,000x15,000,000= 3,500,000
Total amount of expenses for the first quarter 4,500,000

Suggested answers:
1. Amount of advertising costs and staff bonuses to be reported in the interim SCI for the
quarter ended March 31,2021:
Advertising-reported as incurred=whole amount 1,000,000
Staff bonuses-35,000,000/150,000,000x15,000,000= 3,500,000
Total 4,500,000

Activity 8 An entity prepares quarterly interim financial reports in accordance with IAS 34.
The entity sells goods that are subject to warranty. The company made a provision for
warranty in the first quarter of the year 2021 at 5% of sales, as the company in the past
experienced a 5% claim on warranty based on sales. However, in the second quarter , a
modification in the design of the product resulted to a design fault and the company
expected the warranty claims to increase to 10% for the whole year 2021. Sales in the
first and second quarters were P5 million and P7.5 million, respectively.

Required:
1. What would be the warranty expense charged in the second quarter’s interim
financial statements?
Suggested answers:
 1. Warranty expense for the second quarter’s interim FS:
Second quarter warranty expense=10%x7,500,000= 750,000
Adjustment for first quarter warranty expense=5%x5,000,000 250,000
Total warranty expense for the second quarter 1,000,000

Change in rate of warranty expense is a change in estimate hence treated currently

and prospectively, it is the second quarter warranty expense is to adjusted.

Suggested answers:
1. Amount of warranty expense to be charged in the second quarter interim financial
statements
Warranty expense-2nd quarter sales of 7,500,000x10%=750,000
Adjustment of Warranty expense-1st quarter sales of
5,000,000x5% 250,000
Total warranty expense for the second quarter 1,000,000
This is treated as a change in estimate hence treated currently and prospectively
hence the adjustment for the warranty provision for the first quarter is considered
as an adjustment to the second quarter provision.

Suggested Answers;
1. Warranty expense for the second quarter=1,000,000
For the 2nd quarter sales, 7,500,000x10%= 750,000
Adjustment of the 1’st quarter provision
5%x 5,000,000 quarter sales= 250,000
Total warranty expense 1,000,000

Activity 9 An entity’s reporting year ends on December 31, and it is currently preparing
financial statements for the six months ended June 30, 2021, The price of its product
tends to vary. At June 30, 2021, it has inventories of 100,000 units at a cost of P14 per
unit.. The net realizable value at June 30, 2021 is P12 per unit. The expected net
realizable value of these inventories at December 31, 2021 is P15.50 per unit.

Required:
1. At what amount should the inventories be shown/presented in the interim
statement of financial position at June 30, 2021?
Suggested answers:
1. Amount of inventories to be shown in the interim SFP at June 30, 2021:
Desired valuation-measured or valued at the lower of cost and NRV
Cost,100,00x14 cost per unit 1,400,000
NRV, 100,000x12 NRV per unit 1,200,000
Value for the inventories-lower value 1,200,000

If ever NRV is not provided=Est sales price minus costs to sell. Note that profit margin is
ignored for purposes of determining NRV:
Suggested answers:
1. Amount inventories to be shown in the SFP at June 30,2021=1,200,000
Given:
Inventory, at June 30,2021=100,000 units
Cost per unit at June 30=14 per unit
NRV per unit at June 30=12 per unit
NRV per unit at Dec 31=15.50 per unit not revaluation:

Desired valuation of inventories -valued at lower of cost and net realizable value
A B C D E(CXD_
Cost NRV LCNRV Units Total Value
June 30 14 12 12 100,000 1,200,0000

Suggested Answer:
1. Inventories should be shown or presented in the interim June 30, 2021 statement of
financial position at lower of cost and net realizable value of P1,200,000.(Total
cost,100,000x14=1,400,000; Total net realizable value,100,000x12=1,200,000)

Note that the net realizable value of inventories at 15.50 per unit at the end of 2021
is not relevant for purposes of preparing the SFP at June 30, 2021 hence the net
realizable per unit of 12 is used.

OPERATING SEGMENT ACTIVITIES:

Activity 10 A company operates five business segments. Its operating profit for a year was
P4,000,000, distributed among five segments as shown below:

Segment Operating Profits Operating Losses

A P500,000
B P1,000,000
C 500,000
D 1,500,000D
E 3,500,000
Total P5,500,000 P1,500,000

Required:
1. Based on operating profit test, which segments are reportable?
Suggested answers:
1. Segments reportable using the operating profit test
1st step=threshold =10%x5,500,000=550,000
 Segment Operating Profits Operating Losses Reportable or Not
A P500,000 Not Reportable
B P1,000,000 Reportable
C 500,000 Not Reportable
D 1,500,000D Reportable
E 3,500,000 Reportable
Total P5,500,000 P1,500,000

Conclusion -reportable segments using operating profit test=B, D and E

Suggested answers:
1. B, D, E segments are reportable using the operating profit or loss test:
To identify reportable segments applying the operating profit or loss test:
Threshold =10%x5,500,000=550,000
Based on IAS No. 34 -which segments are reportable using the operating result test
whether profit or loss (Basis used-higher value between operating profits or
operating losses-between 5,500,000 and (1,500,000)
10% threshold-10%x5,500,000=550,000

Activity 11 Carl Company has three business segments, each of which was determined to be
reportable segment. In 2021, Carl Company sales totaled P3,750,000 of which Segment
No. 1 contributed 40%. Traceable cost were P875,000 for Segment No. 1 out of a total
of P2,500,000 for the whole entity.

For initial reporting, Carl Company allocates common costs of P750,000 based on the
ratio of a segment’s profit before common costs to the total profit before common
costs.

Required:

1. How much should Carl Company report as operating profit for Segment No. 1?

Suggested answers:
1. Operating profit for Segment No. 1
Segment No. 1 Whole Entity
Sales 1,500,000 3,750,000
Less Traceable costs 875,000 2,500,000
Operating profit before common cost 625,000 1,250,000
Less common costs 375,000 750,000
Operating profit 250,000 500,000
 Supporting computations:
1. Segment No. 1 sales=40%x3,750,000=1,500,000
2. Proportion =625,000/1,250,000=50%
3. Common costs for segment=50%x750,000=375,000

Suggested answers:
Segment No. 1 Whole Entity
Sales 1,500,000 3,750,000
Less Traceable costs 875,000 2,500,000
Operating profit. Before common costs 625,000 1,250,000
Less common costs 375,000 750,000
Operating profit 250,000 500,000
Supporting computations:
1. Sales for Segment=40%x3,750,000=1,500,000
2. Ratio of OP before common costs-Segment,625,000/1,250,00=50%
3. Common costs-Segment=750,000x50%=375,000

Activity 12 E Company has three lines of business, each of which was determined to be a
reportable segment. The following information is available for the year 2021:

Segment 1 Whole Entity

Sales P2,000,000 P5,000,000
Traceable Costs 1,100,000 3,500,000
Common Costs P900,000

For internal reporting, Earl allocates common costs based on the ratio of a segment’s
profit before common costs to the total profit before common costs.

Required:
1. How much is the operating profit before common costs for Segment No. 1?
2. How much is the entity’s operating profit or total operating profit before common
costs?
3. What is the proportion of Segment No. 1 operating profit before common costs to
total operating profit before common costs?
4. How much is the common costs allocated to Segment No. 1?
5. How much should Earl report as operating profit for Segment No. 1?
6. How much is the entity’s operating profit ?
Suggested answers:
 1. How much is the operating profit before common costs for Segment No. 1?
Sales -Segment No. 1 2,000,000
Less traceable costs 1,100,000
Operating profit before common costs 900,000
2. How much is the entity’s operating profit or total operating profit before common
costs?
Sales-entire entity 5,000,000
Less traceable costs 3,500,000
Operating profit before common costs 1,500,000
3. What is the proportion of Segment No. 1 operating profit before common costs to
total operating profit before common costs?
Proportion of Segment operating profit to operating profit for the entire
entity=900,000/1,500,000=60%
4. How much is the common costs allocated to Segment No. 1?
Common costs for Segment 1=900,000x60%=540,000
5. How much should Earl report as operating profit for Segment No. 1?
Operating profit for Segment No. 1
Operating profit before common costs 900,000
Less Common costs for Segment 1 540,000
Operating profit for Segment 360,000
6. How much is the entity’s operating profit ?
Operating profit common cost 1,500,000
Less common costs-100% 900,000
Operating profit for the entity 600,000
Suggested answers:
1. How much is the operating profit before common costs for Segment No. 1?
Segment 1
Sales 2,000,000
Less Traceable costs 1,100,000
Operating profit before common costs 900,000

2. How much is the entity’s operating profit or total operating profit before common
costs?
Whole Entity
Sales 5,000,000
Less Traceable costs 3,500,000
Operating profit before common costs 1,500,000

3. What is the proportion of Segment No. 1 operating profit before common costs to
total operating profit before common costs?
Proportion =900,000/1,500,000=60%
 4. How much is the common costs allocated to Segment No. 1?
Common costs allocated to Segment=900,000x60%=540,000

5. How much should Earl report as operating profit for Segment No. 1?
Operating profit for Segment=900,000-common costs,540,000=360,000

6. How much is the entity’s operating profit ?

Operating profit for the entity=1,500,000-900,000x100%=600,000
Supporting computations:
Suggested answers:
Segment No. 1 Entire Entity
Sales 2,000,000 5,000,000
Less Traceable costs 1,100,000 3,500,000
Operating profit before common costs 900,000 1,500,000
Less Common costs 540,000 900,000
Operating profit after common costs 360,000 600,000

Activity 13 V Corporation, a corporation listed in the stock exchange, reports operating

results from its Segment B activities to its chief operating decision maker. The segment
information for the year and the information for the enterprise follow:

Segment B Total for the entity

Revenue P1,750,000 20,000,000
Profit (all segments reported profit) 450,000 4,800,000
Assets 900,000 8,750,000
Number of employees 1,250 10,000

Required:
1. Based on the above information, what makes Valley Corporation, a reportable
operating segment of the entity?
Suggested answers:
1. What makes Valley corporation reportable
Thresholds Segment No 1 Reportable or Not
Asset 875,000 900,000 Reportable
Revenue 2,000,000 1,750,000 Not Reportable
Operating profit 480,000 450,000 Not Reportable
Computations:
1. Asset Threshold=10%x8,750,000=875,000
2. Revenue Threshold=10%x20,000,000=2,000,000
3. Operating profit=10%x4,800,000=480,000
Conclusion-Segment No. 1 is reportable it met the asset threshold.
Suggested answers:
Segment B is reportable it met the asset threshold:
Thresholds to be used to identify reportable segments
1. Asset threshold=10%x8,750,000=875,000
2. Revenue threshold=10%x20,000,000=2,000,000
3. Operating profit threshold=10%4,800,000=480,000

Threshold Segment B Reportable or Not

Asset Test 875,000 900,000 Reportable
Revenue Test 2,000,000 1,750,000 Not Reportable
Operating Profit 480,000 450,000 Not Reportable

Activity 14 K Company was organized in 2020 operating only in National Capital Region.
Since 2020, it operates in different regions. The following information pertains to K’s
operation for 2021:

Geographical Identifiable External Internal Total Operating

Region/Segment Assets Revenue Revenue Revenue profit(loss)
A 5,000,000 4,000,000 2,500,000 6,500,000 3,500,000
B 2,000,000 3,000,000 1,000,000 4,000,000 (1,500,000)
C 2,000,000 1,000,000 500,000 1,500,000 500,000
D 10,000,000 2,000,000 500,000 2,500,000 (450,000)
E 5,500,000 4,000,000 500,000 4,500,000 1,500,000
Total 24,500,000 14,000,000 5,000,000 19,000,000 5,500,000/(1,950,000)

Required:
1. Applying the 10% threshold for asset test, which segments qualified as reportable?
2. Applying the 10% threshold for operating result test, which segments qualified as
reportable
3. Applying all the appropriate thresholds, which of the above operating segments are
deemed reportable?
Suggested answers:
1. Applying the 10% threshold for asset, segments reportable
Asset threshold=10%x24,500,000=2,450,000
Segment Threshold for Asset Segment’s Assets Reportable or not
A 2,450,000 5,000,000 Reportable
B 2,450,000 2,000,000 Not reportable
C 2,450,000 2,000,000 Not reportable
D 2,450,000 10,000.000 Reportable
E 2,450,000 5,500,000 Reportable
Conclusion-segments reportable-A, D and E
2. Applying the 10% threshold for operating profit
Operating profit threshold=10%x5,500,000=550,000
 Segment Threshold for Segment’s Assets Reportable or not
Operating profit
A 550,000 3,500,000 Reportable
B 550,000 (1,500,000) Reportable
C 550,000 500,000 Not reportable
D 550,000 (450,000) Not reportable
E 550,000 1,500,000 Reportable
Conclusion -using operating profit threshold=reportable segments are: A, B and E
3. Applying all the thresholds:
Asset threshold=2,450,000
Operating profit threshold=550,000
Revenue threshold=10%xTR.19,000,000=1,900,000
Geographical Identifiable External Internal Total Operating
Region/Segment Assets Revenue Revenue Revenue profit(loss)
A 5,000,000R 4,000,000 2,500,000 6,500,000R 3,500,000R
B 2,000,000NR 3,000,000 1,000,000 4,000,000R (1,500,000)R
C 2,000,000NR 1,000,000 500,000 1,500,000NR 500,000NR
D 10,000,000R 2,000,000 500,000 2,500,000R (450,000)NR
E 5,500,000R 4,000,000 500,000 4,500,000R 1,500,000R
Total 24,500,000 14,000,000 5,000,000 19,000,000 5,500,000/(1,950,000)

Conclusion applying all the thresholds-reportable segments are A, B, D. E

Minimum Set of 75%
Percentage of External revenue. A,4,000,000+
B,3,000,000+D,2,000,000+E,4,000,000=13,000,000/14,000,000=93% no need to take C

Suggested answers:

4. Geographical Identifiable External Internal Total Operating

Region/Segment Assets Revenue Revenue Revenue profit(loss)
A 5,000,000 4,000,000 2,500,000 6,500,000 3,500,000
B 2,000,000 3,000,000 1,000,000 4,000,000 (1,500,000)
C 2,000,000 1,000,000 500,000 1,500,000 500,000
D 10,000,000 2,000,000 500,000 2,500,000 (450,000)
E 5,500,000 4,000,000 500,000 4,500,000 1,500,000
Total 24,500,000 14,000,000 5,000,000 19,000,000 5,500,000/(1,950,000)

Suggested answers:
1. Asset test threshold=10% xTA.24,500,000=2,450,000
Reportable segments. A, D and E
2. Operating profit threshold=10%x5,500,000=550,000
Reportable segments=A, B and E
3. Applying all the thresholds including Revenue Threshold
Applying the Revenue threshold
Reportable segments =A, B, D and E
Applying all thresholds
 Reportable segments=A, B, D and E
Revenue Threshold=10%xTR,19,000,000=1,900,000

Segments 10% Threshold Segment’s Reportable/

for Asset Asset Not RReeportable
A 2,450,000 5,000,000 Reportable
B 2,450,000 2,000,000 Not Reportable
C 2,450,000 2,000,000 Not Reportable
D 2,450,000 10,000,000 Reportable
E 2,450,000 5,500,000 Reportable
Total 24,500,000
Asset-10%x24,500,000=2,450,000
1. Applying the asset test , the reportable segments are A, D and E
Segments 10% Threshold Segment’s Reportable/
for Operating Result Operating Result Not Reportable
A 550,000 3,500,000 Reportable
B 550,000 (1,500,000) Reportable
C 550,000 500,000 Not Reportable
D 550,000 (450,000) Not Reportable
E 550,000 1,500,000 Reportable
Total 5,500,000/(1,950,000)

Operating profit =10%x5,500,000=550,000

2. Applying the operating profit test, the reportable segments are A, B, and E

Segments 10% Threshold Segment’s Reportable/

for Revenue Revenue Not Reportable
A 1,900,000 6,500,000 Reportable
B 1,900,000 4,000,000 Reportable
C 1,900,000 1,500,000 Not Reportable
D 1,900,000 2,500,000 Reportable
E 1,900,000 4,500,000 Reportable
Total 19,000,000

Revenue-10%x19,000,000=1,900,000
Applying the revenue test, the reportable segments although not required are A, B D
and E
3. Applying all the test, (Asset, Operating Result and Revenue) , the reportable segments
are A, B, D and E (at least 1 threshold is met)
Asset Threshold=10%x24,500,000=2,450,000
Revenue Threshold=10%x19,000,000=1,900,000
Operating Profit Threshold=10%x5,500,000=550,000
 Segment Assets Reportable or Revenue Reportable or Operating Reportable or
Not Reportable not Reportable Profit(Loss) Not Reportable
A 5,000,000 Reportable 6,500,000 Reportable 3,500,000 Reportable
B 2,000,000 Not Reportable 4,000,000 Reportable (1,500,000) Reportable
C 2,000,000 Not Reportable 1,500,000 Not Reportable 500,000 Not Reportable
D 10,000,000 Reportable 2,500,000 Reportable (450,000) Not Reportable
E 5,500,000 Reportable 4,500,000 Reportable 1,500,000 Reportable

Based on the table, only C is not reportable but A, B. D and E are reportable segments:

Activity 15 The ff. information pertains to D Company and its divisions for the year ended
December 31, 2021:

Sales to unaffiliated customers 500,000

Intersegment sales of products similar to those sold to
unaffiliated customers 150,000
Interest revenue (reviewed by chief operating officer) 10,000

D and all its divisions are engaged solely in manufacturing operations.

Required:
1. In order that the entity’s segment be reportable, it must have at least a revenue of
how much?
Suggested answers:
1. For the segment to be reportable using the revenue test, the segment must have at
least a revenue of 65,0000
Threshold=10%x650,000(500,000+150,000)=65,0000
Suggested answers:
To be reportable=it must have a revenue of how much=650,000x10%=65,000

Activity 16 G Company reports operating profit as to industry segments in its

supplementary financial statements annually. The following information is available for
2021:

Segments Sales Traceable Costs

Segment 1 P375,000 P225,000
Segment 2 250,000 112,500
Segment 3 125,000 62,500
Total P750,000 P400,000

Additional expenses not included in above are as follows:

Indirect operating expenses P120,000

General corporate expenses 90,000
Interest expense 48,000
 G allocates common costs based on the ratio of a segment’s sales to total sales.
Borrowings are decided at the enterprise level.

Required:
!. What should be the operating profit for Segment 2 for 2021?

Suggested answers;
1. Operating profit for Segment 2
Sales 250,000
Less Traceable costs 112,500
Operating profit before common costs 137,500
Less common costs=
Common cost relating to Segment 2=120,000x1/3= 40,000
Operating profit 97,500
Proportion, Segment 2 sales, 250,000/Total Sales, 750,000=1/3
Segment 2
Sales 250,000
Less Traceable costs 112,500
Operating profit before commom cost 137,500
Less common costs 40,000
Operating profit 97,500
Supporting computations:
1. Common costs=120,000
2. Proportion=Segment 2, sales, 250,000/Total sales, 750,000=33% or 1/#
3. Common costs identified with Segment 2=120,000x1/3=40,000

Activity 17 B Company operates in its six different industries, each of which is

appropriately regarded as an operating segment. B’s 2021 combined sales for all
segments aggregated to P5 million. Segment No. 3 had sales of P1 million and
traceable costs of P450,000. Combined common costs for all segments totaled P1.5
million. Common costs are allocated among the six segments on the basis of each
segment’s percentage of B ‘s total sales, which is an acceptable allocation
method.

Required:
1. How much should be reported as Segment No. 3’s operating profit?
Suggested answers:
1. Operating profit for Segment No. 3
Sales 1,000,000
Less Traceable costs 450,000
Operating profit before common costs 550,000
Less common costs,1,500,000x20%= 300,000
Operating profit 250,000
Proportion=Sales of Segment 3 of 1,000,000/5,000,000=20%
Suggested answers:
Segment 3
Sales 1,000,000
Less Traceable cost 450,000
Operating profit before common costs 550,000
Less common costs 300,000
Operating profit 250,000
Supporting computations
1. Proportion=1,000,000, Segment 3=1,000,000Sales-segment 3/5,000,000total sales=
1/5 or 20%
2. Common costs relating to Segment=20%x1,500,000=300,000

Activity 18 N Company has five business divisions. The following data with regard to its
operating segments (all of which are engaged in manufacturing) for the year ended
December 31, 2021 are as follows:

Division Sales Costs & Expenses Interest Expense

1 20,000,000 15,000,000 500,000
2 19,000,000 16,000,000 1,000,000
3 7,000,000 10,000,000 0
4 25,500,000 21,000,000 1,500,000
5 5,000,000 8,000,000 0
Total 76,500,000 70,000,000 3,000,000

N Company does not adopt the practice of reporting interest expense to the chief
operating officer of the enterprise.

Required:
1. N Company shall consider a segment reportable if its operating profit is at least,
how much?
Suggested answers:
1. Segment reportable using the operating profit test:
Division 1 (20,000,000-15,000,000) 5,000,000 Reportable
Division 2(19,000,000-16,000,000) 3,000,000 Reportable
Division 3 (7,000,000-10,000,000) (3,000,000) Reportable
Division 4(25,500,000-21,000,000) 4,500,000 Reportable
Division 5(5,000,000-8,000,000) 3,000,000) Reportable
Operating profit/(operating loss) 12,500,000/(6,000,00)
Operating profit threshold=10%x12,500,000=1,250,000
Conclusion= Segments reportable -Division 1, 2 , 3 , 4 and 5

Suggested answers:
!. Based on the table below: Operating profit/loss threshold=10%
x12,500,000=1,250,000:
Supporting Computations:

Division Sales Costs & Expenses Operating profit or

(loss)
1 20,000,000 15,000,000 5,000,000
2 19,000 16,000,000 3,000,000
3 7,000,000 10,000,000 (3,000,000)
4 25,500,000 21,000,000 4,500,000
5 5,000,000 8,000,000 (3,00,000)
Total 76,500,000 70,000,000 12,500,000/(6,000,000)

Operating profit threshold=10%x12,500,000=1,250,000

Based on operating profit/loss threshold-all divisions are reportable, Division 1, 2, 3 , 4
and 5.

Depreciation-review other methods of determining deprecation

SLM=Cost minus Residual value=Depreciable cost/Est Useful life=annual depreciation
SYD=Cost minus Residual value=Depreciable cost
1st year of the life of the asset=Depreciable cost x 1/SYD
2nd year of the life of the asset=Depreciable cost 2/SYD
Sum of 5 years useful life=1+2+3+4+5=15
Formula=SYD=5(5+1)/2=15