Solution manual fundamentals of accounting by cabrera chapter 11 SM

Chapter 11
Presentation of Financial Statements
Review Questions
1. The statement of financial information provides information about the nature
and amounts of investments in enterprise resources, obligations to enterprise
creditors, and the owners’ equity in net enterprise resources. That
information not only complements information about the components of
income, but also contributes to financial reporting by providing a basis for
(1) computing rates of return, (2) evaluating the capital structure of the
enterprise, and (3) assessing the liquidity and financial flexibility of the
enterprise.
2. Liquidity describes the amount of time that is expected to elapse until an
asset is converted into cash or until a liability has to be paid. The ranking of
the assets given in order of liquidity is:
(1)
(2)
(3)
(4)
(5)

(d)
(e)
(b)
(c)
(a)

Short-term investments.
Accounts receivable.
Inventories.
Buildings.
Goodwill.

3. (1) The values stated are generally historical and not current.
(2) Estimates have to be used in many instances, such as in the
determination of collectibility of receivables or finding the approximate
useful life of long-term tangible and intangible assets.
(3) Many items, even though they have financial value to the business,
presently are not recorded. One example is the value of a company’s
human resources.
4. Classification in financial statements helps users by grouping items with
similar characteristics and separating items with different characteristics.
Current assets are expected to be converted to cash within one year or one
operating cycle, while property, plant and equipment, will provide cash
inflows over a longer period of time. Thus, separating long-term assets from
current assets facilitates computation of useful ratios such as the current
ratio.


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Chapter 11

5. Separate amounts should be reported for accounts receivable and notes
receivable. The amounts should be reported gross, and an amount for the
allowance for doubtful accounts should be deducted. The amount and nature
of any nontrade receivables, and any amounts pledged or discounted, should
be clearly stated.
6. Working capital is the excess of total current assets over total current
liabilities. This excess is sometimes called net working capital, with current
assets and current liabilities being the components of working capital.
Current assets and current liabilities consist of items that will be converted

into cash or paid within a year or the operating cycle, whichever is longer.
The working capital components are the financial resources utilized by an
enterprise in its operating cycle.
7. (a) Equity. “Share Capital (________ shares) reacquired and held in
treasury—at cost.”
Note: This is a reduction of equity.
(b) Current Assets. Included in “Cash.”
(c) Investments. “Land held as an investment.”
(d) Equity. “Appropriation for bonded redemption” or “Appropriation for
sinking fund.”
(e) Long-term debt (adjunct account to bonds payable). “Unamortized
premium on bonds payable.”
(f) Intangible Assets. “Copyrights.”
(g) Investments. “Employees’ pension fund,” with subcaptions of “Cash”
and “Securities” if desired. (Assumes that the company still owns these
assets.)
(h) Equity. “Premium on share capital” or “Additional paid-in capital in
excess of par value.”
(i) Investments. Nature of investments should be given together with
parenthetical information as follows: “pledged to secure loans payable to
banks.”
8. (a) Allowance for doubtful accounts receivable should be deducted from
accounts receivable.
(b) Merchandise held on consignment should not appear on the consignee’s
balance sheet except possibly as a note to the financial statements.
(c) Advances received on sales contract are normally a current liability and
should be shown as such in the balance sheet.
(d) Cash surrender value of life insurance should be shown as a long-term
investment.

Presentation of Financial Statements

3

(e) Land should be reported in property, plant, and equipment unless held for
investment.
(f) Merchandise out on consignment should be shown among current assets
under the heading of inventories.
(g) Pension fund on deposit with trustee should be shown among noncurrent
assets under a separate heading or grouped with similar funds and
deposits in investment section. Note: Some pension funds are not
reported on the balance sheet. This situation occurs when the company
funds the pension plan through another party such that the company loses
control over the funds.
(h) Franchises should be itemized in a section for intangible assets.
(i) Accumulated depreciation of plant and equipment should be deducted
from the plant and equipment accounts.
(j) Materials in transit should not be shown on the balance sheet of the
buyer, if purchased f.o.b. destination.
9. (a) Trade accounts receivable should be stated at their estimated realizable
value. The method most generally followed is to deduct from the total
accounts receivable the amount of the allowance for doubtful accounts.
(b) Land is generally stated in the balance sheet at cost.
(c) Inventories are generally stated at the lower of cost or market to provide
for any possible losses and to avoid the anticipation of profits not yet
realized.
(d) Trading securities consisting of ordinary shares are generally stated at
fair value.
(e) Prepaid expenses should be stated at cost less the amount apportioned to

and written off over the previous accounting periods.
10. The statement of comprehensive income is important because it provides
investors and creditors with information that helps them predict the amount,
timing, and uncertainty of future cash flows. It helps investors and creditors
predict future cash flows in a number of different ways. First, investors and
creditors can use the information on the statement of comprehensive income
to evaluate the past performance of the enterprise. Second, the statement of
comprehensive income helps users of the financial statements to determine
the risk (level of uncertainty) of income--revenues, expenses, gains, and
losses--and highlights the relationship among these various components.
It should be emphasized that the statement of comprehensive income is used
by parties other than investors and creditors. For example, customers can use
the statement of comprehensive income to determine a company’s ability to


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Chapter 11

provide needed goods or services, unions examine earnings closely as a basis
for salary discussions, and the government uses the statements of
comprehensive income of companies as a basis for formulating tax and
economic policy.
11. The major distinction between revenues and gains (or expenses and losses)
depends on the typical activities of the enterprise. Revenues can occur from
a variety of different sources, but these sources constitute the entity’s
ongoing major or central operations. Gains also can arise from many
different sources, but these sources occur from peripheral or incidental
transactions of an entity. The same type of distinction is made between an
expense and a loss.

12. Items that are considered prior period adjustments should be charged or
credited to the opening balance of retained earnings. Prior period
adjustments would ordinarily be either corrections of errors made in a prior
period discovered after issuance of financial statements for that period or
retroactive adjustments required.
13. Other comprehensive income must be displayed (reported) in one of three
ways: (1) a second separate income statement, (2) a combined income
statement of comprehensive income, or (3) as part (separate columns) of the
statement of equity.

Exercises
Exercise 1
Current assets
Cash
Accounts receivable
Less allowance for doubtful accounts
Inventories
Prepaid insurance
Total current assets

P27,000
P110,000
(8,000)

102,000
290,000
9,500
P428,500

Presentation of Financial Statements

5

Exercise 2
Current assets
Cash
Trading securities
Accounts receivable
Less allowance for doubtful accounts
Inventory
Prepaid insurance
Total current assets

P 7,000
11,000
P90,000
(4,000)

86,000
34,000
5,200
P143,200

Exercise 3
Long-term investments
Held-to-maturity securities
Land held for investment
Long-term receivables
Total investments

P 61,000
39,000
42,000
P142,000

Exercise 4
Property, plant, and equipment
Land
Buildings
Less accumulated depreciation
Equipment
Less accumulated depreciation
Capital leases
Total property, plant, and equipment

P 61,000
P207,000
(45,000)
P190,000
(19,000)

162,000
171,000
70,000
P464,000

Exercise 5
Intangible assets
Goodwill

Patents
Franchises
Total intangibles

P150,000
220,000
110,000
P480,000


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Chapter 11

Exercise 6
Current liabilities
Accounts payable
Accrued salaries
Notes payable
Income taxes payable
Total current liabilities

P72,000
4,000
12,500
7,000
P95,500

Exercise 7
Current liabilities

Accounts payable
Advances from customers
Wages payable
Interest payable
Income taxes payable
Total current liabilities

P240,000
41,000
27,000
12,000
29,000
P349,000

Exercise 8
Equity
Share capital - Ordinary
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total equity

P700,000
200,000
120,000
(150,000)
P870,000

Exercise 9
1.

2.
3.
4.
5
6.
7.
8.
9.
10.

h.
d.
f.
f.
c.
a.
f.
g.
a.
a.

11.
12.
13.
14.
15.
16.
17.
18.
19.

20.

b.
f.
a.
h.
c.
b.
a.
a.
g.
f.


Presentation of Financial Statements

Exercise 10
Michelle Inc.
Statement of Financial Position
December 31, 20–
Assets
Current assets
Cash
Less cash restricted for plant
expansion
Accounts receivable
Less allowance for doubtful
accounts
Notes receivable
Receivables—officers

Inventories
Finished goods
Work in process
Raw materials
Total current assets
Long-term investments
Preference share investments
Land held for future plant site
Cash restricted for plant expansion
Total long-term investments
Property, plant, and equipment
Buildings
Less accum. depreciation—
buildings
Intangible assets
Copyrights
Total assets

PXXX
XXX
XXX

PXXX

XXX

XXX
XXX
XXX

XXX
XXX
XXX

XXX
PXXX
XXX
XXX
XXX
XXX
XXX
XXX

XXX
XXX
PXXX

7


8

Chapter 11

Liabilities and Equity
Current liabilities
Accrued salaries payable
Note payable
Unearned subscriptions
Unearned rent

Total current liabilities

PXXX
XXX
XXX
XXX
PXXX

Long-term debt
Bonds payable, due in four years
Discount on bonds payable

PXXX
(XXX)

Total liabilities
Equity
Share capital:
Ordinary shares
Additional paid-in capital:
Premium on ordinary shares
Total paid-in capital
Retained earnings
Total paid-in capital and
retained earnings
Less: Treasury shares, at cost
Total equity
Total liabilities and equity

XX

X
XXX

PXXX
XXX
XXX
XXX
XXX
(XXX)
XXX
PXXX

Exercise 11
Computation of net income
Change in assets:
Change in liabilities:
Change in equity:

P79,000 + P45,000 +P127,000 – P47,000 = P204,000 Increase
P 82,000 – P51,000 =

31,000 Increase
P173,000 Increase


Presentation of Financial Statements

Change in equity accounted for as follows:
Net increase
Increase in ordinary shares

Increase in additional paid-in capital
Decrease in retained earnings due to
dividend declaration
Net increase accounted for
Increase in retained earnings due to net
income

9

P173,000
P125,000
13,000
(19,000)
119,000
P 54,000

Exercise 12
(a)

Total net revenue:
Sales
Less: Sales discounts
Sales returns
Net sales
Dividends revenue
Rental revenue
Total net revenue

(b) Net income:
Total net revenue (from a)

Expenses:
Cost of goods sold
Selling expenses
Administrative expenses
Interest expense
Total expenses
Income before taxes
Income taxes
Net income
(c) Dividends declared:
Ending retained earnings
Beginning retained earnings

P390,0000
P 78,000
124,000

202,000
3,698,000
710,000
65,000
P4,473,000

P4,473,000
1,844,000
994,000
825,000
127,000
3,790,000
683,000

310,000
P 373,000

P1340,000
1,144,000


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Chapter 11

Net increase
Less net income
Dividends declared

196,000
(373,000)
P 177,000
ALTERNATE SOLUTION

Beginning retained earnings
Add net income

P1,144,000
373,000
1,517,000
?
P1,340,000

Deduct dividends declared

Ending retained earnings
Dividends declared must be P177,000
(P1,517,000 – P1,340,000)
Exercise 13
(a)

Multiple-Step Form
W Brothers Corp.
Statement of Comprehensive Income
For the Year Ended December 31, 2007
(In thousands, except earnings per share)

Sales
Cost of goods sold
Gross profit
Operating Expenses
Selling expenses
Sales commissions
Depr. of sales equipment
Transportation-out
Administrative expenses
Officers’ salaries
Depr. of office furn. and equip.
Income from operations
Other Revenues and Gains
Rental revenue

P965,000
605,700
359,300

79,800
64,800
26,900

171,500

49,000
39,600

88,600

260,100
99,200
172,300


Presentation of Financial Statements

11

271,500
Other Expenses and Losses
Interest expense

18,600

Income before taxes
Income taxes
Net income

252,900
90,700
P162,200

Earnings per share (P162,200  405,500)
(b)

P0.40

Single-Step Form
W Brothers Corp.
Statement of Comprehensive Income
For the Year Ended December 31, 2007
(In thousands, except earnings per share)

Revenues
Net sales
Rental revenue
Total revenues
Expenses
Cost of goods sold
Selling expenses
Administrative expenses
Interest expense
Total expenses
Income before taxes
Income taxes
Net income
Earnings per share

(c)

Single-step:
1.
Simplicity and conciseness.
2.
Probably better understood by user.

P 965,000
172,300
1,137,300
605,700
171,500
88,600
18,600
884,400
252,900
90,700
P 162,200
P0.40


12

Chapter 11

3.
4.

Emphasis on total costs and expenses and net income.

Does not imply priority of one expense over another.

Multiple-step:
1.
Provides more information through segregation of operating and
nonoperating items.
2.
Expenses are matched with related revenue.
Note to instructor: Students’ answers will vary due to the nature of the
question; i.e., it asks for an opinion. However, the discussion supporting
the answer should include the above points.
Exercise 14
CG Corporation
Statement of Comprehensive Income
For the Year Ended December 31, 2007
Sales
Cost of goods sold
Gross profit
Selling and administrative expenses
Net income

P1,200,000
750,000
450,000
320,000
P 130,000

Net income
Unrealized holding gain
Comprehensive income

P 130,000
18,000
P 148,000

Exercise 15
LS Co.
Statement of Changes in Equity
For the Year Ended December 31, 2007

Beginning balance
Comprehensive income
Net income*
Other comprehensive income
Unrealized holding loss
Comprehensive income
Dividends

Total
P520,00
0

Comprehensive
Income

120,000

P120,000

(60,000)

(60,000)
P 60,000

(10,000)

Retained
Earnings
P 90,000

Accumulated
Other
Comprehensive
Income
P80,000

Ordinary
Shares
P350,000

120,000
(60,000)
(10,000)

_______

________


Presentation of Financial Statements

Ending balance

P570,00
0

P200,000

P20,000

13

P350,000

*(P700,000 – P500,000 – P80,000).

Test Material
Test Material 11-1
Luntian Corporation
Statement of Financial Position
As of December 31, 2007
Assets
Current assets
Cash
Accounts receivable
Inventories
Total current assets

P175,900
170,000
312,100

P658,000

Long-term investments
Assets allocated to trustee for
expansion:
Cash in bank
BSP Treasury notes, at fair value
Property, plant, and equipment
Land
Buildings
Less accum. depreciation—
buildings

P 70,000
138,000
750,000
P1,070,000
410,00
0

Total assets

a

660,000

1,410,000
P2,276,000

Liabilities and Equity

Current liabilities

208,000


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Chapter 11

Notes payable—current installment
Income taxes payable
Total current liabilities

P100,000
75,000
P 175,000


Presentation of Financial Statements

Long-term liabilities
Notes payable
Total liabilities
Equity
Ordinary shares, no par; 1,000,000
shares authorized and issued;
950,000 shares outstanding
Retained earnings
Less treasury shares, at cost (50,000
shares of no par ordinary)

Total equity
Total liabilities and equity

15

500,000b
675,000

P1,150,000
538,000c
1,688,000
(87,000)
1,601,000
P2,276,000

a

P1,640,000 – P570,000 (to eliminate the excess of appraisal value over cost from the
building account. Note that the appreciation capital account is also deleted.)
b

P600,000 – P100,000 (to reclassify the currently maturing portion of the note payable as
a current liability.)
c

P658,000 – P120,000 (to remove the value of goodwill from retained earnings.
Apparently, retained earnings was credited, either directly or indirectly through the
income summary, for the value of the goodwill since no separate equity account existed
for goodwill. Note that the goodwill account is also deleted.)

Note: As an alternate presentation, the cash restricted for plant expansion would
be added to the general cash account and then subtracted. The amount reported
in the investments section would not change.


16

Chapter 11

Test Material 11-2
Makulay Corp.
Statement of Comprehensive Income
For the Year Ended December 31, 2007
Sales Revenue
Sales
Less: Sales returns and allowances
Sales discounts
Net sales revenue
Cost of goods sold
Gross profit
Operating Expenses
Selling expenses
Admin. and general expenses
Income from operations

P1,380,000
P150,000
45,000

194,000

97,000

Other Revenues and Gains
Interest revenue

291,000
273,000
86,000
359,000

Other Expenses and Losses
Interest expense
Income before taxes and extraordinary item
Income taxes
Income before extraordinary item
Extraordinary item
Loss from earthquake damage
Less applicable tax reduction
Net income

195,000
1,185,000
621,000
564,000

60,000
299,000
101,660
197,340
150,000

51,000

Per ordinary share:
Income before extraordinary item (P197,340  100,000)
Extraordinary item (net of tax)
Net income (P98,340  100,000)

99,000
P 98,340
P1.97
(.99)
P .98


Presentation of Financial Statements

17

Test Material 11-3
Bahag-Hari Corporation
Equity
December 31, 2007
Share capital
Preference shares, P4 cumulative, par value P50
per share; authorized 60,000 shares, issued
and outstanding 10,000 shares
Ordinary shares, par value P1 per share;
authorized 600,000 shares, issued 200,000
shares, and outstanding 190,000 shares
Total share capital

Additional paid-in capital—
In excess of par value
From sale of treasury shares
Total paid-in capital
Retained earnings
Total paid-in capital and retained earnings
Less treasury shares, 10,000 shares at cost
Total equity

P 500,000
200,000
700,000
1,300,000
160,000
2,160,000
301,000
2,461,000
170,000
P2,291,000