Intermediate accounting by robles empleo ch 4 answers 2008

Chapter 4 – The Income Statement and Statement of Changes in Equity
CHAPTER 4
THE INCOME STATEMENT
AND THE STATEMENT OF CHANGES IN EQUITY
PROBLEMS
4-1

(Army Company)

Capital, December 31, 2007
Total assets
Less total liabilities
Capital, December 31, 2006
Total assets
Less total liabilities
Increase in capital
Withdrawals by the owner
Additional investments by the owner
Net income
4-2 (General Trading Company)
Debit change
Increase in assets
Credit changes
Increase in liabilities
Increase in capital stock
Increase in paid-in capital in excess of par
Increase (decrease) in retained earnings
Dividends
Net income (loss)

P1,218,000

276,000
P 970,000
202,000

P942,000
768,000
P174,000
240,000
(140,000)
P274,000

P600,000
P250,000
400,000
125,000

775,000
(P175,000)
100,000
(P75,000)

4-3 (Ray Company)
Raw material purchases
Less increase in raw materials inventory
Raw materials used
Direct labor
Factory overhead
Total manufacturing costs
Add decrease in finished goods
Cost of goods sold for 2007

4.4 (Lay Company)
Cost of goods manufactured
Finished goods, beginning
Finished goods, end
Cost of goods sold
Gross profit
Sales

P430,000
15,000
P415,000
200,000
300,000
P915,000
35,000
P950,000
P2,720,000
380,000
(418,000)
P2,682,000
962,000
P3,644,000

4-5 (Mel Company)
Let x = cost of sales

16


Chapter 4 – The Income Statement and Statement of Changes in Equity

.30x = .18 sales
x = .18/.30 sales
x = .60 sales
Therefore, 100% - 60% - 18% - 12% = 10%
Sales = 28,000/10%; Sales = 280,000
Cost of sales = 60% x 280,000 = 168,000
4-6 (Five Star Products)
Five Star Products
Income Statement
For the Year Ended December 31, 2007

Sales
Cost of sales
Beginning inventory
Purchases
Ending inventory
Gross profit
Selling expenses
General and administrative expenses
Income before income tax
Income tax
Net income

P126,000
466,250
(189,500)

P895,000

(402,750)

P492,250
(161,100)
(128,880)
P202,270
70,794)
P131,476

4-7 (Green Company)
Requirement a (nature of expense method)
Green Company
Income Statement
For Year Ended December 31, 2007
Net sales revenue
Rent revenue
Total revenues
Operating Expenses
Net purchases
Increase in inventory
Delivery expense
Advertising expense
Salaries and commissions
Depreciation expense
Supplies expense
Doubtful accounts expense
Insurance and taxes
Other operating expenses
Total Operating Expenses
Profit from Operations
Interest expense
Profit before income tax from continuing operations

Income tax expense
Profit from continuing operations
Discontinued operations, net of tax
Profit

17

Note
(11)

Total
P3,359,000
105,000
P3.464.000

(12)
(13)

1,762,000
(105,000)
77,000
170,000
502,000
241,000
75,000
27,000
85,000
170,000
3,004,000
P460,000

( 37,000)
P423,000
148,050
P274,950
227,500
P 47,450

(14)
(15)
(16)
(17)

(18)


Chapter 4 – The Income Statement and Statement of Changes in Equity

Notes to Financial Statements (after presenting notes for basis of presentation and
summary of significant accounting policies)
Note11 – Net sales revenue
Sales
Less sales discounts
Sales returns and allowances
Net sales revenue

P 49,000
121,000

Note 12 – Net purchases
Purchases

Add freight-in
Total
Less purchase discounts
Purchase returns and allowances
Net purchases

P41,000
62,000

P3,529,000
170,000
P3,359,000
P1,730,00
0
135,000
P1,865,00
0
103,000
P1,762,00
0

Note 13 – Increase in inventory
Inventory, December 31
Inventory, January 1
Increase in inventory

P446,000
341,000
P105,000

Note 14 – Salaries and commissions
Sales commissions and salaries
Office salaries
Total salaries and commissions

P182,000
320,000
P502,000

Note 15 – Depreciation expense
Depreciation – Buildings and office equipment
Depreciation – Store equipment
Total depreciation expense

P145,000
96,000
P241,000

Note 16 – Supplies expense
Store supplies expense
Office supplies expense
Total supplies expense

P56,000
19,000
P75,000

Note 17 – Other operating expenses
Loss on sale of equipment
Loss from typhoon

Total other operating expenses

P 50,000
120,000
P170,000

Note 18 – Discontinued Operations
Revenues
Expenses
Profit (loss) before income tax
Income tax benefit
Profit (loss) from operations of discontinued operations
Loss on sale of assets, net of tax benefit of P70,000
Discontinued Operations

18

P 900,000
(1,050,000)
P (150,000)
52,500
P (97,500)
(130,000)
P(P227,500)


Chapter 4 – The Income Statement and Statement of Changes in Equity

(function of expense method)

Green Company
Income Statement
For Year Ended December 31, 2007
Note
(11)
(12)

Total
Net sales revenue
P3,359,000
Cost of goods sold
1,657,000
Gross profit
P1,702,000
Other Operating Income
Rent Revenue
105,000
Total Income
P 1,807,000
Operating Expenses
Selling Expenses
(12)
P581,000
General and Administrative Expenses
(13)
596,000
Other Operating Expenses
(14)
170,000
Total Operating Expenses

P1,347,000
Profit from Operations
P460,000
Interest expense
( 37,000)
Profit before income tax from continuing operations
P423,000
Income tax expense
(148,050)
Profit from continuing operations
P274,950
Discontinued operations, net of tax0
(15)
227,500
Profit
P 47,450
Notes to Financial Statements (after presenting notes for basis of presentation and
summary of significant accounting policies)
Note 11– Net sales revenue
Sales
Less sales discounts
Sales returns and allowances
Net sales revenue

P3,529,000
P 49,000
121,000

Note 12 – Cost of goods sold
Inventory, January 1

Purchases
Add freight-in
Total
Less purchase discounts
Purchase returns and allowances
Cost of goods available for sale
Less Inventory, December 31
Cost of goods sold

170,000
P3,359,000
P341,000

P1,730,000
135,000
P1,865,000
(41,000)
(62,000)

Note 13 – Selling expenses
Sales commissions and salaries
Store supplies expense
Delivery expense
Advertising expense
Depreciation expense – store equipment
Total selling expenses

1,762,000
P2,103,000
446,000

P1,657,000

P182,000
135,000
77,000
170,000
96,000
P581,000

Note 14 – General and Administrative expenses

19


Chapter 4 – The Income Statement and Statement of Changes in Equity
Doubtful accounts expense
Office supplies expense
Insurance and taxes
Office salaries
Depreciation – buildings and office equipment
Total administrative expenses
Note 15 – Other operating expenses (continuing operations)
Loss on sale of equipment
Loss from typhoon
Total other operating expenses
Note 16 – Discontinued Operations
Revenues
Expenses
Profit (loss) before income tax
Income tax benefit

Profit (loss) from operations of discontinued operations
Loss on sale of assets, net of tax benefit of P64,000
Discontinued Operations

P27,000
19,000
85,000
320,000
145,000
P596,000
P 50,000
120,000
P170,000
P 900,000
(1,050,000)
P (150,000)
52,500
P (97,500)
(130,000)
P(227,500)

Requirement b
Green Company
Statement of Changes in Equity
For the Year Ended December 31, 2007
Additional
Common
Paid-in
Retained
Stock

Capital
Earnings
Balances, January 1
P700,000
P610,000
P1,785,000
Correction of prior year’s
income due to
understated
depreciation, net of
(117,000)
P63,000 income tax
Restated balances, January
P700,000
P610,000
P1,668,000
Issuance of capital stock
100,000
40,000
Net income for the year
47,450
Dividends declared
(60,000)
Balances, December 31
P800,000
P650,000
P1,655,450

4-8

Total
P3,095,000

(117,000)
P2,978,000
140,000
47,450
(60,000)
P3,105,450

(Private Company)

a.
Revenues
Selling and Administrative Expenses
Disposal costs
Operating Profit (Loss) before income tax
Income tax benefit
Operating Profit (loss)

20

P5,000,000
5,080,000
(75,000)
P(155,000)
54,250
P(100,750)

Chapter 4 – The Income Statement and Statement of Changes in Equity

b.
Revenues
Selling and Administrative Expenses
Disposal costs
Operating Profit (Loss) before income tax
Income tax benefit
Operating Profit (loss)
Loss from measurement to NRV, net of income tax
benefit of P63,000
Discontinued Operations
4-9

P5,000,000
5,080,000
(75,000)
P(155,000)
54,250
P(100,750)
(117,000)
P(217,750)

Masagana Company

Masagana Company
Statement of Changes in Equity
For the Years Ended December 31, 2007 and 2006
Share
Retained

Capital
Earnings
January 1, 2006, balances as previously
P2,000,00
P1,500,000
reported
0
Prior period adjustment :
2005 expense charged erroneously to
(80,000)
Equipment
January 1, 2006 balances, as restated
P2,000,00
P1,420,000
0
2006 Changes
Net income
520,000*
Dividends
(200,000)
Balances, December 31, 2006
P2,000,00
P1,740,000
0
2007 Changes
Net income
750,000
Dividends
(500,000)
Balances, December 31, 2007

P2,000,00
P1,990,000
0

Total
P3,500,00
0
(80,000)
P3,420,00
0
520,000
(200,000)
P3,740,00
0
750,000
(500,000)
P3,990,00
0

Note: The solution above disregards the effect of income tax.
2006 Restated net income = P500,000 + depreciation erroneously recognized (due to
error in 2005).

4-10

(LTC Company)
LTC Company
Comparative Income Statements
For the Years Ended December 31, 2007 and 2006
2007

21

2006


Chapter 4 – The Income Statement and Statement of Changes in Equity
Sales
Cost of goods sold
Gross profit
Selling expenses
General and administrative expenses
Profit before income tax
Income tax
Profit

P3,000,000
1,4,20,000
1,580,000
(350,000)
(260,000)
P970,000
(339,500)
630,500

P2,540,000
1,150,000
1,390,000
(210,000)
(220,000)

P960,000
(336,000)
P624,000

LTC Company
Statement of Changes in Equity
For the Years Ended December 31, 2007 and 2006
Retained
Share
Earnings
Total
Capital
January 1, 2006, balances as previously
P1,000,000
P 600,000
P1,600,000
reported
Cumulative effect of changing from FIFO to
weighted average method of inventory
costing, net of income tax of P10,500*
19,500
19,500
January 1, 2006 balances, as restated
P1,000,000
P619,500
P1,619,500
2006 Transactions:
Net income
624,000
624,000

Dividends
(400,000)
(400,000)
December 31, 2006 balances
P1,000,000
P843,500
P1,843,500
2007 Transactions
Net income
630,500
630,500
Balances, December 31, 2007
P1,000,000
P1,474,000
P2,474,000
* based on 35%.
Cumulative effect shown on the statement of changes in equity
Difference in beginning inventory of 2006 (385,000-355,000)
P30,000
Applicable tax (35% x 30,000)
10,500
Net adjustment (addition) to retained earnings, January 1, 2006
P19,500
The cumulative effect, however, is taken up in the books during 2007, when the
change was decided upon by the management. The following 2007 entry: is made:
Inventory, beginning (or cost of sales)
20,000
Income tax payable (based on 32%)
7,000
Retained earnings

13,000
Thus, the retained earnings at December 31, 2007 is P830,500 + 13,000 + 630,500 =
P1,474,000.

MULTIPLE CHOICE
Theory
MC1

D

MC11

22

D


Chapter 4 – The Income Statement and Statement of Changes in Equity
MC2
MC3
MC4
MC5
MC6
MC7
MC8
MC9
MC10

C
C

A
A
B
A
A
A
D

Problems
MC21. D
MC22

C

MC23

A

MC24
MC25
MC26
MC27
MC28

A
A
D
B
B

MC29

C

MC30

C

MC31
MC32
MC33
MC34
MC35
MC36
MC37

B
C
B
C
D
B
D

MC38

C

MC39
MC40

MC41

D
C
B

MC42

D

MC12
MC13
MC14
MC15
MC16
MC17
MC18
MC19
MC20

D
B
B
A
D
B
D
B
B

210,000 – 50,000 = 160,000; 260,000 – 60,000 = 200,000
200,000 – 160,000 = 40,000 + 12,000 – 50,000 = 78,000 LOSS
225,000 + 100,000 + 10,000 + 15,000 = 350,000;
150,000 + 50,000 + 20,000 + 100,000 + 15,000 = 335,000
350,000 – 335,000 = 15,000 + 25,000 – 125,000 = 85,000 LOSS
21,000 + 25,000 – 10,000 + 70,000 + 5,000 – (5,000 X 8) + 15,000 –
50,000 – 1,000 – 20,000 = 15,000
150,000 + 80,000 + (220,000 x ½) + 140,000 = 480,000
170,000 + (240,000 x ½) = 290,000
150,000 x 8 = 1,200,000 + 80,000 = 1,280,000
272,000 + 36,000 – 41,600 = 266,400 + 76,800 = 343,200
.125/.25 = .50; 100% - 50% - 12.5% - 17.5% - 5% = 15%
750,000/15% = 5,000,000 x 50% = 2,500,000
5,800,000–(4,800,000+650,000–550,000)=900,000–
(7.5%,x900,000)=532,500
.15/.25=60%; 100%-60%-10% - 15% - 3% = 12%; 480,000/12% =
4.0M
1,080000/80% = 1,350,000/90% = 1,500,000 x 30% = 450,000
3,500,000/70% = 5,000,000
5M-3.5M=1.5M – (60% x 1.5M) = 600,000 x 65% = 390,000
3,500,000 – 500,000 = 3,000,000
600,000+900,000 – 1,000,000 = 500,000
P1,550,000 – P1,100,000 = P450,000
450,000 + 600,000 – 250,000 = 800,000; ending inventory before
write off is P100,000 + 150,000 = 250,000
5,000,000 + 28,000 + 520,000 – 280,000 – 500,000 – 720,000 –
110,000 + 16,000 + 100,000 – 400,000 + 55,000 – 70,000 –
50,000 – 80,000 – 120,000 – 450,000 = 419,000
500,000 + (400,000 X 60%) + 70,000 + 120,000 = 930,000
450,000 + 2,800,000 + 80,000 – 520,000 = 2,810,000

Sales
100%
Cost of sales
40% ( 20% / 50%)
Gross profit
60%
Operating expenses
(20%)
Finance costs
( 5%)
Profit before tax
35%
Income tax (35% x 32%) ( 11.2%)
Profit
23.8%
Sales = 2,380,000 / 23.8% = 10,000,000
Purchases = 10,000,000 x 40% x 130% = 5,200,000
2,000,000 + 100,000 – 2,100,000 = 0

23


Chapter 4 – The Income Statement and Statement of Changes in Equity
MC43

C

0 + gain of P1,000,000 on disposal – income tax of P350,000 =
P650,000

MC44
MC45
MC46
MC47

C
B
A

(3,500,000 – 500,000) x 65% = 1,950,000

(360,000 – 320,000) x 65% = P26,000
Net income from continuing operations= P46,800
400,000 – 84,000 + 40,000 – 4,000 – 280,000 = 72,000 before income
tax; Income from continuing operations = P72,000 x 65% = P46,800
Total net income = P46,800 + (40,000 x 65%); total net income is
72,800
RE = 1,600,000 + (16,000 x 65%) – (24,000 x 65% )+ 72,800 ) –
12,000 = P1,655,600
Note: If income tax rate is 32%, the answer would have been
b, P1,658,720.

24