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, 2010
Total assets P1,218,000
Less total liabilities 276,000 P942,000
Capital, December 31, 2006
Total assets P 970,000
Less total liabilities 202,000 768,000
Increase in capital P174,000
Withdrawals by the owner 240,000
Additional investments by the owner (140,000)
Net income P274,000

4-2 (General Trading Company)

Debit change
Increase in assets P600,000
Credit changes
Increase in liabilities P250,000
Increase in capital stock 400,000
Increase in paid-in capital in excess of par 125,000 775,000
Increase (decrease) in retained earnings (P175,000)
Dividends 100,000
Net income (loss) (P75,000)

4-3 (Ray Company)

Raw material purchases P430,000
Less increase in raw materials inventory 15,000
Raw materials used P415,000
Direct labor 200,000
Factory overhead 300,000
Total manufacturing costs P915,000
Add decrease in finished goods 35,000
Cost of goods sold for 2010 P950,000

4.4 (Lay Company)

Cost of goods manufactured P2,720,000
Finished goods, beginning 380,000
Finished goods, end (418,000)
Cost of goods sold P2,682,000
Gross profit 962,000
Sales P3,644,000

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Chapter 4 The Income Statement and Statement of Changes in Equity

4-5 (Mel Company)

Let x = cost of sales
.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, 2010
Sales P895,000
Cost of sales
Beginning inventory P126,000
Purchases 466,250
Ending inventory (189,500) (402,750)
Gross profit P492,250
Selling expenses (161,100)
General and administrative expenses (128,880)
Income before income tax P202,270
Income tax 70,794)
Net income P131,476

4-7 (Green Company)

Requirement a (nature of expense method)
Green Company
Income Statement
For Year Ended December 31, 2010

Note Total
Net sales revenue (11) P3,359,000
Rent revenue 105,000
Total revenues P3.464.000
Operating Expenses
Net purchases (12) 1,762,000
Increase in inventory (13) (105,000)
Delivery expense 77,000
Advertising expense 170,000
Salaries and commissions (14) 502,000
Depreciation expense (15) 241,000
Supplies expense (16) 75,000
Doubtful accounts expense 27,000
Insurance and taxes 85,000
Other operating expenses (17) 170,000
Total Operating Expenses 3,004,000
Profit from Operations P460,000
Interest expense ( 37,000)
Profit before income tax from continuing operations P423,000
Income tax expense 148,050

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Chapter 4 The Income Statement and Statement of Changes in Equity

Profit from continuing operations P274,950

Discontinued operations, net of tax (18) 227,500
Profit P 47,450

Notes to Financial Statements (after presenting notes for basis of presentation and summary of
significant accounting policies)

Note11 Net sales revenue

Sales P3,529,000
Less sales discounts P 49,000
Sales returns and allowances 121,000 170,000
Net sales revenue P3,359,000

Note 12 Net purchases

Purchases P1,730,000
Add freight-in 135,000
Total P1,865,000
Less purchase discounts P41,000
Purchase returns and allowances 62,000 103,000
Net purchases P1,762,000

Note 13 Increase in inventory

Inventory, December 31 P446,000
Inventory, January 1 341,000
Increase in inventory P105,000

Note 14 Salaries and commissions

Sales commissions and salaries P182,000
Office salaries 320,000
Total salaries and commissions P502,000

Note 15 Depreciation expense

Depreciation Buildings and office equipment P145,000
Depreciation Store equipment 96,000
Total depreciation expense P241,000

Note 16 Supplies expense

Store supplies expense P56,000
Office supplies expense 19,000
Total supplies expense P75,000

Note 17 Other operating expenses

Loss on sale of equipment P 50,000
Loss from typhoon 120,000
Total other operating expenses P170,000

Note 18 Discontinued Operations

Revenues P 900,000
Expenses (1,050,000)
Profit (loss) before income tax P (150,000)
Income tax benefit 52,500
Profit (loss) from operations of discontinued operations P (97,500)

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Chapter 4 The Income Statement and Statement of Changes in Equity

Loss on sale of assets, net of tax benefit of P70,000 (130,000)

Discontinued Operations P(P227,500)

(function of expense method)

Green Company
Income Statement
For Year Ended December 31, 2010
Note Total
Net sales revenue (11) P3,359,000
Cost of goods sold (12) 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 P3,529,000
Less sales discounts P 49,000
Sales returns and allowances 121,000 170,000
Net sales revenue P3,359,000

Note 12 Cost of goods sold

Inventory, January 1 P341,000
Purchases P1,730,000
Add freight-in 135,000
Total P1,865,000
Less purchase discounts (41,000)
Purchase returns and allowances (62,000) 1,762,000
Cost of goods available for sale P2,103,000
Less Inventory, December 31 446,000
Cost of goods sold P1,657,000

Note 13 Selling expenses

Sales commissions and salaries P182,000
Store supplies expense 135,000
Delivery expense 77,000
Advertising expense 170,000

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Chapter 4 The Income Statement and Statement of Changes in Equity

Depreciation expense store equipment 96,000

Total selling expenses P581,000

Note 14 General and Administrative expenses

Doubtful accounts expense P27,000
Office supplies expense 19,000
Insurance and taxes 85,000
Office salaries 320,000
Depreciation buildings and office equipment 145,000
Total administrative expenses P596,000

Note 15 Other operating expenses (continuing operations)

Loss on sale of equipment P 50,000
Loss from typhoon 120,000
Total other operating expenses P170,000

Note 16 Discontinued Operations

Revenues P 900,000
Expenses (1,050,000)
Profit (loss) before income tax P (150,000)
Income tax benefit 52,500
Profit (loss) from operations of discontinued operations P (97,500)
Loss on sale of assets, net of tax benefit of P64,000 (130,000)
Discontinued Operations P(227,500)

Requirement b
Green Company
Statement of Changes in Equity
For the Year Ended December 31, 2010
Additional
Common Paid-in Retained
Stock Capital Earnings Total
Balances, January 1 P700,000 P610,000 P1,785,000 P3,095,000
Correction of prior years
income due to understated
depreciation, net of P63,000
income tax (117,000) (117,000)
Restated balances, January P700,000 P610,000 P1,668,000 P2,978,000
Issuance of capital stock 100,000 40,000 140,000
Net income for the year 47,450 47,450
Dividends declared (60,000) (60,000)
Balances, December 31 P800,000 P650,000 P1,655,450 P3,105,450

4-8 (Private Company)

a.
Revenues P5,000,000

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Chapter 4 The Income Statement and Statement of Changes in Equity

Selling and Administrative Expenses 5,080,000

Disposal costs (75,000)
Operating Profit (Loss) before income tax P(155,000)
Income tax benefit 54,250
Operating Profit (loss) P(100,750)

b.
Revenues P5,000,000
Selling and Administrative Expenses 5,080,000
Disposal costs (75,000)
Operating Profit (Loss) before income tax P(155,000)
Income tax benefit 54,250
Operating Profit (loss) P(100,750)
Loss from measurement to NRV, net of income tax
benefit of P63,000 (117,000)
Discontinued Operations P(217,750)

4-9 Masagana Company

Masagana Company
Statement of Changes in Equity
For the Years Ended December 31, 2010 and 2006
Share Retained
Capital Earnings Total
January 1, 2006, balances as previously reported P2,000,000 P1,500,000 P3,500,000
Prior period adjustment :
2005 expense charged erroneously to Equipment (80,000) (80,000)
January 1, 2006 balances, as restated P2,000,000 P1,420,000 P3,420,000
2006 Changes
Net income 520,000* 520,000
Dividends (200,000) (200,000)
Balances, December 31, 2006 P2,000,000 P1,740,000 P3,740,000
2010 Changes
Net income 750,000 750,000
Dividends (500,000) (500,000)
Balances, December 31, 2010 P2,000,000 P1,990,000 P3,990,000

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

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Chapter 4 The Income Statement and Statement of Changes in Equity

For the Years Ended December 31, 2010 and 2006

2010 2006
Sales P3,000,000 P2,540,000
Cost of goods sold 1,4,20,000 1,150,000
Gross profit 1,580,000 1,390,000
Selling expenses (350,000) (210,000)
General and administrative expenses (260,000) (220,000)
Profit before income tax P970,000 P960,000
Income tax (339,500) (336,000)
Profit 630,500 P624,000

LTC Company
Statement of Changes in Equity
For the Years Ended December 31, 2010 and 2006
Retained
Share Capital Earnings Total
January 1, 2006, balances as previously reported P1,000,000 P 600,000 P1,600,000
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
2010 Transactions
Net income 630,500 630,500
Balances, December 31, 2010 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 2010, when the change was
decided upon by the management. The following 2010 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, 2010 is P830,500 + 13,000 + 630,500 = P1,474,000.

MULTIPLE CHOICE

Theory

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Chapter 4 The Income Statement and Statement of Changes in Equity

MC1 D MC11 D
MC2 C MC12 D
MC3 C MC13 B
MC4 A MC14 B
MC5 A MC15 A
MC6 B MC16 D
MC7 A MC17 B
MC8 A MC18 D
MC9 A MC19 B
MC10 D MC20 B

Problems
MC21. D 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
MC22 C 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
MC23 A 21,000 + 25,000 10,000 + 70,000 + 5,000 (5,000 X 8) + 15,000 50,000
1,000 20,000 = 15,000
MC24 A 150,000 + 80,000 + (220,000 x ) + 140,000 = 480,000
MC25 A 170,000 + (240,000 x ) = 290,000
MC26 D 150,000 x 8 = 1,200,000 + 80,000 = 1,280,000
MC27 B 272,000 + 36,000 41,600 = 266,400 + 76,800 = 343,200
MC28 B .125/.25 = .50; 100% - 50% - 12.5% - 17.5% - 5% = 15%
750,000/15% = 5,000,000 x 50% = 2,500,000
MC29 C 5,800,000(4,800,000+650,000550,000)=900,000(7.5%,x900,000)=532,500
MC30 C .15/.25=60%; 100%-60%-10% - 15% - 3% = 12%; 480,000/12% = 4.0M
MC31 B 1,080000/80% = 1,350,000/90% = 1,500,000 x 30% = 450,000
MC32 C 3,500,000/70% = 5,000,000
MC33 B 5M-3.5M=1.5M (60% x 1.5M) = 600,000 x 65% = 390,000
MC34 C 3,500,000 500,000 = 3,000,000
MC35 D 600,000+900,000 1,000,000 = 500,000
MC36 B P1,550,000 P1,100,000 = P450,000
MC37 D 450,000 + 600,000 250,000 = 800,000; ending inventory before write off is
P100,000 + 150,000 = 250,000
MC38 C 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
MC39 D 500,000 + (400,000 X 60%) + 70,000 + 120,000 = 930,000
MC40 C 450,000 + 2,800,000 + 80,000 520,000 = 2,810,000
MC41 B 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
MC42 D 2,000,000 + 100,000 2,100,000 = 0

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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 C (3,500,000 500,000) x 65% = 1,950,000
MC45 B
MC46 A (360,000 320,000) x 65% = P26,000
MC47 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.

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