Chapter – The Income Statement and Statement of Changes in Equity CHAPTER 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 – 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 – 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 P1,730,00 135,000 P1,865,00 103,000 P1,762,00 Note 13 – Increase in inventory Inventory, December 31 Inventory, January 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 – 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 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 – 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 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 – 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 Prior period adjustment : 2005 expense charged erroneously to (80,000) Equipment January 1, 2006 balances, as restated P2,000,00 P1,420,000 2006 Changes Net income 520,000* Dividends (200,000) Balances, December 31, 2006 P2,000,00 P1,740,000 2007 Changes Net income 750,000 Dividends (500,000) Balances, December 31, 2007 P2,000,00 P1,990,000 Total P3,500,00 (80,000) P3,420,00 520,000 (200,000) P3,740,00 750,000 (500,000) P3,990,00 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 – 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 – 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 = 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 = 23 Chapter – The Income Statement and Statement of Changes in Equity MC43 C + 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 ... 105,000 P3 .46 4.000 (12) (13) 1,762,000 (105,000) 77,000 170,000 502,000 241 ,000 75,000 27,000 85,000 170,000 3,0 04, 000 P460,000 ( 37,000) P423,000 148 ,050 P2 74, 950 227,500 P 47 ,45 0 ( 14) (15) (16)... P650,000 MC 44 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 40 0,000 – 84, 000 + 40 ,000 – 4, 000 –... 40 ,000 Net income for the year 47 ,45 0 Dividends declared (60,000) Balances, December 31 P800,000 P650,000 P1,655 ,45 0 4- 8 Total P3,095,000 (117,000) P2,978,000 140 ,000 47 ,45 0 (60,000) P3,105 ,45 0