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CHAPTER 4
THE INCOME STATEMENT
AND THE STATEMENT OF CHANGES IN EQUITY
PROBLEMS
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Chapter 4 The Income Statement and Statement of Changes in Equity
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
Notes to Financial Statements (after presenting notes for basis of presentation and summary of
significant accounting policies)
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Chapter 4 The Income Statement and Statement of Changes in Equity
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Chapter 4 The Income Statement and Statement of Changes in Equity
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
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Chapter 4 The Income Statement and Statement of Changes in Equity
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)
2006 Restated net income = P500,000 + depreciation erroneously recognized (due to error in
2005).
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Chapter 4 The Income Statement and Statement of Changes in Equity
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%
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Chapter 4 The Income Statement and Statement of Changes in Equity
Note: If income tax rate is 32%, the answer would have been b,
P1,658,720.
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