I

·cHAPTER3 . ., .

.,
-i

.! NoTEs ro FINANCIAL STATEMENTS

·) Eyentsaft~[Link]·period . · ·.- ·. . . 1_·> ·
~ ' ' f -11 ' • I :, ( • ••

•1
' ' " '' .

I .
,• '
, I
·I
I
.I

.
; . . \.. . .
. . . ,
dated
· Iatercompany iales are _no·longer .disclosed when censoU
.. · . . .
· ,fiDfflW ~ t s a r e ~ ' : \ .

.• 3
 Problem 3·2 (AlCPA Adapted)
· .
During the current year, Jane cOmpany engaged m the follow·
transactions: lrl&
·
. e 1 mpensation
Ke y management pers~nn ~o . 2,0oo,o 3,00() 00
Sales to affiliated entitles
. ,OOo
\Vhattotal amountshouId be includ
al
ed as related party disclosures.
Jane Company's separate financt statements for the current y ill
.
. ·- , ~ ?
a. 5,000,000
b. 3,000,000
C. ·2,000,000 .. . :'.

d. 0 ,. . . ·- ; ,,

Solution 3-2 Answer a ,

. . , 5, 00 0, ~
PAS 24, paragraph 1_6, rel)ui~s dis
c}osuri: ofkey_~ g ~ ~ t ·
personnel compel).Sat10n... · ,... ,·· , · . . . . . .· ., ,·. .
The sales to affili~leci entities shall be ,
sep~rate financial statements b_u t d(sc!o~ed iri_JiJ.ne Co~Pllny•s _·
financial'stateinents. ,:r· :-.: ~.:·: ,· : :';.eh?11nated 1n consolidated .
.
>< >:_ ·~;:•:,· ·.. :· > -·: ·..
: . ' \ ,' i.' . :- ..:.:·:)'.)' ·: ,•;..-:; ~) ·.. ;
:<··>' }'•' t:'.', -::' .-: _· ' _.: >:· ~ ,·.' ,.
Problem3-3 (l~RS) :. '··.-;.: ..':_.i:.·, •;__:
..
( _ _;_·: :_ : _-. · _· .· ,.:- .
, : ·
.
~ .' ··, \
- Gibson Comp~yi:epo~¢ !hat rem~e . ·' : .. ..,, l . . '· . ... , .. ..

ratjo1
to the entity's chiefexecU;ti_ve officer d 1·a nd -0 ~e r~ ~n ia de-
'

Annual sa1ary ·, ' ··.) ,' ,,:

~ g the current
;_ , • ;'
> , ' • •, , .:.,• • • • , • , • I • , , , ,
year were:
1
'

Share_opt~OJ!S ·and ~ther ~h~re-based

'.,

'
: •

2 000 000
:

-
.'·. • •• - ·· ·'. •• ,

J
, :

• •

Co~tnb~ttons to _retir~ment benefit pla pa ym en ts · ..·._. , 1,000,000 .

• , ,

Re1mburse~1e~t .o\ tfavel expenses fQ n \ •· · :•. · :· ... _. . :. S00,000

r business trips · 1,200 000
' . '
' '·: ,.
. ' . ··. .
" ' '
. :, :-
' '

, .
' ·• '' ' ' ' . ' ·,_ ' ',' .
Wh~(t~tal amount should be disclose ' '
'

, management personnel? . ·. · •, :· · d as compensation: to key

· ·· · ·...•· ·
.a~ ·.3;5.00,000 ~- ',: ·· :··.·· .· · .,_. ~ · ·-
·b. -4. '700 000 . . :.. J . . ,• ' .
1 , '
.c. · 3,000,000 ··. ~ ' . ' '

· ' '
' .

d.. 2,?00,000 1
•· •

Solution 3-3 Answer a·. ·, .· ,·

.. '

'All, except reimburaeinffi:t ofllavel e,c

p,ie,L ·
 Problem 3-4 (IFRS)
The audit ofAnne Company [Link] year ended December 31 2021
was comple. te.d on March . I, 2022. · ' ' .,,

The financial statements were signed by the ma~aging director

on March 15, 2022 and approved by the shareholders on March·
31, 2022.
* On Jantrary 1-5, 2022, a customer owing P900,000 to Anne
1

Company filed for bankruptcy. ,· ·

. ,

The financial ~tatements included an allowance for doubtful

accounts:pert~ining to this customer of Pl00,000. ·
• • : • _· ! . .

* Anne Company's issued share·capital comprised 100,000 drdinary

shares with P1.00 par value. . ·
The entity issued additional 25,000'shares on March 1, 2022 at
parvalue.. ; . ..', '\ • •
* Equip~erit:with carrying amount of P525,000 was d~stroyed
,, by fire ·9nDecember 15,2021.· ·._. · ·
I ' , : • ' •
, ',• • • ( ' , • ·. , • , ' •
•

-. Anne Company had bqoked a;.rec¢iv~ble_. of P400,000 from the

[Link]·entity ori [Link] 31,·202 I.' . . . .
. , A&~:uie inSura}lce_. e~tity .completed [Link].e·stigatfon on February
: l, 2022, it-.'.wa~{'discovere~ that t4e ·fire took. place due to
neg,lig-ence:·of:th~ machine operator. As a result, the insurer's
\ · 1

liabilitr was Z~(O on this"elaim. l •• • - •

. 1' '.

What total amount should be i eported as a<Jjusting events o~

December 31·, 2~21·? '.
a. 1,300,000 .
b'. . 1,200,Q00···
c. 3,800,000 .
· d. 3,700,000

Solution 3..4 Answer b

D,[Link] (900,000 minus allowance 100,.000) . 800,000
Loss on claim receivable · ·· 400,000
Total adjusting events ~,200,000

45
 Problem 3-5 (IFRS)
of rep ort ing pe rio d of No rw ay Co mp any is J?ecember 3J
The end 20 21 are authorized for issu~
2021 and the fin an cia l sta tem en ts for
. .
on March ,s, 2022.
CoJDpany ha~ a receivable
* On Dec~mber 31, 2621, Norwayt is due 60 day~ [Link] end
of P400,000 from a customer tha , ~02~, a _receiver .was
of reporting period. On January 15 v~ info~ed Norway
e1
appointed for the said customer. ~e recl by _June 30, ~022.
that the P400,000 w?uld be paid m ful
* Norway Company had equity inv
e_$[Link] ~~~d for trading. On
w~re record~ at thP'fair
December 31, 2021, these investments to February 15, 2022 .
up
value ofPS,000~000. During the period ~fall the shares in th~ ·
lue
.there was a steady decline in the fair va farr value had fallen to ·
portfolio, and on February 15, 2~22, the , .
P2,000,000. . . . .
tingent [Link] December
* Norway-Company had reported~ co~ Norway Company was
. 31 , 202 1 rel ate d to a co ~ cas e in wh ich
the def end ant . T
· he cas e wa s no t hea rd un til the first week of F e~
, handed down adecision ·
2022. On February 15, 2022; the judg~ ~ermined ~ t Norway
against Norwa~ Company. ~ejucelge 'de
tot ahng P3,000,000.- , .
Company washable to pa y~ ~_s
* On De cem ber 31 ~ :20 2·1, No ~a y Comp~yhad
a receivable"&om .' .
a lar ge cus ton :ier I'n ~e am o~ t_of P3 ,500,000.-0n January 3·1
. in
_ ~t in g by the liquidato; .
_ 20 22 , N? rw ~y Co nip any .~a s ad vis ed
the sai d ~us to!1 1er tha t _the cu st9 nie r was msolvent and thatonl
of April 30, 2022. · y
. 10% pfthe receivable will be_pmd on
Wh at t~t aL a.m o~ i,~ ho uld .be rep orted as adjusting'.. ev·ents .on
' ·, - · :·.
•
December 31 2021? ,. . .--- ... .
. . ' I • , . . •• .

· a. 6,1s9,ooo·. : ·
. b. . 9,\50,000 . . i

C. · · 9,550,000
' I !
•

d. 6,500,,000
Sol~tion)-5 A ~e r' ~ . ·.
i'm,:
'
1

Litigation loss ·
•

D~~btful accounts expense _(3,~00,00

0 ~ go%) . .
T~tal .a~ountofadjustingevents·
., . .. . . i1so:ooo
The financial assets held for trading are c~ "' :: ~ fairwlue _. ...
-~-i , .

m~st be determined at the end of ea.a rtp0.-11111 peritd.

46·
 problem 3-6 (IFRS)
Ginger Company is completing the preparation ofthe financial statements
for the year·e~ded pecemqer 31 ; 2021. The .financial statements are
authorized for issue on March 31, 2022.
* . On March 15, 2022, a dividend of P3,000,000 was declared and .
a contractual profit share payment of J> 1,000,000 ·w as made based
on the profit for the year end~d Deceml;,er 31, 202-1. - .

* On Februruy 1, 2022~ a ctistomer went into liquidation having owed

the entity PS00,000 for_the past 5 months . .

No allowance had be~n made against this account in the financial

statements.

* On March 2~, 202~, a tp.~ufacturi:Qg plant was destroyed by fire

· resulting in a financial loss of P2,500,000. .

[Link] amount should be recogni~ed in projiior loss/or 2021 to

reflectadj_u~tinieven~_aftertheendofreportingperiod?
- . ' . . . ~ \ . . . . . ., ' .

a. 4,oop_,ooo ,
b. 3,000,000
C• . 2,500,0Q0 ·
d~ 1,500,000

Solution -3-6-Answer d · ·
' '

. , · · Contractual -profit share payment 1,000,000

Doubtful accounts expense , . 500,000
\ .. .

· Total ·a.~justin-g ·e'fents · 1,500,.000

· The dividend declaration is·not recognized in profit or loss but a

deduction from retained earnings on March 15, 2022.
. .. \

The manufacturing plant destroyed by fire on March 20, 2022 is a

nonadjusting event requirin~ disclosure only in the financial
statements for 2021. _
The fire loss should be recognized in 2022.

47
 l>r~blem 3-7 (IFRS)
During 2021, Marian Company was _sued by a competitor for
·PS,000,000 for infringement of a patent: .
Based on the advice of the legal counsel, theentity accrued the 8
of P3,000,000 as a provisi_on on December 31, 2021. 1111!
Subsequently, on March ,15, 2~2Z, the Supreme Court decided•
favor of the party allegi~g infringement of the patent and ordered:
defendant to ~y the aggneved partY a sum ofP3,500,000.
The financial statements were prepared by management on February IS
2022 and approved by the board of directors on March 3l, 2022-. ' '
1. ·what amount shoull be recognized as accrued liability on
December 31, 202 l? . · · _,
' a. 5;000,000
b. 3,500,000
'C, 3,000,000
d. 1,500,000
2. ~ ainorint-~nould b~ adjusted on Oecember 31, 2021 in relation
. to this event?
a. 1,500,000 ·
·b. 3,000,000 .
c. soo·ooo ·
d.
' 0' ·
. .
Solution 3-7
Question .I Answer b
'-

Accrued liability:... December 31, 2021 3,500,000

, .The-~ ~ amo~t ofP3,,500,[Link] be accrued as liability because ·

the suit was d~c1ded on March I5, 2022 which is prior to the issuance
ofthejinanczal statements on March 31, 2022.
Question 2 Answer c
Accrue~ liability- Dece~ber 31 202 l 3,500,000
Provision already accrued·
Increase in accrued liability
'
~---
3 000,000
500,000

48'
 )•
Problem 3-8 (IFRS)
Caroline Company provided the following events
that occurteci after
· ·
December 31, 2b2 J:
ble was wri tten off
Jan. 15, 202 2 P3,000,000 of accotmts rece i~a . .
due to the bankruptcy of a maJor customer. ·
carrying amo unt ·
Feb. 15, 202 2 A shipping v~ssel ofthe entity with sea becaus~ of ' .
. of P5, 000 ,00 0 was completely l~st at ·
a hunicane. · , '
Mar. 1o, 202 2 A court case involving the entity
as the defendant was
settled and the entity was obligated ta pay the plai
ntiff
P 1,500,000~ The entity previously has not r~o gni
zed
a liability for the suit because mariagemen~ deemed
it
· . possible that the entity wotild los e~~ case. ·
P4;OOO,00O was .
Ma& 15, 2022 A factory with a carrying amount of
· completely razed by forest fire that erupted in
the
vicinity.
l statements for
The management completed the draft of the financia the boa rd of
2021 9n Fabruary 10, 2022. On' March 31, :202
2~
.
directors authorized the financial stateinenIB, for issue~
The entity announced the profit
•.
and .
other selected hif ~~ tio
.· , , .
n on March
· .
22, 2022. . ·. - · · • f

olders on April i,
The f~an~ial statements weFe [Link] shareh next day. -
2022 and (iled,.with th~ re~la~ory agency [Link]
What [Link] anio~t ·sho4lcl 'b~ ·[Link],orted as adjustin~ ev·ent~ on
- . ·,
1

- · · · ·
[Link] J 1, 2021? ·· ·
a. 9,500,000
b. 8,500,000 ·_ .
c·. 9,000,000
✓- d. 4,500,000
Solution 3-8 .Answer d
Accounts writt~n off 3, 000' :000
1

Loss from lawsuit 1,500,000

Total adjusting events 4,500,000

. !J1e loss on the shipping_ vessel and the fire .Joss should be recognized
be disclosed only in 2021 .
1n 2022 and should
.,
 .[Link],4 ...
. .
. ' ..

·STATEMENT OF COMPRE~~NSIVE INCOM E

Cost of goods sold and. op~ rat1ng expenses.. . - · -
.- . ~ . '

ProbJem4-1 (AICPA Adapted) : , .. ·.:·· . :_ ,'. ·_.·

namely ..
Brock Company reported operating e ~ s in ~o categories,
distribution and general and adrn4ristrat1y~- : ·_ ·: · ·. .· ,,··:
·. ··
,.
The.~just~ci trial ~aiance at year~~ni~ci~de~-;~~ ~oilowing expense
_ _. .
and loss account's for current ye~: . . . ... · .. _... ;- ·- . :·
- ·Accounting and Jegal_'fe~s .: · · /. ~- · _:'- .<.·-. ··.:.\ :·-.: ··
: >.. <_1 ~200,000
· Advertising . · · ·-' · ·_, ·. ·. -·· "< ·: _-·- :· <· ..:. ·: . :_' : ~
. 1500000 I • ' '
' •

. .' , · · · 800,000
'1,
• •
/

Freight out .· . :·:_· ·,·.. _ _ .

·lpte· rest ..'. :·· .'.·.-I· · --::.· ,:.:·.;/. :. -~1·: .. '..:./:.> ·1 .~ :.-- '.:· -: • . · ; 700,000 . • · , .. ·" • · --· ! • • : •

9ng~t~rm)nv·estment: .- r'.i _ ·, 1 • . , .. . •.. - .2,2300,000

·. • .· •· · : .·•
· . 1· ·

t,oss on ·sale1•9f,.l
, 00 . ! . ':. • ·•

--- . ; :· . _· 59,0
J

r,. •: ·~ .':-,. :' '_,<·

'• ' ·• 't
♦ ~ • · ,. • _. • ( t,
!" ., .

-.·.. \'·..: ;•_·

,' • • • -.

s .,_ ., .... - -.~--,-1~.

I '

Offi
. .1cers ·sa ane .. . . . .
. .
· · . 2,-200,000
,. Rent for office space •. · -. . ·.·: : . ·,· · -. . . ;- 1 , ' _. ·..· -1,400,000 .
~ Sales salaries :and comm1ssions:;_ _.,_,-~":_°·' : . '.' >.·.•; I ••• ;

I . ·, . . ·......· .. .
• . , , •• •, . : • ••• ~ • ••

• I • • , ,
•

~: ·; One~h~~of~ ~!~~n~e~pr~~~es is.o~~pi~d-~y,~e ~e

/ •

s de ~e nt ; _ • •
.: · ! •
1. I • • , ,
· .,,. •
~ } • ,· ': ,._

:.
1 ':
~
•

d as total _distribution costs? .

' , - ,• • : .,
• • •. :
r

~ :~o
•

unt should be repor_te

-'

..-. . Wha ~ ~ ~ .• : •. • . .: • : • • • • ,.

,:, ..· :·. ·. - ) . . I· ·-: : •.; . • • • ). , ~, ..: i

r __ . '" ,.:. ; ,·"' ' '~- .

.: · _ a. ._4,800,000 .·. - · · - . :, ·. 1
• 1 • • · •• • •

.'. ·_:- b. -4,000,000 :' . . . . ,:· - " .

-_· c. · 3,700,000 .
:·. ·_ ·d:-, 3,600,000 -
• •
• # •

Solutio~ 4-1 Answer a

A~vertising . 1,500,000
Freight ·out 800,000
.Rent · (2,200,000 x 1/2) -1,100.000
Sales salaries and commissions. 1,400,000
Total distribution costs . ··. · ,4.800,000

5~ .
 , . .. " .
. . .

Problem 4-2 (AICPA Adapted) , ·.

Lee Company reported the followirig
.
data f~r the .curren~. year:
.
· . : .: ._·
"
• ' .,,, . ·
'
• '
j

Legal and ~udit fees I, 700,000

Rent for offi~e space · t .· . . • -2;400,0Q0
Interest on inventory loan · · · · · · · ·. . · ·: ·2,100,000
L~ss on abandoned data [Link] equipmenf _.·_· · . , . 350,000
1 fr~ight in · . .,. · . ·· ..' · ·, · '. 1,750,000
freight out .· r • • ·• • 1,600,000 · <

Officers'.salaries ·.. , ·1,500,0Q{)

Insurance . .: .. · (. . , 850,000
Salesrepresentatives,alaries ._·. '. -~_. ·. :·· '-• . ,; · 2,~~0~000 : .
Research and development ·exp·[Link] ,,.._.. •
~.
. l,000,00;0, ·
. ,•
' ' .
' .. ' ,• . \ " . . . .· .=' . • \ _;. .. ~ '

.The office space_is ~d equally by the sales and accounting dq,arbnents~-

. . .,<. . ,.1 . . . ' :_., .· ",-' . . ·. •. . . _.'· • . ." ·. · I ' ·.; ·, • ' : ·, , : '· : ~- • ':. ,·

What amount should:,be· cl~ssified ~s general ·~ d.~niinisttative

'. .·
. ·es?_--_·.·. _._
expens .. ,·,_.·. ·. ._. .-. _:r; . . ._·.. ~ _ ' ' ' \ i' I ' .., • . 4 ,.

• t t - • • ' •• ' • ' • • • ") ..... . : -_ : • •• • - ,. ~ • • / .:.._ • ~ · .· _ • ~- • • • ~ ~ , •• : " .

a. · 5,250,000 ,· ~-. ;.-, .. ·_ ··. . . \ '

. 6 ·4cn ·ooo .· ' ;'•~·.,.'·. '...,'-'f- ': .,· ,.. ··:· :·• '.·, ;-; ·-,·, -.'• .' .·;·
1 ~-._ · . · : . ·• . • . ·- ~ •• , :· •• • ' . . _. - . '. , •

b. . ' ;iv, >

. _' _- :;_,-· . _'.\,'_:· _:.: i './,,..'. ':_<:(_: \ .<: : · .. ·
_. : :
.
C 5600000 ·--.·· - : · ·.·:'"' "- ~1- _...)' ., ,: ·: .· · · : ·· ·_··.: ' . \
' > •. • <,·. : . .· \"· ·. ...,.·\ ·. ·.• · . . )., , : '"· •_ . . .
' ,_ • ·, ~ • •

_d. 6,250,~Q0 · · · ·~._. ·. :_··· .·-.: ·.· -.~ i·,;:_\·.'>_.- ·1\:: ·\ I

f"
•

·_ l _." ; .·.· :.·,~-_ · . : -~- .c,;·!_;:~ ~• · l ·· ·· i . . ~. ~ · ·,·. '." '

·.
-·: ;.··,-_.,_~·_'i':·~-~-
·Soiutio~ ·4_j·Answ~; ·iz •:· ;-\·.~ -~:·/ ~-_·.: .~
• ' i •

4gal and ·atidi~-fee·s·/ ,: ~:/ ,:_-;·:_\· ::.;_..: ,) .-1_\~:. :·. _. . . . ·-:. _· ·_ ·:. - <··1,7or,OOO
. ~ent for office space'i ,(2,~00,0PO x-t/2) ;, .· ·... ·~ : 1,200,000 . I '

·..O_fficers' ·sat'aries . .-:_ ~ ·. ," . ;,. . .'. .. :.:;. :·• \ . :·'. / .:·L· ·. ·. , ,- .: 1;soo,ooo · ,
:Insu,r~nce ·· . . . .. .. ·;· . . . ·· , . · - sso,ooo (
• l , • .! . ', ,
•
~ • ' • .' ' • • ' '.
• • • • • • J

Total gerier~l and a~mi~istrative exp~o._se~~. :. ··.· · . '...· ; 5,250,000 ·

• , , • . - . J .• ;~, ~, ;• ', ' : · r
• : •

I •

• ,I
' .
 Problem 4-3 (AICPA Adapted)
Vigor Company provided the following infonnation for th~ current
year:
N@t {l~counts receivable at January l 31_ 960,00()
N~t ~Q~ounts receivable at De~ember l,-OQQ,ooo
A~cp~nt receivable [Link] S tQ l
1pv,entory at January 1 1,100,000
Inventory at December 31_ 1,200,000
Inventory turnover 4 to I

Wh~t amount was reported as·gross _income,for the current year?

a. 150,000
~- 200,000 -
~- 300,000 ' · ·
--ci. 400,00Q . .

Solution 4-3 An,swer a

Net sales _ = Average accounts receivable. x acco@ts
receivable twnover
. = 950,000 X 5
· ) = '4,750,000 _

. Cos-!, ofgoods sold = Averag~ inventozy x [Link] turnover

, . '

, \ =. 11so
' 'o0ox .
4~·-
== 4,600,000 .

Gross iBcome .- = 4,750,000 - 4,600,000

i ,
-_ 1so,opo
problem 4-4 (PRlLCl>A .;dapted)
ne cuttent
Hfilgaynon Company p~ de d tbe following infotmation fort
year:
400,000
Begi~ning inventory jQ0,000
freight iti ·90~,000
purch~se 'r,etums ,soo~ooo
Ertdirtg inventory l,250i)OO
Selling expenses 250,000
Sales discourtt

Toe cost of go-ods sold is six times the selling-expenses·.

. What amount w~ reported. gross purchases? as
a. 6,500,000 ' .'
b. 6;100,000-
c. 8,'000;000 -v

d. 8,200,000.
-
· Solution ,4-? Answer d
400,000 ·
Beginninginventory , · _·
8,200,000
Gross purchase~ (SQUEEZE) ' -300,000
Freight in · _ _ ( . 9Q0,900)
Purchase· returns
8,000,000
Goods ·available for sale
t •
- ( 500~000)
,
• •••

.Ending.·irtventory '7,500,000
Cost ,of goods _so Id . (1,250,000 x 6)

' . .

' ' ~ ~ i :. ~& f,"- ,,ivi,u,_,

+t{;;~ r.,Ji; ·, 11 . ·[Link])
fil.l; -~l\ .l~l J"-(.,.,.\Ut l\!
•-... - - ~ ... -----
,.. -- -- ----
,:...__ - -
?j'Nl
{-;;0oJ.< A\[\t fo vtt r,;,,
' ct.;.J, '
. ( ")ult.)
~" · .,., q ,1,..~'i\l '\9,1\.,:
-=J .(p ,
(, I
 Proble~ 4-S (PIDLCPA Adapted)
Bicolano Company provided the following data for the current Year:
· Inventory, January 1 2,000,000
Purchases 7;500,0oo
P,urchase returns and allowances 500,000.
Sales returns and alJowances 750,00Q
Inventory on December 3 l 2,aoo,ooo
Gross profit rate 20·%
1. What amount was reported as cost [Link] sold?
a. 6,700,000
b. .6.,200,000
c. 7,200,000
d. 9,000,000
2. What amount' w~ reported ~ gross sales for the current y~ar?
a. 7,750,000
b. 8,500,000 . .
C. 7,000,000
d. 9,125,000 ·

Soluiton
:
1-5 ·_ .
. ' _;. ' .
••,

Questi~n 1 Answer b-
. ; '

. Inventory- J~nuary I 2,000,000

·. Purchases · . .. 7,500,000
_:-Purchase returns and allowances ( 500,000)
.. -. Goods available for sale 9,000,000
Inventory-- December 3 l (2,800,000)
Cost [Link] sold 6,200,000
Question 2 - Answer b
Net sales . (6,200,000 / 80%) · 7,750,000
Sales returns and allowances . 750,000
Gross sales 8,500,000
Cost ratio (100% minus 20%) 80o/o
-
In th~ absence of any statement to the contrary, the gross profit
rate ,s based on J·a/es. ·
 t ;- •
Problem 4-6 (AICPA Adapted)
Kay Company provided the [Link] for the current year:
Increase in raw material~ inventory·, .·.. . 1~0,000 •
Decrease in goods in process_inventory 200,000
Decrease in finished goods inventory _ - .. · . · 350,000 ·
Raw materials purchased ,· · . , :· . 4,300,000
Direct labor payroll • •· l ; • 2,000,000 .

Factory overhead · · , ·, -!;'. 3,000,000 . 1 • : • ' __

Freight out 450,000

I • • •· . :

Freight in ._ ' ,: j , , I ' : . 25~,000 .

. ; . . ;,.. .
What amount should be_reported as cost of goods sold for the ~~t
? . ·. ,· . . ' . .. . . . . . .
Year . . . . .
. . .. .
,.
'
'
'
.
.

a~ ·9,95_0,000.- - · · .. ;. . .-. ...., · : :-,.·.: .- : - · ·· :_ .: · ·, ·

b. 9;5~0.,000 '. ' ,
' ·'
c. 9,250,000
\ ' .

t .
l
d. - 9,150~000 . ~>-'<
• ' • • -
. I
'
••

Solution 4:-6 Answer

. ,
a .

' Raw µiaterials p-urchase4 ... II': :.. ·' ' . : _. ·:_. I.;.·: . . -4,Joo,000 -·. j

Freight ii\; · ·. . . · . ·. · '- ··_· :'· ·_·. -.. ·.. ··_ _ 250,()_00_
l lncreaseiriraw,mater_ials .. . - ,: : ·· ~· ,:' -._.· \··;~ ...- -;._,( : 150,000)
• _I" • '• • ' • . ;' ; I\·.': •,.' '\ • • ~ • • • 'I J t, . • • ~

Raw materials used, , ·.. -,. - . , . · . ·. 4,400,000

. . Dl·r·ect ·Ja··bo· r · . .·; · - - . . . . ' · ,,·- ··!• • ·' · · • 2 ooo·ooo··.
'- I ' • \, : •., • , • ' • • ' r •• ' ,

F_ac~ory:o_ver~ea~ ·.. ·_ · ' _. ·-: ·.:.. -. ~, .- . · ·.._; ._· . : ·-: 3,000,000 -' '
·. Total inariufacturing cost . ..' · -. · .· · , . :. ·:, : i'- : .. -9,400,000:'
.D~c~e~e. jn 'go~ds [Link]~ · ., . . · 290,000. _
. . , C~st .of goo·ds ma~ufact~red ., . V. 1 1· ! ··
, . · 9,600,000 ·. .

Decrease in fini_~hed goods · ·:;< > ' . · : ·..·, . . · ·· · ··_.: · ·350,000 ·

. - ,· . . ,,; , '
. , •

· · -: • • \

., .. •' • -··· . . . 9950000

J • • •• "' . • • ' • ; • • • \

-Cost of ~o:ods_sol_~:·.: :; :· . ·- . . - · . ,: , z
• , ~ ' ·, ..... >· . I , I I

Any iner~ase in inv;~to',y decreases cost Ofgoods S~ld and any

decrea~e in inventory increases cost ofgoods sold.··,. _. _· . ··. · .

, I
 Pro~lem 4-7 (IAA) ·· ·
Sheraton Company reported the following infonnatiOn for the current
. year: . • J 1,000,000
_ Ending -goods in process 326,000·
. Depreciation on factory building ,. 400,000 .
Beginning raw materials 1,980,000 .
Direct labor · . 560,000 .
Factory supervisor's salary · .. 210,000· 1

Depreciation on headquarters building 760,000

Beginning goods in process 340,000
Ending raw materials · . 360,000
Indirect labor ·. 2,300,000 .
Purchases of raw. materials , . , . · ·

_What amount _should i,e reported as COst Of goocJs inanufa~ for

thecurrentyear? . · · · . · · -·. ·,. .· · . · . .··.. ·. · · ,. .. . .·. •. ; . .

a. 5,340,000 . :

b. 5,58Q,000 .
c. 5,550,000.
d. 5,820,000 ·
• . • , ' ... • .· I'. . . "\ : .

-Solution 4-7 Answer

.. . .,
a. : :. ·,.:.. ;. :-,.. · ,: .c · ·
. . . . .. ..·
Beii~iilng riiW ~atei-l~1S •·
· .·. · ·. · •, 400,000 ;
. " : -' : ,_-:: . . -. ; . : , • I •. 1 ..

_ Pur,chas~s_· of raw.mat_eria.Is· . . .· ·-· .·-•. : -.. . . . , 4300,000

.. • • I, , . -~ . • • •
- . ' .. • ,' . : · . .. - : , . ' . 7 • ,· . ·. .

Raw:matedals available f0 ~ use·. . . . , .· 2;700,000 ·

E!lding raw-materials ··.. · . , · .- . .
• •. , .. _I . •
. . ·· _( _- -3401000)
. . .. ·. ·-· .• .·· · :,; ::·_ 2 •3
. 60. 000
Raw _materials usei ,· . •' ,. . . . , , .

: Direct ·labor . · . :·. -1-nonooo

,:,ov, '.
.
· Fact~ry o~erhead~ • ~- • I

.. . Depr~ciatiOII ~~ ·factory building . · · .. ' .320.000

. t
.. Fac;tory supe.rv1sor's salary 560,000 ,. I,

.. _-Indirect labor 360,000 , 1,240,000

Tot~I t_panufacturing co;f ·S;S~,000
_Begmning
. . goods i·n process.. 760t000
·\
To~I goods in prncess . 6,340,000
Endmg goods in process
(1,000.000)
Cost of good s manufactured
·
s,340.000
•
 l problem 4-8 rHILCPA Adapted) .
7
~t
. .
Argentina Company incurred the following ·costs and expenses during
the current year: _ . _ ·_ \ ·
•I
J Raw material purchases · . 4,000,000
1
i Direct labor / _1,500,000
Indirect labof - factory_ , · 800,000
l factory repairs and mamtenance / . 200,000
•;
;
l Taxes on factory building .,, 100,000
.f
1 Depreciation-factory building /_ , - ·, 300,000
l; Taxes on salesroom and general office 150,QOO
1

• Depre~i~tion - sales equ,ipment . · _ 50,000

' . _1 400,000
·=
I
Advertising
l Sales salaries 500,000 .
·1I
•' Office salaries . .. 700,000·
Utilities - 60~ applic~ble to fact_ory / ?,o_
V' .: •. . :500,000
I •

Beginning _: -· ·.· Endi~g -

-Raw ll}aterials . _ . : . , ..__ • . · , . .· '300,000 _,._ · 450>000 _ .
Work m process_ , ·. · · , . . · · · 400,000 · 3S0~.000
l Finished goods · -~-_. . .-,. ·. ; ., · · '·:· ·_ --: . • . \S00,000 _·. · 700,000
' • • j, : ' • ... • ~' t ., •\.' t < I ' 0 ~.
~• .. .- J • • _.. • • l

1. _-~~ ~o~~ sh~~~~ r~~-as c~~t ofraw~aterials used? . i I •

·_~. - 3~850,0QO -/ ·::-,... : . ·:-- ·_ · 1

• '. - ·.•- ._ ..• ·. • • . •

· ·· 'b. -4,000~ooo _. ·. _·_ ··..-.. . .- .. , .-_ -_ . · ·: · _.,.

::·_:_ :c.·'. 4,150,000 · :::_: _·: / _< . _- _: ,·.- --- .-; - • •• • • . : = ·-. · . -

· ·_. ··d.·:· '4 750 000 · -· ·., ·..· ; -. - :-_ . .· . ·. · .. · .. :: . ·-; :

· · :, :_·.. -~- _· '. i' · ·,: 1 .· _:_ · :·: ; :·· r, ~ :..:.-,>: ... ,.-~ · = · .

2. - _ ·What amount should pe repo~ 8:8 cost of goods ~~ufactured

·-: .' forthecurr
·,
eirt -vear?
J _.:
. . .< .'
·1. . -<:1'1" : . :·
.·.. ·, r
·.. .
.• , ·••. • : ..
. .
' .· .
..

. ·... a. _,7;450,900 . ---: ~ ....

,_ ,. . !. : • ._

: b.. ·.7;200,000 \ . . : · .-.. . . •; _.: ; .·. ..

£.: ,• 1~1,00,000 . I I • : • .. '

. ·d.' .7,300,000 ·.
• I • •

.· . .
3. · What amollllt should be reported as cost ef .,.S •hi for~
. ·• .. ·1 i • . -· ' ·. '
·. . · . _
. current year · ·. • I • •

a. 7,300,000
- 1,300,000
b.
c.
d.
.6,900,000
7,600,000 .

,_,
'·
'
Solution 4-8

Question J Answer a

Beginning raw materials 300,00o

4,000,00()
Raw material purchases
Raw materials available for use
---
. ~;300,000
t 4so~ooo)
Ending raw m_aterials
-
3,850,000
Raw materials used
-
Question 2 Answer c

Raw materials used 3,850,000·

Direct labor 1,500,000
Factory overhead; . ·
Indirect labor · 800,00,0
·. Factory _repairs.and maintenance 200,000
1, 00,000
Taxes on factory ·building
Pepreciation.7:: (ac(qry building : 300~00Q
Utilities (60% x 500,000) 300,000 1,700,000
Total manufacturing cost · 7,050,009
Beginning work in process . . 400,000
Ending work in -process ( 350,000)
· Cos~ ·o f goods manufa~tured . 7, l 00,000

Question 3 Answer b:

Beginning finished goods · · 500,000

Cost of goods manufactured 7, I00,000
Goods available for sale . · 7,600,000
Ending finished goods · ( 700,000)
Cost of-goods sol,d 6.900,000
 ~-
~I

' -. . . I . r
problem 4-9 (PHILCPA· Adapted) -. · .. · . /;. ~ .. '.
MercUI'Y Company sho~ed cost of [Link] of_P4,320,000 in the
statement of comprehensiv~ income afu:r the first year_of o~rations; ,-
. ·)

l' · The total manufacturing cost compris,ed the following:

. . • • • I • , • ' ' .·

..
· · •, .· ' .. I '•, . ..

... .
• ••

.,

Materials used , . . 50%

. I .• .
Direct la~or,inc~rred .· · ... ' : .. ·,'. -30% J
Manufacturing over~e_ad ' . . ,. /. . ' ,. ~ '
.'
" .. . ...
. . . ,' 20% . .
,. : ""
l
. ,!

f .

: ·Goods in process at ye~r-end ·amounted to 10% ·of the ·total

·•: manufacturing cost. , \ • ,. '.' i "' . ,: •' . . • .. .
I • '
~
'. •••• ' • •) • • _' .

. ..
irect labor cost (39% x 6~000,09~) .· ·.... ~ 1,800,000,
• • .. . : : •. · t, . • > •, •• ; ~-

.·•.
 Problem 4-10 (IAA)
Co mp any rep orted op era tin g expe nse s other than interes
Tanzania of go od s so ld but only 20o/,0 t
expenst for the ye ar at 40 % of co st
of
sales. Interest expense is 5% of sales.
The amount ofpurchases js 1_200(o ofcos t ofgoods sold Ending invento
oiy . l}'
is twice as mu ch as the beg mm ng mv ent
inc om e for the yea r is P2 , 100,0 00 . The inoom e tax rate is JOOA.o.
The ne t
What amount was reported as ~e s for the
1.
year?
a. 10,000,000 , . w- .
b: 15,000,000 ,, -
C. 18,000,000
. d. 12,000,000
__.2S"
ses? .
2. What amount was reported ~ _purcha 1

a 6,000,000
~ 7,200,000
C. 3,000~00.0
~- \600,00() · I .

Solution 4-1 Oi
Question 1 Answer d ·
/ .
.
. . .
Income before income tax {2, I 00,000
' '

/ 70%) 3,000,000
. Sales (3,000,000 ( 2_5%) .. · 12,000,000
. . I

S:ales ·:: · · ·, . -i- 100%

Co~[Link] goods .sold . · (' 50%)
· ·Operating exp~nses ( 20%)
lnteres~ expense : ' ( 5%)
. I '
. 1• :

· Income before -income tax 25%

% 'divided by .40%) · 50%

Percent~ge of c~st of goods -~·old (20
Question 2 Answer b
Cost of goods sold (50% x 12,.000,00.0) 6,000,000'
Mul~Jply by 120%
Purchases 7,200, 000

60
 problem 4-_11 (Pff1:LCPA Adapted)

Ronalyn Company reported that the ~cial records were destroyed

by fire at the end ofthe current year. .

However, certain statistical data related to the income statement are

available. ·

Interest expense · 20Q,000

Cost of goods sold 3,.000,000
Sales discount 300,000

The beginning inventory wa.s P500~000 ~d decreas~ 20% during the

year.
Administrative expenses are 25% ofcost of goods sold but only 10%
ofgross ~es. ·. ·. .
Distribution cost:$ repres~nt 70%.ofthe operating e;xpenses.

1. What amount shquld be reported as gross sales?

~
·- a.· 1,500,000
b. 8~000;000
<; • . 4,500,000
d, -s,000,000
2. What total ~ount should be rep(?rted as operating expenses?

a.. l,?50,900
b. 2,500,000
C. 3,000,QQQ .
d. 2~ 700,000
· 3. .What amount should be reported as income before tax for the
current year?

a. 1,500,000
b. .1,000,000
C~ 1,800,000
d. 1,750,000

61
,..---- - -~-.
·1
.,.. ,... ._

)
I
~
I problem 4-.11 (PIDLCPA A~apted)
i
.l I •

l Ronalyn Company reported that the fi~cial re~or~ were destroyed

by fire at the end o~the current year.. . . . · .
i
·
. . '

However, certain statistical data related to the income statement are

available. - ·· , 1
•

_,
.
• I
. ~- Interest expense
.

.· 200,000 -
)
I

Cost of goods sold . -~ 3,.000,000 : · ·

Sales discount ,. I·'.
-300i000 ; I' .

Toe beginning inverito~ ~8$ P500~000 ~d ~ecrease4 20% cluri:1}g the .

year. . . . ·, ·: .. , · .· ·.. , - ·. ·- ·. · ·

Admirus~t~~e expense~ ar~ 25½ of-co~t ofg~s sold but only 100/4 · -
ofgross·ajes~.·· .· .: '- - _.,·_ · _ · :_, · .,'.; ·. ·.,: .,: ., ~_ - ·,:_.- ,
. . ' . . . ,' ' . .'. ' '~ . >' • .1: ••) : ,: •, . .. . • \ '. .. . . • > ,• ' ' I • , ,' • :, ; • :. , I • •

Distributi~n cos~ repr~sent 70.'[Link]·operating e}{perises~._: - . .

. . . ' ,,· . : . . .. . .
' '• . ' .- ·. -. . ,. ,· : ' : . ~-~ • . .,., . '1 ' . -· ., . : '. : _. .. . ;, ._

j · 1. What amount shq~ld ~e reported as ~oss salesr >· .· ~ · -:1-' - · · _' :

' . .' :
•••. a,• 7,500,000
' '. ·,. ·,,..
, '~-•~ ,• •~•
, :' : '. .., .,_,. _, <· .
·; •,. _;
<. . . , . )_ . .
•• •• C I

, •,
'.
·b. -- 8~000~000 ·,· :·: . -.-- <· .' ;_:,: . ·. ••.
. ~- ·.,4,500,000 _ · ·. · . , , : 2 ' ·. .- · . .- .· ..
,: d.~-5,000,000 . l. ·_ · · . ·.
! . • • • • ~ ·/ · I • ,,
'-
• ..
.. _..- . .- . .
• • • ., -

· ~· .. 2._•.·~ t.total_~ountsh~uldbe_reJ)<?rte4_as~pera~gexpenses~: ~ _
. 1... , . . '~ . . .. . • .. ,. . -·.- . : I • . : ..- ....• : _:. •.•.
>.
.;; · ... a._..1,7so,900- - ,. . · . · '\'
' .
,
~

.
.

··~. _ · b., .· 2,500,000 - '· ·

_,._ C. . J,000,000
.... ' ··:
: - · . ·, d~ -2;700,000.

·. · · 3. .What ~oun{ shou~d·be :rep~rted as income..before tax (or the

current year? · · · ·
a.· 1,500,000
: b. .1,000,000
c; · 1,800,000 ·
d. 1,750,000

61
 Solution 4-11

Question 1 Answer a
Cost of goods sold (10~ / 25%) 40o/r
~
j,000,000
Cost of goods sold . 0
Divide by cost ratio 0

75
Gross sales

Question 2 Answer b
, . • • .- .J

· Administrative expenses ·( t 0% x 7,500,000)

Operating exp~nses ( 750,000 (~0%). 2,500,000

,Administrative expenses ( 750,000)
1,750,000
Distribution costs ' ' • "t
, . '
. I .

Question 3 An~wer a
-1,500,000
Sales .
·. ,·
Sales discount
)
;( 300,000)

· , Net sales. . 7,200,000

Cost of goods·sold ,. (3,000,000)
'_;

Gross income · -: · :, , , -~- :.. 4,200,000

Administrative expenses ( _'750,000)
Distribution costs (1,750,000) .
lnt~re_st .expe~se .( 200,000)
' .
Income before income tax 1,500,000
I