CHAPTER 2 d.

Current and noncurrent method

1. Which of the following is not presented in an income
statement? QUIZ 2: MULTIPLE CHOICE
a. Sales revenue
b. Depreciation The trial balance of Entity A shows the following items of income
c. Selling expenses and expense for the period ended December 31, 20x1:
d. Property, plant and equipment
Accounts Dr. Cr.
2. A business has net sales of ₱100,000, cost of sales of ₱60,000
Sales 1,800,000
and other operating expenses of ₱40,000. The gross profit of
the business is Interest income 120,000
Gains 40,000
a. 20,000
Inventory, beg. 100,000
b. 40,000 Purchases 400,000
c. 60,000 Freight-in 20,000
d. 0 Purchase returns 10,000
3. The income statement of ABC Company shows gross profit. Purchase discounts 14,000
ABC Company’s income statement is most likely to have Freight-out 50,000
been prepared using Sales commission 60,000
a. the single-step method. Advertising expense 30,000
b. the multi-step method. Salaries expense 600,000
c. the step-by-step method. Rent expense 60,000
d. the dance-step method. Depreciation expense 80,000
4. Entity A reports profit of ₱60,000 and total expenses of Utilities expense 40,000
₱240,000. Entity A’s total income must be Supplies expense 20,000
a. 360,000 Transportation and travel 10,000
expense
b. 300,000
Insurance expense 24,000
c. 180,000 Taxes and licenses 140,000
d. 400,000 Interest expense 4,000
5. An income statement differs from a statement of Miscellaneous expense 2,000
comprehensive income because Loss on the sale of equipment 30,000
a. the former shows profit or loss while the latter does not Totals 1,670,000 1,984,000
b. the latter shows other comprehensive income while the
former does not Additional information:
c. the former shows other comprehensive income while the a. Ending inventory is ₱160,000.
latter does not b. One-half of the salaries, rent, and depreciation expenses
d. None of these. The income statement and statement of pertain to the sales department. The sales department does not
comprehensive income are the same share in the other expenses.
6. Which of the following is not presented in the statement of
comprehensive income? Requirements:
a. Income a. Prepare the statement of comprehensive income using the
b. Expenses function of expense method (multi-step approach). Use the
pro-forma statement provided below. Be sure to place a proper
c. Assets heading for the statement.
d. Other comprehensive income b. Prepare a partial “note” showing breakdowns for the selected
7. Which of the following statements is correct regarding an line items
income statement prepared using the single-step method?
a. Operating expenses are classified according to their
function within the entity, such as cost of sales, selling Requirement (a):
expenses, general and administrative expenses, and other
functional expenses. Entity A
b. As a minimum, a heading for “cost of sales” or “cost of
goods sold” must be presented. Statement of Comprehensive Income
c. The single-step method is not acceptable for external For the period ended December 31, 20x1
reporting.
d. Expenses are presented according to their nature, such as
employee benefits, depreciation, and the like, without Notes
regard to their function in the entity’s operations. Sales 1,800,000

8. Which of the following is not a presentation method for the Cost of sales 1 (336,000)
statement of comprehensive income? GROSS PROFIT 1,464,000
a. Single-statement presentation
Other income 2 160,000
b. Single-step approach
c. Two-statement presentation Distribution costs 3 (510,000)
d. Classified presentation Administrative expenses 4 (606,000)

9. Expenses are presented in the income statement using Other expenses 5 (30,000)
a. Nature of expense method Interest expense (4,000)
b. Function of expense method PROFIT FOR THE YEAR 474,000
c. a or b
 Other comprehensive income - Statement of Comprehensive Income
COMPREHENSIVE INCOME FOR THE 474,000
YR. QUIZ 1: TRUE OR FALSE
1. The Statement of comprehensive income shows information
on an entity’s financial position during the period. FALSE –
financial performance
Requirement (b): 2. Revenue includes both income and gains. FALSE – income
includes both revenue and gains.
Note 1: Cost of sales 3. The revenue earned by a merchandising business from its
This account consists of the following: sales of goods is commonly referred to as sales. TRUE
Inventory, beg. 100,000 4. If income is greater than expenses, the difference is loss.
FALSE
Purchases 400,000 5. A statement of comprehensive income that shows expenses by
Freight-in 20,000 their function is said to have been prepared using the multi-
step approach. TRUE
Purchase returns (10,000) 6. The revenue earned by a service business from rendering
services is commonly referred to as service fees. TRUE
Purchase discounts (14,000)
7. Expenses decrease equity. TRUE
Total goods available for sale 496,000 8. If total income is ₱100 while total expenses is ₱80, loss is
₱20. FALSE – profit of ₱20
Inventory, end (160,000) 9. The Statement of profit or loss and other comprehensive
Cost of sales 336,000 income is the same with the Income statement. FALSE –
different
10. A statement of comprehensive income that presents separately
Note 2: Other income. an entity’s cost of sales is said to have been prepared using the
This account consists of the following: single-step method. FALSE – multistep

Interest income 120,000 QUIZ 2: TRUE OR FALSE

1. The Statement of profit or loss and other comprehensive
Gains 40,000 income is different from the income statement. TRUE
Other income 160,000 2. The Statement of comprehensive income shows profit or loss
only. FALSE – profit or loss and other comprehensive
income
Note 3: Distribution costs. 3. An entity can present an income statement alone in lieu of the
This account consists of the following: statement of comprehensive income. FALSE – a statement
showing other comprehensive income must also be presented.
Freight-out 50,000 4. The elements of the statement of comprehensive income are
Sales commission 60,000 income and expenses. TRUE
5. Income increases equity. TRUE
Advertising expense 30,000 6. The residual category of expenses under the function of
expense method is “Distribution costs.” FALSE –
Salaries expense (300,000 x 1/2) 300,000
Administrative expenses
Rent expense (30,000 x 1/2) 30,000 7. Losses incurred on sales of noncurrent assets are presented
under “Administrative expenses.” FALSE – losses are
Depreciation expense (40,000 x 1/2) 40,000 included in the “Other expenses” category. If material, losses
Distribution costs 510,000 are presented separately.
8. Distribution costs (or Selling expenses) are costs attributable
to selling activities. TRUE
Note 4: Administrative expenses 9. The categories of expenses under the function of expense
This account consists of the following: method include “Cost of sales,” “Distribution costs,” and
“Administrative expenses” only. FALSE – finance costs,
Salaries expense (300,000 x 1/2) 300,000 income tax expense, and if applicable, other expenses are also
categories of expenses under the function of expense method.
Rent expense (30,000 x 1/2) 30,000 10. If profit is ₱100 while other comprehensive income is ₱80,
Depreciation expense (40,000 x 1/2) 40,000 total comprehensive income is ₱20. FALSE - ₱180 (100 + 80)
Utilities expense 40,000
Supplies expense 20,000 QUIZ 3:

Transportation and travel expense 10,000 Use the following information for the next two questions:
The following items were presented for the purpose of determining
Insurance expense 24,000
comprehensive income.
Taxes and licenses 140,000 Profit for the year 2,000
Increase in revaluation surplus
Miscellaneous expense 2,000 1,000
Administrative expenses 606,000 Remeasurements of the net defined benefit liability (asset) – loss
(200)
Net change in translation of foreign operation
(400)
Note 5: Other expenses. Dividends declared
This account consists of a loss incurred on the sale of equipment. (100)
Stock rights 300
Chapter 2
1. How much is the other comprehensive income?
 a. 400
b. 600
c. 800
5. The records of SOIREE EVENING PARTY Co. showed the
d. 2,000 following information:
2. How much is the total comprehensive income? Increase in accounts receivable 100,000
a. 1,800 Collections on accounts
b. 2,200 800,000
c. 2,400 Cash sales 120,000
d. 2,800 Increase in inventory 40,000
Freight-in
Profit for the year 2,000 14,000
Freight-out 13,000
Other comprehensive income: Decrease in accounts payable
1,0 60,000
Revaluation gain 00 Disbursements for purchases 480,000
Remeasurements of the net defined benefit Purchase discounts
liability (asset) (200) 4,000
Translation loss on foreign operation (400)
How much is the gross profit for the year?
Total other comprehensive income (a) 400
a. 662,000
b. 656,000
Total comprehensive income (b) 2,400 c. 648,000
d. 626,000
Use the following information for the next two questions:
Sales on account are computed as follows:
The records of Afternoon Sun Co. show the following information:

Interest expense ₱24,000

Accounts
Cost of inventories sold
receivable
600,000
Insurance expense
A/R, beg. -
100,000
Advertising expense 20,000
Sales on account 900,00 Collections on
Freight-out 10,000
(squeeze) 0 800,000 accounts
Freight-in
100,0
4,000
00 A/R, end
Loss on sale of equipment
2,000
Legal and other professional fees Cost of sales is computed as follows:
12,000 Accounts payable
Rent expense (one-half occupied by sales department) Purchase discounts 4,000 60,000 A/P, beg
8,000 Gross purc
Sales commission expense Disbursements for purchases 480,000 424,000 (squeeze)
14,000
A/P, end -
Doubtful accounts expense
16,000
Inventory
3. How much is the total distribution (selling) costs? Inventory,
a. 48,000 beg. -
b. 56,000 Gross
purchases 424,000 4,000 Purchase discounts
c. 64,000
Cost of sales
d. 108,000 Freight in 14,000 394,000 (squeeze)
4. How much is the total administrative expenses? 40,000 Inventory, end
a. 24,000
b. 132,000
c. 226,000 Gross profit is computed as follows:
d. 668,000 Cash sales 120,000
Credit sales 900,000
Selling expenses Administrative expenses Total sales 1,020,000
Advertising expense Insurance expense Cost of sales (394,000)
P20K P100K Gross profit
Freight-out Legal and other professional 626,000
10 fees 12
Rent expense (one half) Rent expense (one half)
4 4 6. The records of BRACKISH SALTY Co. showed the
Sales commission expense Doubtful accounts expense following information:
14 16 Accounts receivable, net, Jan. 1, 20x1 40,000
Total selling expenses Total administrative expenses Accounts receivable, net, Dec. 31, 20x1 160,000
P48K P132K Accounts receivable turnover 4:1
Inventory, Jan. 1, 20x1 Manufacturing overhead is 20% of prime costs
120,000 Increase in work-in-process inventory
Inventory, Dec. 31, 20x1 60,000 40,000
Inventory turnover 3:1 Decrease in finished goods inventory
50,000

How much is the gross profit for the year? How much is the cost of goods sold?
a. 120,000 a. 380,000
b. 130,000 b. 464,000
c. 132,000 c. 514,000
d. 146,000 d. 546,000

Solution: Accounts
payable
Accounts receivable Net credit sales 60,0
= 00 A/P, beg.
turnover Average accounts receivable
Disbursements for 440,0 380,00 Purchases
Where: purchases 00 0 (squeeze)
Average accounts A/R, beg. + A/R, end.
= A/P, end -
receivable 2
Raw materials inventory
Average accounts 40,000 + 160,000
= RM Invty, beg. - Raw materials used in
receivable 2
Average accounts Purchases 380,000 280,000 production (squeeze)
receivable = 100,000 100,000 RM Invty, end.

Accounts receivable Net credit sales Work-in-process

=
turnover Average accounts receivable inventory
WIP, beg. -
Net credit sales Cost of
4 = goods
100,000
280,00 manufactur
Net credit sales = 400,000 RM used in production 0 ed
140,00 464,00
Cost of sales Direct labor (50% of RM) 0 0 (squeeze)
Inventory turnover = 84,00
Average inventory
Production overhead* 0
Where:
Inventory, beg. + Inventory, end. 40,000 WIP, end.
Average inventory =
2
Total goods put into 504,00
Using the formulas given above, cost of sales is computed as process 0 504,000
follows:
120,000 + 60,000 *Prime cost = Direct materials + Direct labor
Average inventory = Prime cost = 280,000 + 140,000 = 420,000
2
Production overhead = 20% x 420,000 = 84,000
Average inventory = 90,000
Finished goods
Cost of sales inventory
Inventory turnover =
Average inventory
FG, beg. 50,000
Cost of
Cost of sales Cost of goods goods sold
3 =
90,000 manufactured 464,000 514,000 (squeeze)
Cost of sales = 270,000
- FG, end
Gross profit is computed as follows:
Net credit sales Total goods avail. for
400,000 sale 514,000 514,000
Cost of sales
(270,000)
Gross profit 130,000 8. PRENTICE A LEARNER Co. reported profit after tax of
₱210,000. PRENTICE’s income tax rate is 30%. Operating
expenses for the year is 15% of sales and 25% of cost of sales.
7. The records of SURLY BAD TEMPERED Co. showed the Other expenses were 10% of sales. How much is the total
following information: sales?
Decrease in accounts payable
a. 1,800,000
60,000
Disbursements for purchases 440,000 b. 2,000,000
Increase in raw materials 100,000 c. 2,200,000
Direct labor is 50% of raw materials used in production d. 2,240,000
Sales 100% 00
Cost of sales (15% / 25%) (60%)
Gross profit 40% 30,0
Operating expenses (15% of 100%) or (25% of 60%) (15%) 00
Other expenses (10% of 100%) (10%) Unrealized gain on investments in FVPL
Profit before tax 15%
(40,000)
The profit after tax given in the problem is translated to profit Casualty loss on typhoon
before tax as shown below: (44,0
Profit after tax (given) 210,000 00)
Divide by: (100% less 30% tax rate) 70% Interest expense
Profit before tax 300,000 886,0
00
Sales (300,000 Profit before tax ÷ 15%) 2,000,000 Profit before tax
(300,0
9. The records of HACK TO CHOP Co. on December 31, 20x1 00)
showed the following information: Income tax expense
2,000,0 586,00
Sales 00 0
Sales discounts 20,000 Profit for the year
Cost of sales 800,000
Distribution costs 96,000 Other comprehensive income:
Administrative costs 240,000 Items that will not be reclassified subsequently to
Casualty loss on typhoon 40,000 profit or loss:
Dividends received from investments in FVPL 24,000 (26,0
Dividends received from investment in associate 48,000 00)
Share in the profit of an associate 72,000 Loss on revaluation
Dividends declared and paid 28,000 38,0
Interest expense 44,000 00
Unrealized gain on investments in FVPL 30,000 Unrealized gain on investments in FVOCI
Unrealized gain on investments in FVOCI 38,000 22,0
Income tax expense 300,000 00
Loss on revaluation 26,000 Remeasurements of defined benefit pension plans
Remeasurements of the net defined benefit liability 34,0
(asset) - gain 22,000 00
Correction of understatement in depreciation in prior
year 32,000 Items that may be reclassified subsequently to
Translation adjustment of foreign operation - loss 8,000 profit or loss:
(8,0
How much is the profit for the year? 00)
a. 886,000 Loss on translation of foreign operation
26,0
b. 586,000
00
c. 612,000 Other comprehensive income for the year
d. 626,000 612,0
HACK TO CHOP Co. TOTAL COMPREHENSIVE INCOME FOR 00
Statement of profit or loss and other comprehensive income THE YEAR
For the year ended December 31, 20x1
2,000, 10. WASHY PALE Co. has the following information on
000 December 31, 20x1:
Sales - Cost of sales is ₱260,000.
(20,0 - Operating expenses are 13% of sales and 20% of cost of sales.
00) - Interest expense is 5% of sales.
Sales discounts - Income tax rate is 30%. There were no temporary differences
1,980,0 during the year.
00
Net sales How much is the profit for the year?
(800,0 a. 65,000
00)
Cost of sales
b. 140,000
1,180,0 c. 38,600
00 d. 47,600
Gross profit
(96,0 Cost ratio is derived from the percentages of operating expenses
00) over sales and cost of sales as follows:
Distribution costs Cost ratio = 13% / 20% = 65%
(240,0
00) Amount
Administrative costs
Sales 400,000 (260,000 COS ÷ 65%)
24,0
00 Cost of sales (260,000) (start)
Dividends received from investments in FVPL Gross profit 140,000
Share in the profit of an associate 72,0 Operating expenses (52,000) (400,000 x 13%) or (260,000
Interest expense (20,000) (400,000 x 5%)
Profit before tax 68,000
Income tax expense (20,400) (40,000 x 30%)
Profit after tax 47,600