Chapter18 - Answer
Chapter18 - Answer
Chapter18 - Answer
18
18-1.
PREPARATION OF AUDITED
FINANCIAL STATEMENTS
Salve Company
Requirement (1)
Salve Company
For the Year Ended December 31, 2006
Schedule 1: Cost of Goods Sold
Inventory, 1/1/2006
Purchases
Transportation-in
Cost of purchases
Less: Purchases discounts taken
Purchases returns and allowances
Net purchases
Cost of goods available for sale
Less: Inventory, 12/31/2006
Cost of goods sold
P 37,800
P173,000
13,500
P186,500
P4,100
6,200
(10,300)
176,200
P214,000
(34,100)
P179,900
P 18,200
5,600
7,700
17,000
P 48,500
P 2,700
1,400
8,500
32,000
P 44,600
18-2
P 14,500
9,600
P 24,100
Requirement (2)
Salve Company
Income Statement
For the Year Ended December 31, 2006
Sales
Less: Sales discounts taken
Sales returns and allowances
Net sales
Cost of goods sold (Schedule 1)
Gross profit
Operating expenses
Selling expenses (Schedule 2)
General and administrative expenses (Schedule 3)
Depreciation expense (Schedule 4)
Total operating expenses
Operating income
Other items
Rent revenue
Interest expense
Loss on sale of office equipment
Loss from flood
Pretax income from continuing operations
Income tax expense (P7,440 P3,600)
Income from continuing operations
Results from discontinued operations
Loss from operations of discontinued segment R
(net of P2,610 income tax credit)
Gain on disposal of segment R (net of P3,000
income taxes)
Net income
Components of Income
Income from continuing operations
Results from discontinued operations
Net income
P340,700
P 4,900
12,100
(17,000)
P323,700
(179,900)
P143,800
P48,500
44,600
24,100
(117,200)
P 26,600
P 6,900
(3,700)
(5,000)
(12,000)
(13,800)
P 12,800
(3,840)
P 8,960
P(6,090)
7,000
910
P 9,870
18-3
P183,700
(7,700)
P176,000
9,870
P185,870
(4,800)
P181,070
P 70,200
81,000
P25,000
7,000
21,000
23,000
18,000
94,000
P245,200
19,900
(22,000)
P243,100
32,000
P275,100
(36,000)
P239,100
18-4
P 27,400
11,700
8,300
9,000
15,700
P 72,100
P 14,400
30,000
9,000
3,000
P 56,400
Requirement (2)
Mindanao Manufacturing Company
Income Statement
For the Year Ended December 31, 2006
Sales
Less: Sales returns
Net sales
Cost of goods sold (Schedule 1)
Gross profit
Operating expenses
Selling expenses (Schedule 2)
General and administrative expenses (Schedule 3)
Total operating expenses
Operating income
Other items
Interest revenue
Miscellaneous rent revenue
Loss on sale of factory equipment
Loss from expropriation
Pretax income from continuing operations
Income tax expense (P31,350 P9,000)
Income from continuing operations
Results from discontinued operations
Loss from operations of discontinued segment E
(net of P4,800 income tax credit)
Gain on disposal of segment E (net of P12,600
income taxes)
Net income
P472,100
(5,000)
P467,100
(239,100)
P228,000
P72,100
56,400
(128,500)
P 99,500
P 3,200
5,900
(4,100)
(27,000)
(22,000)
P 77,500
(22,350)
P 55,150
P(11,200)
29,400
18,200
P 73,350
Components of Income
Income from continuing operations
Results from discontinued operations
Net income
18-5
Requirement (3)
Mindanao Manufacturing Company
Statement of Retained Earnings
For the Year Ended December 31, 2006
Retained earnings, 1/1/2006
Less: Prior period adjustment, correction of
understated depreciation expense of 2005 (net of
P3,030 income tax credit)
Adjusted retained earnings, 1/1/2005
Add: Net income
Less: Cash dividends (P1.20 per share)
Retained earnings, 12/31/2006
P197,800
(7,700)
P190,730
73,350
P264,080
(24,000)
P240,080
Requirement (4)
Return on shareholders equity
=
=
=
Net income
Average shareholders equity
P73,350
P500,000
14.67%
18-6
18-3.
1.
2.
3.
4.
5.
6.
7.
8.
9.
18-7
Tigger Company
Tigger Company
Comparative Statements of Income
For the Year Ended December 31
Sales
Cost of goods sold
Gross profit
Operating expenses
Operating income
Other items:
Loss from obsolete inventory
Casualty loss
Gain on early retirement of bonds
Miscellaneous
Pretax income from continuing
operations
Income tax expense (30%)
Income from continuous operations
Results from discontinued operations
Income (loss) from operations of
discontinued segment (net of
P90,000 income tax credit in
2006 and P90,000 income taxes
in 2005)
Net income
2006
P 2,900,000
(980,000)
P 1,920,000
(970,000)
P 950,000
a
c
2005
P 3,900,000
(2,310,000)
P 1,590,000
(1,390,000)
P 200,000
b
d
(150,000)
(50,000)
750,000
(225,000)
P 525,000
(60,000)
250,000
(90,000)
(210,000) i
315,000
P
P
300,000
(90,000)
210,000
210,000
420,000
P4,600,000 P700,000
P2,600,000 P290,000
P1,500,000 P110,000
18-8
Inee Company
Requirement (1)
Inee Company
Income Statement
For the Year Ended December 31, 2006
Sales revenues (net)
Cost of goods sold
Gross profit
Operating expenses
Selling expenses
Administrative expenses
Depreciation expense
Total operating expenses
Operating income
Other items
Interest revenue
Interest expense
Loss due to flood
Pretax income before extraordinary item
Income tax expense
Net income
Earnings per share (5,000 ordinary shares)
P200,000
(121,120)
P 78,880
P26,000
16,000
7,000
(49,000)
P 29,880
P 1,000
(4,880)
(5,000)
(8,880)
P 21,000
(6,300)
P 14,700
P2.94
18-9
Requirement (2)
Inee Company
Working Paper for Segment Reporting
For Year Ended December 31, 2006
(not required)
1
Total revenues (sales)
Operating expenses
Cost of goods sold
Sales salaries
Sales commissions
Delivery costs
Advertising expense
Misc. selling expenses
Bad debts expense
Administrative salaries
Property taxes
Misc. administrative
expenses
Depreciation expense
Total operating
expenses
Segment profit / operating
income
Segments assets
Segment
Totals
P 98,000
P60,000
P42,000
P200,000
P 60,760
3,000
1,960
3,000
4,600
0
980
4,000
560
P36,000
2,000
1,200
1,500
3,200
0
600
2,300
490
P24,360
1,000
840
500
1,500
0
420
1,600
350
P121,120
6,000
4,000
5,000
9,300
0
2,000
7,900
1,400
0
2,240
0
1,680
0
1,680
P 81,100
P48,970
P 16,900
P138,000
Unallocate
d
P
0
P
Totals
P200,000
0
0
0
0
1,200
500
0
2,100
1,600
P121,120
6,000
4,000
5,000
10,500
500
2,000
10,000
3,000
0
5,600
1,000
1,400
1,000
7,000
P32,250
P162,320
P 7,800
P170,120
P11,030
P 9,750
P 37,680
P(7,800)
P 29,880
P84,000
P54,000
P276,000
P24,000
P300,000
Inee Company
Industry Segment Financial Results
For Year Ended December 31, 2006
Reportable Operating Segments
1
2
All Other
Segments
Total
Results
P 98,000
P 60,000
P 42,000
P200,000
P 16,900
P 11,030
P 9,750
P 37,680
(7,800)
1,000
(4,880)
(5,000)
P 21,000
P138,000
P 84,000
P 54,000
P276,000
24,000
18-10
P300,000
Requirement (3)
Segment profit is total revenue less operating expenses. In computing segment
profit, none of the following items has been added or deducted: general corporate
expenses, interest revenue, interest expense, income taxes, or the flood loss
(relating to the companys operations in Division 1).
Depreciation for Divisions 1 and 2 was P2,240 and P1,680, respectively. Capital
expenditures amounted to P25,000 in Division 1 and P6,000 in Division 2 during
2006 and are included in the total assets on December 31, 2006.
18-6.
Lawin Company
Lawin Company
Balance Sheet
December 31, 2006
Assets
Current Assets
Cash
Temporary investments in
marketable securities
Accounts receivable
P590,000
Less: Allowance for doubtful
accounts
(80,000)
Inventory
Prepaid items:
Insurance
P120,000
Office supplies
80,000
Total current assets
Long-term Investments
Investment in held-to-maturity bonds
Plant and Equipment
Land
Buildings and equipment
P3,560,000
Less: Accumulated depreciation
(920,000)
Total plant and equipment
Intangible Assets
Patents (net)
Total Assets
Liabilities
Current Liabilities
P 190,000
280,000
510,000
600,000
200,000
P1,780,000
1,030,000
P 810,000
2,640,000
3,450,000
470,000
P6,730,000
P1,020,000
150,000
Taxes payable
Unearned rent
Total current liabilities
Long-Term Liabilities
Bonds payable (due 2012)
Less: Discount on bonds payable
Total long-term liabilities
Total Liabilities
Shareholders Equity
Contributed Capital
Ordinary shares, P10 par
Premium on ordinary shares
Total contributed capital
Retained Earnings
Total contributed capital and retained
earnings
Less: Treasury shares (at cost)
Total Shareholders Equity
Total Liabilities and Shareholders Equity
18-7.
18-11
250,000
90,000
P1,510,000
P1,100,000
(100,000)
1,000,000
P2,510,000
P1,200,000
930,000
P2,130,000
2,420,000
P4,550,000
(330,000)
P4,220,000
P6,730,000
P 6,100
8,400
14,300
6,000
48,600
2,600
P 80,000
P 7,700
16,400
18-12
24,100
P17,000
P92,500
(32,400)
P57,800
(30,000)
Liabilities
Current Liabilities
Notes payable
Accounts payable
Interest payable
Wages payable
Dividends payable
Income taxes payable
Unearned rent
Total current liabilities
Long-Term Liabilities
Bonds payable (due 2020)
P28,000
Less: Discount on bonds payable
(2,500)
Accrued pension cost
Total long-term liabilities
Other Liabilities
Deferred taxes payable
Total Liabilities
Shareholders Equity
Contributed Capital
Preference shares, P100 par
Ordinary shares, P10 par
Premium on preference shares
Premium on ordinary shares
Total contributed capital
Retained Earnings
Accumulated Other Comprehensive
Income
Unrealized increase in value of
available-for-sale shares
60,100
27,800
104,900
8,600
P217,600
P 4,900
20,900
500
2,700
5,600
8,900
5,000
P 48,500
P 25,500
13,300
38,800
2,800
P 90,100
P 30,000
44,100
7,000
16,300
P 97,400
28,100
2,000
18-13
P127,500
P217,600
18-8.
Working capital =
P31,500 =
Current ratio =
1.65 =
Nick Company
Nick Company
Balance Sheet
December 31, 2006
Assets
Current Assets
Cash
Temporary investments in
available-for-sale securities
Accounts receivable
Less: Allowance for doubtful accounts
Inventory
Prepaid insurance
Total current assets
Noncurrent Investments
Notes receivable (due 2013)
Investment in Day Company bonds
Sinking fund for bond retirement
Total long-term investments
Property, Plant and Equipment
Land
Buildings
Less: Accumulated depreciation
Equipment
Less: Accumulated depreciation
Total property, plant and
equipment
Intangible Assets
Patents (net)
P 3,800
4,600
P18,500
(700)
17,800
30,500
2,900
P 59,600
P 10,000
9,000
7,000
26,000
P 12,000
P63,400
(21,000)
P29,600
(13,000)
42,400
16,600
71,000
P 5,900
18-14
3,700
9,600
P166,200
Liabilities
Current Liabilities
Accounts payable
Income taxes payable
Wages payable
Current portion of mortgage payable
Total current liabilities
Long-Term Liabilities
Mortgage payable
Bonds payable (due 2017)
P40,000
Add: Premium on bonds payable
4,300
Total long-term liabilities
Total Liabilities
Shareholders Equity
Contributed Capital
Preference shares, P100 par
Ordinary shares, P5 par
Premium on preference shares
Premium on ordinary shares
Total contributed capital
Retained Earnings
Accumulated Other Comprehensive
Income
Unrealized increase in value of
available-for-sale securities
Total contributed capital, retained
earnings and accumulated other
comprehensive income
Less: Treasury shares (at cost)
Total Shareholders Equity
Total Liabilities and Shareholders Equity
18-9.
P 19,400
7,200
4,100
4,000
P 34,700
P 16,000
44,300
60,300
P 95,000
P 6,000
11,000
2,400
14,700
P 34,100
37,800
1,100
P 73,000
(1,800)
P 71,200
P166,200
P 109,000
317,700
a
b
18-15
560,000
P 926,700
47,000
P 200,000
P1,750,000
1,964,000
P3,714,000
(420,000)
3,294,000
3,494,000
37,000
P 100,000
30,000
250,000
a
b
d
380,000
P4,944,700
f, g
P 426,000
f
g
1,223,000
P1,649,000
i
i
3,295,700
c, j
18-16
P4,944,700
Explanation of Amounts
a
P225,000
P345,700
2,000
P 57,700
P450,000
P133,800
(14,000)
P119,800
P900,000
(100,000)
P800,000
P500,000
(100,000)
P400,000
P 61,200
(40,000)
P 21,200
(14,000)
(2,000)
(100,000)
P109,000
(30,000)
P317,700
(51,300)
P
(6,400)
0
(250,000)
P200,000
P2,231,000
(231,000)
P2,000,000
18-10.
18-17
P 51,300
(4,300)
P 47,000
Kiko Company
Kiko Company
Balance Sheet
December 31, 2006
Assets
Current Assets
Cash
Accounts receivable (net)
Inventory
Total current assets
P 2,900
5,000
4,200
a
b
c
P12,1
00
Property, Plant and Equipment
Land
Buildings and equipment
Less: Accumulated depreciation
Total property, plant and
equipment
Total Assets
P 6,800
P 82,800
(16,000)
e
f
66,800
73,600
P85,7
00
Liabilities
Current Liabilities
Accounts payable
Salaries payable
Total current liabilities
Long-Term Liabilities
Bonds payable
Less: Discount on bonds payable
Total long-term liabilities
Total Liabilities
Shareholders Equity
Contributed Capital
Ordinary shares, P5 par
Additional paid-in capital
Total contributed capital
Retained Earnings
Total Shareholders Equity
P 3,000
1,500
g
h
P 4,500
P 6,000
(300)
5,700
P10,200
P16,500
12,700
j
k
P29,200
46,300
P75,500
18-18
18-11.
P85,700
Lifer Company
Lifer Company
Balance Sheet
December 31, 2006
Assets
Current Assets
Cash
Accounts receivable
Inventories
Prepaid items
Total current assets
Property, Plant and Equipment
Land
Buildings
P103,000
Equipment
18,100
P121,100
Less: Accumulated
depreciation
(32,520)
Total property, plant and equipment
Patents (net)
Total Assets
P 1,200
4,000
10,890
1,420
P 17,510
P 13,600
88,580
102,180
5,500
P125,190
Liabilities
Current Liabilities
Accounts payable
Income taxes payable
Miscellaneous payable
P 5,100
4,290
1,400
18-19
P 10,790
P15,000
(900)
P14,100
20,000
34,100
P 44,890
Shareholders Equity
Preference shares, P100 par
Premium on preference shares
Ordinary shares, P10 par
Premium on ordinary shares
Retained Earnings
Total Shareholders Equity
Total Liabilities and Shareholders Equity
P 21,000
2,300
P17,500
14,300
P23,300
31,800
25,200
80,300
P125,190
Balance
1/1/06
P 1,900
Calculations
Balance
12/31/06
P 1,200
Accounts
receivable
5,100
4,000
Inventories
13,900
10,890
Prepaid items
Land
Buildings
Equipment
Accumulated
depreciation
1,300
12,000
60,000
20,000
1,420
P(2,800)
(400)
P(3,200)
4,800
P 1,600
Purchase of building
P43,000
* Note: Mortgage account
will be included under
long-term liabilities
Cost of equipment sold
P(1,900)
13,600
103,000
18,100
18-20
7,100
P(2,100)
1,100
P(1,000)
(600)
P(1,600)
(32,520)
5,500
Accounts payable
5,500
5,100
Income taxes
payable
4,100
4,290
Misc. payables
1,200
1,400
15,000
Discount on bonds
payable
Mortgage payable
Preference shares
Premium on
preference
shares
Ordinary shares,
P10 par
Premium on
ordinary shares
0
17,000
1,500
14,000
11,200
No change
15,000
(900)
20,000
21,000
2,300
17,500
P3,000
(1,500)
P1,500
P3,600
(2,000)
P1,600
23,800
= P3,100
18-21
14,300
25,200
18-22
Harry Company
Requirement (1)
Harry Company
Worksheet for Statement of Cash Flows
For Year Ended December 31, 2006
Accounts
Cash
Accounts receivable
Inventory
Investment in bonds
Property and equipment
Accumulated depreciation
Accounts payable
Salaries payable
Interest payable
Notes payable
Ordinary shares, no par
Retained earnings
Sales
Cost of goods sold
Depreciation expense
Salaries expense
Other operating expenses
Interest revenue
Interest expense
Income tax expense
12/3/1/05 Post-Closing
Trial Balance
Debit
Credit
2,700
7,300
8,100
10,000
105,300
42,400
8,100
1,300
0
0
43,600
38,000
12/31/06 Adjusted
Trial Balance
Debit
Credit
3,300
6,200
9,900
18,600
133,300
49,200
8,500
700
300
9,000
58,100
31,500
Change
Debit
600
1,100
1,800
8,600
28,000
6,800
400
600
300
9,000
14,500
6,500
89,000
48,800
6,800
12,000
1,700
Worksheet Entries
Debit
Credit
(s)
600
(i)
1,100
(j)
1,800
(n)
8,600
(o) 28,000
(h)
6,800
(k)
400
(l)
600
(m)
300
(p)
9,000
(r) 14,500
(q)
6,500
89,000
48,800
6,800
12,000
1,700
1,200
900
6,000
Credit
(c)
(h)
(d)
(f)
48,800
6,800
12,000
1,700
(e)
(g)
900
6,000
1,200
900
6,000
(a)
89,000
(b)
1,200
133,400
133,400
247,500
247,500
122,300
122,300
122,300
18-23
122,300
(a)
(i)
(b)
(k)
89,000
1,100
1,200
-400
(m)
300
Payments to employees
Payments of interest
Other operating payments
Payments of income taxes
Cash Flows From Investing Activities
Payment for purchase of investments
Payment for purchase of building
Cash Flows From Financing Activities
Proceeds from issuance of note payable
Proceeds from issuance of ordinary shares
Payment of dividends
Net Increase in Cash
(p)
(r)
(c)
(j)
(d)
(l)
(e)
(f)
(g)
48,800
1,800
12,000
600
900
1,700
6,000
(n)
(o)
8,600
28,000
(q)
6,500
(s)
600
9,000
14,500
18-24
Totals
115,500
18-25
P 90,100
1,200
P 91,300
P(50,200)
(12,600)
(600)
(1,700)
(6,000)
(71,100)
P 20,200
P (8,600)
(28,000)
P 9,000
14,500
(6,500)
(36,600)
17,000
P
600
2,700
P 3,300
18-26
18-13.
Balances, 1/1/06
Unrealized increase in
value of available-forsale securities
Ordinary shares issued
Preference shares issued
Ordinary shares
reacquired
Net income
Cash dividend paid on
preference*
Cash dividend paid on
ordinary
Balances, 12/31/06
Preference
Shares
P100 par
P50,000
Ordinary
Shares
P10 par
P100,000
Additional
Paid-in
Capital on
Preference
Shares
P6,000
Additional
Paid-in
Capital on
Ordinary
Shares
P130,000
Retained
Earnings
P224,000
Accumulated
Other
Comprehensiv
e Income
Treasury
Shares
P9,000
20,000
11,000
30,000
1,760
P(10,400)
P61,000
P120,000
P7,760
P160,000
Total
P510,000
9,000
50,000
12,760
(10,400)
57,000
57,000
(4,270)
(4,270)
(14,500)
(14,500)
P262,230
P9,000
P(10,400)
P609,590
18-27
18-14.
1.
2.
3.
4.
Income 2005
Explanation
Debit Credit
Sales tax accrual omitted:
December 31, 2005
2,000a
2,000
December 31, 2006
5,000
5,000
December 31, 2007
9,000
Accounts payable and inventory omitted: No correction because errors offset each other
Inventory recorded twice
4,000
4,000
Bad debtsb
5,000
1,000
2,200
5. Bond premium
6. Travel advances
7. Salary accrual
8. Cost misclassification
a
1,200
1,200 12,000
18,000 18,000
10,000
11,000 10,000 7,000 11,000
5,000c 25,000 5,000
5,000
Account
The correct sales tax expense for 2005 is P12,000 (P200,000 x 6%). Since P10,000 was recorded in 2005, the correcting amount is
P2,000. However, this P2,000 would have been recorded by the company in 2006, so the total recorded sales tax expense of
P15,000 includes only P13,000 for sales made in 2006. Therefore the correct balance of P18,000 (P300,000 x 6%) is obtained by a
correcting amount of P5,000. Similarly, in 2007 the P5,000 would have been recorded by the company, so the total recorded sales
tax expense of P26,000 includes only P21,000 for sales made in 2004. Therefore the correct balance of P30,000 (P500,000 x 6%)
is obtained by a correcting amount of P9,000.
Since bad debts were written off each year directly to bad debts expense, the increase in the Allowance for Doubtful Accounts
balance each year represents the additional bad debts expense.
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c