CHAPTER 4

PREPARING THE FINANCIAL STATEMENTS

True or False

1. T 11. F 21. T 31. F

2. F 12. F 22. T 32. T
3. T 13. T 23. T 33. F
4. F 14. F 24. T
5. F 15. T 25. F
6. T 16. T 26. F
7. T 17. T 27. T
8. F 18. F 28. F
9. F 19. T 29. F
10. T 20. F 30. T

Problems
1.

1. D 6. C, D 11. A 16. B 21. A, D

2. A 7. A, D 12. C 17. E 22. B, D
3. A 8. A, D 13. B 18. E 23. B, D
4. C 9. B, C for 14. A 19. E 24. A, D
indirect
method
5. A 10. C 15. C 20. A 25 B

2.

1. F 6. O 11. I 16. F
2. I 7. F 12. O 17. F
3. F 8. O 13. F 18. O
4. O 9. I 14. I, N 19. N
5. F 10. F 15. I 20. I

3. (Ambiance Company)

(a) Current assets consist of:

Inventory P1,000,000
Listed investments in shares of other companies
held for trading, at fair value 200,000
Cash 300,000
Accounts receivable, net of allowance for
uncollectible accounts of P24,000 380,000
Prepaid rent 60,000
Receivable from officers, collectible on 6/30/19 195,000
Receivable arising from sale of land, due 1/31/19 2,000,000
Total current assets P4,135,000

(b) Non-current assets consist of:

Equipment, net of accumulated depreciation

of P160,000 P 390,000
Patents, net of accumulated amortization of P18,000 36,000
Total non-current assets P 426,000
4. (Celeste Corporation)
(a) Account form

Celeste Corporation
Statement of Financial Position
December 31, 2018

Current Assets Current Liabilities

Cash 410,000 Accounts Payable 437,300
Shares Held as Trading Notes Payable due
Securities 167,800 8/1/19 200,000
Accounts Receivable 475,000 Bonds Payable due
Inventory 514,500 6/30/19 2,500,000
Total Current Assets 1,567,300 Total Current Liabilities 3,137,300
Non-current Assets Non-current Liabilities
Land 2,000,000 Notes Payable 800,000
Building, net 1,400,000 Total Liabilities 3,937,300
Equipment, net 1,830,000 Shareholders’ Equity
Land Held as Share Capital 1,800,000
Investment Property 1,000,000 Share Premium 1,200,000
Total Noncurrent Assets 6,230,000 Retained Earnings 860,000
Total Shareholders’ Equity 3,860,000
Total Liabilities &
Total Assets 7,797,300 Shareholders’ Equity 7,797,300

(b) Report form

Celeste Corporation
Statement of Financial Position
December 31, 2018

Assets

Current Assets
Cash 410,000
Shares Held as Trading Securities 167,800
Accounts Receivable 475,000
Inventory 514,500
Total Current Assets 1,567,300
Non-current Assets
Land 2,000,000
Building, net 1,400,000
Equipment, net 1,830,000

Land Held as Investment Property 1,000,000

Total Noncurrent Assets 6,230,000
Total Assets 7,797,300

Liabilities

Current Liabilities
Accounts Payable 437,300
Notes Payable due 8/1/19 200,000
Bonds Payable due 6/30/19 2,500,000
Total Current Liabilities 3,137,300
Non-current Liabilities
Notes Payable 800,000
Total Liabilities 3,937,300

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 Shareholders’ Equity
Contributed Capital
Share Capital 1,800,000
Share Premium 1,200,000
Total contributed capital 3,000,000
Retained Earnings 860,000
Total Shareholders’ Equity 3,860,000
Total Liabilities & Shareholders’ Equity 7,797,300

(c) Financial position form

Celeste Corporation
Statement of Financial Position
December 31, 2018

Current Assets
Cash 410,000
Shares Held as Trading Securities 167,800
Accounts Receivable 475,000
Inventory 514,500
Total Current Assets 1,567,300

Less Current Liabilities

Accounts Payable 437,300
Notes Payable due 8/1/19 200,000
Bonds Payable due 6/30/19 2,500,000
Total Current Liabilities 3,137,300
Working capital (1,570,000)
Non-current Assets
Land 2,000,000
Building, net 1,400,000
Equipment, net 1,830,000

Land Held as Investment Property 1,000,000

Total Noncurrent Assets 6,230,000
Total assets, net of current liabilities 4,660,000
Less Non-current Liabilities
Notes Payable 800,000
Net Assets 3,860,000

Contributed Capital
Share Capital 1,800,000
Share Premium 1,200,000
Total contributed capital 3,000,000
Retained Earnings 860,000
Total Shareholders’ Equity 3,860,000

3
5. (Celeste and Clyde)
Celeste and Clyde
Statement of Financial Position
December 31, 2018

Assets

Current Assets
Cash 410,000
Shares Held as Trading Securities 167,800
Accounts Receivable 475,000
Inventory 514,500
Total Current Assets 1,567,300
Non-current Assets
Land 2,000,000
Building, net 1,400,000
Equipment, net 1,830,000

Land Held as Investment Property 1,000,000

Total Noncurrent Assets 6,230,000
Total Assets 7,797,300

Liabilities

Current Liabilities
Accounts Payable 437,300
Notes Payable due 8/1/19 200,000
Total Current Liabilities 637,300
Non-current Liabilities
Notes Payable 800,000
Mortgage Payable due 6/30/24 2,500,000
Total Non-current Liabilities 3,300,000
Total Liabilities 3,937,300

Partners’ Equity

Celeste, Capital 1,800,000

Clyde, Capital 2,060,000
Total Partners’ Equity 3,860,000
Total Liabilities and Partners’ Equity 7,797,300

6. (Goodwill Trading Corporation)

(a) Cash 35,000

Trading Securities 130,000
Accounts Receivable 320,000
Less Allowance for Uncollectible Accounts 34,000 186,000
Finished Goods Inventory 350,000
Goods in Process Inventory 280,000
Materials Inventory 120,000
Total current assets 1,101,000

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 (b) Total current assets 1,101,000
Less current liabilities
Accounts Payable 240,000
Income Tax Payable 87,000
Interest Payable 10,000
Unearned Rent 24,000
Mortgage Payable, current 100,000 461,000
Working capital 640,000

(c) Mortgage Payable, non-current 400,000

(d) Working capital 640,000

Add Non-current assets
Land 3,000,000
Buildings 5,000,000
Accumulated Depreciation-Buildings (1,200,000)
Investment Property 900,000 7,700,000
Total assets less current liabilities 8,340,000
Less Non-current Liabilities 400,000
Net Assets (or Total shareholders’ equity) 7,940,000

7. (Excalibur Products)
Excalibur Products
Income Statement
For the Year Ended December 31, 2017

Sales P895,000
Cost of sales
Beginning inventory P126,000
Purchases 466,250
Ending inventory (189,500) (402,750)
Gross profit P492,250
Selling expenses (161,100)
General and administrative expenses (128,880)
Profit before income tax P202,270
Income tax (60,681)
Profit for the year P141,589

8. (Willy Enterprises)

(a) Function of Expense Method

Willy Enterprises
Income Statement
For Year Ended December 31, 2018

Sales revenue P500,000

Cost of sales 240,000
Gross profit on sales P260,000
Other operating income
Interest income 24,000
Gain on trading securities 20,000
Total Income P304,000
Selling expenses P73,000
Administrative expenses 107,000
Other operating expenses 8,000 188,000
Profit before finance expense and income tax P116,000

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 Finance expense 9,000
Profit before income tax P107,000
Income tax 32,100
Profit P 74,900

(b) Nature of Expense Method

Willy Enterprises
Income Statement
For Year Ended December 31, 2018

Sales revenue P500,000

Other operating income
Interest income 24,000
Gain on trading securities 20,000
Total Income P544,000
Operating expenses
Net purchases P290,000
Increase in inventories (50,000)
Salaries and commissions 114,000
Supplies expense 11,000
Rent expense 40,000
Depreciation expense 15,000
Other operating expenses 8,000
Total operating expense 428,000
Profit before finance expense and income tax P116,000
Finance expense 9,000
Profit before income tax P107,000
Income tax 32,100
Profit P 74,900

9. (Masuerte Corporation)

(a.1) Purchases P2,150,000

Purchase returns and allowances (70,000)
Net purchases P2,080,000
Increase in inventories (80,000)
Cost of goods sold P2,000,000

(a.2) Sales P3,348,000

Sales returns and allowances (95,000)
Net sales P3,253,000
Cost of goods sold 2,000,000
Gross profit P1,253,000

(a.3) Sales salaries and commissions P 185,000

Advertising 78,000
Delivery expense 35,000
Depreciation – Store Equipment 30,000
Miscellaneous selling 16,000
Total selling expenses P 159,000

(a.4) Office salaries P 202,000

Utilities 56,000
Taxes and licenses 44,000
Depreciation-office equipment 36,000
Insurance expense 12,000

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 Repairs and maintenance 14,000
Uncollectible accounts expense 23,000
Miscellaneous administrative expenses 5,000
Total administrative expenses P 392,000

(a.5) Gross profit P 1,253,000

Gain on sale of equipment 30,000
Total selling expenses (159,000)
Total administrative expenses (392,000)
Interest expense ( 46,000)
Profit before income tax P1,046,000

(b) Profit after tax (1,046,000 x 70%) P 732,200

Earnings per share (732,200/40,000 shares) P18.305

10. (Lunatic Company)

(a)
Lunatic Company
Statement of Changes in Equity
For Years Ended December 31, 2018 and 2019

Share Share Retained Treasury

Capital Premium Earnings Shares
Balances, December 31, 2017 P200,000 P 80,000 P100,000 P24,000
Transactions in 2018
Sale of treasury shares 3,000 (12,000)
Profit for the year 80,000
Dividends declared (22,000) --------
Balances, December 31, 2018 P200,000 P83,000 P158,000 P12,000
Transactions in 2019
Sale of treasury shares 6,000 (12,000)
Profit for the year 98,000
Dividends declared (35,000)-____________
Balances, December 31, 2019 P200,000 P89,000 P221,000 ------

(b)
Lunatic Company
Shareholders’ Equity
December 31, 2019

Share Capital, P10 par (20,000 shares outstanding) P200,000

Share Premium 89,000
Total Contributed Capital P289,000
Retained Earnings 221,000
Total Shareholders’ Equity P510,000

11. See other page

12. (San Diego Corporation)

Average number of shares outstanding

200,000 + (30,000 x 6/12) – (6,000 x 2/12) 214,000

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13. (Bellview Company)

(a) Operating expenses reported P180,000

Depreciation expense (35,000)
Increase in accrued operating expenses (12,000)
Operating expenses paid in 2018 P133,000

(b) Cash paid for operating expenses P(133,000)

Cash paid for merchandise purchases (650,000)
Cash collected from sales 990,000
Cash paid for interest (6,000)
Cash paid for income taxes (90,000)
Net cash provided by operations P111,000

14. (Peso Company)

(a) Indirect method

Cash flows from operating activities

Profit before income tax P220,000
Adjustments for
Depreciation expense 80,000
Operating income before working capital changes P300,000
Decrease in accounts receivable 50,000
Increase in inventories (89,000)
Decrease in accounts payable (46,000)
Increase in salaries payable 24,000
Cash generated from operations P239,000
Income tax paid (66,000 – 12,000) (54,000)
Net cash from operating activities P185,000

(b) Direct method

Cash flows from operating activities

Collections from customers P1,050,000
Payments to trade creditors (715,000)
Payments for salaries (96,000)
Cash generated from operations P 239,000
Income taxes paid 54,000
Net cash from operating activities P185,000

Computations:
Collections: 1,000,000 + 50,000 = 1,050,000
Payments to trade creditors: 580,000 + 89,000 + 46,000 = 715,000
Salaries paid:120,000 - 24,000 = 96,000
Income taxes paid: 66,000 - 12,000 = 54,000

15. Items that would be reported in the Statement of Cash Flows (indirect method)
1. Under operating activities, depreciation expense of P120,000 is added to profit
before income taxes.
2. Under operating activities, net gain of P5,000 from sale of machine is deducted
from profit before income taxes. (Gain of P9,000 from sale of machine A less loss
of P4,000 from sale of machine B).
3. Under investing activities section, P29,000 is reported as a cash inflow of sale of
machine (27,000 from machine A plus P2,000 from machine B).

8
 4. Under investing activities, P250,000 is reported as a cash outflow for purchase of
machine.

16. (Dollar Company)

(Indirect method)

Dollar Company
Statement of Cash Flows
For year ended December 31, 2018

Cash flows from operating activities

Profit before income tax P828,500
Adjustments for
Depreciation expense 290,000
Interest expense 60,000
Operating income before working capital changes P1,178,500
Decrease in accounts receivable 110,000
Increase in inventory (200,000)
Decrease in accounts payable (90,000)
Cash generated from operating activities P998,500
Income taxes paid 223,350
Net cash from operating activities P775,150
Cash flows from investing activities
Purchase of equipment (1,880,000)
Cash flows from financing activities
Issue of ordinary share capital P550,000
Issue of bonds at par 1,000,000
Cash dividends paid (259,950) 1, 290,050
Net increase in cash P185,200
Add cash balance, January 1 42,000
Cash balance, December 31 P227,200

Profit before tax is 828,500, computed as 579,950/70%

Dividends paid is 259,950, computed as 579,950 – 320,000
Income taxes paid is 30% x 828,500 = 248,550 -25,200 = 223,350

17. (Catherine Company)

(a)
Income before interest and income tax P270,000
Adjustments for
Depreciation expense 110,000
Gain on sale of equipment (10,000)
Increase in accounts receivable (40,000)
Increase in inventories (30,000)
Increase in accounts payable 60,000
Cash flow from operations before interest
and income taxes P360,000
Income tax paid (75,000)
Interest paid (20,000)
Net cash flow from operating activities P265,000

(b)
Catherine Company
Statement of Cash Flows
For Year Ended December 31, 2018

9
 Cash flow from operating activities
Income before interest and income tax P270,000
Adjustments for
Depreciation expense 110,000
Gain on sale of equipment (10,000)
Increase in accounts receivable (40,000)
Increase in inventories (30,000)
Increase in accounts payable 60,000
Cash flow from operations before interest
and income taxes P360,000
Income tax paid (75,000)
Interest paid (20,000)
Net cash flow from operating activities P265,000
Cash flow from investing activities
Sale of equipment P100,000
Purchase of equipment (70,000) 30,000
Cash flow from financing activities
Dividends paid (120,000)
Increase in cash during the period P175,000
Cash balance, December 31, 2017 230,000
Cash balance, December 31, 2018 P405,000

18. (Plains and Prints)

(a)
Plains and Prints
Statement of Cash Flows
For Year Ended December 31, 2018

Cash flow from operating activities

Collections from customers P4,240,000
Payment to suppliers (2,680,000)
Payment of accrued expenses (880,000)
Cash flow from operations before interest
and income tax P 680,000
Payment of interest (60,000)
Payment of income tax (325,000)
Net cash flow from operating activities P295,000
Cash flow from investing activities
Sale of land P 125,000
Sale of equipment 170,000
Purchase of equipment (830,000) (535,000)
Cash flow from financing activities
Redemption of bonds payable P (200,000)
Issue of shares 800,000
Payment of dividends (275,000) 325,000
Increase in cash during the period P 85,000
Cash balance, December 31, 2017 185,000
Cash balance, December 31, 2018 P270,000

Collections from customers = 4,450,000 + 130,000 – 340,000 = 4,240,000

Payment to suppliers = 2,325,000 + 270,000 + 200,000 – 115,000 = 2,680,000
Payment of accrued expenses = 1,105,000 – 165,000 – 50,000 + 20,000 – 30,000
= 880,000

(b) Profit before interest and income tax P1,010,000

Adjustments for
Depreciation expense 165,000
Loss on sale of equipment 10,000
Increase in trade receivables (210,000)

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 Increase in inventories (270,000)
Decrease in prepaid expenses 10,000
Decrease in accounts payable (85,000)
Increase in accrued expenses 50,000
Cash flow from operations before interest
and income tax P680,000
Interest paid (60,000)
Income tax paid (325,000)
Net cash flow from operating activities P295,000

19. (Robinson Company)

(a) Sales revenue P18,000,000

Accounts receivable, January 1 1,500,000
Accounts receivable, December 31 (800,000)
Collections from customers P18,700,000

(b) Rent expense P3,100,000

Prepaid rent, January 1 (500,000)
Prepaid rent, December 31 720,000
Payments for rental P3,320,000

(c) Salaries expense P5,400,000

Salaries payable, January 1 50,000
Salaries payable, December 31 (120,000)
Payments for salaries P5,330,000

(d) Commission income P2,000,000

Unearned commission, January 1 (320,000)
Unearned commission, December 31 190,000
Collections from commission revenue P1,870,000

20. (Golden Harvest Corporation)

(a) Collections from sale of merchandise P3,700,000

Dividends received on investments held 90,000
Payments for operating expenses (1,505,000)
Payments for merchandise purchased (2,580,000)
Payments for interest on notes payable (120,000)
Net cash flow from operating activities P (415,000)

(b) Sale of investment property P1,300,000

Purchase of furniture and fixtures (3,400,000)
Net cash flow from investing activities P2,100,000

(c) Sale of share capital P4,200,000

Issue of bonds payable 2,000,000
Purchase of treasury shares (100,000)
Payment of notes payable (1,000,000)
Dividends paid (500,000)
Net cash flow from financing activities P4,600,000

(d) Net cash flow from operating activities P (415,000)

Net cash flow from investing activities 2,100,000
Net cash flow from financing activities 4,600,000
Increase in cash during the period P6,285,000
Cash balance, beginning 500,000

11
 Cash balance, ending P6,785,000

21. 1. C 6. C
2. A 7. A
3. C 8. A
4. A 9. A
5. B 10. B

22. (1) Adjusting event. The assignment of a receiver indicates bankruptcy that requires
the recognition of impairment loss in profit or loss and the derecognition of the
related receivable on the statement of financial position.

(2) Adjusting event. The March 31, 2019 event requires that Julie Company
recognizes a liability of P1,900,000 as of December 31, 2018. Thus, the
provision of P2,500,000 previously recognized should be adjusted to the amount
of P1,900,000.

(3) Non-adjusting event. This may be disclosed if the transaction is material and
non-disclosure could influence the economic decisions of users.

(4) Non-adjusting event. This may not be disclosed if not considered significant and
will not affect the evaluation of the user.

(5) Non-adjusting event requiring disclosure of the abnormally large change in asset
prices.

Multiple Choice Questions

Theory

1. B 11. C 21. B 31. C

2. A 12. B 22. C 32. C
3. C 13. D 23. A 33. A
4. C 14. D 24. B 34. D
5. D 15. B 25. A
6. C 16. D 26. A
7. A 17. A 27. D
8. D 18. A 28. D
9. C 19. B 29. A
10. D 20. C 30. C

Problems

35. B Cash on hand and in bank 610,000

Petty cash 6,000
Notes receivable 500,000
Accounts receivable 1,200,000
Merchandise inventory 1,300,000
Prepaid expenses 90,000
Total current assets 3,706,000

36. C Accounts payable 650,000

Notes payable 1,000,000
Accrued expenses 80,000
Total current liabilities 1,730,000

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37. C Cash 137,000
Equity investments at FV through P & L (at fair value) 90,000
Notes receivable 92,000
Accounts receivable 129,000
Allowance for uncollectible accounts (6,000)
Merchandise inventory 136,000
Total current assets 578,000

38. B Employees income tax withheld 4,000

Notes payable 120,000
Trade accounts payable 97,000
Bonds payable 50,000
Income tax payable 28,000
Total current liabilities 299,000

39. A Ordinary share capital 360,000

Share premium 480,000
Treasury shares (at cost) (30,000
Cumulative net unrealized loss on equity securities at FV (OCI) (12,000)
Retained earnings appropriated for contingencies 90,000
Unappropriated retained earnings 120,000
Total shareholders’ equity 1,008,000

40. A Accounts receivable 2,160,000

Allowance for bad debts (250,000)
Cash 224,000
Inventory 830,000
Notes receivable (short term) 970,000
Total current assets 3,934,000

41. C Accounts payable 980,000

Wages payable 108,000
Income taxes payable 720,000
Total current liabilities 1,808,000

42. D Accounts receivable (net) 160,000

Debt securities at FV through profit or loss 50,000
Cash 110,000
Merchandise inventory 300,000
Prepaid expenses 10,000
Total current assets 630,000

43. NOTE: QUESTION SHOULD BE NON-CURRENT LIABILITIES

Mortgage payable (1,200,000 – 200,0000 1,000,000
Notes payable 1,500,000
Premium on notes payable 25,000
Total non-current liabilities 2,525,000

44. Ordinary share capital, P100 par 1,000,000

Share premium – ordinary 250,000
Preference share capital 450,000
Retained earnings (550,000 + 500,000 – 250,000) 800,000
Total shareholders’ equity 2,500,000

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45. B Cash 175,000
Prepaid expenses 136,000
Inventory 820,000
Financial assets at FV through profit or loss 153,000
Accounts receivable 366,000
Total current assets 1,650,000

46. A Wages payable 250,000

Dividends payable 140,000
Taxes payable 228,000
Accounts payable 248,000
Total current liabilities 866,000

47. C Long-term funds 525,000

Financial assets at FV through other comprehensive income 300,000
Investment in associates 1,020,000
Property, plant and equipment 1,200,000
Accumulated depreciation (400,000)
Goodwill 450,000
Total non-current assets 3,095,000

48. A Advertising 150,000

Freight out 80,000
Rent expense (220,000 x ½) 110,000
Sales salaries and commissions 140,000
Total selling expenses 480,000

49. A Legal and audit fees 170,000

Rent expense 120,000
Total general and administrative expenses 290,000

50. Sales 5,800,000

Cost of goods sold (4,800,000 + 650,000 – 550,000) (4,900,000)
Gross profit 900,000
Selling expenses (5% x 900,000) (45,000)
General and administrative expenses (2.5% x 900,000) (22,500)
Profit 832,500

51. D Cost of sales 600,000

Finished goods inventory, January 1 (1,000,000)
Finished goods inventory, December 31 900,000
Cost of goods manufactured 500,000

52. B Total credits 1,550,000

Total debits 1,100,000
Profit before tax 450,000

53. C Sales revenue 5,000,000

Commission income 28,000
Inventory, December 31 520,000
Purchases (net of returns) (2,800,000)
Sales commissions (500,000)

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 Administrative salaries (720,000)
Office supplies expense (110,000)
Dividend income 16,000
Gain on sale of equipment 100,000
Rent expense (400,000)
Unrealized gain on investments at FV through PL 55,000
Depreciation expense-store equipment (70,000)
Depreciation expense-office equipment (50,000)
Freight in (80,000)
Freight out (120,000)
Profit before finance cost and income tax 419,000

54. D Sales commissions 500,000

Rent expense (60% x 400,000) 240,000
Depreciation-store equipment 70,000
Freight out 120,000
Total selling expenses 930,000

55. C Merchandise inventory, January 1 450,000

Net purchases 2,800,000
Freight in 80,000
Merchandise inventory, December 31 (520,000)
Cost of goods sold 2,810,000

56. B Profit before finance charge and income tax 419,000

Interest expense (180,000)
Profit before income tax 239,000
Income tax (71,700)
Profit 167,300
Unrealized gain on investments at FV through OCI, net of tax 61,600
Total comprehensive income 228,900

57. C Total liabilities 376,000

Total capital (2,000,000 +100,000 – 8,000) 2,092,000
Total assets 2,468,000

58. A Cash (490,000 – 25,000) 465,000

Investments in equity securities held for trading (380,000 – 200,000) 180,000
Accounts receivable (1,250,000 – 500,000) 750,000
Non-trade notes receivable (50,000 x 2) 100,000
Merchandise inventory 900,000
Prepaid expenses 80,000
Total current assets 2,475,000

59. A Receivable from officer 500,000

Cash earmarked for acquisition of equipment 25,000
Non-trade notes receivable (300,000 – 100,000) 200,000
Plant and equipment 3,750,000
Total non-current assets 4,475,000

60. D Cash and cash equivalents (650,000 – 162,500) 487,500

Notes receivable 390,000
Accounts receivable, net of allowance for bad debts 256,750
Inventory, 910,000
Total current assets 2,044,250

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61. C Reported total comprehensive income 1,111,500
Adjustment to profits in prior years for errors in depreciation 112,500
Correct total comprehensive income 1,224,000

62. A Financing activities (112,500 – 120,000 - 33,750) (41,250)

Investing activities 40,500
Operating activities (409,500+6,750-187,500-157,500–18,250-9,000) 44,000

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