2nd Flr, GF Partners Bldg, 139 H.V. dela Costa, Salcedo Village, Makati City 3rd Flr.

Equitable PCI Building, 2070 Claro M. Recto ,Manila Tel.7348895/7349198

Practical Accounting 1 Income Statement Part II Retained Earnings

1.

Prof. Rommel M. Valdez

Witt Co. incurred the following infrequent losses during 2004: P175,000 from a major strike by employees. P150,000 from an early extinguishment of debt. P125,000 from the abandonment of equipment used in the business. In Witts 2004 income statement, the total amount of losses considered to be ordinary should be a. P275,000 b. P450,000 c. P325,000 d. P150,000

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Following are losses incurred by Miyata Corp. during 2004. All items are considered to be material in amount. In July, Miyatas chemical plant was destroyed by an earthquake resulting in a loss of P800,000. The region where the plant was located had not had an earthquake in 15 years. In September, a loss of P200,000 resulted from the retirement of Miyatas bonds. The bonds had been classified as current liabilities on the December 31, 2003 balance sheet because of their expected retirement in 2004. In November, a loss of P150,000 was incurred on the sale of Miyatas investment in bonds of Grand Corp. The bonds constitutes 5% of the net assets of Grand Corp. Miyata has been holding these bonds as an investment for several years. This is the only investment in securities the company has ever made. In its income statement for 2004, Miyata would report extraordinary loss of a. P1,150,000 b. P1,000,000 c. P950,000 d. P800,000 Fine Co.s income statements for the years ended December 31, 2004 and 2003 included the following before adjustments: 2004 2003 Operating income P 800,000 P 600,000 Gain on sale of division 450,000 1,250,000 600,000 Provision for income taxes 375,000 180,000 Net income P 875,000 P 420,000 On January 1, 2004, Fine agreed to sell the assets and product line of one of its operating divisions for P1,600,000. The sale was consummated on Dec. 31, 2004 and resulted in a gain on disposition of P450,000. This divisions net losses were P320,000 in 2004 and P250,000 in 2003. The income tax rate for both years was 32%. In preparing revised comparatives income statements, Fine should report gain (loss) from discontinued operations of 2004 2003 a. P130,000 P0 b. P130,000 P (250,000) c. P88,400 P0 d. P88,400 P (170,000) On July 1, 2003, COMPANY Z decided to sell Segment C. The sale is to be made on April 1, 2004 for P980,000, at that time Segment C is expected to have a book value of P900,000. Actual and estimated pretax operating information for Segment C is as follows: Sales Operating expenses 1/1/03 to 6/30/03 P125,000 183,000 7/1/03 to 12/31/03 P100,000 108,000 1/1/04 to 3/31/04 P19,000 22,000

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The company is subject to 35% tax. The results from discontinued operations section of Company Zs income statement for the year ended 12/31/03 would be reported at a. (P44,850) b. (P42,900) c. (P37,700) d. P7,150 5. On September 30, 2004, when the carrying amount of the net assets of a business segment was P70,000,000, XYZ Company signed a legally binding contract to sell the business segment. The sale is expected to be completed by January 31, 2005 at a selling price of P60,000,000. In addition, prior to January 31, 2005, the sale contract obliges XYZ Company to terminated the employment of certain employees of the business segment incurring an expected termination cost of P2,000,000 to be paid on June 30, 2005. The segments revenue and operating expenses for 2004 were P40,000,000 and P45,000,000, respectively. Before income tax, how much will be reported as a loss from ordinary activities of the discontinuing segment for 2004? a. P17,000,000 b. P12,000,000 c. P15,000,000 d. P7,000,000 6. During 2004, Paul Co. discovered that the ending inventories reported on its financial statements were incorrect by the following amounts: 2002 P60,000 understated 2003 75,000 overstated Paul uses the periodic inventory system to ascertain year-end quantities that are converted to peso amounts using the FIFO cost method. Prior to any adjustments for these errors and ignoring income taxes, Pauls retained earnings at January 1, 2004 would be a. Correct. c. P75,000 overstated. b. P15,000 overstated. d. P135,000 overstated. Goddard had used the FIFO method of inventory valuation since it began operations in 2004. Goddard decided to change to the weighted average method for determining inventory costs at the beginning of 2007. The following schedule shows a year-end inventory balances under FIFO and weighted average method. Year 2004 2005 2006 FIFO P4,500,000 7,800,000 8,300,000 Weighted average P5,400,000 7,100,000 7,800,000

7. What amount, before income taxes, should be reported in the 2007 statement of retained earnings as the cumulative effect of the change in accounting policy? a. P500,000 decrease b. P300,000 decrease c. P200,000 decrease d. 0 8. On January 1, 2004, Roem Corp. changed its inventory method to FIFO from LIFO for both financial and income tax reporting purposes. The change resulted in a P500,000 increase in the January 1, 2004 inventory. Assume that the income tax rate for all years is 30%. The cumulative effect of the change should be reported by Roem in its 2004 a. Retained earnings statement as a P350,000 addition to the beginning balance. b. Income statement as a P350,000 cumulative effect of accounting change. c. Retained earnings statement as a P500,000 addition to the beginning balance. d. Income statement as a P500,000 cumulative effect of accounting change.