Unit 1- Financial Statements

Topic 3- Statement of Comprehensive Income

Activity 1

1. True
2. False
3. False
4. True
5. True
6. True
7. False
8. False
9. True
10. False
11. True
12. False
13. False
14. True
15. False
16. False
17. True
18. False
19. False
20. True

Activity 2

___A___ 1. The bad debt rate was increased from 1% to 2%, thus increasing bad debt
expense.
___A___ 2. Obsolete inventory was written off. This was the first loss of this type in the
company's history.
___C___ 3. An uninsured casualty loss was incurred by the company. This was the first loss
of this type in the company's 50-year history.
___D___ 4. Recognition of income earned last year which was inadvertently omitted from
last
year's income statement.
___A___ 5. The company sold one of its warehouses at a loss.
___A___ 6. Settlement of litigation with federal government related to income taxes of three
years ago. The company is continually involved in various adjustments with the
federal government related to its taxes.
___C____ 7. A loss incurred from expropriation (the company owned resources in South
America which were taken over by a dictator unsympathetic to American
business).
___D____ 8. The company neglected to record its depreciation in the previous year.
___A____ 9. Discontinuance of all production in the United States. The manufacturing
operations were relocated in Mexico.

___A____ 10. Loss on sale of investments. The company last sold some of its investments two
years

Activity 3

1. What is the purpose of reporting comprehensive income?

a. To report changes in equity due to transactions with owners.
b. To report a measure of overall enterprise performance.
c. To replace net income with a better measure.
d. To combine income from continuing operations with income from discontinued
operations and extraordinary items.

2. During year 1, the “other revenues and gains” section of Totman Company’s Statement
of Earnings and Comprehensive Income contains P5,000 in interest revenue, P15,000
equity in Harpo Co. earnings, and P25,000 gain on sale of available-for-sale securities.
Assuming the sale of the securities increased the current portion of income tax expense
by P10,000, determine the amount of Totman’s reclassification adjustment to other
comprehensive income.
a. $ 5,000
b. $ 2,500
c. $35,000
d. $15,000

Solution: 25,000-10,000 = 15,000

3. Which of the following is not an acceptable option of reporting other comprehensive

income and its components?
I. In a separate statement of comprehensive income.
II. In a statement of earnings and comprehensive income.
III. In a statement of changes in stockholders’ equity.
a. I only.
b. II only.
c. III only.
d. I and II.

4. Accumulated other comprehensive income should be reported on the balance sheet as a

component of
Retained earnings Additional paid-in capital
a. No Yes
b. Yes Yes
c. Yes No
d. No No
 5. Which of the following changes during a period is not a component of other
comprehensive income?
a. Unrealized gains or losses as a result of a debt security being transferred from held-to
maturity to available-for- sale.
b. Stock dividends issued to shareholders.
c. Foreign currency translation adjustments.
d. Pension liability adjustments.
6. A company buys ten shares of securities at P1,000 each on January 15, year 1. The
securities are classified as available-for-sale. The fair value of the securities increases to
P1,250 per share as of December 31, year 1. The company does not elect to use the fair
value option for reporting available for-sale securities. Assume no dividends are paid and
that the company has a 30% tax rate. What is the amount of the holding gain arising
during the period that is classified in other comprehensive income for the period ending
December 31, year 1?
a. 0
b. P1,750
c. P2,500
d. P7,500
7. If (P2,450) net of tax is the reclassification adjustment included in other comprehensive
income in the year the securities are sold, what is the gain (loss) that is included in
income from continuing operations before income taxes? Assume a 30% tax rate.
a. P(2,450)
b. P(3,500)
c. P 2,450
d. P3,500
8. Which of the following changes during a period is not a component of other
comprehensive income?
a. Pension liability adjustment for funded status of plan.
b. Treasury stock, at cost.
c. Foreign currency translation adjustment.
d. Reclassification adjustment, for securities gain included in net income.
9. In Baer Food Co.’s year 1 single-step income statement, the section titled “Revenues”
consisted of the following:
Net sales revenue P187,000
Results from discontinued operations:
Loss from discontinued component Z including loss on disposal of $1,200 P16,400
Less tax benefit 4,000
(12,400)
Interest revenue 10,200
Gain on sale of equipment 4,700
Extraordinary gain 1,500
Total revenues P191,000
In the revenues section of the year 1 income statement, Baer Food should have reported total
revenues of

a. P216,300
 b. P215,400
c. P203,700
d. P201,900

Items 10 and 11 are based on the following:

Vane Co.’s trial balance of income statement accounts for the year ended December 31, year 2,
included the following:
Debit Credit

Sales P575,000
Cost of sales P240,000
Administrative expenses 70,000
Loss on sale of equipment 10,000
Sales commissions 50,000
Interest revenue 25,000
Freight out 15,000
Loss on early retirement of long-term debt 20,000
Uncollectible accounts expense 15,000
Totals P420,000 P600,000

Other information
Finished goods inventory:
January 1, year 2 P400,000
December 31, year 2 360,000
Vane’s income tax rate is 30%. In Vane’s year 2 multiple-step income statement,
10. What amount should Vane report as the cost of goods manufactured?
a. P200,000
b. P215,000
c. P280,000
d. P295,000
11. What amount should Vane report as income after income taxes from continuing
operations?
a. P126,000
b. P129,500
c. P140,000
d. P147,000
12. A material loss should be presented separately as a component of income from
continuing operations when it is
a. An extraordinary item.
b. A discontinued component of the business.
c. Unusual in nature and infrequent in occurrence.
d. Not unusual in nature but infrequent in occurrence.
13. Which of the following should be included in general and administrative expenses?
Interest Advertising
a. Yes Yes
b. Yes No
 c. No Yes
d. No No
14. An extraordinary item should be reported separately on the income statement as a
component of income
Net of income taxes Before discontinued operations of a component of a business
a. Yes Yes
b. Yes No
c. No No
d. No Yes

15. Searles does not elect the fair value option for recording financial assets and liabilities.
What amount of comprehensive income should Searles Corporation report on its
statement of income and comprehensive income given the following net of tax figures
that represent changes during a period?

Pension liability adjustment recognized in OCI P (3,000)

Unrealized gain on available-for-sale securities 15,000
Reclassification adjustment, for securities gain included in net income (2,500)
Stock warrants outstanding 4,000
Net income 77,000
a. P86,500
b. P89,000
c. P89,500
d. P90,500
16. The following changes in Vel Corp.’s account balances occurred during year 1:

Increase
Assets P89,000
Liabilities 27,000
Capital stock 60,000
Additional paid-in capital 6,000
Except for a $13,000 dividend payment and the year’s earnings, there were no changes in
retained earnings for year 1. What was Vel’s net income for year 1?
a. P 4,000
b. P 9,000
c. P13,000
d. P17,000
17. A company buys ten shares of securities at P2,000 each on December 31, year 1. The
securities are classified as available for sale. The company does not elect to use the fair
value option for reporting its available-for-sale securities. The fair value of the securities
increases to P2,500 on December 31, year 2, and to P2,750 on December 31, year 3. On
December 31, year 3, the company sells the securities. Assume no dividends are paid and
that the company has a tax rate of 30%. What is the amount of the reclassification
adjustment for other comprehensive income on December 31, year 3?
a. P 7,500
b. P (7,500)
 c. P 5,250
d. P (5,250)
18. When a component of a business has been discontinued during the year, the loss on
disposal should
a. Include operating losses of the current period.
b. Exclude operating losses during the period.
c. Be an extraordinary item.
d. Be an operating item.
19. On January 1, year 2, Shine Co. agreed to sell a business component on March 1, year 2.
The gain on the disposal should be
a. Presented as an extraordinary gain.
b. Presented as an adjustment to retained earnings.
c. Netted with the loss from operations of the component as a part of discontinued
operations.
d. None of the above.
20. On December 1, year 2, Greer Co. committed to a plan to dispose of its Hart business
component’s assets. The disposal meets the requirements to be classified as discontinued
operations. On that date, Greer estimated that the loss from the disposition of the assets
would be P700, 000 and Hart’s year 2 operating losses were P200,000. Disregarding
income taxes, what net gain (loss) should be reported for discontinued operations in
Greer’s year 2 income statement?
a.P0
b.P(200,000)
c.P(700,000)
d.P(900,000)

Activity 4

Problem 1
Presented below is certain information pertaining to Edson Company.

Assets, January 1 P240,000

Assets, December 31 230,000
Liabilities, January 1 150,000
Common stock, December 31 80,000
Retained earnings, December 31 31,000
Common stock sold during the year 10,000
Dividends declared during the year 13,000

Compute the net income for the year.

Net income:
Stockholders' equity, December 31 P 111,000
Stockholders' equity, January 1 90,000
 Increase P 21,000
Add: Dividend declared 13,000
Less: Common stock sold (10,000)
Net income P 24,000

Note:

Stockholders' equity, December 31:

Common stock, December 31 P80,000

Retained earnings, December 31 31,000
Stockholders' equity, December 31 P111,000

Stockholders' equity, January 1:

Assets, January 1 P240,000

Liabilities, January 1 (150,000)
Stockholders' equity, January 1 P90,000

Problem 2
Fill in the appropriate blanks for each of the independent situations below.

Company A Company B Company C

Sales (a) P261,000 P343,400 P540,000
Beginning inventory 52,600 (d) 97,800 90,000
Net purchases 175,300 255,600 (g) 380,000
Ending inventory 52,200 108,000 63,000
Cost of goods sold (b) 175,700 (e) 245,400 407,000
Gross profit 85,300 98,000 (h) 133,000
Operating expenses (c) 73,900 50,000 48,000
Income before taxes 6,000 (f) 48,000 (i) 85,000

Problem 3

Farr Company
Income Statement
For the year 2020

Sales P 1,400,000
Cost of goods sold 780,000
Gross profit P 620,000
Selling and administrative expenses (240,000)
Income from operations P 380,000
Other revenue 120,000
Other expenses (100,000)
 Income before taxes P 400,000
Income taxes (30%) (120,000)
Income before extraordinary item P 280,000
Hurricane loss (pre-tax) on plant (extraordinary item), net of 203,000
applicable income taxes of P87,000
Net Income P 77,000

Activity 5

1. The total profit comes from its revenues. It accounts for a large portion of the company's
revenue. The revenues rose significantly from 2018 to 2019. Its net income in 2019 is, however,
smaller than in 2018. Even though revenue increased, this does not imply that profits would
increase as well, since expenditures must be considered. Observe that selling and administrative
costs have risen, possibly as a result of their excessive promotion spending, which has resulted in
an increase in revenue.

2. Jollibee Food Corporation's Statement of Other Detailed Profits is shown below. It is clear that
objects in OCI are categorized according to whether or not they can be reclassified to P/L.
3. The company's costs include general administrative, publicity, and promotions. The general
and administrative costs account for a large portion of the company's spending.

4. I recommend or propose that the organization conduct market research to see whether it can
grow into new markets, enhance customer service, establish a staff training program, and decide
if the prices of products and services are right and whether they can be raised without decreasing
revenue. On the other hand, ensure that you have the best suppliers for your company and
bargain for better rates or discounts if you purchase in bulk, maintain stock management, and try
to minimize waste and mistakes in the workplace by educating employees, or cut marketing costs
by using low-cost marketing strategies. This is done to raise the company's income while
lowering its expenses in order to generate the desired profit.
5. The corporation presents its Statement of Comprehensive Income in two statements, the first
of which is a profit or loss statement and the second of which is a statement of other
comprehensive income.