PROBLEM 2-6 (BOOK)

Masay Company
Statement of Cost of Goods Manufactured
Year Ended December 31, 2012

Raw materials – January 1 200,000

Purchases 3,000,000
Raw materials available for use 3,200,000
Less raw materials – December 31 280,000
Raw materials used 2,920,000
Direct labor 950,000
Factory overhead:
Indirect labor 250,000
Superintendence 210,000
Light, heat and power 320,000
Rent – factory building 120,000
Repairs & maintenance – machinery 50,000
Factory supplies used 110,000
Depreciation – machinery 60,000 1,120,000
Total manufacturing costs 4,990,000
Goods in process, January 1 240,000
Total cost of goods in process 5,230,000
Less goods in process, December 31 170,000
Cost of goods manufactured 5,060,000

COST OF SALES / FUNCTIONAL METHOD – INCOME STATEMENT

Masay Company
Income Statement
Year Ended December 31, 2012

Note
Net sales revenue (1) 7,450,000
Cost of goods sold (2) 5,120,000
Gross income 2,330,000
Other income (3) 210,000
Total income 2,540,000
Expenses:
Distribution costs (4) 830,000
Administrative expenses (5) 590,000
Other expenses (6) 300,000 1,720,000
Income before tax 820,000
Income tax expense 320,000
Net income 500,000

Note 1 – Net Sales Revenue

Sales 7,500,000
Sales returns & allowances (50,000)
Net sales revenue 7,450,000

Note 2 – Cost of Goods Sold

Finished goods, January 1 360,000
Cost of goods manufactured 5,060,000
 Goods available for sale 5,420,000
Finished goods – December 31 300,000
Cost of goods sold 5,120,000

Note 3 – Other Income

Gain from expropriation of asset 100,000
Gain on sale of equipment 100,000
Interest income 10,000
Total other income 210,000

Note 4 – Distribution Costs

Sales salaries 400,000
Advertising 160,000
Depreciation-store equipment 70,000
Delivery expenses 200,000
Total 830,000

Note 5 – Admin expenses

Office salaries 150,000
Depreciation-office equipment 40,000
Accounting and legal fees 150,000
Office expense 250,000
Total 590,000

Note 6 – Other Expenses

Earthquake loss 300,000

Continuation Problem 2-6 – Nature of Expense Method – Income Statement

Masay Company
Income Statement
Year Ended December 31, 2012

Note
Net sales revenue (1) 7,450,000
Other Income (2) 210,000
Total income 7,660,000
Expenses:
Decrease in finished goods &
Goods in process (3) 130,000
Raw materials used (4) 2,920,000
Direct labor 950,000
Factory overhead (5) 1,120,000
Salaries (6) 550,000
Advertising 160,000
Depreciation (7) 110,000
Delivery expense 200,000
Accounting & legal fees 150,000
Office expenses 250,000
Other expenses (8) 300,000 6,840,000
Income before tax 820,000
Income tax expense 320,000
 Net income 500,000

Note 1 – Net Sales Revenue

Sales 7,500,000
Sales returns & allowances (50,000)
Net sales revenue 7,450,000

Note 2 – Other Income

Gain from expropriation of asset 100,000
Gain on sale of equipment 100,000
Interest income 10,000
Total other income 210,000

Note 3 – Decrease in Finished Goods and Goods in Process

Jan. 1 Dec. 31 Decrease
Finished goods 360,000 300,000 60,000
Goods in process 240,000 170,000 70,000
Total 600,000 470,000 130,000

Note 4 – Raw Materials Used

Raw materials – January 1 200,000
Purchases 3,000,000
Raw materials available for use 3,200,000
Raw materials – December 31 280,000
Raw materials used 2,920,000

Note 5 – Factory Overhead

Indirect labor 250,000
Superintendence 210,000
Light, heat and power 320,000
Rent –factory building 120,000
Repairs & maintenance – machinery 50,000
Factory supplies used 110,000
Depreciation – machinery 60,000
Total 1,120,000

Note 6 – Salaries
Sales salaries 400,000
Office salaries 150,000
Total salaries 550,000

Note 7 – Depreciation
Depreciation – store equipment 70,000
Depreciation – office equipment 40,000
Total 110,000

Note 8 Other Expenses

Earthquake loss 300,000
Problem 2-7 (Book)

Christian Company
Statement of Cost of Goods Manufactured
December 31, 2012

Purchases 1,600,000
Freight-in 80,000
Total 1,680,000
Increase in raw materials (100,000)
Raw materials used 1,580,000
Direct labor 1,480,000
Factory overhead:
Indirect labor 600,000
Depreciation-machinery 50,000
Factory supplies expense 130,000
Factory superintendence 480,000
Factory maintenance 150,000
Factory heat, light and power 220,000 1,750,000
Total manufacturing costs 4,810,000
Decrease in goods in process 90,000
Cost of goods manufactured 4,900,000

Christian Company
Income Statement
Year Ended December 31, 2012

Sales revenue 8,000,000

Cost of goods sold (1) 5,100,000
Gross Income 2,900,000
Expenses:
Distribution costs (2) 800,000
Administrative expenses (3) 930,000 1,730,000
Income before tax 1,170,000
Income tax expense (170,000)
Net income 1,000,000

Note 1 – Cost of Goods Sold

Cost of goods manufactured 4,900,000
Decrease in finished goods 200,000
Cost of goods sold 5,100,000

Note 2 – Distribution Costs

Sales salaries 520,000
Advertising 120,000
Delivery expense 160,000
Total 800,000

Note 3 – Administration Expenses

Office supplies expense 30,000
 Office salaries expense 800,000
Doubtful accounts expense 100,000
Total 930,000

Problem 2-8 (Book)

Ronald Company
Statement of Cost of Goods Manufactured
Year Ended December 31, 2012

Materials, January 1 1,120,000

Purchases 1,600,000
Freight on purchases 220,000
Purchase discount (20,000) 1,800,000
Materials available for use 2,920,000
Less Materials – December 31 1,560,000
Materials used 1,360,000
Direct labor 2,000,000
Factory overhead:
Heat, light and power 600,000
Repairs & maintenance 100,000
Indirect labor 300,000
Other factory overhead 340,000
Factory supplies used
(300,000+660,000-540,000) 420,000
Depreciation – factory building 280,000 2,100,000
Total manufacturing costs 5,460,000
Goods in process – January 1 360,000
Total cost of goods in process 5,820,000
Less goods in process – December 31 320,000
Cost of goods manufactured 5,500,000

Ronald Company
Income Statement
Year Ended December 31, 2012

Note
Net sales revenue (1) 6,980,000
Cost of goods sold (2) (5,400,000)
Gross Income 1,580,000
Other income (3) 160,000
Total income 1,740,000
Expenses:
Distribution costs 200,000
Administrative expenses 340,000 540,000
Income before tax 1,200,000
Income tax expense 200,000
Net income 1,000,000
 Note 1 – Net Sales Revenue
Sales 7,120,000
Sales returns & allowances 140,000
Net sales revenue 6,980,000

Note 2 – Cost of Goods Sold

Finished goods – January 1 420,000
Cost of goods manufactured 5,500,000
Goods available for sale 5,920,000
Finished goods – Dec. 31 520,000
Cost of goods sold 5,400,000

Note 3 – Other Income

Interest revenue 160,000

CHAPTER 3 – CASH and CASH EQUIVALENTS

CASH and CASH EQUIVALENTS

CASH

- money and any other negotiable instrument that is payable in money and acceptable by the bank for
deposit and immediate credit.

- includes: checks, bank drafts, money orders

- to be reported as cash, an item should be unrestricted in use….meaning must be readily available in

the payment of current obligations and not be subject to any restrictions, contractual or otherwise.

The ff items are included in cash:

1) cash on hand –
undeposited cash collections, customer’s checks, cashier’s or managers checks, traveler’s
checks, bank drafts, money orders

2) cash in bank –
demand deposit or checking account, savings account w/c are unrestricted as to withdrawal

3) cash fund –
for current purposes only, such as petty cash fund, payroll fund and dividend fund
Cash Equivalents – short-term, highly liquid investments that are readily convertible into cash
Ex.: 3 mth BSP treasury or BSP treasury bill purchased 3 mths before maturity
3 mth time deposit
3 mth money market instrument or commercial paper

• equity securities not cash equivalents bec no maturity

Measurement of cash, at face value. If in foreign currency, at current exchange rate.

* if institution holding cash is in bankruptcy, cash should be written to estimated realizable value.

Cash & cash equivalents, should be the first item in the current assets.

Classification of investments in time deposit, money market & treasury bills:

1) if term is 3 mths or less, classified as cash and cash equivalents.
2) if more 3 mths but within 1 year, short-term financial assets
3) if more than 1 year, long-term investments.

Cash set aside for noncurrent purpose or payment of noncurrent obligation, long-term
investment.
Ex: sinking fund, preference share redemption fund, contingent fund, insurance fund,
fund for acquisition or construction of property, plant & equipment.

Bank overdrafts:

- when cash has a credit balance or results from the issuance of checks in excess of deposits
- not permitted in the Philippines

- should not be offset against other bank accounts with debit balances unless an entity maintains two
or more accounts in one bank and one account results in an overdraft

Compensating balance:

- minimum checking or demand deposit account balance that must be maintained in connection with
a borrowing arrangement with a bank.
Classification:
a) if not legally restricted – part of cash
b) legally restricted bec of formal compensating balance – separately as cash held as
compensating balance under current assets if the related loan is short-term
c) if the related loan is long-term, compensating balance is noncurrent investment

Undelivered or unreleased checks:

- merely drawn and recorded checks but not given to payees

- needs adjusting entry to restore to cash and credit to payable

Postdated checks delivered:

- drawn and recorded checks and already given to payees but they bear a date subsequent to the
end of reporting period
- needs adjusting entry to restore to cash and credit to payable
Stale checks or checks long outstanding:

- checks not encashed within a longer period of time

- in banking practice, becomes stale if not encashed within 6 mths from issuance
- entity policy

- how accounted?
a) if immaterial: entry to put back to cash and credit to miscellaneous income
b) if material: cash is restored and liability is again set up

Window dressing
- deliberate misstatement of the assets, liabilities, equity, income and expenses by opening the books
beyond the accounting period for the purpose of showing a better picture of financial highlights and
profit activities
- not acceptable and desirable
- entries made to window dress must be reversed

Lapping:
- practice used for concealing a cash shortage
- misappropriating a collection from one customer and concealing the defalcation by applying a
subsequent collection made from another customer
- involves series of postponement of the entries for the collection of receivables
- may happen when the bookkeeper and cashier are one and the same person

Kiting:
- occurs when a check is drawn against a first bank and depositing the same check in a second bank
to cover the shortage in the latter bank. No entry is made for the both the drawing and the deposit of
the bank.
- can be discovered via simultaneous bank reconcilitations of both bank accounts

Accounting for cash shortage (page 164)

Temporary/suspense account:
Cash short or over xxx
Cash xxx

If accountability of cashier or cash custodian:

Due from cashier xxx
Cash short or over xxx

Accounting for cash overage (page 165)

Temporary/suspense account:
Cash xxx
Cash short or over xxx

If no claim:
Cash short or over xxx
Miscellaneous income xxx

If found to be money of cashier:

Cash short or over xxx
Payable to cashier xxx
2 methods of handling petty cash fund:

1) Imprest fund system

a) check drawn to establish the fund

entry: Petty cash fund xxx

Cash in bank xxx

b) payment of expenses out of the fund – no formal journal entries are made

c) replenishment of petty cash payments:

- replenishment check is usually equal to the petty cash disbursements
entry: Expenses xxx
Cash in bank xxx

d) end of accounting period, adjust the unreplenished expenses in order to state the correct petty
cash balance (but reversed at the beginning of the next accounting period)

entry: Expenses xxx

Petty cash fund xxx

2) Fluctuating fund system

- check drawn to replenish the fund do not necessarily equal the petty cash disbursements
a) check drawn to establish the fund
entry: Petty cash fund xxx
Cash in bank xxx

b) payment of expenses out of the fund – unlike imprest, upon payment, immediately recorded
entry: Expenses xxx
Petty cash fund xxx

c) replenishment or increase of the fund

entry: Petty cash fund xxx
Cash in bank xxx

d) end of acctg period, no adjustment

e) decrease of petty cash fund, with entry

Chapter 3 theory answers:

3-1: d, b, a, c, c, d, b, c, c, a
3-2: d, b, b, d, a, b, b, c, c, a
3-3: d, d, c, c, c, d, c, b, d, b
Chapter 3 selected problems (Book)

3­4:

a) Undeposited collections       60,000
    Cash in bank – PCIB            500,000                  
        Cash in bank – PCIB(payroll)      150,000       
        Cash in bank – PCIB (savings)    100,000                     
       Money market instruments­                   
              90 days      2,000,000           
  
     Total        2,910,000 in bank           2,250,000            

      Currency & coins      1,000  
      Check drawn payable

3­7:

2.)   Cash on hand 500,000      Cash in bank   2,000,000

      NSF customer check ( 40,000)            Undelivered co. check               100,000
      Postdated customer chec   ( 60,000)           Postdated co. check                  150,000
      Adjusted cash on hand 400,000                       Adjusted cash      
          To petty cashier                    14,000      
      Adjusted petty cash                15,000          
                                                                                          
      Cash on hand 400,000
      Petty cash              15,000
      Cash in bank         2,250,000
      Total cash         2,665,000

Requirement 1:
Accounts receivable (60,000+40,000) 100,000
Cash on hand 100,000

           Advances to employee    3,000
Cash short or over    2,000
           Petty cash fund    5,000
           Cash in bank (100,000+150,000) 250,000
Accounts payable           250,000

3­18: Answer: A

   Petty cash fund           50,000
             Undeposited collections             1,100,000
             Cash in bank                             2,500,000

             Total                                          3,650,000

3­20:  Answer:  B

             Cash in First Bank 5,000,000
             Change fund                                            50,000
             Petty cash fund                                         15,000

             Total                                                 5,065,000

3­21:  Answer:  A

             Checkbook balance        8,000,000
             Postdated customer check          (2,000,000)
             NSF check                                        (  500,000)
             Undelivered company check        1,500,000

             Adjusted balance                            7,000,000

3­22:  Answer:  B

Cash in bank – current    6,000,000
Less compensating balance                (400,000)
Net cash in bank 5,600,000
Petty cash fund      50,000
Time deposit               2,500,000
Saving deposit                 1,000,000

Cash & cash equivalents                     9,150,000