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 Prof. Rommel M. Valdez

Income Statement – Part II

Retained Earnings

1. 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 Witt’s 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

2. Following are losses incurred by Miyata Corp. during 2004. All items are considered to be
material in amount. In July, Miyata’s 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 Miyata’s 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
Miyata’s 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

3. 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 division’s 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)

4. 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:

1/1/03 to 6/30/03 7/1/03 to 12/31/03 1/1/04 to 3/31/04

Sales P125,000 P100,000 P19,000
Operating expenses 183,000 108,000 22,000
 The company is subject to 35% tax.

The results from discontinued operations section of Company Z’s 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 segment’s 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, Paul’s 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 FIFO Weighted average

2004 P4,500,000 P5,400,000
2005 7,800,000 7,100,000
2006 8,300,000 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.