Chapter 4

STATEMENT OF COMPREHENSIVE INCOME

Cost of goods sold and operating expenses

Problem 4-1 (AICPA Adapted)

Brock Company reported operating expenses in two categories, namely distribution and general and
administrative.

The adjusted trial balance at year-end included the following expense and loss accounts for current year:

Accounting and legal fees 1,200,000

Advertising 1,500,000
Freight out 800,000
Interest 700,000
Loss on sale of long-term investment 300,000
Officers’ salaries 2,250,000
Rent for office space 2,200,000
Sales salaries and commissions 1,400,000

One-half of the rented premises is occupied by the sales department.

What amount should be reported as total distribution costs?

a. 4,800,000
b. 4,000,000
c. 3,700,000
d. 3,600,000

Solution 4-1 Answer a

Advertising 1,500,000
Freight out 800,000
Rent (2,200,000 x 1/2) 1,100,000
Sales salaries and commissions 1,400,000
Total distribution costs 4,800,000
Problem 4-2 (AICPA Adapted)

Lee Company reported the following data for the current year:

Legal and audit fees 1,700,000

Rent for office space 2,400,000
Interest on inventory loan 2,100,000
Loss on abandoned data processing equipment 350,000
Freight in 1,750,000
Freight out 1,600,000
Officers’ salaries 1,500,000
Insurance 850,000
Sales representative salaries 2,150,000
Research and development expense 1,000,000

The office space is used equally by the sales and accounting departments.

What amount should be classified as general and administrative expenses?

a. 5,250,000
b. 6,450,000
c. 5,600,000
d. 6,250,000

Solution 4-2 Answer a

Legal and audit fees 1,700,000

Rent for office space (2,400,000 x 1/2) 1,200,000
Officers’ salaries 1,500,000
Insurance 850,000
Total general and administrative expenses 5,250,000

Problem 4-3 (AICPA Adapted)

Vigor Company provided the following information for the current year:

Net accounts receivable at January 1 900,000

Net accounts receivable at December 31 1,000,000
Account receivable turnover 5 to 1
Inventory at January 1 1,100,000
Inventory at December 31 1,200,000
Inventory turnover 4 to 1

What is the gross margin for the current year?

a. 150,000
b. 200,000
c. 300,000
d. 400,000
Solution 4-3 Answer a

Net Sales =Average accounts receivable x accounts receivable turnover

=950,000 x 5
=4,750,000

Cost of sales =Average inventory x iventory turnover

= 1,150,000 x 4
=4,600,000

Gross margin = 4,750,000 – 4,600,000

=150,000

Problem 4-4 (PHILCPA Adapted)

Hiligaynon Company provided the following information for the current year:

Beginning inventory 400,000

Freight in 300,000
Purchase returns 900,000
Ending inventory 500,000
Selling expenses 1,250,000
Sales discount 250,000

The cost of goods sold is six times the selling expenses.

What is the amount of gross purchases?

a. 6,500,000
b. 6,700,000
c. 8,000,000
d. 8,200,000

Solution 4-4 Answer d

Beginning inventory 400,000

Gross purchases (SQUEEZE) 8,200,000
Freight in 300,000
Purchase returns (900,000)
Goods available for sale 8,000,000
Ending inventory (500,000)
Cost of goods sold (1,250,000 x 6) 7,500,000
Problem 4-5 (PHILCPA Adapted)
Bicolano Company provided the following data for the current year:

Inventory, January 1 2,000,000

Purchases 7,500,000
Purchase returns and allowances 500,000
Sales returns and allowances 750,000
Inventory on December 31 2,800,000
Gross profit rate on net sales 20%

What is the amount of gross sales for the current year?

a. 7,750,000
b. 8,500,000
c. 7,000,000
d. 9,125,000

Solution 4-5 Answer b

Inventory – January 1 2,000,000

Purchases 7,500,000
Purchase returns and allowances ( 500,000)
Goods available for sale 9,000,000
Inventory - December 31 (2,800,000)
Cost of goods sold 6,200,000

Net sales (6,200,000 / 80%) 7,750,000

Sales returns and allowances 750,000
Gross Sales 8,500,000

Problem 4-7 (AICPA Adapted)

Carmela Company provided the following information for the current year:

Net Sales 1,800,000

Ending inventory 120,000
Gross margin on sales 40%

What is the cost of goods available for sale?

a. 1,200,000
b. 1,220,000
c. 1,080,000
d. 960,000

Solution 4-6 Answer a

(1,800,000 x 60% = 1,080,000 + 120,000) 1,200,000

Problem 4-7 (AICPA Adapted)

Kay Company provided the following information for the current year:

Increase in raw materials inventory 150,000

Decrease in goods in process inventory 200,000
Decrease in finished goods inventory 350,000
Raw materials purchased 4,300,000
Direct labor payroll 2,000,000
Factory overhead 3,000,000
Freight out 450,000
Freight in 250,000

What is the cost of goods sold for he current year?

a. 9,950,000
b. 9,550,000
c. 9,250,000
d. 9,150,000

Solution 4-7 Answer a

Raw materials purchased 4,300,000

Freight in 250,000
Increase in raw materials (150,000)
Raw materials used 4,400,000
Direct labor 2,000,000
Factory overhead 3,000,000
Total manufacturing cost 9,400,000
Decrease in goods in process 200,000
Cost of goods manufactured 9,600,000
Decrease in finished goods 350,000
Cost of goods sold 9,950,000
Problem 4-8 (IAA)
Sheraton Company reported the following information for the current year.

Ending goods in process 1,000,000

Depreciation on factory building 320,000
Beginning raw materials 400,000
Direct labor 1,980,000
Factory supervisor's salary 560,000
Depreciation on headquarters building 210,000
Beginning goods in process 760,000
Ending raw materials 340,000
Indirect labor 360,000
Purchases of raw materials 2,300,000

What is the cost of goods manufactured for the current year?

a. 5,340,000
b. 5,580,000
c. 5,550,000
d. 5,820,000

Solution 4-8 Answer a

Beginning raw materials 400,000
Purchases of raw materials 2,300,000
Raw materials available for use 2,700,000
Ending raw materials ( 340,000)
Raw materials used 2,360,000
Direct labor 1.980,000
Factory overhead:
Depreciation on factory building 320,000
Factory supervisor's salary 560,000
Indirect labor 360,000 1,240,000
Total manufacturing cost 5,580,000
Beginning goods in process 760,000
Total goods in process 6,340,000
Ending goods in process (1 ,000,000)
Cost of goods manufactured 5,340,000
Problem 4-9 (PHILCPA Adapted)

Argentina Company incurred the following costs and expenses during the current year:

Raw material purchases 4,000,000

Direct labor 1,500,000
Indirect labor — factory 800,000
Factory repairs and maintenance 200,000
Taxes on factory building 100,000
Depreciation — factory building 300,000
Taxes on salesroom and general office 150,000
Depreciation — sales equipment 50,000
Advertising 400,000
Sales salaries 500,000
Office salaries 700,000
Utilities — 60% applicable to factory 500,000

Beginning Ending
Raw materials 300,000 450,000
Work in process 400,000 350,000
Finished goods 500,000 700,000

1. What is the cost of raw materials used?

a. 3,850,000
b. 4,000,000
c. 4,150,000
d. 4,750,000

2. What is the cost of goods manufactured for the current year?

a. 7,450,000
b. 7,200,000
c. 7,100,000
d. 7,300,000

3. What is the cost of goods sold for the current year?

a. 7,300,000
b. 6,900,000
c. 7,600,000
d. 8,300,000

Solution 4-9
Question I Answer a

Beginning raw materials 300,000

Raw material purchases 4,000,000
Raw materials available for use 4,300,000
Ending raw materials ( 450,000)
Raw materials used 3,850,000
Question 2 Answer c
Raw materials used 3,850,000
Direct labor 1,500,000

Factory overhead:
Indirect labor 800,000
Factory repairs and maintenance 200,000
Taxes on factory building 100,000
Depreciation — factory building 300,000
Utilities (60% x 500,000) 300,000 1,700,000

Total manufacturing cost 7,050,000

Beginning work in process 400,000
Ending work in process ( 350,000)
Cost of goods manufactured 7,100,000

Question 3 Answer b
Beginning finished goods 500,000
Cost of goods manufactured 7,100,000
Goods available for sale 7,600,000
Ending finished goods ( 700,000)
Cost of goods sold 6,900,000

Problem 4-10 (PHILCPA Adapted)

Mercury Company showed cost of goods sold of P4,320,000 in the statement of comprehensive income after
the first year of operations.

The total manufacturing cost comprised the following:

Materials used 50%
Direct labor Incurred 30%
Manufacturing overhead 20%

Goods in process at year-end amounted to 10% of the total manufacturing cost.

Finished goods at year-end amounted to 20% of the cost of goods manufactured.

What is the amount of the direct labor cost incurred?

a. 1,800,000
b. 2,400,000
c. 3,000,000
d. 5,400,000

Solution 4-10 Answer a

Total manufacturing cost 100% 6,000,000
Less: Goods in process — 12/31 10% 600,000
Cost of goods manufactured 90% 5,400,000
Less: Finished goods — 12/31 (20% x 90%) 18% 1,080,000
Cost of goods sold 72% 4,320,000
Total manufacturing cost (4,320,000 / 72%) 6,000,000
Direct labor cost (30% x 6,000,000) 1,800,000
Problem 4-11 (IAA)

Tactful Company reported that the operating expenses other than interest expense for the year amount to
40% of cost of goods sold but only 20% of sales. Interest expense is 5% of sales.

The amount of purchases is 120% of cost of goods sold. Ending inventory is twice as much as the beginning
inventory. The net income for the year P560,000. The income tax rate is 30%.

What is the amount of sales for the year?

a. 2,080,000
b. 1,485,000
c. 2,285,000
d. 3,200,000

Solution 4-11 Answer d

Income before income tax (560,000 / 70%) 800,000
Sales (800,000 / 25%) 3,200,000

Sales 100%
Cost of goods sold (20% / 40%) ( 50%)
Operating expenses ( 20%)
Interest expense ( 5%)
Income before income tax 25%

Problem 4-12 (PHILCPA Adapted)

Jericho Company showed net income of P480,000 for the year. Selling expenses were equal to 15% of sales
and also 25% of cost of goods so All other expenses were 13% of sales.

What is the gross profit for the year?

a. 4,000,000
b. 2,400,000
c. 1,600,000
d. 2,000,000

Solution 4-12 Answer c

Sales 100%
Cost of goods sold ( 15% / 25%) (60%)
Selling expenses (15%)
Other expenses (13%)
Net income 12%

Sales ( 480,000 / 12%) 4,000,000

Cost of goods sold (60% x 4,000,000) 2,400,000
Gross profit 1,600,000
Problem 4-13 (PHILCPA Adapted)

Ronalyn Company reported that the financial records were destroyed by fire at the end of the current year.

However, certain statistical data related to the income statement are available.

Interest expense 20,000

Cost of goods sold 2,000,000
Sales discount 100,000

The beginning inventory was P400,000 and decreased 20% during the year.

Administrative expenses are 25% of cost of goods sold but only 10% of gross sales.

Four-fifths of the operating expenses relate to sale activities.

1. What is the amount of gross sales?

a. 5,000,000
b. 7,000,000
c. 3,000,000
d. 4,000,000

2. What is the total amount of operating expenses?

a. 2,000,000
b. 2,500,000
c. 1,500,000
d. 2,520,000

3. What is the income before tax for the current year?

a. 380,000
b. 480,000
c. 330,000
d. 400,000

Solution 4-13

Question 1 Answer a

Cost of goods sold (10% / 25%) 40%

Cost of goods sold 2,000,000

Divide by cost ratio 40%
Gross sales 5,000,000
Question 2 Answer b

Administrative expenses (10% x 5,000,000) 500,000

Operating expenses ( 500,000 / 1/5) 2,500,000

Administrative expenses ( 500,000)
Distribution costs 2,000,000

Question 3 Answer a

Sales 5,000,000
Sales discount ( 100,000)
Net sales 4,900,000
Cost of goods sold (2,000,000)
Gross profit 2,900,000
Administrative expenses ( 500,000)
Distribution costs (2,000,000)
Interest expense ( 20,000 )
Income before income tax 380,000