Chapter 4

Introduction: Accounting and Its Environment

Exercises

Exercise 1

1. b
2. a
3. a
4. c
5. b
6. b
7. c
8. c

Exercise 2

1. b
2. d
3. a
4. d
5. a
6. c
7. b
8. e
9. e
10. b
11. c
12. c

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Exercise 3

Requirement (a)

Josie Tan Enterprises

Balance Sheet
January 2, 2007

Assets: Liabilities: P 0
Cash P30,000 Owners Equity:
J. Tan, Capital P30,000
Total assets P30,000 Total liabilities and
owners equity P30,000

Requirement (b)

Josie Tan Enterprises

Balance Sheet
January 2, 2007

Assets: Liabilities: P 0
Cash P30,000 Owners Equity:
J. Tan, Capital P20,000
Total assets P30,000 E. Tan, Capital 10,000
Total owners equity P30,000
Total liabilities and
owners equity P30,000

Requirement (c)

Josie Tan Enterprises

Balance Sheet
January 2, 2007

Assets: Liabilities: P 0
Cash P30,000 Owners Equity:
Ordinary share capital P 6,000
Total assets P30,000 Additional paid-in capital 24,000
Total owners equity P30,000
Total liabilities and
owners equity P30,000
 Communication Through Financial Statements 3

Requirement (d)

Josie Tan Enterprises

Balance Sheet
January 2, 2007

Assets: Liabilities: P 0
Cash P30,000 Owners Equity:
Ordinary share capital P30,000
Total assets P30,000 Total liabilities and
owners equity P30,000

Exercise 4

Requirement (a)

Jaycee and Company

Income Statement (Single-Step)
For the Year Ending December 31, 2007

Revenues:
Sales P564,120
Rent Revenue 36,000
Total Revenue P600,120
Expenses:
Cost of Goods Sold P318,120
Rent 125,000
Wages 106,190
Advertising 32,650
Utilities 21,400
Interest 8,560
Total Expenses (611,920)
Net Loss P (11,800)

Requirement (b)

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Jaycee and Company

Income Statement (MultiStep)
For the Year Ending December 31, 2007

Sales P564,120
Less:
Cost of Goods Sold 318,120
Gross Margin P246,000
Operating Expenses:
Rent P125,000
Wages 106,190
Advertising 32,650
Utilities 21,400
Total Operating Expenses (285,240)
Operating Loss P (39,240)
Other Revenues:
Rent Revenue 36,000
Other Expenses:
Interest Expense (8,560)
Net Loss P (11,800)

Exercise 5

Requirement (a)

Canada Company
Statement of Capital
For the Year Ending December 31, 2007

Canada, Capital, January 3, 2007 P100,000

Add: Net Income 75,000
Canada, Capital, December 31, 2007 P175,000

Requirement (b)
 Communication Through Financial Statements 5

Canada Company
Statement of Capital
For the Year Ending December 31, 2007

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Canada, Capital, January 3, 2007 P50,000

Add: Net Income 37,500
Canada, Capital, December 31, 2007 P 87,500

Sibal, Capital, January 3, 2007 P30,000

Add: Net Income 22,500
Sibal, Capital, December 31, 2007 52,500

Tan, Capital, January 3, 2007 P20,000

Add: Net Income 15,000
Tan, Capital, December 31, 2007 87,500
Total Owners Equity, December 31, 2007 P175,000

Requirement (c)

Canada Company
Statement of Shareholders Equity
For the Year Ending December 31, 2007

Additional Total
Ordinary Paid-in Retained Shareholders
Shares Capital Earnings Equity
Balance, Jan. 3 P20,000 P80,000 P 0 P100,000
Net Income 75,000 75,000

Balance, Dec. 31 P20,000 P80,000 P75,000 P175,000

Exercise 6

Requirement (a)

Canada Company
Statement of Capital
For the Year Ending December 31, 2008

Canada, Capital, January 1, 2008 P175,000

Add: Net Income 120,000
P295,000
Less: Drawings 80,000
Canada, Capital, December 31, 2008 P215,000
Requirement (b)

Canada Company
Statement of Capital
For the Year Ending December 31, 2008
 Communication Through Financial Statements 7

Canada, Capital, January 1, 2008 P 87,500

Add: Net Income 60,000
P147,500
Less: Drawings 40,000
Canada, Capital, December 31, 2008 P107,500

Sibal, Capital, January 1, 2008 P 52,500

Add: Net Income 36,000
P 88,500
Less: Drawings 25,000
Sibal, Capital, December 31, 2008 63,500

Tan, Capital, January 1, 2008 P 35,000

Add: Net Income 24,000
P 59,000
Less: Drawings 15,000
Tan, Capital, December 31, 2008 44,000

Total Owners Equity, December 31, 2007 P215,000

Requirement (c)

Canada Company
Statement of Shareholders Equity
For the Year Ending December 31, 2007

Additional Total
Ordinary Paid-in Retained Shareholders
Shares Capital Earnings Equity
Balance, Jan. 1 P20,000 P80,000 P 75,000 P175,000
Net Income 120,000 120,000
Dividends (80,000) (80,000)

Balance, Dec. 31 P20,000 P80,000 P115,000 P215,000

Requirement (d)

Canada Company
Statement of Retained Earnings

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For the Year Ending December 31, 2008

Retained Earnings, January 1, 2008 P 75,000

Add: Net Income 120,000
P195,000
Less: Drawings (80,000)
Retained Earnings, December 31, 2008 P115,000

Exercise 7

a. Rainee Ingrid Company is a sole proprietorship. This can be determined by

examining the statement of capital or the balance sheet. Absence of retained
earnings or stock accounts eliminates the possibility that the company is a
corporation. Since there is only one capital account, the company cant be a
partnership. The single capital account suggests that Rainee Ingrid is the
sole owner of a sole proprietorship.

b. Rainee Ingrid uses a multistep income statement format. This is

demonstrated by the calculation of a gross margin for the company. The
multistep format highlights the relationship between sales revenue and cost
of goods sold, thus arriving at gross margin. From gross margin, all
operating expenses are deducted, resulting in operating income, another
item not found on a single-step income statement. In a multistep format,
other revenues and expenses are shown below operating income.

c. Articulation is the link among the income statement, the statement of owners
equity, and the balance sheet. Specifically, there is a relationship between
net income (or loss) on the income statement and the amount of earned
equity on the balance sheet. The statement of owners equity acts as a
bridge statement between the income statement and the balance sheet.

In the case of Rainee Ingrid Company, the P74,510 net income amount
shown on the income statement can also be found on the companys
statement of capital. The ending balance on the statement of capital was
derived by adding net income for 2007 (P74,510) to the January 1, 2007
capital balance (P338,060) and subtracting the owners drawings for the year
(P90,000). The ending balance in the capital account (P322,570), shown on
the statement of capital, can also be found on the companys balance sheet.

Exercise 8

Requirement (a)
 Communication Through Financial Statements 9

Nico Francis and Company

Income Statement (Single-Step)
For the Year Ending December 31, 2007

Revenues:
Sales P156,000
Interest Revenue 5,200
Total Revenue P161,200
Expenses:
Cost of Goods Sold P 92,000
Rent 18,000
Wages 14,600
Advertising 3,200
Utilities 2,400
Total Expenses (130,200)
Net Income P 31,000

Requirement (b)

Nico Francis and Company

Income Statement (MultiStep)
For the Year Ending December 31, 2007

Sales P156,000
Less:
Cost of Goods Sold 92,000
Gross Margin P 64,000
Operating Expenses:
Rent P 18,000
Wages 14,600
Advertising 32,000
Utilities 2,400
Total Operating Expenses (38,200)
Operating Income P 25,800
Other Revenues:
Interest Revenue 5,200
Net Income P 31,000

Test Material

Test Material 4-1

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Clarisse Enterprises
Income Statement
For the Year Ended December 31, 2007

Revenues:
Commissions Earned P100,000
Expenses:
Insurance Expense P 5,000
Rent Expense 18,000
Salaries Expense 42,000 (65,000)
Net Income P 35,000

Clarisse Enterprises
Statement of Owners Equity
For the Year Ended December 31, 2007

K. Clarisse, Capital, January 1, 2007 P422,000

Add: Net income for the year 35,000
Subtotal P457,000
Less: Withdrawals by K. Clarisse 15,000
K. Clarisse, Capital, December 31, 2007 P442,000

Clarisse Enterprises
Balance Sheet
December 31, 2007

Assets Liabilities
Cash P 31,000 Accounts Payable P 24,000
Accounts Receivable 3,000 Notes Payable 30,000
Supplies 2,000
Land 200,000 Owners Equity
Buildings 260,000 K. Clarisse, Capital 442,000
Total Liabilities and
Total Assets P496,000 Owners Equity P496,000

Test Material 4-2

Andres Enterprises
Income Statement
For the Month Ended May 31, 2007
 Communication Through Financial Statements 11

Revenues:
Commissions Earned P127,000
Expenses:
Insurance Expense P 12,000
Rent Expense 24,000
Salaries Expense 100,000 (136,000)
Net Income P (9,000)

Andres Enterprises
Statement of Owners Equity
For the Month Ended May 31, 2007

F. Andres, Capital, May 1, 2007 P579,000

Less: Net loss for the month 9,000
Subtotal P570,000
Less: Withdrawals by F. Andres 80,000
F. Andres, Capital, May 31, 2007 P490,000

Andres Enterprises
Balance Sheet
May 31, 2007

Assets Liabilities
Cash P156,000 Accounts Payable P 31,000
Accounts Receivable 14,000 Notes Payable 33,000
Supplies 4,000
Land 150,000 Owners Equity
Buildings 230,000 F. Andres, Capital 490,000
Total Liabilities and
Total Assets P554,000 Owners Equity P554,000

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