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 income 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 goods sold = Average inventory x inventory turnover 
= 1,150,000 x 4
= 4,600,000 
Gross income  = 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 sales  20% 

1. What is the cost of goods sold? 

a. 6,700,000
b. 6,200,000
c. 7,200,000
d. 9,000,000 

2. 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 
Question 1 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 

Question 2 Answer b 
Net sales (6,200,000 / 80%) 7,750,000 
Sales returns and allowances 750,000
Gross sales  8,500,000 
Cost ratio (100% minus 20%)  80% 

Problem 4-6 (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 the current year?

a. 9,950,000
b. 9,550,000
c. 9,250,000
d. 9,150,000 
Solution 4-6 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 4-7
(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 4-7 
Question 1 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 4-8 (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 4-8 Answer a 

Total manufacturing cost 100% 6,000,000
Goods in process - 12/31 10% (600,000) 

Cost of goods manufactured 90% 5,400,000

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 4.9 (IAA) 

Tanzania Company reported operating expenses other than interest expense for the year at 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 is P2,100,000. The income tax rate is 30%.
1. What is the amount of sales for the year? 
a. 10,000,000
b. 15,000,000
c. 18,000,000 
d. 12,000,000

2. What is the amount of purchases? 

a. 6,000,000
b. 7,200,000
c. 3,000,000
d. 3,600,000 

Solution 4-9 
Question 1 Answer b
Income before income tax (2,100,000 / 70%) 3,000,000
Sales (3,000,000/25%) 12,000,000 

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

Question 2 Answer b
Cost of goods sold (50% x 12,000,000) 6,000,000 
Multiply by 120%
Purchases  7,200,000