Colegio de San Gabriel Arcangel

Area E, City of San Jose del Monte, Bulacan

Lesson Module

Course Title: Intermediate Accounting 3 Level: Second Year

Course Code: AE17 Lesson No.: 2
Lesson Hours: 3
Objectives:
At the end of this Module, the student will be able to:
1. Appreciate the significance of the statement of comprehensive income
2. Compute income using the capital maintenance approach
3. Identify the components of the statement of comprehensive income
4. Prepare a statement of comprehensive income, complying with the requirements of
the revised IAS 1
5. Appreciate the significance of the statement of comprehensive income
6. Present on the financial statements the effects of the changes in accounting policies,
changes in accounting estimates and correction of prior period errors

Subject Matter: Statement of Comprehensive Income

Procedures:
A. Motivation

B. Lesson Presentation

Approaches to Income Statement

a) Capital Maintenance Approach
It measures profit or net income as the excess of ending capital over the beginning
capital, after excluding the effects of transactions with owners

1. Financial capital maintenance – a profit is earned only if the financial amount

of the net assets at the end of the period exceeds the financial amount of the
net assets at the beginning of the period, after excluding any distributions to,
and contributions from, owners during the period. The financial capital
concept does not require any particular basis for measurement
2. Physical capital maintenance concept requires the adoption of the current
cost basis of measurement. Under this concept, a profit is earned only if the
physical productive capacity or operating capability of the enterprise at the
end of the period exceeds the physical productive capacity at the beginning of
 the period after excluding any distributions to, and contributions from, owners
during the period
b) Transaction Approach
Under the transaction approach, profit is measured as the difference between the
total income and total expenses for a given reporting period, based on recorded
transactions of the enterprise

The approach is applied using the accrual basis of accounting

Elements of Performance
1. Income
Income is defined in the Conceptual Framework as increases in economic
benefits during the accounting period in the form of inflows or enhancements of
assets or decreases of liabilities that result in increases in equity, other than
those relating to contributions from equity participants. Income is generally
derived from any combination of three activities such as:
 Selling products (trading and manufacturing entities derived revenue from
the sale of goods)
 Rendering of services and permitting others to use enterprise resources
which result in interest, rent, royalties, fees and the like (service entities
earn revenue from the fees they charge for the services performed
 Disposing of resources other than products (for example plant and
equipment or investments in other entities).

Revenues does not include receipt of asset purchased, proceeds from borrowing,
investment by owners, or adjustments of revenue of prior periods

2. Expenses
Expenses are decreases in economic benefits during the accounting period in
the form of outflows or depletions of assets or incurrences of liabilities that results
in decreases in equity other than those relating to distributions to equity
participants

The general term “expenses” encompass both expenses and losses. Expenses
result from major or central revenue producing activities of the enterprise, while
losses result from incidental transactions.

Revenue recognition principle

1. There is probable inflow of economic benefit
2. The inflow can be reliably measured
C. Application
EXERCISE 1-1
The incomplete records of Las Vegas Company showed the following information:

Dec. 31, 2020 Dec. 31, 2019

Cash 216,000 120,000
Accounts receivable 362,000 240,000
Prepaid rent 40,000 70,000
Furniture and fixtures 600,000 540,000
Total assets 1,218,000 970,000
Accounts payable 224,000 188,000
Salaries payable 52,000 14,000
Total liabilities 276,000 202,000
Capital 942,000 768,000

During 2020, the owner withdrew cash of P250,000 and made additional investments of P100,000.

Required: Determine the net income of Las Vegas Company for 2020 using the capital maintenance approach.

Ending capital 942,000

Less Beginning capital 768,000
Net increase in capital 174,000
Add withdrawals 250,000
Less additional investments (100,000)
Income for the period 324,000

EXERCISE 2
The following changes in account balances of Belagio Trading Company During 2020 are presented below:

Increases
(Decreases)
Assets 600,000
Liabilities (250,000)
Share capital 400,000
Share premium 125,000

During the year, there were no other changes to retained earnings except the dividend payment of P120,000

Required: Determine the profit or loss for the year 2020

Increases in assets (revenues) + Increases in liabilities (expenses) (-)
Decreases in assets (-) Decreases in liabilities +
600,000 + 250,000 – 525,000 + 120,000 = 445,000

EXERCISE 3
The following information was taken from the Venetian Company’s accounting records for the year ended December 31,
2020:

Increase in raw materials inventory 15,000

Decrease in finished goods inventory 35,000
Raw material purchases 430,000
Direct labor payroll 200,000
Factory overhead 300,000
Freight-out 45,000
Increase in work in process inventory 20,000

Required
What is the Venetian’s cost of goods sold for 2020?
TMC + Beg WIP – EWIP + FGbeg-FG end = CGS
P + materials Beg – Mat Ending + DL + FO + Beg WIP – EWIP + FGbeg-FG end = CGS
430,000 – 15,000 + 200,000 + 300,000 – 20,000 + 35,000 = 930,000

EXERCISE 4
The following information is available for the GBM Company for the year 2020:

Gross profit 962,000

Cost of goods manufactured 2,720,000
Goods in process inventory, beginning 264,000
Goods in process inventory, ending 324,000
Finished goods inventory, beginning 380,000
Finished goods inventory, ending 418,000

Required
How much was GBM Co’s sales for the year 2020?
Sales – CGS = GP
Sales = CGS + GP
Sales = 2720,000 + 380,000 – 418,000 + 962,000
Sales = 3,644,000

EXERCISE 5
The following information for Manalang Company pertains to the year 2020:

Profit for the year 280,000

Selling expenses were equal to 18% of sales and also
equal to 30% of cost of sales
Other expenses 12% of sales

Required
Determine the cost of sales of Manalang Company for the year 2020
Sales 100% 2,800,000 280,000 /10%
CGS 60% 1,680,000 18/30 = 60%
GP 40%
Expenses 18%
Other expenses 12%
Profit 10% 280,000

EXERCISE 6
Excalibur Products had sales during 2020 of P895,000, the gross profit percentage is 55% (492,250)

Purchases of inventory during 2020 totaled P466,250 and a count of inventory on hand at the end of the year totaled
P189,500. Selling expenses are 18% of sales and general and administrative expenses are equal to 80% of selling
expenses.
CGS = 45% = 402,750 466,250 – 189,500 = 276,750
beg, inventory = 402,750 – 276,750 = 126,000

Excalibur’s income tax rate is 30% and the company has 60,000 ordinary shares outstanding.

Required

Prepare a functional method income statement for the year ended December 31, 2020.
Excalibur Products
Income Statement
For the year ended December 31, 2020

Sales 895,000
Cost of goods sold
Beginning inventory 126,000
Add purchases 466,250
Cost of goods available for sale 592,250
Less ending inventory 189,500 402,750
Gross profit 492,250
Less expenses
Selling expenses 161,100
General and administrative expenses 128,880 289,980
Income before tax 202,270
Income tax (30%) 60,681
Net income 141,589

Earnings per share 141,589/60,000 2.36

Sales 895,000
Cost of goods sold 402,750
Gross profit 492,250
Less expenses
Selling expenses 161,100
General and administrative expenses 128,880 289,980
Income before tax 202,270
Income tax (30%) 60,681
Net income 141,589

Earnings per share 141,589/60,000 2.36

Selling 18% of sales = 895,000 x 18% = 161,100
General & Administrative = 80% of SE = 128,880

EXERCISE 7
The following is a partial list of accounts, after adjustments, of the Lexir Company on December 31, 2020:
Depreciation – building & office equipment 145,000
Sales commissions and salaries 182,000
Inventory, January 1, 2020 341,000
Store supplies expense 56,000
Retained earnings, January 1, 2020 1,785,000
Purchase returns and allowances 62,000
Bad debt expense 27,000
Freight in 135,000
Sales discounts 49,000
Purchases 1,730,000
Delivery expense 77,000
Office supplies expense 19,000
Ordinary share capital, P10 par 800,000
Share premium 650,000
Loss on sale of equipment 50,000
Insurance and taxes 85,000
Sales 3,529,000
Rent revenue 105,000
Office salaries 320,000
Advertising expense 170,000
Sales returns and allowances 121,000
Purchase discounts 41,000
Depreciation – store equipment 96,000
Discontinued operations (debit) 350,000
Interest expense 37,000
Unrealized gains and losses on investments carried at fair value 50,000
through other comprehensive income, January 1, 2020 (credit)
Unrealized gains recorded during the year on investment at fair value 80,000
through other comprehensive income
Actuarial gains taken to other comprehensive income 40,000

The following information is also available:

 During the year, the company declared and paid P0.75 per share cash dividend on its 80,000 ordinary shares
 A physical count determined that on December 31, 2020, ending inventory is P446,000
 A typhoon destroyed a warehouse resulting in a pretax loss of P120,000
 The debit balance in the discontinued operations relates to the pre-tax summarized operations and disposal of an
unprofitable line of business, which the enterprise decided to discontinue on May 1, 2020. This line was
considered a cash generating unit (CGU). During the year 2020, before the unit’s actual disposal, the CGU had
revenues of P900,000 and expenses of P1,050,000. On September 1, 2020, the assets of the CGU were sold at a
loss of P200,000
  The company found and corrected a pre-tax P180,000 understatement of the 2019 depreciation expense due to a
mathematical error
 During the year, 10,000 ordinary shares were issued at an average price of P14 per share. These amounts are
already reflected in the given balances.
 The company adopts the policy recognizing actuarial gains and losses in other comprehensive income. No
actuarial gains and losses were recognized in the prior periods
 There were no investments disposed of during the year
 The company’s income tax rate is 30%. The company has not recorded yet the company’s income tax relating
to profit or loss and to other comprehensive income
Required
1. Prepare a statement of comprehensive income using a one statement format for the year ended December 31,
2020 classifying the expenses
a) By nature
b) By function
2. Prepare a statement of changes in equity for Lexir Company for the year ended December 31, 2020