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Digos Company was organized on January 1, 2010.

On the same date, 25,000, P100 par


value, ordinary shares were issued in exchange for property, plant and equipment valued at
P3,000,000 and cash of P1,000,000. The following data summarize activities for 2010:

a) Profit for the year ended December 31, 2010 was P1,000,000.

b) Raw materials on hand on December 31 were equal to 25% of raw materials purchased.

c) Manufacturing costs were distributed as follows:


Materials used 50%
Direct labor 30%
Factory overhead 20% (includes depreciation of building, P100,000)

d) Goods in process remaining in the factory on December 31 were equal to 1/3 of the goods
finished and transferred to stock.

e) Finished goods remaining in stock on December 31 were equal to 25% of the cost of goods
sold.

f) Operating expenses were 30% of sales.

g) Cost of goods sold was 150% of the operating expenses total.

h) Ninety percent of sales were collected during 2010. The balance was considered collectible.

i) Seventy five percent of the raw materials purchased were paid for. There were no expense
accruals or prepayments at the end of the year.

QUESTIONS:

Based on the above information, prepare a balance sheet and income statement
for the year ended December 31, 2010

1. Sales for the year ended December 31, 2010


a. P4,000,000 c. P2,000,000
b. P5,000,000 d. P3,000,000

2. Total manufacturing cost for the year ended December 31, 2010
a. P4,166,667 c. P 666,667
b. P3,000,000 d. P2,850,000

3. Cash as of December 31, 2010


a. P1,900,000 c. P650,000
b. P1,150,000 d. P500,000

4. Total current assets as of December 31, 2010


a. P4,000,000 c. P2,575,000
b. P2,600,000 d. P3,861,111

5. Total liabilities and equity as of December 31, 2010


a. P5,761,111 c. P5,500,000
b. P5,750,000 d. P5,475,000
Answers: 1) A; 2) B; 3) D; 4) B, 5) C

Suggested Solution:

Question No. 1
Sales (1,000,000/25%) P4,000,000
Less cost of goods sold (45% x 4,000,000) 1,800,000
Gross profit 2,200,000
Less expenses (30% x 4,000,000) 1,200,000
Profit P1,000,000

Question No. 2
Purchases (1,500,000/75%) P2,000,000
Raw materials – December 31 500,000
Raw materials used (50% x 3,000,000) 1,500,000
Direct labor (30% x 3,000,000) 900,000
Factory overhead (20% x 3,000,000) 600,000
Total manufacturing cost 3,000,000
Goods in process – Dec. 31 (1/3 x 2,250,000) 750,000
Cost of goods manufactured 2,250,000
Finished goods – Dec. 31 (25% x 1,800,000) 450,000
Cost of goods sold P1,800,000

Question No. 3
Cash receipts:
Cash investment P1,000,000
Collections (90% x 4,000,000) 3,600,000 P4,600,000
Less cash disbursements:
Purchases (75% x 2,000,000) 1,500,000
Direct labor 900,000
Factory overhead 500,000
Operating expenses 1,200,000 4,100,000
Cash balance P 500,000

Question No. 4
Cash P 500,000
Accounts receivable (10% x 4,000,000) 400,000
Inventories 1,700,000
Total current assets P2,600,000

Question No. 5
Accounts payable (25% x 2,000,000) P 500,000
Share capital, P100 par 2,500,000
Share premium 1,500,000
Retained earnings 1,000,000
Total liabilities and equity P5,500,000