PRIA FAR - 018 Financial Statements (PAS 1, Etc.) Notes and Solution

PHILIPPINE REVIEW INSTITUTE FOR ACCOUNTANCY, INC
MAY 2020 CPALE (BATCH NO. 05)

Financial Accounting and Reporting (FAR) Nenita S. Robles/ Floyd C. Paguio
STATEMENT OF FINANCIAL POSITION (PAS 1)

1. How much is the adjusted working capital?
a. 334,000
b. 289,000
c. 264,000
d. 215,000
1. D Solution:
➢ The adjusted cash is computed as follows:
Cash – unadjusted 30,000
Unreplenished petty cash expenses ( 3,000)
Unreleased checks recorded as disbursement
resulting to overdraft 61,000
Contribution to sinking fund ( 4,000)
Adjusted cash balance 84,000
➢ The adjusted accounts receivable is computed as follows:

Accounts receivable 80,000
Allowance for uncollectibility (10,000)
Adjusted accounts receivable, net 70,000
➢ The adjusted inventory is computed as follows:

Inventory* 80,000
Cost of unsold goods sent out on consignment
excluded from inventory (24,000 ÷ 120%) 20,000
Cost of goods held on consignment (10,000)
Adjusted inventory 90,000
*The cost of inventory expected to be sold beyond 12 months but within the normal operating cycle is properly included as
part of cost of inventories presented as current assets.
➢ The adjusted prepaid assets are computed as follows:

Prepaid assets 10,000
Security deposit (to be presented as noncurrent) (4,000)
Adjusted prepaid assets 6,000
➢ The adjusted accounts payable is computed as follows:

Accounts payable (40,000 + 12,000 debit balance) 52,000
Unreleased checks recorded as disbursement
resulting to overdraft 31,000
Cost of goods held on consignment ( 10,000)
Adjusted accounts payable, net 103,000
➢ Accrued interest on the notes payable is computed as follows:

(P200,000 x 10% x 6/12) 10,000
The current assets and current liabilities are computed as follows:

Current assets Current liabilities
Cash 84,000 Accounts payable 103,000
Accounts receivable, net 70,000 Advances from customers 6,000
Advances to suppliers 12,000 Interest payable 10,000
Inventory 90,000
Prepaid income tax 16,000
Prepaid assets 6,000
Land held for sale 56,000
Total current assets 334,000 Total current liabilities 119,000
The adjusted working capital is computed as follows:

Working capital = Current assets – Current liabilities
Working capital = P 334,000 – P 119,000
Working capital = P 215,000
PRIA: Financial Statements (HO. No. 18)

Page 1 of 12
2. How much is the total current liabilities?

a. 119,000
b. 155,000
c. 172,000
d. 189,000
2. B Solution:
10% Note payable 80,000
Interest payable on the 12% note (120,000 x 12% x 9/12) 10,800
14% Mortgage note payable 60,000
Interest payable on the 14% note (60,000 x 14% x 6/12) 4,200
Current liabilities 155,000
Use the following information for the next three questions:

3. How much is the total noncurrent liabilities as of January 1, 20x1?
a. 2,600,000
b. 2,800,000
c. 3,200,000
d. 3,400,000
4. How much is the total current assets as of December 31, 20x1?

a. 1,600,000
b. 800,000
c. 300,000
d. 2,200,000
5. How much is the total noncurrent assets as of December 31, 20x1?

a. 4,500,000
b. 6,500,000
c. 5,800,000
d. 5,500,000
3. A Solution:
Assets = Liabilities + Equity
(1,200,000 + 4,000,000) = (900,000 + Noncurrent liabilities) + 1,700,000
Noncurrent liabilities = 5,200,000 – 900,000 – 1,700,000
Noncurrent liabilities, Jan. 1, 20x1 = 2,600,000
4. A Solution:
Working capital, Jan. 1, 20x1 = 1,200,000 – 900,000
Working capital, Jan. 1, 20x1 = 300,000
Working capital, Dec. 31, 20x1 = Working capital, Jan. 1, 20x1 times 2
Working capital, Dec. 31, 20x1 = 300,000 x 2 = 600,000

600,000 = Current assets, Dec. 31, 20x1 – 1,000,000
Current assets, Dec. 31, 20x1 = 1,600,000
5. D Solution:
Equity
1,700,000 Jan. 1
Dividends 1,000,000 2,400,000 Profit for the year
Dec. 31 3,100,000
Assets = Liabilities + Equity

(1,600,000 + Noncurrent assets) = (1,000,000 + 3,000,000) + 3,100,000
Noncurrent assets, Dec. 31, 20x1 = 4,000,000 + 3,100,000 – 1,600,000
Noncurrent assets, Dec. 31, 20x1 = 5,500,000

Page 2 of 12
6. How much is the total assets as of December 31, 20x1?

a. 4,000,000
b. 3,800,000
c. 3,200,000
d. 2,800,000
6. C Solution:
Sales are computed as follows:
Net credit sales
Accounts receivable turnover =
Average accounts receivable
Net credit sales

10 =
400,000
Net credit sales = 4,000,000
Net credit sales

Total assets turnover =
Average total assets
Where:
Total assets, beg. + Total assets, end
Average total assets =
2
Net credit sales
Total assets turnover =
4,000,000
2 =
Average total assets = 4,000,000
2
Average total assets = 2,000,000
Total assets, Jan. 1 + Total assets, Dec. 31

Average total assets =
2
800,000 + Total assets, Dec. 31
2,000,000 =
2
Total assets, Dec. 31 = (2,000,000 x 2) - 800,000
Total assets, Dec. 31 = 3,200,000
STATEMENT OF COMPREHENSIVE INCOME (PAS 1)

7. How much is the other comprehensive income?
a. 400
b. 600
c. 800
d. 2,000
8. How much is the total comprehensive income?

a. 1,800
b. 2,200
c. 2,400
d. 2,800
7. A
Profit for the year 2,000
Other comprehensive income:

Revaluation gain 1,000
Remeasurements of the net defined benefit liability (asset) (200)
Translation loss on foreign operation (400)
Total other comprehensive income (a) 400
Total comprehensive income (b) 2,400

Page 3 of 12
8. C (see solution above)
Use the following information for the next two questions:

9. How much is the total distribution (selling) costs?
a. 48,000
b. 56,000
c. 64,000
d. 108,000
10. How much is the total administrative expenses?

a. 24,000
b. 132,000
c. 226,000
d. 668,000
9. A
Selling expenses Administrative expenses
Advertising expense P20K Insurance expense P100K
Freight-out 10 Legal and other professional fees 12
Rent expense (one half) 4 Rent expense (one half) 4
Sales commission expense 14 Doubtful accounts expense 16
Total selling expenses P48K Total administrative expenses P132K
10. B (see solution above)
11. How much is the gross profit for the year?

a. 662,000
b. 656,000
c. 648,000
d. 626,000
11. D
Sales on account are computed as follows:
Accounts receivable
A/R, beg. -
Sales on account (squeeze) 900,000 800,000 Collections on accounts
100,000 A/R, end
Cost of sales is computed as follows:

Accounts payable
Purchase discounts 4,000 60,000 A/P, beg

Disbursements for Gross purchases
purchases 480,000 424,000 (squeeze)
A/P, end -
Inventory
Inventory, beg. -
Gross purchases 424,000 4,000 Purchase discounts
Freight in 14,000 394,000 Cost of sales (squeeze)
40,000 Inventory, end
Gross profit is computed as follows:

Cash sales 120,000
Credit sales 900,000
Total sales 1,020,000
Cost of sales (394,000)
Gross profit 626,000
12. How much is the gross profit for the year?

Page 4 of 12
a. 120,000
b. 130,000
c. 132,000
d. 146,000
12. B Solution:
Net credit sales
Where:
A/R, beg. + A/R, end.
Average accounts receivable =
2
40,000 + 160,000
Average accounts receivable =
2
Average accounts receivable = 100,000
Net credit sales

Net credit sales

4 =
100,000
Net credit sales = 400,000
Cost of sales
Inventory turnover =
Average inventory
Where:
Inventory, beg. + Inventory, end.
Average inventory =
2
Using the formulas given above, cost of sales is computed as follows:

120,000 + 60,000
Average inventory =
2
Average inventory = 90,000
Cost of sales
Inventory turnover =
Average inventory
Cost of sales
3 =
90,000
Cost of sales = 270,000
Gross profit is computed as follows:

Net credit sales 400,000
13. How much is the cost of goods sold?

a. 380,000
b. 464,000
c. 514,000
d. 546,000
13. C Solution:
Accounts payable
60,000 A/P, beg.
Disbursements for purchases 440,000 380,000 Purchases (squeeze)
A/P, end -

Page 5 of 12
Raw materials
inventory
RM Invty, beg. - Raw materials used in
Purchases 380,000 280,000 production (squeeze)
100,000 RM Invty, end.
Work-in-process inventory
WIP, beg. -
Cost of goods
RM used in production 280,000 manufactured
Direct labor (50% of RM) 140,000 464,000 (squeeze)
Production overhead* 84,000
40,000 WIP, end.
Total goods put into process 504,000 504,000
*Prime cost = Direct materials + Direct labor

Prime cost = 280,000 + 140,000 = 420,000
Production overhead = 20% x 420,000 = 84,000
Finished goods inventory

FG, beg. 50,000
Cost of goods sold
Cost of goods manufactured 464,000 514,000 (squeeze)
- FG, end
Total goods avail. for sale 514,000 514,000
14. How much is the total sales?

a. 1,800,000
b. 2,000,000
c. 2,200,000
d. 2,240,000
14. B Solution:
Sales 100%
Cost of sales (15% / 25%) (60%)
Gross profit 40%
Operating expenses (15% of 100%) or (25% of 60%) (15%)
Other expenses (10% of 100%) (10%)
Profit before tax 15%
The profit after tax given in the problem is translated to profit before tax as shown below:
Profit after tax (given) 210,000
Divide by: (100% less 30% tax rate) 70%
Profit before tax 300,000
Sales (300,000 Profit before tax ÷ 15%) 2,000,000
15. How much is the profit for the year?

a. 886,000
b. 586,000
c. 612,000
d. 626,000
15. B Solution:
PRIA Co.
Statement of profit or loss and other comprehensive income
For the year ended December 31, 20x1

Page 6 of 12
Sales 2,000,000
Sales discounts (20,000)
Net sales 1,980,000
Gross profit 1,180,000
Distribution costs (96,000)
Administrative costs (240,000)
Dividends received from investments in FVPL 24,000
Share in the profit of an associate 72,000
Unrealized gain on investments in FVPL 30,000
Casualty loss on typhoon (40,000)
Interest expense (44,000)
Income tax expense (300,000)
Profit for the year 586,000
Other comprehensive income:
Items that will not be reclassified subsequently to profit or loss:
Loss on revaluation (26,000)
Unrealized gain on investments in FVOCI 38,000
Remeasurements of defined benefit pension plans 22,000
34,000
Items that may be reclassified subsequently to profit or loss:
Loss on translation of foreign operation (8,000)
Other comprehensive income for the year 26,000
TOTAL COMPREHENSIVE INCOME FOR THE YEAR 612,000
16. How much is the profit for the year?

a. 65,000
b. 140,000
c. 38,600
d. 47,600
16. D Solution:
Cost ratio is derived from the percentages of operating expenses over sales and cost of sales as follows:
Cost ratio = 13% / 20% = 65%
Amount
Sales 400,000 (260,000 COS ÷ 65%)
Cost of sales (260,000) (start)
Operating expenses (52,000) (400,000 x 13%) or (260,000 x 20%)
Interest expense (20,000) (400,000 x 5%)
Income tax expense (20,400) (40,000 x 30%)
Profit after tax 47,600
NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS (PFRS 5)

17. How should PRIA Co. classify the headquarters building?
a. Included under property, plant and equipment at ₱5,000,000.
b. Included under property, plant and equipment at ₱5,800,000.
c. Classified as held for sale at ₱5,000,000
d. Classified as held for sale at ₱5,800,000

Page 7 of 12
18. How should PRIA Co. classify the headquarters building?

a. Included under property, plant and equipment at ₱5,000,000.
b. Included under property, plant and equipment at ₱5,800,000.
c. Classified as held for sale at ₱5,000,000
d. Classified as held for sale at ₱5,800,000
17. C 5,000,000 lower of carrying amount and fair value less costs sell
18. A – not available for immediate sale in its present condition
19. How should PRIA Co. classify the equipment?

a. Inventory, ₱1,000,000 c. Held for sale, ₱1,150,000
b. Investment property, ₱1,250,000 d. Held for sale, ₱1,000,000
19. A – Sale is not highly probable
20. In the revenues section of the 20x3 income statement, PRIA should have reported total revenues of
a. 197,200 b. 215,400 c. 203,700 d. 201,900
20. A
Solution:
Net sales revenue 187,000
Interest revenue 10,200
Adjusted total revenues 197,200
21. How should these facts be reported in PRIA's income statement for 2004?
Total Amount to be Included in
Income from Results of
Continuing Operations Discontinued Operations
a. 600,000 loss 500,000 gain
b. 100,000 loss 0
c. 0 100,000 loss
d. 500,000 gain 600,000 loss
21. C (600,000 loss – 500,000 gain) = 100,000 loss
STATEMENT OF CHANGES IN EQUITY (PAS 1)

22. According to PAS 1, dividends declared by an entity are disclosed in the
a. Statement of financial position d. Notes
b. Statement of profit or loss and OCI e. Any of these
c. Statement of changes in equity f. c or d
23. Which of the following shows a correct effect on equity?

Transaction Effect on equity
a. Issuance of shares Decrease
b. Retirement of shares Increase
c. Profit Decrease
d. Loss Decrease
24. The amount of profit or loss appears in which of the following financial statements?
a. Statement of financial position
b. Statement of comprehensive income
c. Statement of changes in equity
d. b and c
25. The statement of changes in equity is dated

a. as of a point in time. c. after some time.
b. for a period of time. d. Not dated
26. The first line in the Statement of changes in owner’s equity is

a. Profit or loss c. Additional contributions
b. Beginning capital d. Drawings

Page 8 of 12
STATEMENT OF CASH FLOWS (PAS 7)

27. What amount should PRIA include as net cash provided by operating activities in its 2002 statement of cash flows?
a. 436,200 b. 445,200 c. 453,600 d. 454,200
D
Solution:
Profit 450,000
Increase in accounts payable 9,000
Decrease in prepaid rent 12,600
Increase in accounts receivable, net (17,400)
Cash flow from operating activities 454,200
28. If PRIA uses the direct method, what amount should PRIA report as cash paid to suppliers in its 2002 statement of cash
flows?
a. 121,000 b. 134,000 c. 136,000 d. 149,000
D
Solution:
Inventory
beg. 22,500
Net purchases (squeeze) 142,500 135,000 Cost of goods sold
30,000 end.
Accounts payable
19,500 beg.
Payments (squeeze) 149,000 142,500 Net purchases
end. 13,000
29. The net cash provided by (used in) operating activities is

a. 60,000 b. 40,000 c. 30,000 d. (20,000)
30. The net cash provided by (used in) investing activities is

a. 220,000 b. 140,000 c. 60,000 d. (80,000)
31. The net cash provided by (used in) all activities is

a. 580,000 b. 410,000 c. 380,000 d. (60,000)
29. A (See solution below)
30. B (See solution below)
31. A
Solution:
Cash receipts from customers 200,000
Cash receipts from dividends on long-term investments 30,000
Cash payments for wages and other operating
(120,000)
expenses
Cash payments for insurance (10,000)
Cash payments for taxes (40,000)
Cash flow from operating activities 60,000
Cash receipts from repayment of loan made to another
220,000
entity
Cash payment to purchase land (80,000)
Cash flow from investing activities 140,000
Cash receipts from the issuance of ordinary shares 400,000
Cash payments for dividends (20,000)
Cash flow from financing activities 380,000
Net cash flows for the period 580,000
EVENTS AFTER THE REPORTING PERIOD (PAS 10)

32. Requirement: Compute for the total amount of adjusting events.

Page 9 of 12
Solution:
Estimated liability on pending litigation 400,000
Total adjusting events 400,000
Adjusting events are those that provide evidence of conditions that existed at the end of the reporting period. Those that
are indicative of conditions that arose after the reporting period are non-adjusting events.
Thus, the declaration of dividends, issuance of shares, and impairment of the building after the reporting period
are non-adjusting events. There is no present obligation for decommissioning and restoration costs as of the end of
reporting period because the oil rig was installed after the reporting period.
The business combination is neither recognized nor disclosed in the December 31, 20x1 financial statements
because the business combination is not an event after the reporting period, i.e., it occurred after the financial statements
were authorized for issue.
33. Requirement: Compute for the adjusted profit for the year. Provide journal entries.
Solution:
Unadjusted profit, December 31, 20x1 4,400,000
Reduction in provision for loss on pending litigation
(240K – 200K) 40,000
Reduction in NRV of inventories [1.8M - (1.76M – 60K)] (100,000)
Impairment loss on receivables (200,000)
Adjusted profit, December 31, 20x1 4,140,000
Pertinent adjusting entries are:

Dec. 31, 20x1 Estimated liability on pending litigation 40,000
Probable loss on litigation 40,000
Dec. 31, 20x1 Cost of goods sold 100,000
Inventory 100,000
Dec. 31, 20x1 Impairment loss on receivables 200,000
Accounts receivable 200,000
OPERATING SEGMENTS (PFRS 8)

34. Requirement: Identify the reportable segments.
Answer: The reportable segments are segments A, B, C and D.

Solutions:
Revenue test
The threshold under the revenue test is P600,000 or (P6,000,000 x 10%). Segments A and B are reportable because each
of their revenues is at least P600,000 or 10% of the total revenues.
Asset test
The threshold under the revenue test is P9,800,000 or (P92,800,000 x 10%). Segments A, B, and C are reportable because
each of their total assets is at least P9,800,000 or 10% of the total assets.
Profit or loss test

Segments Profit Loss
A 400,000
B 280,000
C (140,000)
D (1,400,000)
E 100,000
Totals 780,000 (1,540,000)
Based on the table above, the aggregate losses of P1,540,000 is higher than the aggregate profits. Therefore, the 10% limit
of profit or loss is P154,000 or (P1,540,000 x 10%). Segments A, B and D are reportable under this test since each of their
reported profits or loss is at least P154,000 or 10% of P1,540,000.

Page 10 of 12
Based on the tests performed, the reportable segments to be disclosed in ABC’s notes to financial statements are
segments A, B, C, and D.
Answer: LIMPID Co. shall disclose three reportable segments in its notes to financial statements, namely, “A/B,” “E” and
“C/D.”
Solution:
Under the “management approach,” segments A and B (aggregated as one segment) and segment E are reportable
operating segments because these segments are used by ABC Co. in its internal reporting.
Segments C and D are subjected to the quantitative thresholds as shown below:

Segments Revenues Revenue test Profit Profit test Assets Asset test
A 1,600 N/A 400 N/A 20,000 N/A
B 1,600 N/A 200 N/A 4,000 N/A
C 100 3% 20 3% 2,000 5%
D 300 8% 40 5% 4,000 9%
E 400 N/A 140 N/A 14,000 N/A
Totals 4,000 800 44,000
Segments C and D do not individually meet any of the quantitative thresholds. However, since the problem states that
segments C and D have similar economic characteristics and share a majority of the aggregation criteria, they are
aggregated and tested if their combined results qualify under the quantitative thresholds.
The combined revenue of C and D of P400 (100 + 300) is equal to the revenue threshold of P400 (4,000 x 10%). Therefore,
C and D shall be disclosed as one reportable segment.
ABC Co. shall disclose three reportable segments in its notes to financial statements, namely, “A/B,” “E” and “C/D.”
Answer: The three reportable segments are segments A, B, and C. The other segments are combined and disclosed as
“all other segments.”
Solution:
Under the revenue test, segments A and B are reportable because they each have total revenues (external and internal)
exceeding the threshold of P600,000 or (6,000,000 x 10%).
Under the profit or loss test, segments A and B are reportable because they each have profit exceeding the threshold of
P280,000 (2,800,000 x 10%).
Under the total assets test, segments A and B are reportable because they each have total assets exceeding the threshold
of P4,400,000 (44,000,000 x 10%).
However, the sum of the external revenues of segments A and B does not meet the 75% limit as shown below:
External
Segments revenues
A 2,400,000
B 800,000
Total external revenues of A and B 3,200,000
Total entity's external revenues 4,600,000

Multiply by: 75%
Limit on external revenues of reportable segments 3,450,000

Page 11 of 12
Since management believes that of the other segments (i.e., C, D, E, and F), information on segment C is most relevant to
users, segment C shall be disclosed as a reportable segment even if it does not meet any of the quantitative thresholds in
order for the “75% limit” to be met.
If segment C is included as reportable segment, the total external revenues of reportable segments A, B, and C is
P3,700,000 (2,400,000 + 800,000 + 500,000) which meets the “75% limit” of P1,725,000.
37. Question: PRIA Co. shall provide disclosure for major customers if revenues from transactions with a single external
customer amount to how much?
Answer: at least P460,000 or (10% x P4,600,000 total external revenues)
INTERIM FINANCIAL REPORTING (PAS 34)

38. Requirement: Compute for the adjusted profit before tax.
Solution:
Unadjusted profit before tax 200,000
Write-down of inventory -
Impairment of asset (150,000 – 140,000) (10,000)
Unrealized gain (38,000 – 20,000) 18,000
Depreciation (60,000 x 1/4) (15,000)
Employee benefits (140,000 x 1/4) (35,000)
Adjusted profit before tax 158,000
39. Requirement: Compute for the profit or loss for the first quarter ended March 31, 20x1.
Solution:
a. Sales 2,000,000
b. Cost of sales (900,000)
Gross income 1,100,000
c. Commission (5% x 2,000,000) (100,000)
d. Bad debts (30,000 - 10,000) (20,000)
e. Depreciation (2,400,000 ÷ 5) x 3/12 (120,000)
f. Insurance (80,000 x 3/12) (20,000)
g. Property tax (52,000 x 3/12) (13,000)
h. Advertising costs (100,000)
i. Staff bonuses (184,000 x 3/12) (46,000)
k. Loss on sale (60,000)
l. Repairs (24,000)
n. Rent (10,000 x 3) + [(2,000,000 – 1,800,000) x 2%] (34,000)
p. Other operating expenses (240,000)
Profit before bonus to key personnel 323,000
j. Bonus to key personnel (323,000 x 10%) (32,300)
Profit for the first quarter 290,700
***
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PRIA FAR - 018 Financial Statements (PAS 1, Etc.) Notes and Solution

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PHILIPPINE REVIEW INSTITUTE FOR ACCOUNTANCY, INC

MAY 2020 CPALE (BATCH NO. 05)

STATEMENT OF FINANCIAL POSITION (PAS 1)

➢ The adjusted accounts receivable is computed as follows:

➢ The adjusted inventory is computed as follows:

➢ The adjusted prepaid assets are computed as follows:

➢ The adjusted accounts payable is computed as follows:

➢ Accrued interest on the notes payable is computed as follows:

The current assets and current liabilities are computed as follows:

The adjusted working capital is computed as follows:

PRIA: Financial Statements (HO. No. 18)

2. How much is the total current liabilities?

Use the following information for the next three questions:

4. How much is the total current assets as of December 31, 20x1?

5. How much is the total noncurrent assets as of December 31, 20x1?

Working capital = Current assets – Current liabilities

Assets = Liabilities + Equity

PRIA: Financial Statements (HO. No. 18)

6. How much is the total assets as of December 31, 20x1?

Net credit sales

Net credit sales

Total assets, Jan. 1 + Total assets, Dec. 31

STATEMENT OF COMPREHENSIVE INCOME (PAS 1)

8. How much is the total comprehensive income?

Other comprehensive income:

Total comprehensive income (b) 2,400

PRIA: Financial Statements (HO. No. 18)

8. C (see solution above)

Use the following information for the next two questions:

10. How much is the total administrative expenses?

10. B (see solution above)

11. How much is the gross profit for the year?

Cost of sales is computed as follows:

Purchase discounts 4,000 60,000 A/P, beg

Gross profit is computed as follows:

12. How much is the gross profit for the year?

PRIA: Financial Statements (HO. No. 18)

Net credit sales

Net credit sales

Using the formulas given above, cost of sales is computed as follows:

Gross profit is computed as follows:

13. How much is the cost of goods sold?

PRIA: Financial Statements (HO. No. 18)

Purchases 380,000 280,000 production (squeeze)

100,000 RM Invty, end.

Total goods put into process 504,000 504,000

*Prime cost = Direct materials + Direct labor

Finished goods inventory

Total goods avail. for sale 514,000 514,000

14. How much is the total sales?

Sales (300,000 Profit before tax ÷ 15%) 2,000,000

15. How much is the profit for the year?

PRIA: Financial Statements (HO. No. 18)

16. How much is the profit for the year?

Sales 400,000 (260,000 COS ÷ 65%)

Cost of sales (260,000) (start)

Gross profit 140,000

Operating expenses (52,000) (400,000 x 13%) or (260,000 x 20%)

Interest expense (20,000) (400,000 x 5%)

Profit before tax 68,000

Income tax expense (20,400) (40,000 x 30%)

Profit after tax 47,600