CHAPTER 12

CHANGE IN ACCOUNTING POLICY

Problem 1

MJCT Company had used the FIFO method of inventory valuation since it began
operations in 2016. The entity decided to change to the weighted average method for
measuring inventory at the beginning of 2019.

The following schedule shows year-end inventory balances:

YEAR FIFO WEIGHTED AVERAGE

2016 4,500,000 5,400,000

2017 7,800,000 7,100,000
2018 (Over stated) dec 8,300,000 7,800,000

What pretax amount should be reported in the statement of retained earnings for 2019
as the cumulative effect of the change in accounting policy?
a. 500,000 decrease
b. 300,000 decrease
c. 500,000 increase
d. 300,000 increase

Problem 2

Kiwi Company has been using FIFO method of inventory valuation. Come year 2019,
the entity decided to change from FIFO to Weighted Average Method for measuring its
inventory.

The following schedule shows year-end inventory balances:

YEAR WEIGHTED AVERAGE FIFO

2016 4,500,000 5,400,000

2017 7,800,000 7,100,000
2018 (over stated) 8,300,000 7,800,000
What pretax amount should be reported in the statement of retained earnings for 2019
as the cumulative effect of the change in accounting policy?
a. 500,000 decrease
b. 300,000 decrease
c. 500,000 increase
d. 300,000 increase

Problem 3

During 2019,Peaches Company the decided to change from FIFO method of inventory
valuation to the weighted average method for measuring its inventory.

The following schedule shows year-end inventory balances:

FIFO WEIGHTED AVERAGE

January 1 inventory 7,100,000 (Under stated)7,700,000

December 31 inventory 7,900,000 8,300,000

In the statement of retained earnings for 2019, what amount should be reported as the
pretax cumulative effect of this accounting change?
a. 1,000,000 addition
b. 1,000,000 deduction
c. 600,000 addition
d. 600,000 deduction
CHANGE IN ACCOUNTING ESTIMATE

Problem 1

Chico company purchased a machinery on January 1, 2015 for P 7,200,000.

The machinery had a useful life of 10 years with no residual value and was depreciated
using the straight line method.

In 2018, a decision was made to change the depreciation method from straight line to
sum of the years’s digit method. The useful life and residual value remained unchanged.

1. What is the carrying amount of the machinery on January 1, 2018?

a. 7,200,000
b. 5,040,000
c. 5,760,000
d. 6,480,000

2. What is the depreciation for 2018?

a. 1,260,000
b. 1,440,000
c. 916,360
d. 720,000

Problem 2

On January 1, 2015, Frostie Company purchased an equipment for P7,000,000. The

equipment’s useful life is 10 years, no residual value and depreciated using straight line
method. The entity decided to change the depreciation method from straight line to sum
of the years’s digit method in 2018. The useful life and residual value remained
unchanged.

1. What is the carrying amount of the machinery on January 1, 2018?

a. 7,000,000
b. 4,900,000
c. 5,040,000
d. 2,100,000

2. What is the depreciation for 2018?

a. 1,260,000
b. 1,225,000
 c. 2,100,000
d. 4,900,000

Problem 3

On January 1, 2015, Umpong Company bought a large machinery for P7,200,000.The

machinery had a useful life of 8 years, it was depreciated using the straight line method.
The machinery has no residual value. In the year 2018, the company decided to change
its depreciation method; from straight line to sum of the years’s digit method. The useful
life and residual value remained the same.

1. What is the carrying amount of the machinery on January 1, 2018?

a. 7,200,000
b. 5,040,000
c. 4,500,000
d. 6,480,000

2. What is the depreciation for 2018?

a. 1,260,000
b. 1,440,000
c. 1,500,000
d. 2,700,000

PRIOR PERIOD ERRORS

Problem 1

While preparing the 2017 financial statements. Carbo Company discovered

computational errors in the 2015 and 2016 depreciation expense.

These errors resulted in overstatement of each year’s income by P 100,000, net of

income tax.

The following amounts were reported in the previously issued financial statements:

2015 2016
Retained earnings, January 1 2,000,000 2,800,000
Net income 800,000 600,000
_______________________
Retained earnings – December 31 2,800,000 3,400,0000
----------------------------------------

The net income for 2017 is correctly reported at P700,000.

What is the correct balance for retained earnings on December 31, 2017?
a. 3,900,000
b. 4,100,000
c. 4,300,000
d. 4,000,000

Problem 2

During 2017 financial statement preparation. Reese Company discovered errors in their
2015 and 2016 depreciation expense. These errors resulted in overstatement of
100,000 and 120,000 for years 2015 and 2016, respect net of income tax.

The following amounts were reported in the previously issued financial statements:

2015 2016

Retained earnings, January 1 2,000,000 2,800,000

Net income 800,000 600,000
_______________________
Retained earnings – December 31 2,800,000 3,400,0000
----------------------------------------

The net income for 2017 is correctly reported at P700,000.

What is the correct balance for retained earnings on December 31, 2017?
a. 3,900,000
b. 3,880,000
 c. 4,300,000
d. 4,000,000

Problem 3

While preparing the 2017 financial statements. Oreo Company discovered

computational errors in the 2015 and 2016 depreciation expense.

These errors resulted in overstatement of each year’s income by P100,000, net of

income tax.

The following amounts were reported in the previously issued financial statements:

2015 2016

Retained earnings, January 1 3,000,000 2,800,000

Net income 800,000 700,000
_______________________
Retained earnings – December 31 3,800,000 3,500,0000
----------------------------------------

The net income for 2017 is correctly reported at P700,000.

What is the correct balance for retained earnings on December 31, 2017?
a. 3,900,000
b. 4,100,000
c. 4,300,000
d. 4,000,000