ACCTG 110 – Intermediate Accounting 3

Quiz No. 6
Change in Accounting Estimate, Accounting Policy and Error

Problem 1
In its income statement prepared, Kate Jessamae Inc. reported P206,000, P275,000, and P340,000 of
profits before errors are discovered for the years 2018, 2019, and 2020, respectively. While its
statement of financial position shows P1,564,500, P1,610,000, and P1,789,000 of retained earnings prior
to correction for the same years, respectively. The company maintains a gross profit rate of 25% of
sales.

In the analysis of the financial statements, the auditor found the following errors: a. Advances from
customers in 2018 for goods to be delivered in 2019 totaling P105,000 were inappropriately
charged to sales in 2018.
b. The computation for annual depreciation using straight line basis was understated by P30,000.
This error was discovered in 2021.
c. In 2019, Kate erroneously reported an error of P100,000 of sales in 2020. The cost of this sales
amounted to P75,000.
d. Purchases for goods in transit, FOB shipping point, in 2019 were not recorded in the company’s
books amounting P95,000.
e. In 2019, prepaid insurance was understated by P10,000.
f. As at the end of 2018 inventory was overstated by P60,000. This is due to sales in 2018 that was
reported in 2019.
g. Advances to employees of P70,000, expected to be charged against their salaries in 2019 were
recognized as salaries expense in 2018.
h. In 2019, the entity incurred repairs and maintenance for its truck, acquired in 2019, amounting
to P50,000. This amount is capitalized as part of the cost of truck, although further investigation
shows that these do not company with all of the capitalization criteria in accordance with PAS
16. The useful life of the truck is 5 years and is depreciated on a straight line basis.
i. In 2018, the depreciation of the company’s equipment was overstated by P75,000 due to the
full charging of the company’s cost to profit or loss during the year. The original cost of the
equipment is P100,000 with a four year useful life.
j. On December 31, 2019 unearned rent income was understated by P50,000. k. On December 31,
2021, the company’s inventory includes those received during the year, but are ordered FOB
Shipping point as of the end of 2020 amounting to P25,000. The inventory was not included in
2020 report.
l. A fully depreciated equipment with no residual value was sold in 2018 for P10,000, but the sale
was recorded in 2019.
m. December 31, 2019 interest receivable was overstated by P15,000.
n. The company’s tax rate is 30%.

Requirements: Compute for the following:

1. The net effect of error to 2018 net income, over (under)
2. The net effect of error to 2019 net income, over (under)
3. The net effect of error to 2020 net income, over (under)
4. The total adjustments to 2018 retained earnings
5. The total adjustments to 2019 retained earnings
6. The total adjustments to 2020 retained earnings
7. The corrected profit for 2018
8. The corrected profit for 2019
9. The corrected profit for 2020
10. The retained earnings to be reported in the year 2020
11. What is the net effect of the error to the working capital in 2018
12. What is the effect of the error to the working capital in 2019
 13. What is the effect of the error to the working capital in 2020
Problem 2
On January 1, 2021 Cristine Joy Inc. purchased a new truck for P1,600,000. The truck had an estimated
useful life of 10 years and a residual value of P150,000 at the end of its useful life. Cristine Joy Inc.
elected to depreciate the machine using the SYD method. On January 1, 2023, the company decided to
change to double declining balance method of depreciation, until 2026 and then change to straight line
method for the remaining life of the truck.

Requirements:
14. Depreciation expense in 2023
15. Carrying amount of the machine on December 31, 2023
16. Accumulated depreciation on December 31, 2026
17. Carrying amount of the truck as of December 31, 2027.

Problem 3
On 2021, Lorme Ann Construction Company decided to change the following in the current year: ∙
From the weighted average method of inventory valuation to FIFO method. Inventory balances
under each method were as follows:
FIFO Weighted-average
January 1, 2021 100,000 110,000
December 31, 2021 120,000 115,000

∙ The company’s policy in recording insurance is to report it as prepaid insurance for the year and
adjust for expenses at year end. This policy is known as asset method. However, starting 2021,
the company decided to expense all payments to insurance during the year with appropriate
adjustment at the end of the period. Should this policy is adapted in the prior years, the total
amount of expense reported due to the payment of insurance should be P30,000.
∙ In its application to PFRS 15: Revenue from Contracts with Customers, the entity decided to change
its revenue model from cost recovery method to percentage of completion method. The
following are the corresponding revenues for both prior periods and current periods, under both
methods respectively.
Prior years Current Year
Cost Recovery Method 200,000 350,000
Percentage of Completion 250,000 450,000

∙ The net income for the year amounted to P300,000 and the retained earnings ending balance is
P950,000. No other transactions affected the retained earnings during the year. ∙ The company’s tax
rate is 30%.

18. In its financial statement, what amount should be reported as a cumulative effect of this
accounting change?
19. What is the effect of this change to net income?
20. What is the adjusted balance of retained earnings at the earliest period presented?

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