CHAPTER 9 - SOLUTION

Problem 9-2
During the current year, Orca Company decided to change from the FIFO method of inventory valuation to
the weighted average method. Inventory balances under each method were as follows:
FIFO Weighted average
January 1 7,200,000 7,700,000
December 31 7,900,000 8,300,000

What amount should be reported as the pretax effect of the accounting change in the statement of changes
in equity for the current year?
a. 500,000 addition
b. 500,000 deduction
c. 900,000 addition
d. 900,000 deduction

Answer: A - 500,000 addition

Solution:
FIFO inventory - January 1 ₱ 7,200,000
Weighted average inventory – January 1 7,700,000
Increase in beginning inventory ₱ 500,000

Problem 9-3
Goddard Company had used the FIFO method of inventory valuation since it began operations in 2017.
The entity decided to change to the weighted average method for determining inventory cost at the
beginning of 2020.

The entity provided the following year-end inventory balances under FIFO and weighted average method:
Year FIFO Weighted average
2016 4,500,000 5,400,000
2017 7,800,000 7,100,000
2018 8,300,000 7,800,000

What pretax amount should be reported in the 2019 statement of changes in equity 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

Answer: A - 500,000 decrease

Solution:
FIFO inventory- 2017 ₱ 8,300,000
Weighted average inventory – 2017 7,800,000
Decrease in inventory ₱ 500,000

Problem 9-4
On January 1, 2020, Poe Construction Company changed to the percentage of completion method from
cost recovery method of income recognition. On December 31, 2019 the entity compiled data showing that
income under the cost recovery method aggregated P7,000,000.

If the percentage of completion method had been used, the accumulated income through December 31,
2019 would have been P9,000,000. The income tax rate is 30%.

The cumulative effect of the accounting change should be reported in the 2020.
a. Retained earnings statement as P2,000,000 credit adjustment to the beginning
balance.
b. Income statement as P2,000,000 credit.
c. Retained earnings statement as a P1,400,000 credit adjustment to the beginning balance
d. Income statement as a P1,400,000 credit.
Answer: C - Retained earnings statement as a ₱1,400,000 credit adjustment to the beginning
balance.
Solution:
Percentage of completion ₱ 9,000,000
Cost recovery method 7,000,000
Total ₱ 2,000,000
Tax (30% x 2,000,000) ( 600,000)
Total ₱ 1,400,000

Problem 9-5
Banko Construction Company has used the cost recovery method of accounting since it began
operations in 2017.
In 2020, for justifiable reasons, management decided to adopt the percentage of completion
method.
The following schedule, reporting income for the past 3 years, has been prepared by the entity.
2016 2017 2018
Total revenue from
completed contracts 25,000,000 42,000,000 40,000,000
Less: Cost of completed
contracts 18,000,000 29,000,000 28,000,000
Income from operations 7,000,000 13,000,000 12,000,000
Casualty loss 0 0 (2,000,000)
Income 7,000,000 13,000,000 10,000,000

Analysis of the accounting records disclosed the following income by contracts, earned in the
years 2016-2018 using the percentage of completion method.
2016 2017 2018
Contract 1 7,000,000
Contract 2 5,000,000 8,000,000
Contract 3 3,000,000 7,000,000 2,000,000
Contract 4 1,000,000 6,000,000
Contract 5 (1,000,000)
What pretax amount should be reported as the cumulative effect of change in accounting policy in
the statement of retained earnings for 2019?
a. 6,000,000
b. 8,000,000
c. 7,000,000
d. 0

Answer: A - 6,000,000
Solution:
Percentage of completion Cost recovery method
2016 (7M + 5M + 3M) 15,000,000 7,000,000
2017 (8M + 7M + 1M) 16,000,000 13,000,000
2018 (2M + 6M - 1M) 7,000,000 12,000,000
Total 38,000,000 32,000,000

Cumulative Effect (38M - 32M) 6,000,000

Problem 9-6
During 2020, Build Company changed from the cost recovery method to the percentage of completion
method. The tax rate is 30%. Gross profit figures are:

2018 2019 2020

Cost recovery method 950,000 1,250,000 1,400,000
Percentage of completion 1,600,000 1,900,000 2,100,000

How should this accounting change be reported in 2020?

a. 1,300,000 increase in profit or loss
b. 1,300,000 increase in retained earnings
c. 910,000 increase in profit or loss
d. 910,000 increase in retained earnings

Answer:
Solution:
Percentage of completion 2,100,000
Cost recovery method 1,400,000
Total 700,000
Add: Tax rate (30%x 700,000) 210,000
Net cumulative effect 910,000

Or

Gross Profit under cost recovery

2017 950,000
2018 1,250,000 2,200,000

Gross Profit under percentage of completion

2017 1,600,000
2018 1,900,000 3,500,000
Pretax cumulative effect 1,300,000
Income tax (30% x 1.3M) (390,000)
Increase in Retained Earnings 910,000

Problem 9-7
Animus Company provided the following information at year-end:
December 31, 2020 December 31, 2019
Development costs 8,160,000 5,840,000
Amortization (1,800,000) (1,200,000)

The capitalized development costs relate to a single project that commenced in 2017. It has now been
discovered that one of the criteria for capitalization has never been met.

1. What adjustment is required to restate retained earnings on January 1, 2020?

a. 6,360,000
b. 1,720,000
c. 4,640,000
d. 0

Answer: C – 4,640,000
Solution:
Development costs – December 31, 2019 5,840,000
Amortization (1,200,000)
Total 4,640,000
2. What amount of the development costs should be expensed in 2020?
a. 5,840,000
b. 6,360,000
c. 1,720,000
d. 0

Answer: C – 1,720,000
Solution:
Development costs, 2020 8,160,000
Amortization (1,800,000)
Carrying amount 6,360,000
Error capitalized 4,640,000
Expensed in 2020 1,720,000

Problem 9-8
While preparing the financial statement for 2020, Dakila Company discovered computational errors in the
2018 and 2019 depreciation expense.
These errors resulted in overstatement of each year’s income by P25,000, net of income tax. The net
income for 2020 is correctly reported at P500,000.
The following amounts were reported in the previously issued financial statements:
2018 2019
Retained earnings, January 1 700,000 500,000
Net income 150,000 200,000
Retained earnings, December 31 850,000 700,000

What is the balance of retained earnings on December 31, 2019?

a. 1,300,000
b. 1,350,000
c. 1,400,000
d. 1,325,000

Answer: A - 1,300,000

Solution:
Retained earnings – January 1, 2020 ₱ 850,000
Prior period errors –depreciation:
2018 ( 25,000)
2019 ( 25,000)
Corrected beginning balance ₱ 800,000
Net income for 2019 500,000
Retained earnings – December 31, 2019 ₱1,300,000

Problem 9-9
Effective January 1, 2020, King Company adopted the accounting policy of expensing advertising and
promotion costs when incurred. Previously, advertising and promotion costs applicable to future periods
were recorded in prepaid expenses.

The entity can justify the change which was made for both financial statement and income tax reporting
purposes.

The prepaid advertising and promotion costs totaled P600,000 on December 31, 2018. The income tax rate
is 30%.

What is the adjustment for the effect of the change in accounting policy that should result in a net charge
against income for 2019?
a. 600,000
b. 180,000
c. 420,000
d. 0

Answer: D - 0
Solution:
The company committed an error of deferring advertising and promotion costs. A prior
period error is not included in profit or loss but treated as an adjustment of retained
earnings.

Problem 9-10
During the year ended December 31, 2020, the following events occurred at Harbor Company:
 It was decided to write off P800,000 from inventory which was over two years old as it was obsolete.
 Sales of P1,000,000 had been omitted from the financial statements for the year ended December
31, 2018.

What amount should be reported as a prior error in the financial statements for 2019?
a. 1,800,000
b. 1,000,000
c. 800,000
d. 200,000

Answer: B – 1,000,000
Solution:
Inventory write off is not a prior period error.

Problem 9-11
In reviewing the draft financial statements for the year ended December 31, 2020, Bituin Company
decided that market conditions were such that the provision for inventory obsolescence on December 31,
2020 should be increased by P3,000,000.

If the same basis of calculating inventory obsolescence had been applied on December 31, 2019, the
provision would have been P1,800,000 higher than the amount recognized in statement of comprehensive
income.

1. What adjustment should be made to net income of 2019?

a. 3,000,000 decrease
b. 3,000,000 increase
c. 1,200,000 decrease
d. 1,200,000 increase

Answer: C – 1,200,000 decrease

Solution:
Overvaluation of December 31, 2020 inventory (3,000,000)
Overvaluation of December 31, 2019 inventory 1,800,000
Net decrease in 2019 profit (1,200,000)

2. What adjustment should be made to net income of 2019 presented as comparative

figure in 2020?
a. 1,800,000 decrease
b. 1,800,000 increase
c. 3,000,000 decrease
d. 0

Problem 9-12
During the year December 31, 2020, Samar Company revealed the following events:
 A counting error relating to inventory on December 31, 2019 was discovered. This required a
reduction in the carrying amount of inventory on that date of P280,000.
  The provision for uncollectible accounts receivable on December 31, 2019 was P300,000. During
2020, an amount of P50,000 was written off the December 31,2019 accounts receivable.

What adjustment is required to restate retained earnings on January 1, 2020?

a. 280,000
b. 300,000
c. 580,000
d. 0

Answer: A – 280,000
Solution:
The reduction in the carrying amount of inventory in December 31, 2019 of P280,000 is a prior error
in the 2020 statement of retained earnings.
The provision for uncollectible accounts receivable is a change in accounting estimate
and therefore has no effect on retained earnings.

Problem 9-13
After the issuance of the 2019 financial statements, Narra Company discovered a computational error of
P150,000 in the calculation of the December 31, 2019 inventory. The error resulted in a P150,000
overstatement in the cost of goods sold for the year ended December 31, 2019.

In October 2020, the entity paid the amount of P500,000 in settlement of litigation instituted against it during
2019.

In the 2020 financial statements, what is the pretax adjustment to retained earnings on January 1, 2020?
a. 150,000 credit
b. 350,000 debit
c. 500,000 debit
d. 650,000 credit

Answer: A – 150,000 credit or B – 350,000 debit

Solution:
Inventory – January 1, 2019 150,000 or Settlement of litigation has no effect on retained earnings
Retained earnings 150,000

Problem 9-16
Natasha Company reported net income of P700,000 for 2020.

The entity declared and paid dividends of P150,000 in 2020 and P300,000 in 2019.

In the financial statements for the year ended December 31, 2019, the entity reported retained earnings of
P1,100,000 on January 1, 2019. The net income for 2019 was P600,000.

In 2020, after the 2019 financial statements were approved for issue, the entity discovered an error in the
December 31, 2020 financial statements.

The after-tax effect of the error was a P650,000 overstatement of net income for the year ended
December 31, 2019 due to underdepreciation.

1. What amount was reported as retained earnings on December 31, 2018?

a. 1,400,000
b. 1,700,000
c. 2,000,000
d. 2,100,000

Answer:
Retained earnings – January 1, 2019 1,100,000
Net income 600,000
Dividend declared and paid in 2019 (300,000)
 Retained earnings – December 31, 2019 1,400,000

2. What amount should be reported as retained earnings on December 31, 2019?

a. 1,300,000
b. 2,900,000
c. 1,650,000
d. 1,950,000
Answer:
Retained earnings – January 1, 2020 1,400,000
Net income 700,000
Prior period error (650,000)
Dividend declared and paid in 2020 (150,000)
Retained earnings – December 31, 2020 1,300,000

Or

Retained earnings, Jan. 1, 2020 1,400,000

Correction of error:
Overstatement of prior period Income (650,000)
Corrected Retained earnings 750,000
Net Income 700,000
Dividends Paid (150,000)
Retained earnings, Dec. 31,2019 1,300,000