Scribd Logo
Upload

Welcome to Scribd!

  • 2 views

    Chapter 9 (With Problems)

    Uploaded by

    Abigail Padilla
    valix vol 3

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content

    You might also like

    Chapter 9 (With Problems)

    Uploaded by

    Abigail Padilla
    2 views25 pages
    valix vol 3

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Report this Document
    valix vol 3

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    Download as pdf
    2 views25 pages

    Chapter 9 (With Problems)

    Uploaded by

    Abigail Padilla
    valix vol 3

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    Download as pdf
    of 25
    CHAPTER 9 ACCOUNTING CHANGES Change in accounting policy Prior period errors TECHNICAL KNOWLEDGE To understand the concept of a change in accounting policy. To know the recognition and reporting of a change in accounting policy. : To know the guideline when selecting accounting policy in. the absence of an accounting standard. To understand the concept of prior period errors. To know the recognition and reporting of prior period errors. 230 ACCOUNTING POLICIES Accounting Policies are ¢ conventions, rules and pr preparing and presenting he specific principles, bases, ‘actices applied by an entity in financial statements. Accounting policies Are essential for a proper understandin; of the information fanat 6 contained in the financial statements. An entity is required to outline ail significant accounting policies applied in preparing financial statements Under accounting standards, ‘ alternative treatments are possible. In this case, it becomes all the more important for an entity to clearly state the accounting policies used in preparing financial statements, * The entity shall select and apply the same accounting policies each period in order to achieve comparability of financial statements or to identify trends in the financial position, performance and cash flows of the entity. Change in accounting policy Once selected, accounting policies must be applied consistently for similar transactions and events. ‘A change in accounting policy shall be made only when: a. Required by an accounting standard or an interpretatiqn of the standard. b. The change will result in more relevant and faithfully represented information about the financial position, financial performance and cash flows of the entity. i olicy Examples of change in accounting P! 7 i ises when an entity ado A change in accounting policy On 1. hich is different fron generally accepted accounting principle w' from, the one previously used by the entity. Examples of change in accounting policy are: a. Change in the method of inventory pricing from the Firo to weighted average method. 7 ting for long ter, b. Change in the method of accoun i construction contract from cost recovery method ty percentage of completion method. initi i i ts at revalued ¢. The initial adoption of policy to carty, asset 1 amount is a change in accounting policy to be dealt with as revaluation in accordance with PAS 16. d. Change from cost model to fair value model in measuring investment property. e. Change to a new policy resulting from the requirement of a new PFRS. The following are not changes in accounting policy: a. The application of an accounting policy for events or transactions that differ in substance from previously occurring events or transactions. b. The application of a new accounting policy for events or transactions which did not occur previously or that were immaterial., How to report a change in accounting policy A change in accounting policy required by a standard or 4° interpretation shall be applied in accordance with the transitional provisions therein. If the standard or interpretation contains no transition®! provisions or if an accounting policy is changed voluntarily: the change shall be, applied restropectively or retroactivel)’ 232 yr Retrospective application Rt one ae tion is applying a new accounting policy ” Tr event: fae * . jad always been applied, ‘8 and conditions as if that policy PAS 8, paragraph 22, provides that a just the opening balance of each affected colafouont ot auuicr ie the ae ea presented and the comparative amounts jisclos Prior period : i fig always been appliod, presented as if the new policy Simply stated, retrospective application means that any resulting adjustment from the change in accounting policy shall be reported as an adjustment to the opening balance of retained earnings. The amount of the adjustment is determined as of the beginning of the year of change. However, the adjustment may be made to another component of equity, not retained earnings, in order to comply with another standard. If comparative information is presented, the financial statements of the prior period presented shall be restated to conform with the new accounting policy. The impact of the new policy on the retained earnings prior to the earliest period presented shall be adjusted against the opening balance of retained earnings. ‘Tilustration An entity has used the FIFO method of inventory valuation since it began operations in 2019. The entity decided to change to the weighted average method for determining inventory cost at the beginning of 2020. FIFO Weighted average December 31, 2019 1,000,000 750,000 December 31, 2020 1,500,000 1,200,000 FIFO inventory - January 1, 2020 1,000,000 Weighted average inventory - January 1, 2020 750,000 Decrease in beginning inventory 250,000 233 in peginning inventory decrease fthe 950,000 Adjustment o! Retained earnings 250,009 Inventory - January 1 ost of goods gold for 2020 woulg The c tation of the © 00 and i then Show beginning inventory at Ee reehie snding inventory at P1,200,000 to conform wit mee method. ‘ i " i ity for the year endeq The statement of changes 19 equity December 31, 2020 would show the effect of the change of P250,000 net of tax as a deduction from the beginning balance of retained earnings. Limitation of retrospective application ge in accounting policy is Restropective application of a chant e y determine the cumulative not required if it is impracticable to effect of the change. Applying a requirement of a standard is impracticable when the entity cannot apply it after making every effort to do so. For a particular prior period, it is impracticable to apply a change in an accounting policy when: 1. The effects of the retrospective application are not determinable. 2. Theretrospective application requires assumptions about what management's intentions would have been at that time. 3. The retrospective application requires significant estimate, and it is impossible to distinguish objectively information about the estimate that: a. Provides evidence of circu: : i msta: dat that time, and mces that existe b. Would have been available at that time. 284 prospective application Prospective application means that the new accounting policy is applied to events and transactio; i at which the policy is changed,’ Curing after the date When it is impracticable for an entity to apply a new accounting policy retrospectively because it. cannot determine the cumulative effect of applying the policy to all prior periods, the entity shall apply the new policy prospectively from the earliest Period practicable. In other words, if the amount of thé adjustment on the opening balance of retained earnings cannot be reasonably determined, the change in accounting policy shall be applied prospectively. No adjustments relating to prior periods are made either to the opening balance of retained earnings or other component of equity because existing balances are not recalculated. Change in reporting entity A change in reporting entity is a change whereby entities change their nature and report their operations in such a way that the financial statements are in effect those of a different reporting entity. For example, this accounting change may result from changing the specific subsidiaries comprising the group of entities for which consolidated financial statements are vresented, Achange in reporting entity is actually a change in accounting Policy and therefore shall be ‘treated retrospectively or retroactively to disclose what the statements would have looked like if the current entity had been-existence in the , Prior year. In other words, the financial statements of all prior periods Presented shall be restated to show financial information for the new reporting entity. 235 ‘ d Absence of accounting standar i bs PAS 8, paragraph 10, provides that Sere =a of an accounting standard that epee th a selecting t, agement shal us Baa is eats ae pooeunting policy that arene that is relevant to the economic decision ™! ‘ing Userg and faithfully represented. Paragraphs 11 and 12 specify the following hierarchy i guidance which management may Ane - selecting accounting policies in such circumstances: a. Requirements of current standards dealing with similar matters. b. Definition, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Conceptual Framework for Financial Reporting. c. Most recent pronouncements of other standard-setting bodies that use a similar Conceptual Framework, other accounting literature and accepted industry practices. Prior period errors Prior period errors are omissions and misstatements in the financial statements for one or more periods arising from & failure to use or misuse of reliable information that: a, Was available when financial statements for those periods were authorized for issue. b. cou reasonably be expected to have been obtained and taken into account in the preparati tio” of those financial statements,” eae Hick may occur as a result of mathematical mistak** mistakes in applying accounting policies, misinte’ retatio? of facts, fraud or oversight. , misinterp’ 236 ee How to treat prior period errors Prior period errors shall be corrected retrospectively by adjusting the opening balances of retained earnings and affected assets and liabilities. If comparative statements are presented, the financial statements of the prior period shall be restated so as to reflect the retroactive application of the prior period errors as a retrospective restatement. Retrospective restatement.means correcting the recognition, measurement and disclosure of amounts of elements of financial statements as if a prior period error had never occurred. In other words, the net income, its components, retained earnings and other affected balances for the prior period presented shall be adjusted accordingly. If the error occurred before the earliest prior period presented, the opening balances of assets, liabilities and equity for the earliest prior period presented shall be restated. When it is impracticable to determine the cumulative effect at the beginning of the current period of an error on all prior periods, the entity shall restate the comparative information to correct the error prospectively from the earliest date practicable. 237 * . i rors Disclosure of prior period er! An entity shall disclose the following: + ‘ i ‘or. a. The'nature of the prior period err b. The amount of correction for each prior period Presenteq to the extent practicable: tatement line item affected, a. For each financials I d earnings per share. b. For basic and dilute c. The amount of correction at the beginning of the earlies, prior period presented. d. If retrospective restatement is impracticable for , particular prior period, the circumstances that led to the existence of that condition and a description of how and from when the error has been corrected. Illustration During 2021, an entity discovered that certain goods that had been sold during 2020 were incorrectly included in December 31, 2020 inventory in the amount of P300,000. The accounting records for 2021 before adjustment revealed sales of P5,000,000 and cost of goods sold of P3,000,000. The adjustment on December 31, 2021 to correct the prior period error is: f Retained earnings 300,000 Inventory, January 1 (or cost of goods sold) 300,000 Accordingly, the partial income statement for 2021 would appear as: Sales 000,000 Cost of goods sold (3,000,000 - 300,000) 700,000 : Pear Gross income 2,300,009 so 238 QUESTIONS 4, Define accounting policies. 2. Define @ change; in accounting policy. 3. Give examples of change in accounting policy. 4, When is a change in accounting policy allowed? 5. How is a change in accounting policy reported? 6. Explain the retrospective application of a change in * accounting policy. 7. Explain the adoption of an accounting policy in the absence of an accounting standard. 8. What is a change in reporting entity? 9. Define prior period errors. 10. Explain the treatment. of prior period errors. 239 PROBLEMS Problem 9-1 (AICPA Adapted) ae Z kk Company chan, -At the beginning of current year, Blac! Bed the inventory cost flow method to FIFO from LUFO for boy financial statement and income tax reporting Purposes, The change resulted in a P600,000 increase in the beginning inventory. Ignoring incomé tax, the accounting change should be reported in the current year. a. Income statement as a P600,000 debit b. Retained earnings statement as a P600,000 debit adjustment to the beginning balance — c. Income statement as a P600,000 credit d. Retained earnings statement as a P600,000 credit adjustment to the beginning balance Problem 9-2 (AICPA Adapted) 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? 500,000 addition 500,000 deduétion 900,000 addition 900,000 deduction Bop 240 ce. problem 9-3 (AICPA Adapted) Goddard Company had used the FIFO met! invento! valuation since it began operations in 2017, The entity ‘decided 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: a FIFO Weighted average 2017 4,500,000 5,400,000 au 7,800,000 7,100,000 2019 8,300,000 7,800,000 What pretax amount should be reported in the 2020 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 Problem 9-4 (AICPA Adapted) 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. : ©. Retained earnings statement as a P1,400,000 credit adjustment to the beginning balance. 4. Income statement as a P1,400,000 credit. 241 Problein 9-5 (IAA) any has used the cost TECOVey, Banko Construction Comp: Ty method of accounting since it bega” operations in 2017, reasons, manage! ion method. g income for the past 3 year, ment decided t In 2020, for justifiable © adont the percentage of completio! The following schedule, reportini has been prepared by the entity. 2017 2018 2019 Total revenue from completed contracts 25,000,000 42,000,000 40,000,009 Less: Cost of completed contracts 18,000,000- 29,000,000 28,000,000 Income from operations 7,000,000 13,000,000 | 12,000,009 om operation: 0 3 Coon Casualty loss Inceme 7,000,000 13,000,000 10,000,000 Analysis of the accounting records disclosed the following income by contracts, earned in the years 2017-2019 using the percentage of completion method. 2017 2018 2019 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 (2,000,000) What pretax amount should be reported. as the cumulative effect of change in accounting policy in the statement retained earnings for 2020? a. 6,000,000 b. 8,000,000 c. 7,000,000 da. 0 242 Problem 9-6 (IAA) During 2020, Ruild Company changed from the cost recovery method to the percentage of completi is 30%. Gross profit figures ae letion method. The tax rate 2018 2019 2020 Cost recovery method 950,000 000 Percentage ofeompletion 1,600,000 Tepu'oue 10e 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 Problem 9-7 (IFRS) 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 f : 2. What amount of the development costs should be expensed in 2020? a. 5,840,000 b. 6,360,000 e. 1,720,000 d. 0 248 N Problem 9-8 (AICPA: Adapted) While preparing the financial statements for 2020, Dati), Company discovered computational errors in the 2018 a 2019 depreciation expense. fouch He i t of each year’s inco, ‘These errors resulted in overstatement O° me by P25,000, net of income tax. The net income for 2029 i correctly reported at 500,000. The following amounts were reported in the previously issueg financial statements: 2019 2018 Retained earnings, January 1 To O00 200, Net income Benne Rt oo Retained earnings, December 31 850,000 700,009 == = What is the balance of retained earnings on December 31, 2020? a. 1,300,000 b. 1,350,000 ec. 1,400,000 d. 1,325,000 Problem 9-9 (IAA) Effective January 1, 2020, King Company adopted the accounting policy of expensing advertising and promotion costs when: incurred. Previou: 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, 2019. The income tax rate is 30%, What is the adjustment for the effect of the change it accounting policy that should result in a net charge against income for 2020? nop . & 2 8 Ss 244 problem 9-10 (IFRS) During the year ended D, i events occurred at Harbor Compene? joa ine ef re + It was decided to write off P; was over two years old ag + Sales of P1,000,000 had been omi i rae omitt 1 tatements for the year ended Dee a Cal What amount should be . . i the finiancial statements for a0ae a prior period error in a. 1,800,000 b. 1,000,000 c. 800,000 d. 200,000 P800,000 from inventory which it was obsolete. Problem 9-11 (IFRS) 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 the statement of comprehensive income. 1. What adjustment should be made to net income of 2020? a. 3,000,000 decrease b. 3,000,000 increase c. 1,200,000 decrease d. 1,200,000 increase 2. What adjustment should be made to net income of 2019 presented as comparative figure in 2020? 1,800,000 decrease 1,800,000 increase 3,000,000 decrease 0 perp 246 Problem 9-12 (IFRS) During the year ended December 31, 2020, Samar Company revealed the following events: . i inventory on December 3), ating ie required @ reduction in the n that date of P280,009, + A counting error rel : 2019 was discovered. Thi: carrying amount of inventory ©} ollectible accounts receivable on 300,000. During 2020, an amount ff the December 31, 2019 accounts + The provision for unc December 31, 2019 was of P50,000 was written o} receivable. What pretax adjustment is required to restate retained earnings on January 1, 2020? a. 280,000 b. 300,000 c. - 580,000 da. 0 Problem 9-13 (PHILCPA Adapted) 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? 150,000 credit a. b. 350,000 debit ce. 500,000 debit d. 650,000 credit 246 ce problem 9-14 (AICPA Adapted) niversal Company failed to accru 000 u December 31, 2019. ‘e warranty cost of P100,| In addition, a change from straight line to accelerated depreciation made at the beginning of 2020 resulted in a cumulative effect of P60,000 on retained earnings. What pretax amount should be reported as prior period error in 2020? . a. 100,000 b. 160,000 c. 60,000 d. 0 Problem 9-15 (AICPA Adapted) On January 1, 2020, Raven Company discovered that it had incorrectly expensed a P2,100,000 machine purchased on January 1, 2017. The entity estimated the machine's original useful life to be 10 years and the residual value at P100,000. The entity used the straight line method of depreciation and is subject to a 30% income tax rate. In the December 31, 2020 financial statements, what amount should be reported as a prior period error? a. 1,659,000 b. 1,029,000 © 1,050,000 4. 1,680,000 247 Ny Problem 9-16 (IFRS) Natasha Company reported net income of P700,000 for 2029 The entity declared and paid dividends of P150,000 in 2029 and P3800,000 in 2019. ments for the year ended December tained earnings of P1,100,009 ,, d ret or 2019 was P600,000, In the financial state: 2019, the entity reporte January 1, 2019. The net income 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, 2019? 1,400,000 1,700,000 2,000,000 2,100,000 Bo op 2. What amount should be reported as retained earnings on December 31, 2020? 1,300,000 2,900,000 1,650,000 1,950,000 peop 248 problem 9-17 Multiple choice (IFRS) 1, Which is the first step within the hi i when selecting accounting ee, of guidance . Apply a sti apis, . a ey ronal from IFRS if it specifically relates b. Apply the requirements i as ced and related issue. an ee dealing with similar e. Consider the applicability of the definitions, recognition criteria and measurement concepts in the Conceptual Framework, d. Consider the most recent pronouncements of other standard setting bodies, 2. In the absence of an accounting standard that applies specifically to a transaction, what is the most authoritative source in developing and applying an accounting policy? a, The requirement and guidance in the standard or interpretation dealing with similar and related issue. b. The definition, recognition criteria and measurement of asset, liability, income and expense in the Conceptual Framework. c. Most recent pronouncement of other standard-setting body. d. Accounting literature and accepted industry practice. 3. A change in accounting policy shall be made when I. Required by law. IL. Required by an accounting standard or an interpretation of the standard. Ill. The change will result in more relevant or reliable information about the financial position, financial performance and cash flows of the entity. Land III only . Il and III only Tand II only . I, and III peop 249 itted to change an accounting 4. Why is an entity per™ policy? ity to present a more ti a. The change would allow the en! SOO the financial stateme, result in 1 nts . The ang more reliable and relevant information about financial position, financial performance ang h flows. ere 7 c. The change is made by the interne! auditor. d. The change is made by the CPA. 5. A change in accounting policy requires what kind of adjustment to the financial statements! a. Current period adjustment b. Prospective adjustment c. Retrospective adjustment d. Current and prospective adjustment requires that the 6. A change in accounting policy re\ S prior periods should cumulative effect of the change for be reported as an adjustment to a. Beginning retained earnings for the earliest period presented. b. Net income for the period in which the change occurred. c. Comprehensive income for the earliest period presented. d. Shareholders’ equity for the period in which the change occurred. ‘ 7. Which of the following is accounted f in accounting policy? for as a change » a. Achange in the estimated i eaicrtinens useful life of property, plant b. Achange from cash basis to accrual basis of accounting ae ange from expensing immaterial expenditures t leferring and amortizing them when material d. Achange in i ae i inventory valuation from FIFO to averaé® |

    You might also like