HOMEWORK ON ACCOUNTING CHANGES, POLICY AND ERRORS

1. On January 1, 2014, Davao Company purchased a machine for P3,000,000 and depreciated it by the straight–
line method using an estimated life of 8 years with no salvage value. On January 1, 2017, the company
determined that the machine has a useful life of 6 years from the date of acquisition and will have a salvage
value of P240,000. An accounting change was made in 2017 to reflect these additional data.
(a) How much is the carrying amount of the machine on December 31, 2016?
(b) How much is the accumulated depreciation of the machine on December 31, 2017?
(c) How much is the carrying amount of the machine on December 31, 2018?

2. During 2017, Estancia Company determined that its machinery which was previously depreciated over a
seven-year life had an estimated useful life of five years only. An accounting change was made in 2017 to
reflect the change in estimate. If the change had been made in 2016, accumulated depreciation would have
been P800,000 at December 31, 2016 instead of P600,000. As a result of this change, the 2017 depreciation
expense was P50,000 greater. The income tax rate was 35%. What amount of adjustment should be made on
Accumulated Profits to effect the change in estimated useful life of the machinery?

3. On January 1, 2013, Guagua Company purchased for P5,000,000 a machine with a useful life of ten (10) years
and P50,000 of salvage value. The machine was depreciated by the double–declining balance method. The
company shifted to the sum of the year’s digit method of depreciation on January 1, 2017, disclosing in its
books the reason for the change. What should be the depreciation expense on this machine for the year ended
December 31, 2017?

4. On January 1, 2017, Iloilo Company changed its inventory cost flow method to FIFO from weighed average
for both financial statement and income tax reporting purposes to comply with the new standard. The change
resulted in a P600,000 decrease in the beginning inventory at January 1, 2017. Prepare a journal entry to effect
this change.

5. Mabuhay Company declared 10% share dividends in 2017 and 2018, both share dividends declarations were
charge to retained earnings at par value. At the date of declaration in 2017, Mabuhay had 200,000, P100 par
value shares outstanding, shares were selling at P120. In 2018, shares were traded at P125 when dividends
were declared.

Assuming that the errors were discovered at the end of 2018:

1. How much is the net increase (decrease) in retained earnings in 2018?
2. How much is the net increase (decrease) in shareholder’s equity in 2018?
3. How much is the correct amount charge to retained earnings in 2017 and 2018 declaration?
4. Prepare the journal entry to correct the balances in 2018.

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