INTERMEDIATE ACCOUNTING 3- ACTIVITY 2

PERDIZO, MILJANE P.
BSA III

Problem 1
On Jan 1 2019, Irene Company purchased a machine for 5,280,000 and depreciated it by the straight line
method using an estimated useful life of 8 years with no residual value. On Jan 1, 2022, the entity
determined that the machine had a useful life of 6 years from the date of acquisition and the residual
value was 480,000. AN accounting change was made in 2022 to reflect these additional data. What is the
accumulated depreciation for the machine on December 31, 2022?
Solution:
Year 1 to Year 3:
Cost of machine = P5,280,000
Salvage Value = P0
Useful Life = 8 years
Annual Depreciation = (Cost of Machine – Salvage Value)/Useful Life
Annual Depreciation = (5,280,000 – P0)/ 8
Annual Depreciation = 660,000

Accumulated Depreciation at the year 3 = P660,000 x 3 = 1,980,000

Book Value at the year 3 = P5,280,000 – 1,980,000 = P3,300,000

Year 4:
Remaining book value = P3,300,000
Salvage Value = 480,000
Remaining Useful Life = 4 years
Annual Depreciation = (P3,300,000 – 480,000)/3 = 940,000
Accumulated Depreciation at the year 4 = P1,980,000 + 940,000 = P2,920,000

Problem 2
On Jan 1 2019, Irene Company changed from the average cost method to the FIFO method to account
for its inventory. Ending inventory for each method was as follows:

2018 2019
Average Cost 500,000 900,000
FIFO Cost 700,000 1,400,000

The income statement information calculated by the average cost method was as follows:
Sales 10,000,000 13,000,000
Cost of goods sold 7,000,000 9,000,000
Operating Expenses 1,500,000 2,000,000
Income before tax 1,500,000 2,000,000
Tax expense 450,000 600,000

The entity accrues tax expense on December 31 of each year and pays the tax in April of the following
year. The income tax rate is 30%. What is the net income to be reported in 2019 after the change to the
FIFO inventory method?

Solution:

Problem 3 
Irene Company was incorporated on Jan 1 2019. In preparing the FS for the year ended December 31
2021, the entity used the following original cost and useful life for the property, plant and equipment:

Cost Useful life

Building 15M 15 yrs
Machinery 10.5M 10 yrs
Furniture 3.5M 7 yrs

On Jan 1 2022, the entity determined that the remaining useful life is 10 years for the building, 7 years
for the machinery and 5 years for the furniture. The entity used the straight line method of depreciation.
What is the total depreciation for 2021?

Solution:

Building Machinery Furniture

Cost- Jan 1, 2019 P15,000,000 P 10,500,000 P 3,500,000
Acc. Dep.
(15,000,000/15x3) 3,000,000
(10,500,000/10x3) 3,150,000
(3,500,000/7x3) 1,500,000
Carrying Amount P 12,000,000 P 7,350,000 P 2,000,000

Acc. Dep. For 2021

(15,000,000/15x3) P 3,000,000
(10,500,000/10x3) P 3,150,000
(3,500,000/7x3) P 1,500,000

Problem 4

Irene Company purchased a machinery on Jan 1 2020 for 7.2M. The machinery has a useful life of 10
years with no residual value and depreciated using the straight line method. In 2023, a decision was
made to change the depreciation method from straight line to sum of years’ digit method. The estimates
of useful life and residual value remained unchanged. What is the depreciation for 2023?

Solution:
 Cost P7,200,000
Accumulated Depreciation
(7,200,000/10x3) 2,160,000
Carrying Amount 5,040,000
Sum of the years (10-3) x 7/28
Depreciation P 1,260,000

Problem 5

Irene Company purchased an equipment on Jan 1, 2020 for 2.4M. The entity used the straight line
depreciation based on a 10 year useful life with no residual value. During 2023, the entity decided that
the equipment would be used only 3 more years. What entry should be made on Jan 1, 2023 to reflect
the accounting change? Explain.

Solution:

2,400,000 / 10 = 240,000 x 3 = 720,000

2,400,000- 720,000 = 1,680,000
1,680,000 / 3 = P 560,000