ACCOUNTING CHANGES
4. Explain "retrospective application" of a change in policy.
Change in accounting policy
1. What is a change in accounting policy?
An accounting policy is the specific principle, basis, convention, rule and practice used by an
entity in preparing and presenting the financial statements. A change in accounting policy
arises when an entity adopts a generally accepted accounting principle which is different 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 FIFO to weighted average method.
b. Change in the method of accounting for long term construction contract.
c. The initial adoption of policy to carry assets at revalued amount.
d. Change from cost model to fair value model in measuring investment property.
e. Change to a new policy resulting from requirement of a new PFRS.
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.
2. When is a change in accounting policy allowed?
PAS 8, paragraph 14, provides that a change in accounting policy shall be made only when:
a. Required by an accounting standard or an interpretation of the standard.
b. The change will result in more relevant or reliable information about the financial
position, financial performance and cash flows of the entity.
3. What is the treatment of a change in accounting policy?
A change in accounting policy required by a standard or an interpretation shall be applied in
accordance with the transitional provisions therein. If the standard or interpretation contains
no transitional provisions or if an accounting policy is changed voluntarily, the change shall
be applied restropectively or retroactively.
"Retrospective application" is applying a new accounting policy to transactions, other events
and conditions as if that policy had always been applied. PAS 8, paragraph 22, provides that
"an entity shall adjust the opening balance of each affected component of equity for the
earliest prior period presented and the other comparative amounts disclosed for each prior
period presented as if the new policy had always been applied." 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.
5. Explain the limitation of retrospective application of a change in accounting policy.
Retrospective application of a change in accounting policy is not required if it is impracticable
to determine the cumulative 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.
6. What are the circumstances where it is impracticable to apply a change in an accounting
policy?
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. The retrospective 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 circumstances that existed at that time, and
b. Would have been available at that time.
7. Explain the "prospective application" of a change in accounting policy.

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 the adjustment on the opening balance of retained earnings
cannot be reasonably determined, the change in accounting policy shall be applied
prospectively.
Prospective application means that the new accounting policy is applied to events,
transactions and conditions occurring after the date of change.
No adjustments relating to prior periods are made either to the opening balance of retained
earnings or in reporting the net income or loss for the current period because existing
balances are not recalculated.
8. Explain the selection and application of an accounting policy where there is an absence of an
accounting standard.
PAS 8, paragraph 10, provides that in the absence of an accounting standard that specifically
applies to a transaction or event, management shall use its judgment in selecting and
applying an accounting policy that results in relevant and reliable information.
Paragraphs 11 and 12 specify the following hierarchy of guidance which management may
use when selecting accounting policies in such circumstances:
a. Requirements of current standards dealing with similar matters.
b. Definitions, 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 nractices.
Change in reporting entity
9. What is a 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 presented.
10. How is the change in reporting entity reported?
A change in reporting entity is actually a change in accounting policy and therefore shall be
treated 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.
Change in accounting estimate
11. What is a change in accounting estimate?
PAS 8, paragraph 5, defines a change in accounting estimate as "an adjustment of the
carrying amount of an asset or a liability or the amount of the periodic consumption of an
asset that results from the assessment of the present status of and expected future benefit
and obligation associated with the asset and liability". Simply stated, a change in accounting
estimate is a normal, recurring correction or adjustment which is the natural result of the use
of estimate.
An estimate may need revision if changes occur regarding the circumstances on which the
estimate was based or as a result of new information, more experience or subsequent
development. By its very nature, the revision of the estimate does not relate to prior periods
and is not a correction of an error.
A change in the measurement basis applied is a change in accounting policy and is not a
change in accounting estimate. Sometimes it is difficult to distinguish a change in accounting
estimate and a change in accounting policy. In such a case, the change is treated as a
change in accounting estimate, with appropriate disclosure.
12. Give examples of items requiring the use of estimate.
Examples of items for which estimates are necessary include:
a. Bad debts
b. Inventory obsolescence
 c. Service life, residual value and expected pattern of consumption of benefits of
depreciable asset
d. Warranty cost
e. Fair value of financial assets and financial liabilities
13. How should the effect of a change in accounting estimate be accounted for?
PAS 8, paragraph 36, provides that the effect of a change in accounting estimate shall be
recognized prospectively by including it in income or loss of:
a. The period of change if the change affects that period only.
b. The period of change and future periods if the change affects both.
In other words, changes in accounting estimates are to be handled currently and
prospectively, if necessary. To the extent that a change in accounting estimate gives rise to
changes in assets and liabilities, or relates to item of equity, it shall be recognized by
adjusting the carrying amount of the related asset, liability or equity in the period of change.
A change in an accounting estimate shall not be accounted for by restating amounts reported
in financial statements of prior periods. Otherwise stated, changes in accounting estimates
are not prior period errors and, therefore, no adjustment is necessary to effect the change.
14. What is the treatment of a change in depreciation method?
A change in depreciation method is accounted for as a change in accounting estimate.
PAS 16, paragraph 61, provides that "the depreciation method shall be reviewed at least at
each financial year-end and if there has been a significant change in the expected pattern of
consumption of the future economic benefits embodied in an asset, the method shall be
changed to reflect the changed pattern, and such change shall be accounted for as a change
in accounting estimate.
Prior period errors
15. What is the meaning of "prior period errors"?
Prior period errors are omissions from and misstatements in the financial statements for one
or more periods arising from a failure to use or misuse of rehable information that:
a. Was available when financial statements for those periods were authorized for issue.
b. Could reasonably be expected to have been obtained and taken into account in the
preparation and presentation of those financial statements.
In other words, prior period errors result to incorrect, inaccurate and unreliable financial
statements of prior periods. Errors may occur as a result of mathematical mistakes, mistakes
in applying accounting policies, misinterpretation of facts, fraud or oversight.
16. What are the three types of errors?
The three types of errors are:
1. Statement of financial position errors
2. Income statement errors
3. Combined statement of financial position and income statement errors
17. Explain "statement of financial position errors".
Statement of financial position errors affect the statement of financial position or real
accounts only, meaning, the improper classification of an asset, liability and capital account.
In such a case, an entry is simply made to reclassify the account balances.
18. Explain "income statement errors".
Income statement errors affect the income statement or nominal accounts only, meaning, the
improper classification of revenue and expense accounts. These errors have no effect on the
statement of financial position and on net income. Thus, a reclassifying entry is necessary
only if the error is discovered in the same year it is committed. Otherwise, if the error is
discovered in a subsequent year, no reclassifying entry is necessary because the nominal
accounts for the current year are correctly stated.
19. Explain "combined statement of financial position and income statement errors".
These errors affect both the statement of financial position and I income statement because
they result in a misstatement of net I income.
For example, if accrued salaries payable is overlooked, the effects are:
a. Salaries expense is understated (income statement error).
b. Liability is understated (statement of financial position error).
c. Net income is overstated (income statement error).
 d. Retained earnings account is overstated (statement of financial position error).
If depreciation is overstated, the effects are:
a. Depreciation expense is overstated (income statement error).
b. Property, plant and equipment are understated (statement of financial position error).
Combined statement of financial position and income statement errors may be classified as
counterbalancing errors and non-counter-balancing errors.
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.
This is known as retrospective restatement which means "correcting the recognition,
measurement and disclosure of amounts of elements of financial statements as if a prior
period error had never occurred."

20. What are counterbalancing errors? In other words, the net income, its components, retained earnings and other affected
balances for the prior period presented shah be adjusted accordingly.
Counterbalancing errors are those which if not detected are automatically counterbalanced or If the error occurred before the earliest prior period presented, the opening balances of
corrected in the next accounting period. In other words, these errors will be offset or assets, liabilities and equity for the earliest prior period presented shall be restated.
corrected over two periods or these errors correct themselves over two periods. If the net
income of one year is understated, the net income of subsequent year is overstated. The two
periods equalize each other. 23. What are the necessary disclosures with respect to prior period errors?
Effects of counterbalancing errors
a. The income statements for two successive periods are incorrect. An entity shall disclose the following:
b. The statement of financial position at the end of the first period is incorrect. 1. The nature of the prior period error.
c. The statement of financial position at the end of the second period is correct. 2. The amount of correction for each prior period presented, to the extent practicable:
Counterbalancing errors usually include misstatement of inventory, prepaid expense, accrued a. For each financial statement line item affected.
expense, deferred income and accrued income. b. For basic and diluted earnings per share.
3. The amount of correction at the beginning of the earliest prior period presented.
4. If retrospective restatement is impracticable for a particular prior period, the
21. What are non-counter-balancing errors? circumstances that led to the existence of that condition and a description of how and
from when the error has been corrected.
Non-counter-balancing errors are those which if not detected are not automatically
counterbalanced or corrected in the next accounting period. In other words, if the net income Multiple Choice - Theory
of one year is understated or overstated, the net income of subsequent year is not affected. Basic concepts
Effects of non-counter-balancing errors 1. Accounting changes are often made and the monetary impact is reflected in the financial
a. The income statement of the period in which the error is committed is incorrect but the statements of an entity even though, in theory, this may be a violation of the accounting
succeeding income statement is not affected. concept of
b. The statement of financial position of the year of error and succeeding statements of A. Consistency C. Objectivity
financial position are incorrect until the error is corrected. B. Materiality D. Prudence FA © 2014
Non-counter-balancing errors usually include misstatement of depreciation and doubtful
accounts. 2. Which of the following is not classified as an accounting change?
A. Change in accounting policy
22. What is the treatment of prior period errors? B. Change in accounting estimate
C. Error in the financial statements
Prior period errors shall be corrected retrospectively by adjusting the opening balances of D. All of these are classified as an accounting change FA © 2014
retained earnings and affected assets and liabilities.
3. Which of the following is the best explanation why accounting changes are classified into
change in accounting policy and change in accounting estimate?
A. The materiality of the change involved.
B. The need of managers to provide a favorable profit picture.
C. The fact that some treatments are considered GAAP and some are not. TOA © 2013
D. Each change involves different method of recognition in the financial statements.
policy?
A. The change is long-term.
B. The change is made by the internal auditor.
C. The change would allow the entity to present a more favorable profit picture.
D. The change would result in the financial statements providing more reliable and relevant
information about financial position, financial performance and cash flows. FA © 2014

4. Which is the best explanation why accounting changes are classified into change in 9. An entity changes an accounting policy if
accounting policy and change in accounting estimate? I. It is required by law.
A. Management decision. II. The change will result in providing reliable and more relevant information
B. The materiality of the changes involved. A. I only C. Both I and II
C. The fact that some methods are considered GAAP. FA © 2014 B. II only D. Neither I nor II TOA © 2013
D. The accounting changes involve different method of recognition in the financial
statements. 10. A change in accounting policy shall be made when
I. Required by an accounting standard or an interpretation of the standard.
Change in accounting policy II. The change will result in more relevant or reliable information about the financial
5. These are the specific principles, bases, conventions, rules and practices applied in the' position, financial performance and cash flows of the entity.
preparation and presentation of financial statements. A. I only C. Either I or II
A. Accounting concepts C. Accounting principles B. II only D. Neither I nor II FA © 2014
B. Accounting policies D. Accounting standards FA © 2014
11. A change in measurement basis is
6. In the absence of an accounting standard that applies specifically to a transaction, what is the A. A change in accounting estimate C. A correction of an error
most authoritative source in developing and applying an accounting policy? B. A change in accounting policy D. Not an accounting change FA © 2014
A. Accounting literature and accepted industry practice.
B. Most recent pronouncement of other standard-setting body. 12. The initial application of a policy to revalue assets is
C. The requirement and guidance in the standard or interpretation dealing with similar and A. A change in accounting estimate C. Correction of a prior period error
related issue. B. A change in accounting policy D. Not an accounting change TOA © 2013
D. The definition, recognition criteria and measurement of asset, liability, income and
expense in the. Conceptual Framework. FA © 2014 13. Which of the following is accounted for as a change in accounting policy?
A. A change in the estimated useful life of plant assets.
7. An entity changes an accounting policy when B. A change in inventory valuation from average cost to FIFO.
A. It is required by law. C. A change from the cash basis of accounting to the accrual basis of accounting.
B. The management decides to do so. D. A change from expensing immaterial expenditures to deferring and amortizing them
C. The change would result in providing reliable and more relevant information about when material. TOA © 2013
financial position, performance and cash flows.
D. It is required by IFRS or the change would result in providing reliable and more relevant 14. Which of the following is accounted for as a change in accounting policy?
information about financial position, performance and cash flows. FA © 2014 A. A change from cash basis to accrual basis
B. A change in valuation from FIFO to average cost
8. Which of the following would be a reason why an entity is permitted to change accounting C. A change in the estimated useful life of plant asset FA © 2014
 D. A change from expensing immaterial expenditures to deferring and amortizing them
20. A change in accounting policy does not include
15. A change in accounting policy includes A. Change in the estimated useful life of an asset.
I. Adoption of an accounting policy for events or transactions that differ in substance from B. Change in method of inventory valuation from FIFO to weighted average.
previously occurring events or transactions. C. Change in method of inventory valuation from weighted average to FIFO.
II. The adoption of a new accounting policy for events or transactions which did not occur D. Change from the practice of paying as Christmas bonus one month's salary to the new
previously or that were immaterial. practice of paying one-half month's salary. FA © 2014
A. I only C. Both I and II
B. II only D. Neither I nor II FA © 2014 21. How is a change in accounting policy reported?
I. A change in accounting policy required by PFRS shall be reported in accordance with
16. Which of the following should be treated as a change in accounting policy? the transitional provisions therein.
I. A new accounting policy of capitalizing development costs as a project has become II. If the PFRS contains no transitional provisions or if an accounting policy is changed
eligible for capitalization for the first time. voluntarily, the change shall be reported retrospectively.
II. A new policy resulting from the requirements of a new PFRS. A. I only C. Either I or II
III. To provide more relevant information, items of property, plant and equipment are now B. II only D. Neither I nor II FA © 2014
being measured at fair value, whereas they had previously been measured at cost.
IV. An entity engaging in construction contracts for the first time needs an accounting policy 22. This means "applying a new accounting policy to transactions, other events and conditions as
to deal with this. if that policy had always been applied".
A. I and II only C. II and III only A. Prospective application C. Retrospective application
B. I and IV only D. I, II, III and IV FA © 2014 B. Prospective restatement D. Retrospective restatement FA © 2014

17. A change in accounting policy includes all of the following, except 23. Which of the following terms best describes applying a new accounting policy to transactions
A. The initial adoption of a policy to carry assets at revalued amount. as if that policy had always been applied?
B. The change in inventory valuation from FIFO to weighted average method. A. Prospective application C. Retrospective application
C. The change in depreciation method from sum of years' digits to straight line. B. Prospective restatement D. Retrospective restatement FA © 2014
D. The change from cost model to revaluation model in measuring property, plant and
equipment. FA © 2014 25. A change in accounting policy requires what kind of adjustment to the financial statements?
A. Current and prospective adjustment C. Prospective adjustment
18. Which of the following is not treated as a change in accounting policy? B. Current period adjustment D. Retrospective adjustment FA © 2014
A. A change from average cost to FIFO
B. A change to a different method of depreciation 26. If it is impracticable to determine the cumulative effect of an accounting change to any of the
C. A change from cost recovery to percentage of completion method prior periods, the accounting change should be accounted for
D. A change from full cost to successful effort method in the extractive industry FA © 2014 A. On a prospective basis.
B. As a prior period adjustment.
19. Which of the following is not treated as a change in accounting policy? C. As a cumulative effect change on the income statement.
A. A change from cost recovery to percentage of completion D. As an adjustment to retained earnings in the first period presented. TOA © 2013
B. A change from average cost to FIFO for inventory valuation
C. A change to a different method of depreciation for plant assets 27. Which of the following should be considered a direct effect of a change in accounting policy?
D. A change from full cost to successful effort method in the extractive industry TOA © 2013 A. Deferred tax C. Royalty payment
 B. Profit sharing D. None of these TOA © 2013 A. Net income for the period in which the change occurred.
B. Comprehensive income for the earliest period presented.
28. Indirect effect from a change in accounting policy should be reported C. Beginning retained earnings for the earliest period presented.
A. As a prior period error. D. Shareholders' equity for the period in which the change occurred. FA © 2014
B. In the period in which the accounting change occurs.
C. Retrospectively to the earliest period presented. 34. Which of the following statements is correct concerning application of a change in accounting
D. As a cumulative change in accounting policy in the current period. TOA © 2013 policy?
I. An entity shall account for a change in accounting policy resulting from the initial
29. A public entity that changed an accounting policy voluntarily should application of a standard or an interpretation in accordance with the transitional
A. Account for the change retrospectively. provision, if any.
B. Inform shareholders prior to taking the decision. II. When an entity changes an accounting policy upon initial application of a standard or an
C. Treat the effect of the change as a component of other comprehensive income. interpretation that does not include specific transitional provision applying to that change,
D. Treat the change prospectively and adjust the effect of the change in the current period the change shall be applied retrospectively.
and future periods FA © 2014 A. I only C. Both I and II
B. II only D. Neither I nor II TOA © 2013
30. Which of the following changes should be treated retrospectively?
I. A change is made in the method of calculating the provision for uncollectible accounts Change in reporting entity
receivable. 35. A change in reporting entity is actually a change in accounting
II. Investment properties are now measured at fair value, having previously been measured A. Concept C. Method
at cost. B. Estimate D. Policy FA © 2014
A. I only C. Both I and II
B. II only D. Neither I nor II FA © 2014 36. Which of the following does not represent a change in reporting entity?
A. Disposition of a subsidiary or other business unit
31. An entity that changed the method of inventory valuation from weighted average to FIFO B. Changing the entities included in combined financial statements
shall account for the change as C. Presenting consolidated statements in place of the statements of individual entities
A. A change in estimate and account for it prospectively. D. Changing specific subsidiaries that constitute the group of entities for which consolidated
B. A correction of an error and account for it retrospectively. financial statements are presented. FA © 2014
C. A change in accounting policy and account for it prospectively. .
D. A change in accounting policy and account for it retrospectively. FA © 2014 37. Which of the following accounting treatment is proper for a change in reporting entity?
A. Note disclosure and supplementary schedule
32. An entity decided to change from FIFO to weighted average method of inventory valuation. B. Restatement of current period financial statements
The entity should report the effect of this accounting change as C. Adjustment to retained earnings and note disclosure
A. Prior period error D. Restatement of financial statements of all prior periods presented FA © 2014
B. Component of other comprehensive income
C. Component of income from continuing operations 38. An entity has included in the consolidated financial statements this year a subsidiary acquired
D. Retrospective application to previous years' financial statement TOA © 2013 several years ago that was appropriately excluded from consolidation last year. How should
this change be reported?
33. A change in accounting policy requires that the cumulative effect of the change should be A. A correction of an error
shown as an adjustment to B. Neither an accounting change nor a correction of an error
 C. An accounting change that should be reported prospectively B. By restating the financial statements of all prior periods presented.
D. An accounting change that should be reported retrospectively FA © 2014 C. As a component of income from continuing operations, in the period of change and
future periods if the change affects both.
39. Which of the following statements is correct regarding accounting changes that result in D. As a separate disclosure after income from continuing operations, in the period of
financial statements that are in effect the statements of a different reporting entity? change and future periods if the change affects both. FA © 2014
A. The financial statements of all prior periods presented are adjusted retrospectively.
B. No restatements or adjustments are required if the changes involve consolidation 44. Which of the following is characteristic of a change in an accounting estimate?
method of accounting for subsidiaries. A. It usually need not be disclosed
C. No restatements or adjustments are required if the changes involve the cost or equity B. It does not effect the financial statements of prior period
method of accounting for investments. C. It makes necessary the reporting of proforma amounts for prior periods
D. Cumulative-effect adjustments should be reported as separate line item in the financial D. It should be reported through the restatement of the financial statements FA © 2014
statements pertaining to the year of change. FA © 2014
45. This means "applying a new accounting policy to transactions and events occurring after the
Change in accounting estimate date at which the policy is changed".
40. It is an adjustment of the carrying amount of an asset or a liability or the amount of the A. Prospective application C. Retrospective application
periodic consumption of an asset that results from the assessment of the present status and B. Prospective restatement D. Retrospective restatement FA © 2014
expected future benefit and obligation associated with the asset and liability.
A. Change in accounting estimate C. Change in reporting entity FA © 2014 46. Which of the following statements best describes "prospective application"?
B. Change in accounting policy D. Correction of a prior period error A. Correcting the financial statements as if a prior period error had never occurred.
B. Applying a new accounting policy to transactions as if that policy had always been
41. When it is difficult to distinguish between a change in estimate and a change in accounting applied.
policy, an entity shall C. Recognizing a change in accounting policy in the current and future periods affected by
A. Treat the entire change as a change in accounting policy. the change.
B. Treat the entire change as a change in estimate with appropriate disclosure. D. Applying a new accounting policy to transactions occurring after the date at which the
C. Ignore it in the year of the change and then wait for the following year to see how the policy is changed. FA © 2014
change develops and then treat it accordingly.
D. Apportion on a reasonable basis the relative amounts of change in estimate and the 47. Prospective recognition of the effect of a change in an accounting estimate means that the
change in accounting policy and treat each one accordingly. change is applied to transactions from the
A. Date of the change in estimate
42. When it is difficult to distinguish a change in an accounting policy from a change in an B. Beginning of the year of change
accounting estimate, the change is treated as C. End of the current reporting period
A. Correction of an error D. Date of issuance of financial statements FA © 2014
B. Change in accounting policy
C. Initial adoption of an accounting policy 48. Why is retrospective treatment of changes in accounting estimate prohibited?
D. Change in accounting estimate with appropriate disclosure FA © 2014 A. The retrospective treatment for any type of presentation is not allowed.
B. Retrospective treatment of changes in accounting estimate is prohibited because PFRS
43. The effect of a change in accounting policy that is inseparable from the effect of a change in requires it.
accounting estimate shall be reported C. PFRS does not prohibit retrospective treatment of changes in accounting estimate but is
A. As a correction of an error. silent on this issue.
 D. Changes in accounting estimate are normal recurring corrections and adjustments which balance.
are the natural result of the accounting process. FA © 2014
55. A change from the straight line method of depreciation to sum of years' digits is accounted for
49. Which accounting change should always be accounted for in current and future periods? as
A. Change in accounting estimate C. Change in reporting entity A. Accounting error C. Change in accounting policy
B. Change in accounting policy D. Correction of an error FA © 2014 B. Change in accounting estimate D. Prior period error FA © 2014

50. Which of the following is the proper time period to record the effect of a change in accounting 56. When an entity changed from the straight line to double declining depreciation, which of the
estimate? FA © 2014 following should be reported?
A. Current period C. Current period and prospectively A. Prior period error
B. Retrospectively D. Current period and retrospectively B. Proforma effect of retroactive application
C. Cumulative effect of change in accounting policy
51. The effect of a change in accounting estimate shall be recognized prospectively by including D. An accounting change that should be reported currently and prospectively FA © 2014
it in profit or loss of
A. Prior periods only 57. Which of the following is not a justification for a change in depreciation method?
B. Current period only A. A change in the estimated future benefits from an asset
C. Future periods only B. A change in the pattern of the estimated future benefits from an asset
D. Current period and future periods if the change affects both FA © 2014 C. To conform with the depreciation method prevalent in a particular industry FA © 2014
D. A change in the estimated useful life of an asset as a result of unexpected obsolescence
52. How should the effect of a change in accounting estimate be accounted for?
A. By reporting proforma amounts for prior periods. 58. When an entity changed from the straight-line method of depreciation for previously recorded
B. As a prior period adjustment to beginning retained earnings. assets to the double declining balance method, which of the following should be reported?
C. In the period of change and future periods if the change affects both. A. Prior period error
D. By restating amounts reported in financial statements of prior periods. FA © 2014 B. Proforma effect of retroactive application
C. Cumulative effect of change in accounting policy
53. Which of the following should be reported as a change in accounting estimate? D. An accounting change that should be reported currently and prospectively TOA © 2013
A. Change made to comply with a new PFRS
B. Change in the revenue recognition for long-term construction contract 59. The effect of the accounting change should be recorded on a prospective basis when the
C. Change in the beginning inventory due to a discovery of a bookkeeping error change is from
D. Increase in the rate applied to net credit sales from one percent to two percent in A. Cash basis of accounting for vacation pay to the accrual basis.
determining provision for uncollectible accounts receivable FA © 2014 B. Presentation of statements of individual entities to their inclusion in consolidated
statements.
54. The effect of a change in the expected pattern of consumption of economic benefit of a C. Straight line method of depreciation for previously recorded assets to the double
depreciable asset shall be declining balance method.
A. Included in other comprehensive income. D. Cost recovery method of accounting for long-term construction-type contract to the
B. Included in the determination of income or loss in the period of change. FA © 2014 percentage of completion method. TOA © 2013
C. Included in the determination of income or loss in the period of change and future
periods. 60. Which of the following is not a justification for a change in depreciation method?
D. Included in the statement of retained earnings as an. adjustment of the beginning A. A change in the estimated future benefits from an asset
 B. A change in the pattern of the estimated future benefits from an asset
C. To conform with the depreciation method prevalent in a particular industry TOA © 2013
D. A change in the estimated useful life of an asset as a result of unexpected obsolescence
61. Which of the following is required for a change from sum of years' digits to straight line?
A. Retrospective restatement
B. Recomputation of depreciation for current and future years
C. The cumulative effect on prior years is reported in the statement of retained earnings
D. All of these are required FA © 2014
62. The effect of a change in the expected pattern of consumption of economic benefits of a
depreciable asset shall be included
A. as component of other comprehensive income.
B. in the determination of income or loss in the period of change only. TOA © 2013
C. in the determination of income or loss in the period of change and future periods.
D. in the statement of retained earnings as an adjustment of the beginning balance.
63. A change in the estimated useful life of a building
A. Is not allowed by GAAP.
B. Must be handled as a retroactive adjustment.
C. Affects the depreciation on the building beginning with the year of the change.
D. Creates a new account to be recognized in the income statement reflecting the
difference in net income. FA © 2014
64. When an entity changed the expected service life of an asset because additional information
has been obtained, which of the following should be reported?
A. Prior period error
B. Proforma effect of retroactive application
C. Cumulative effect of change in accounting policy
D. An accounting change that should be reported in the period of change and future periods
if the change affects both FA © 2014
65. The estimated life of a building that has been depreciated 30 years of an originally estimated
life of 50 years has been revised to a remaining life of 10 years. What is the treatment of the
accounting change?
A. Continue to depreciate the building over the original 50-year life.
B. Depreciate the remaining carrying amount over the remaining life of the asset.
C. Adjust accumulated depreciation to its appropriate balance, through net income, based
on a 40-year life and then depreciate the adjusted carrying amount as though the
estimated life had always been 40 years.
D. Adjust accumulated depreciation to its appropriate balance, through retained earnings,
based on a 40-year life and then depreciate the adjusted carrying amount as though the
estimated life had always been 40 years. FA © 2014
66. A change in the residual value of an asset arising because additional information has been
obtained is
A. A correction of an error
B. Not an accounting change
C. An accounting change that should be reported by restating the financial statements of all
prior periods presented
D. An accounting change that should be reported in the period of change and future periods
if the change affects both FA © 2014
67. When the residual value of property, plant and equipment had drastically changed and the
change is material, the entity should
A. Change the annual depreciation for the current year and future years.
B. Change the depreciation charge and treat it as a correction of an error. FA © 2014
C. Retrospectively change the depreciation charge based on the revised residual value.
D. Ignore the effect of the change on annual depreciation because change in residual value
would normally affect the future only since this is expected to be recovered in the future.
68. When an independent valuation expert advised an entity that the residual value of the plant
and machinery had drastically changed and the change is material, the entity should
A. Change the depreciation charge and treat it as a correction of an error.
B. Change the annual depreciation for the current year and future years. TOA © 2013
C. Retrospectively change the depreciation charge based on the revised residual value.
D. Ignore the effect of the change on annual depreciation because change in residual value
would normally affect the future only since this is expected to be recovered in the future.
69. A change in the estimated warranty liability requires
A. Correcting prior period retained earnings
B. Restating the financial statements of all prior periods presented.
C. Reporting current and future financial statements on the new basis.
D. Presenting the effect of proforma data on income and earnings per share for all prior
periods presented. FA © 2014
70. During the current year, an entity increased the estimated quantity of copper recoverable
from the mine. The entity used the units of production method. As a result of the change,
 which of the following should be reported in the financial statements for the current year? of an error.
A. Retroactive application of new depletion base B. The use of reasonable estimate is an essential part of the preparation of financial
B. Cumulative effect of change in accounting policy statements and does not undermine their reliability.
C. Cumulative effect of change in accounting policy and retroactive application of new C. As a result of the uncertainties inherent in business activities, many items in financial
depletion base statements cannot be measured with precision but can only be estimated.
D. Neither cumulative effect of change in accounting policy nor retroactive application of D. An estimate may need revision if changes occur in the circumstances on which the
new depletion base FA © 2014 estimate was based or as a result of new information or more experience. FA © 2014

71. During the current year, an entity increased the estimated quantity of copper recoverable Prior period error
from its mine. The entity used the units of production depletion method. As a result of the 76. Prior period errors are omissions from and misstatements in the financial statements or one
change, which of the following should be reported in the entity's financial statements? or more periods arising from a failure to use or misuse of reliable information that
I. Cumulative effect of change in accounting policy I. Was available when financial statements for those periods were authorized for issue.
II. Retroactive application of new depletion base II. Could reasonably be expected to have been obtained and taken into account in the
A. I only C. Both I and II preparation and presentation of those financial statements.
B. II only D. Neither I nor II TOA © 2013 A. I only C. Either I or II
B. II only D. Both I and II TOA © 2013
72. A change in the unit depletion rate is accounted for as
A. Change in accounting policy Counterbalancing & non-counterbalancing error
B. Change in accounting estimate 77. Which of the following is a counterbalancing error?
C. Correction of an accounting error A. Understated depletion expense
D. Change in accounting estimate effected through a change in accounting policy FA © 2014 B. Bond premium under-amortized
C. Overstated depreciation expense
73. A change in the periods benefited by a deferred cost because additional information has D. Prepaid expense adjusted incorrectly FA © 2014
been obtained is
A. A correction of an error 78. Which of the following errors will not self-correct in the next year?
B. Not an accounting change A. Accrued revenue not recognized at year-end
C. An accounting change that should be reported by restating the financial statements of all B. Accrued expense not recognized at year-end
prior periods presented C. Depreciation expense overstated for the year
D. An accounting change that should be reported in the period of change and future periods D. Prepaid expense not recognized at year-end FA © 2014
if the change affects both FA © 2014
Examples
74. Which of the following statements in relation to a change in accounting estimate is true? 79. An entity made a very large arithmetical error in the preparation of the year-end financial
I. Changes in accounting estimate are accounted for retrospectively. statements by improper placement of a decimal point in the calculation of depreciation. The
II. Changes in accounting estimate result from new information or new development. error caused the net income to be reported at almost double the proper amount. The
A. I only C. Both I and II correction of the error when discovered in the next year should be treated as
B. II only D. Neither I nor II FA © 2014 A. A prior period error.
B. Other expense for the year in which the error was made. TOA © 2013
75. Which of the following statements is incorrect concerning accounting estimate? C. An increase in depreciation expense for the year in which the error is discovered.
A. By its very nature, the revision of an estimate relates to a prior period and is a correction D. A component of income for the year in which the error is discovered but separately listed
 on the income statement and fully explained in a note to the financial statements.
80. An example of a correction of an error in previously issued financial statements is a change
A. In the tax assessment related to a prior period.
B. From the cash basis of accounting to the accrual basis of accounting.
C. From the FIFO method of inventory valuation to the average cost method. FA © 2014
D. In the service life of plant assets based on change in the economic environment.
81. Which of the following, if discovered in the accounting period subsequent to the period of
occurrence, should be reported as correction of an error?
A. Capitalization of an expense.
B. A change from double declining to straight-line depreciation.
C. Change in percentage of sales used for determining bad debt expense.
D. The estimate of useful life of a depreciable asset should have been revised. FA © 2014
Not an example
82. Which of the following should not be reported retroactively?
A. Change from a good faith but erroneous estimate to a new estimate.
B. Correction of an overstatement of ending inventory made two years ago.
C. Use of an unrealistic accounting estimate, then changing to a realistic estimate. Valix 2012
D. Use of an unacceptable accounting principle, then changing to an acceptable accounting
principle.
83. Which of the following is not an example of an accounting error?
A. Misstatement of asset, liability or equity
B. Failure to recognize accrual and deferral
C. Recognition of gain on fully depreciated asset
D. Incorrect classification of an expenditure as between expense and asset FA © 2014
84. Prior period errors include all of the following, except
A. Effects of mathematical mistakes
B. Mistakes in applying accounting policies
C. Oversights or misinterpretation of facts and fraud
D. Effects of a change in the estimated useful life of an asset FA © 2014
Retrospective restatement
85. This means "correcting the recognition, measurement and disclosure of amounts of elements
of financial statements as if a prior period error had never occurred".
A. Prospective application C. Retrospective application
B. Prospective restatement D. Retrospective restatement FA © 2014
86. On March 1, 2015, the entity discovered that, as a result of a computational error,
depreciation expense for 2014 was overstated. The 2014 financial statements were
authorized for issue on March 31, 2015. What must the entity do?
A. Do nothing.
B. Reduce depreciation for 2015
C. Correct the 2014 financial statements before issuing them.
D. Restate the depreciation expense reported for 2014 in the comparative figures of the
2015 financial statements as retrospective restatement of a prior period error. FA © 2014
87. On March 31, 2015, the entity discovered that, as a result of a computational error,
depreciation expense for 2014 was overstated. The 2014 financial statements were
authorized for issue on March 1, 2015. What must the entity do?
A. Do nothing.
B. Reduce depreciation for 2015.
C. Reissue the 2014 financial statements with the correct depreciation expense.
D. Restate the depreciation expense reported for 2014 in the comparative figures of the
2015 financial statements as retrospective restatement of a prior period error. FA © 2014
88. An entity shall correct material prior period errors retrospectively in the first set of financial
statements after their discovery by
I. Restating the comparative amounts for the prior period presented in which the error
occurred.
II. Restating the opening balances of asset, liability and equity for the earliest prior period
presented if the error occurred before the earliest prior period presented.
A. I only C. Either I or II
B. II only D. Neither I nor II TOA © 2013
89. An entity changed from the cash basis of accounting to the accrual basis of accounting during
the current year. The cumulative effect of this change shall be reported in the financial
statements as a
A. Component of income from continuing operations.
B. Component of income from discontinued operations.
C. Prior period adjustment resulting from the correction of an error.
D. Prior period adjustment resulting from the change in accounting policy. FA © 2014
90. Corrections of prior period errors are reported in
A. Other comprehensive income C. Retained earnings
 B. Other income or expense D. Shareholders' equity TOA © 2013 A. The cumulative effect of the error is reported in the beginning balance of each related
account.
91. An entity changed from an accounting principle that is not generally accepted to one that is B. The financial statements are restated to reflect the correction of period-specific effects of
generally accepted. The effect of the change shall be reported, net of applicable income tax, the error.
in the current C. An adjustment to ending retained earnings of the current year should be made with a
A. Income statement as component of discontinued operations note disclosure describing the error.
B. Retained earnings statement after net income but before dividends D. The cumulative effect of the error is reported in the income statement of the current year
C. Income statement as component of income from continuing operations as a cumulative effect of change in accounting policy. TOA © 2013
D. Retained earnings statement as an adjustment of the opening balance FA © 2014
96. Items reported as prior period errors
92. Where financial statements for a single year are being presented, a prior period error A. Do not require further disclosure in the body of the financial statements.
recognized in the current year ordinarily should B. Do not affect the presentation of prior period comparative financial statements.
A. Affect net income of the current year C. Are reflected as adjustment of the opening balance of retained earnings of the earliest
B. Be included in other comprehensive income. period presented. FA © 2014
C. Be shown in the current year's statement of changes in equity FA © 2014 D. Do not include the effect of a mistake in the application of accounting policy as this is
D. Be shown as an adjustment of the balance of retained earnings at the start of the current accounted for as a change in accounting policy rather than as a prior period error.
year
97. A change in accounting policy requires that the cumulative effect of the change for prior
93. During the current year, an entity discovered that ending inventory reported in the financial periods should be reported as an adjustment to
statements for the prior year was understated. How should the entity account for this A. Net income for the period in which the change occurred.
understatement? B. Comprehensive income for the earliest period presented.
A. Adjust the beginning inventory in the prior year. C. Beginning retained earnings for the earliest period presented.
B. Make no entry because the error will self-correct D. Shareholders' equity for the period in which the change occurred. TOA © 2013
C. Adjust the ending balance in retained earnings at current year-end. FA © 2014
D. Restate the financial statements with corrected balances for all periods presented. Effect of correction
98. The draft financial statements of an entity for the current year have been prepared. A final
94. On March 25, 2014, the entity discovered that depreciation expense for 2013 was overstated. review of the draft revealed that closing inventory at the end of the prior year included items
The December 31, 2013 financial statements were authorized for issue on March 1, 2014. which had been sold in the later part of the prior year.
What must the entity do? What is the effect of the adjustment to be made to the profit for the current year and to the
A. Do nothing. profit for the prior year presented as the comparative figure in the financial statements of the
B. Reduce depreciation for the year ended December 31, 2014. current year?
C. Reissue the December 31, 2013 financial statements with the correct depreciation TOA © 2013 A. B. C. D.
expense. Profit for current Increase Increase Decrease Decrease
D. Restate the depreciation expense reported for the year ended December 31, 2013 in the year
comparative figures of the 2014 financial statements as retrospective restatement of a Profit for prior year Increase Decrease Increase Decrease
prior period error. TOA © 2013
Effect of error
95. An entity discovered an error in the prior year financial statements after the statements were 99. If an inventory account is overstated at the beginning of the year, the effect is to
issued. This requires that A. Overstate gross margin
 B. Overstate net purchases position
C. Understate cost of goods sold
D. Overstate cost of goods available for sale Valix 2012 106. If inventory is overstated at the beginning of the year, the effect is to
A. Overstate gross margin
100. If the beginning inventory in the current year was overstated, and that is the only error in the B. Overstate net purchases
current year, the income for the current year would be C. Understate cost of goods sold
A. Understated and assets are overstated. D. Overstate cost of goods available for sale FA © 2014
B. Overstated and assets are overstated.
C. Understated and assets are understated. 107. When the current year's ending inventory is overstated
D. Understated and assets are correctly stated. FA © 2014 A. The next year's net income is overstated.
B. The current year's net income is overstated.
101. If an inventory account is understated at year-end, the effect is to overstated the C. The current year's total assets are understated.
A. cost of goods available for sale C. gross margin D. The current year's cost of goods sold is overstated. FA © 2014
B. cost of goods sold D. net purchases Valix12
108. An overstatement of ending inventory in the current period would result in income of the next
102. If inventory is understated at year-end, the effect is to period being
A. Overstate the gross margin A. Overstated
B. Overstate the net purchases B. Understated
C. Overstate the cost of goods sold C. Correctly stated
D. Overstate the cost of goods available for sale FA © 2014 D. The answer cannot be determined from the information FA © 2014

103. Which of the following would result if the current year's ending inventory is understated in the 109. The current year-end physical inventory appropriately included merchandise purchased on
cost of goods sold calculation? account that was not recorded in purchases until next year. What effect will this error on the
A. Net income would be overstated current year-end assets, liabilities, retained earnings, and earnings for the year then ended,
B. Total assets would be overstated respectively?
C. Retained earnings would be overstated FA © 2014 A. B. C. D.
D. Cost of goods sold would be overstated FA © 2014 Assets Understate No effect No effect No effect
Liabilities No effect Overstate Understate Understate
104. If the ending inventory is understated, net income of the same period Retained earnings Overstate Understate Overstate Understate
A. Would be unaffected Earnings for the year Overstate Understate Overstate Overstate
B. Would be overstated
C. Would be understated 110. An entity used a periodic inventory system and neglected to record a purchase of
D. Cannot be determined from the information FA © 2014 merchandise on, account at year-end. This merchandise was omitted from the year-end
physical count. How will these errors affect assets, liabilities, and shareholders' equity at
105. The overstatement of ending inventory in the current year will cause year-end and net earnings for the year?
A. Statement of financial position not to be misstated in the next year-end. FA © 2014 Assets Liabilities Equity Net earnings
B. Cost of goods sold to be understated in the income statement of next year. FA © 2014 A. Understate Understate No effect No effect
C. Cost of goods sold to be overstated in the income statement of the current year. B. Understate No effect Understate Understate
D. Retained earnings to be understated in the current year-end statement of financial C. No effect Understate Overstate Overstate
 D. No effect Overstate Understate Understate 116. Failure to record accrued salaries at the end of an accounting period results in
A. Overstated assets C. Overstated revenue
111. On December 27, 2013, an entity ordered merchandise for resale. The merchandise was B. Overstated retained earnings D. Understated retained earnings FA © 2014
shipped f.o.b. shipping point on December 28, 2013, and the goods arrived on January 2,
2014. The invoice was received on December 30, 2013. 117. At the end of the current year, an entity failed to accrue sales commissions during the current
The entity did not record the purchase in the current year and did not include the goods in year but paid in the next year. The error was not repeated in the next year. What was the
ending inventory. The effects on the financial statements for the current year were effect of the error on current year-end working capital and retained earnings, respectively?
A. Income, assets, liabilities and owners' equity were correct. FA © 2014 A. B. C. D.
B. Income, assets, liabilities and owners' equity were incorrect. Working capital No effect No effect Overstated Overstated
C. Income and owners' equity were correct; assets and liabilities were incorrect. FA © 2014 Retained earnings No effect Overstated No effect Overstated
D. Income and owners' equity were correct; liabilities were incorrect, assets were correct.
118. Failure to record depreciation expense at the end of an accounting period results in
112. If at end of period an entity erroneously excluded some goods from the ending inventory and A. Overstated assets C. Understated assets
also erroneously did not record the purchase of these goods in the accounting records, these B. Overstated expenses D. Understated income FA © 2014
errors would cause
A. No effect on net income, working capital and retained earnings Cause of error
B. The ending inventory, cost of goods sold and retained earnings to be understated 119. For an entity with a periodic inventory system, which of the following would cause income to
C. Cost of goods available for sale, cost of goods sold and net income to be understated be overstated in the period of occurrence?
D. The ending inventory, cost of goods available for sale and retained earnings to be A. Overestimating bad debt expense C. Understating beginning inventory
understated FA © 2014 B. Overstated purchases D. Understated ending inventory FA © 2014

113. At the end of the current year, special insurance costs, incurred but unpaid, were not 120. Which of the following would cause income of the current period to be understated?
recorded. If these insurance costs were related to work in process, what is the effect of the A. Understating estimate of residual value
omission on accrued liabilities and retained earnings in the current year-end statement of B. Failure to recognize unearned rent revenue
financial position? C. Capitalizing research and development cost
FA © 2014 A. B. C. D. D. Changing from weighted average to FIFO for merchandise inventory FA © 2014
Accrued liabilities No effect No effect Understated Understated
Retained earnings No effect Overstated No effect Overstated 121. Which of the following errors could result in an overstatement of both current assets and
shareholders' equity?
114. At the middle of the year, an entity paid for insurance premium for the current year and A. An understatement of accrued sales commissions
debited the amount to prepaid insurance. At year-end, the bookkeeper forgot to record the B. Annual depreciation on manufacturing machinery is understated
amount expired. In the financial statements prepared at year-end, the omission C. Noncurrent note receivable principal is misclassified as current asset
A. Overstates liabilities C. Understates assets D. Holiday pay expense for administrative employees is misclassified as manufacturing
B. Overstates owners' equity D. Understates net income FA © 2014 overhead FA © 2014

115. Failure to record the expired amount of prepaid rent expense would not Disclosure requirements
A. Overstate net income C. Understate expense 122. Which of the following disclosures is required for a change from sum-of-years digits to
B. Overstate owners' equity D. Understate liabilities FA © 2014 straight line?
A. Restatement of prior years' income statements
 B. Recomputation of current and future years' depreciation C. Correction of an error related to a prior period should be considered as an adjustment to
C. The cumulative effect on prior years, net of tax, in the current statement of retained current year net income.
earnings D. A change from expensing certain costs to capitalizing such costs due to a change in the
D. All of these are required TOA © 2013 period benefited should be handled as a change in accounting estimate. TOA © 2013

Comprehensive 128. Which of the following statements is incorrect regarding accounting changes?
123. Which type of accounting change should always be accounted for in current and future A. A change in accounting estimate is reflected in the current and future periods.
periods? B. A change in depreciation method is classified as a change in accounting policy.
A. Change in accounting estimate C. Change in reporting entity C. A change in depreciation method is classified as a change in accounting estimate.
B. Change in accounting policy D. Correction of an error TOA © 2013 D. The standard generally reflects a preference for restating prior results to improve
comparability of financial statements. TOA © 2013
124. The occurrence that most likely would have no effect on net income is
A. Ending inventory deemed worthless in the current year. 129. Which of the following statements is incorrect in relation to accounting changes?
B. Collection in the current year of a dividend from an investment. A. A change in accounting estimate is reflected in the current and future periods.
C. Sale in the current year of an office building contributed by a shareholder in a prior year. B. A change in depreciation method is classified as a change in accounting policy. FA © 2014
D. Correction of an error in the financial statements of a prior period discovered subsequent C. A change in depreciation method is classified as a change in accounting estimate.
to the issuance of financial statements. TOA © 2013 D. Generally, there is a preference for restating prior results to improve comparability.

125. Which of the following statements in relation to accounting changes is true? Multiple Choice - Problems
A. Prior statements should be restated for changes in accounting estimate. Change in accounting policy
B. Changes in accounting policy are always handled in the current and prospective period. Change from FIFO to weighted-average method
C. Correction of a prior period error should be considered as an adjustment of current net 1. During 2014, Orca Company decided to change from the FIFO method of inventory valuation
income. to the weighted average method. Inventory balances under each method were as follows:
D. A change from expensing certain costs to capitalizing such costs due to a change in the FIFO Weighted average
period benefited should be handled as a change in accounting estimate. FA © 2014 January 1 7,100,000 7,700,000
December 31 7,900,000 8,300,000
126. Which of the following statements is true? Ignoring income tax, in the statement of retained earnings for 2014, what amount should be
A. The effect of a change in accounting estimate is recognized retrospectively. reported as the cumulative effect of this accounting change?
B. To the extent practicable, an entity must correct a prior period error prospectively in the A. 600,000 addition C. 1,000,000 addition
first financial statements authorized for issue after the discovery. B. 600,000 deduction D. 1,000,000 deduction P1 © 2014
C. To the extent practicable, an entity must correct a prior period error retrospectively in the
first financial statements authorized for issue after the discovery. TOA © 2013 2. During 2014, Orca Company decided to change from the FIFO method of inventory valuation
D. When an entity discovers an error in the financial statements of a prior period, it must to the weighted average method. Inventory balances under each method were as follows:
immediately withdraw those financial statements and reissue them with the error FIFO Weighted average
corrected. January 1 7,200,000 7,700,000
December 31 7,900,000 8,300,000
127. Which of the following statements in relation to accounting changes is correct? Ignoring income tax, what amount should be reported as the effect of the accounting change
A. Prior statements should be restated for changes in accounting estimate. in the statement of changes in equity for 2014?
B. Changes in accounting policy are always handled in the current or prospective period. A. 400,000 C. 600,000
 B. 500,000 D. 900,000 FA © 2014 December 31, 2013 would have been P9,000,000. If the income tax rate is 30%, the
cumulative effect of the accounting change should be reported in the 2014
3. Goddard Company had used the FIFO method of inventory valuation since it began A. Income statement as P2,000,000 credit.
operations in 2011. The entity decided to change to the weighted average method for B. Income statement as a P1,400,000 credit. FA © 2014
determining inventory costs at the beginning of 2014. The following schedule shows year-end C. Retained earnings statement as P2,000,000 credit adjustment to the beginning balance.
inventory balances under the FIFO and weighted average method: D. Retained earnings statement as a P1,400,000 credit adjustment to the beginning
Year FIFO Weighted average balance.
2011 4,500,000 5,400,000
2012 7,800,000 7,100,000 6. During 2014, Build Company changed from the cost recovery method to the percentage of
2013 8,300,000 7,800,000 completion method. The tax rate is 30%. Gross profit figures are as follows:
What amount, before income tax, should be reported in the statement of retained earnings for 2012 2013 2014
2014 as the cumulative effect of the change in accounting policy? Cost recovery method 950,000 1,250,000 1,400,000
A. 300,000 decrease C. 500,000 decrease Percentage of completion 1,600,000 1,900,000 2,100,000
B. 300,000 increase D. 500,000 increase FA © 2014 How should this accounting change be reported in 2014?
A. 910,000 increase in profit or loss
Change from Average cost to FIFO method B. 1,400,000 increase in profit or loss
4. On January 1,2014, Folk Company changed from the average cost method to the FIFO C. 910,000 increase in retained earnings
method to account for inventory. Ending inventory for each method was as follows: D. 1,400,000 increase in retained earnings P1 © 2014
2013 2014
Average cost 500,000 900,000 7. Banko Company used the cost recovery method of accounting since it began operations in
FIFO cost 700,000 1,400,000 2011. In 2014, management decided to adopt the percentage of completion method.
The income statement information calculated by the average cost method was as follows: 2011 2012 2013
2013 2014 Revenue from completed contracts 25,000,000 42,000,000 40,000,000
Sales 10,000,000 13,000,000 Cost of completed contracts 18,000,000 29,000,000 28,000,000
Cost of goods sold 7,000,000 9,000,000 Income from operations 7,000,000 13,000,000 12,000,000
Operating expenses 1,500,000 2,000,000 Casualty loss 0 0 ( 2,000,000)
Income before tax 1,500,000 2,000,000 Income 7,000,000 13,000,000 10,000,000
Tax expense 450,000 600,000 Analysis of the accounting records disclosed the following income by contracts using the
The entity accrues tax expense on December 31 of each year and pays the tax in April of the percentage of completion method.
following year. The income tax rate is 30%>. What is the net income to be reported in 2014 2011 2012 2013
after the change to the FIFO inventory method? Contract 1 7,000,000
A. 1,610,000 C. 1,890,000 Contract 2 5,000,000 8,000,000
B. 1,750,000 D. 2,300,000 FA © 2014 Contract 3 3,000,000 7,000,000 2,000,000
Contract 4 1,000,000 6,000,000
Change from cost recovery method to percentage of completion method Contract5 (1,000,000)
5. On January 1, 2014, Poe Construction Company changed to the percentage of completion Ignoring income tax, what is the cumulative effect of change in accounting policy that should
method from cost recovery method of income recognition. On December 31, 2013, the entity be reported in the statement of retained earnings for 2014?
compiled data showing that income under the cost recovery method aggregated P7,000,000. A. 0 C. 7,000,000
If the percentage of completion method had been used, the accumulated income through B. 6,000,000 D. 8,000,000 FA © 2014
 12. On January 1, 2013, London Company purchased a large quantity of personal computers.
Change in estimate The cost of these computers was P6,000,000. On the date of purchase, the management
Change in life estimated that the computers would last approximately four years and would have a residual
8. Rodrigo Company had purchased an equipment on January 1, 2011 for P2,400,000. The value at that time of P600,000. The entity used the double declining balance method. During
entity used the straight-line depreciation based on a ten-year useful life with no residual January 2014, the management realized that technological advancements had made the
value. During 2014, the entity decided that the equipment would be used only three more computers virtually obsolete and that they would have to be replaced. The management
years. What entry should be made on January 1,2014 to reflect this accounting change? changed the remaining useful life of the computers to two years. What is the depreciation
A. No entry expense for 2014?
B. Debit depreciation and credit accumulated depreciation P560,000. A. 1,200,000 C. 2,400,000
C. Debit retained earnings and credit accumulated depreciation P480,000. FA © 2014 B. 1,500,000 D. 3,000,000 FA © 2014
D. Debit other comprehensive income and credit accumulated depreciation P480,000.
13. Acute Company was incorporated on January 1, 2011. In preparing the financial statements
9. During 2014, Kerr Company determined that machinery previously depreciated over a seven- for the year ended December 31,2013, the entity used the following original cost and useful
year life had a total estimated useful life of only five years. An accounting change was made life for the property, plant and equipment:
in 2014 to reflect the change in estimate. If the change had been made in 2013, accumulated Original cost Useful life
depreciation would have been P800,000 on December 31, 2013, instead of P600,000. As a Building 15,000,000 15 years
result of the change, the 2014 depreciation expense was P50,000 greater. The tax rate was Machinery 10,500,000 10 years
30%. What amount should be reported in the income statement for the year ended December Furniture 3,500,000 7 years
31, 2014 as the cumulative effect on prior years for changing the estimated useful life of the On January 1,2014, the entity determined that the remaining useful life is 10 years for the
machinery? building, 7 years for the machinery and 5 years for the furniture. The entity used the straight
A. 0 C. 150,000 line method of depreciation with no residual value. What is the total depreciation for 2014?
B. 130,000 D. 200,000 FA © 2014 A. 2,550,000 C. 3,500,000
B. 2,650,000 D. 3,700,000 FA © 2014
10. On January 1, 2011, Charisma Company bought a machine for P1,500,000. The machine
had useful life of six years with no residual value. On January 1, 2014, the entity determined 14. On January 1,2008, Paragon Company paid P6,000,000 to acquire a new barge. In the belief
that the machine had useful life of eight years from the date it was acquired with no residual that it was entitled to a refund of purchase taxes on the acquisition of the barge, the entity
value. The straight line method of depreciation is used. What amount of depreciation should claimed and was refunded P600,000 by the local government. However, in late 2014 the
be recorded for 2014? entity repaid the refund when it became apparent that it had made an error in making the
A. 125,000 C. 187,500 claim from the local government as it had not been entitled to the refund of purchase taxes on
B. 150,000 D. 250,000 FA © 2014 acquisition of the barge. The useful life of the barge is 15 years from the date of acquisition.
The residual value of the barge is NIL.
11. Blue Company purchased a machine on January 1, 2011 for P6,000,000. At the date of In 2014, the period over which the barge is expected to be economically usable increased
acquisition, the machine had a life of six years with no residual value. The machine is being from 15 to 26 years. However, the entity expected to dispose of the barge after using it for 20
depreciated on a straight line basis. On January 1,2014, the entity determined that the years from the date of acquisition. On December 31,2014, the entity assessed the residual
machine had a useful life of eight years from the date of acquisition with no residual value. value of the barge at P800,000. What is the carrying amount of the barge on December
What is the depreciation of the machine for 2014? 31,2014?
A. 375,000 C. 600,000 A. 3,400,000 C. 3,460,000
B. 500,000 D. 750,000 P1 © 2014 B. 3,420,000 D. 3,600,000 FA © 2014
Change in life & residual value
15. On January 1, 2011, Flair Company purchased a machine for P2,640,000 and depreciated it Change from accelerated depreciation to straight-line method
by the straight line using an estimated life of 8 years with no residual value. On January 1, 20. On January 1, 2014, Canyon Company decided to decrease the estimated useful life of an
2014, the entity determined that the machine had a useful life of 6 years from the date of existing patent from 10 years to 8 years. The patent was purchased on January 1,2009 for
acquisition with a residual value of P240,000. What is the accumulated depreciation on P3,000,000. The estimated residual value is zero. The entity decided on January 1,2014 to
December 31, 2014? change the depreciation method from an accelerated method to the straight line method. On
A. 1,460,000 C. 1,600,000 January 1, 2014, the cost of a depreciable asset is P8,000,000 and the accumulated
B. 1,540,000 D. 1,760,000 FA © 2014 depreciation is P3,400,000. The remaining useful life of the depreciable asset on January
1,2014 is 10 years and the residual value is P200,000. What is the total charge against
16. On January 1, 2011, Flax Company purchased a machine for P5,280,000 and depreciated it income for 2014 as a result of the accounting changes?
by the straight line method using an estimated useful life of eight years with no residual value. A. 627,500 C. 940,000
On January 1, 2014, the entity determined that the machine had a useful life of six years from B. 647,500 D. 960,000 FA © 2014
the date of acquisition and the residual value was P480,000. An accounting change was
made in 2014 to reflect these additional data. What is the accumulated depreciation for the Change from double-declining method to straight-line method
machine on December 31,2014? Change from double-declining method to straight-line method
A. 2,920,000 C. 3,200,000 21. On January 1, 2012, Zee Company purchased for P2,400,000 a machine with a useful life
B. 3,080,000 D. 3,520,000 P1 © 2014 often years and no residual value. The machine was depreciated by the double declining
balance method and the carrying amount of the machine was Pl,536,000 on December 31,
17. On January 1, 2010, Roma Company purchased equipment for P4,000,000. The equipment 2013. The entity changed to the straight line method on January 1, 2014. What is the
has a useful life of 10 years and a residual value of P400,000. On January 1, 2014, the entity depreciation for 2014?
determined that the useful life of the equipment was 12 years from the date of acquisition and A. 153,600 C. 240,000
the residual value was P460,000. What is the depreciation of the equipment for 2014? B. 192,000 D. 307,200 AICPA 0587
A. 175,000 C. 300,000
B. 262,500 D. 360,000 FA © 2014 22. Turtle Company purchased equipment on January 1, 2012 for P5,000,000. The equipment
had an estimated 5-year service life. The policy for 5-year assets is to use the 200% double
18. On January 1,2012, Milan Company purchased an equipment for P6,000,000. The equipment declining balance method for the first two years and then switch to the straight-line
had been depreciated using the straight line with residual value of P600,000 and useful life of depreciation method. What amount should be reported as accumulated depreciation on
20 years. On January 1,2014, the entity determined that the remaining useful life is 10 years December 31,2014?
and the residual value is P800,000. What is the depreciation for 2014? A. 3,000,000 C. 3,920,000
A. 270,000 C. 546,000 B. 3,800,000 D. 4,200,000 FA © 2014
B. 466,000 D. 582,500 FA © 2014
23. On January 1,2012, Brazilia Company purchased for P4,800,000 a machine with a useful life
19. Dawn Company purchased a machine on January 1, 2011 for P3,000,000. At the date of often years and a residual value of P200,000. The machine was depreciated by the double
acquisition, the machine had a life of six years with no residual value. The machine is being declining balance and the carrying amount of the machine was P3,072,000 on December 31,
depreciated on a straight line basis. On January 1, 2014, the entity determined that the 2013. The entity changed to the straight line method on January 1, 2014. The residual value
machine had a useful life of five years from the date of acquisition with residual value of did not change. What is the depreciation expense on this machine for the year ended
P100,000. What is the depreciation for 2014? December 31, 2014?
A. 500,000 C. 700,000 A. 287,200 C. 384,000
B. 600,000 D. 750,000 FA © 2014 B. 359,000 D. 460,000 FA © 2014
Change from SYD to straight-line method Effect on income from continuing operations
24. On January 1, 2013, Kevin Company purchased a machine for P2,750,000. The machine 28. Remy Company had the following events and transactions during 2014:
was depreciated using the sum of years' digits method based on a useful life of 10 years with • Depreciation for 2012 was found to be understated by P300,000.
no residual value. On January 1,2014, the entity changed to the straight line method of • A litigation settlement resulted in a loss of P250,000. The inventory on December 31,
depreciation. The entity can justify the change. What is the depreciation of the machine for 2012 was overstated by P400,000.
2014? * The entity disposed of the recreational division at a loss of P500,000.
A. 180,000 C. 250,000 The income tax rate is 30%. What is the effect of these events on the income from
B. 220,000 D. 275,000 FA © 2014 continuing, operations for 2014?
A. 175,000 C. 525,000
Change from straight-line to SYD B. 385,000 D. 665,000 FA © 2014
25. Xavier Company purchased a machinery on January 1, 2011 for P7,200,000. The machinery
had useful life of 10 years with no residual value and was depreciated using the straight line Corrected income before tax
method. In 2014, a decision was made to change the depreciation method from straight line 29. Zenson Company has determined the 2014 net income to be P5,000,000. Revenue received
to sum of years' digits method. The useful life and residual value remained unchanged. What in advance in 2014 of P250,000 was credited to a revenue account when received. Of the
is the depreciation for 2014? total, P50,000 was earned in 2014, P120,000 will be earned in 2015 and the remainder will
A. 720,000 C. 1,260,000 be earned in 2016. Loss on sale of equipment of P150,000 in 2014 was erroneously debited
B. 916,360 D. 1,440,000 FA © 2014 to retained earnings. What is the adjusted net income for 2014?
A. 4,650,000 C. 4,930,000
Prior Period Errors B. 4,850,000 D. 4,600,000 FA © 2014
Depreciation expense
26. On January 1,2013, Aker Company acquired a machine at a cost of P2,000,000. The 30. Jenny Company reported net income of P9,000,000 in 2014. The audit of the' records
machine is depreciated on the straight-line method over a five-year period with no residual revealed that ending inventory of 2013 was understated by P500,000. Insurance payment of
value. Because of a bookkeeping error, no depreciation was recognized in the 2013 financial P900,000 in 2012 was charged to expense. The insurance coverage related equally to 2012,
statements. The oversight was discovered during the preparation of the 2014 financial 2013 and 2014. Revenue received in advance of PI,000,000 in 2014 was treated as earned
statements. What is the depreciation expense on the machine for 2014? in 2014 but it will actually be earned in 2015. Interest payable of P2,000,000 at the end of
A. 0 C. 500,000 2014 was not recorded. What is the corrected net income for 2014?
B. 400,000 D. 800,000 FA © 2014 A. 5,200,000 C. 6,700,000
B. 6,000,000 D. 7,200,000 FA © 2014
Net charge against income
27. Effective January 1,2014, King Company adopted the accounting policy of expensing 31. Lea Company had correctly determined the following information related to operations for
advertising and promotion costs when incurred. Previously, advertising and promotion costs 2014.
applicable to future periods were recorded in prepaid expenses. The entity can justify the Revenue from sales 7,000,000
change, which was made for both financial statement and income tax reporting purposes. Expenses 4,000,000
The prepaid advertising and promotion costs totaled P600,000 on December 31,2014. The Income before income tax 3,000,000
income tax rate is 30%. What is the net charge against income for 2014 as a result of the During 2014, the entity discovered an error in depreciation in 2013. The correction of this
change? error, which has not been recorded, will result in an increase in depreciation for 2013 of
A. 0 C. 420,000 P200,000. During 2014, an inventory loss of P400,000 was due to a government ban on
B. 180,000 D. 600,000 FA © 2014 certain highly flammable fabrics. This loss has not been recorded. What is the adjusted
 income before tax for 2014?
A. 2,600,000 C. 3,000,000 35. Canal Company reported the following net income:
B. 2,400,000 D. 3,400,000 FA © 2014 2012 6,000,000
2013 6,500,000
32. Toronto Company failed to recognize accruals and prepayments during the first year of In the determination of the net income, the following items are ignored:
operations. The income before tax is P5,000,000. The accruals and prepayments not 2012 2013
recognized at the end of the year are: Prepaid insurance 100,000 150,000
Prepaid insurance 200,000 Accrued salaries 50,000 200,000
Accrued wages 250,000 Unearned rental income 250,000 450,000
Rent revenue collected in advance 300,000 Accrued interest receivable 300,000 400,000
Interest receivable 100,000 What is the corrected net income for 2013?
What is the corrected income before tax? A. 6,100,000 C. 6,400,000
A. 4,750,000 C. 5,000,000 B. 6,300,000 D. 6,500,000 P1 © 2014
B. 4,950,000 D. 5,250,000 FA © 2014
36. Malampaya Company showed income before income tax of P6,500,000 on December 31,
33. Timm Company failed to recognize accruals and prepayments since the inception of business 2014. The year-end verification of the transactions revealed the following errors:
three years ago. The income before tax, accrual and prepayments at the end of the current * P 1,000,000 worth of merchandise was purchased in 2014 and included in the ending
year are: inventory. However, the purchase was recorded only in 2015.
Income before tax 1,400,000 * A merchandise shipment valued at P1,500,000 was properly recorded as purchase at
Prepaid insurance 20,000 year-end. Since the merchandise was still at the port area, it was inadvertently omitted
Accrued wages - 25,000 from the inventory on December 31,2014.
Rent revenue collected in advance 30,000 * Advertising for December 2014, amounting to P500,000, was recorded when payment
Interest receivable 50,000 was made in January, 2015.
What is the corrected income before tax? * Rent of P300,000 on an equipment applicable for six months was received on November
A. 1,375,000 C. 1,400,000 1, 2014. The entire amount was reported as income upon receipt.
B. 1,385,000 D. 1,415,000 P1 © 2014 * Insurance premium covering the period from July 1, 2014 to July 1, 2015, amounting to
P200,000 was paid and recorded as expense on July 31, 2014. The entity did not make
34. During the course of an audit of the financial statements of Julie Company for the year ended any adjustment at the end of the year.
December 31, 2014, the following data are discovered: What is the corrected income before tax for 2014?
* Inventory on January 1, 2014 had been overstated by P300,000. A. 6,300,000 C. 6,500,000
* Inventory on December 31, 2014 was understated by P500,000. B. 6,400,000 D. 6,900,000 FA © 2014
* An insurance policy covering three years had been purchased on January 1, 2013 for
P150,000. The entire amount was charged as an expense in 2013. 37. Henson Company had determined the 2012 and 2013 net income to be P4,000,000 and
During 2014, the entity received a P100,000 cash advance from a customer for merchandise P5,000,000, respectively. In a first time audit of the financial statements, the following errors
to be manufactured and shipped during 2015. The amount had been credited to sales are discovered:
revenue. The gross profit on sales is 50%. Net income for 2014 per book was P2,000,000. * Merchandise inventory was incorrectly determined - P50,000 overstatement for2012 and
What is the proper net income for 2014? PI50,000 overstatement for 2013.
A. 1,650,000 C. 2,350,000 * Revenue received in advance in 2012 of P300,000 was credited to a revenue account
B. 2,050,000 D. 2,650,000 FA © 2014 when received. Of the total, P50,000 was earned in 2012, P200,000 was earned in 2013
 and the remainder will be earned in 2014. A. 4,647,200 C. 4,952,800
* P400,000 gain on sale of plant asset in 2013 was erroneously credited to retained B. 4,680,000 D. 5,000,000 P1 © 2014
earnings.
What is the corrected net income for 2013? Total prior period error
A. 5,400,000 C. 5,500,000 40. Universal Company failed to accrue warranty cost of P 100,000 on December 31, 2013. In
B. 5,450,000 D. 5,550,000 P1 © 2014 addition, a change from straight line to accelerated depreciation made at the beginning of
2014 resulted in a cumulative effect of P60,000 on retained earnings. What amount before
38. Mariot Company reported income before tax of P3,700,000 for 2013 and P5,200,000 for tax should be reported as prior period error in 2014?
2014. An audit produced the following information: A. 0 C. 100,000
* The ending inventory for 2013 included 5,000 units erroneously priced at P59 per unit. B. 60,000 D. 160,000 FA © 2014
The correct cost was P95 per unit.
* Merchandise costing P175,000 was shipped to Mariot Company, FOB shipping point, on 41. After the issuance of the 2014 financial statements, Narra Company discovered a
December 26, 2013. The purchase was recorded in 2013, but the merchandise was computational error of P150,000 in the calculation of the December 31, 2014 inventory. The
excluded from the ending inventory because it was not received until January 4, 2014. error resulted in a PI50,000 overstatement in the cost of goods sold for the year ended
* On December 28, 2013, merchandise costing P30,000 was sold to Deluxe Company. December 31,2014. In October 2015, the entity paid the amount of P500,000 in settlement of
Deluxe had asked Mariot in writing to keep the merchandise until January 2, 2014. The litigation instituted against it during 2014. Ignore income tax. In the financial statements for
merchandise was included in the inventory count. The sale was correctly recorded in 2015, what is the adjustment of the retained earnings on January 1, 2015?
December 2013. A. 150,000 credit C. 500,000 debit
* Gray Company sold merchandise costing P15,000 to Mariot Company. The purchase B. 350,000 debit D. 650,000 credit Wiley 2011
was made on December 29, 2013 and the merchandise was shipped on December 30,
2013. Terms were FOB shipping point. Because the bookkeeper was on vacation, 42. Samar Company reported the following events during the year ended December 31,2015:
neither the purchase nor the receipt of goods was recorded until January 2014? * A counting error relating to the inventory on December 31,2014 was discovered. This
What is the corrected income before tax for 2014? required a reduction in the carrying amount of inventory at that date of P280,000.
A. 4,815,000 C. 4,890,000 * The provision for uncollectible accounts receivable on December 31,2014 was
B. 4,875,000 D. 5,525,000 FA © 2014 P300,000. During 2015, P500,000 was written off the December 31,2014 accounts
receivable.
39. On July 1, 2012, Dave Company purchased for cash a machine with an invoice price of What adjustment is required to restate retained earnings on January 1, 2015?
P3,600,000. The terms of payment were 2/10, n/30. Irrevocable purchase taxes amounted to A. 0 C. 300,000
P150,000. On July 3, the machine was delivered and freight charge of P70,000 was paid. B. 280,000 D. 580,000 P1 © 2014
Installation cost amounted to P252,000. During the process of installation, carelessness by a
workman caused damage to an adjacent machine with resulting repair cost of P32,000. 43. Harbor Company reported the following events during 2014:
On November 10, 2012, after four months of satisfactory operations, the machine was * It was decided to write off P800,000 from inventory which was over two years old as it
thoroughly cleaned and oiled at a cost of P42,000. The useful life of the machine is 10 years. was obsolete.
The straight line depreciation was used with no residual value and depreciation started on the * Sales of P600,000 had been omitted from the financial statements for the year ended
month of acquisition. December 31, 2013.
On December 31,2013, the unaudited financial statements showed the machine at a cost of What total amount should be reported as prior period error in the financial statements for the
P3,528,000 with accumulated depreciation of P529,200. Net income for 2013 was year ended December 31, 2014?
P5,000,000. A. 200,000 C. 800,000
Ignoring income tax, what is the corrected net income for 2013? B. 600,000 D. 1,400,000 FA © 2014
 30%. What amount should be reported as corrected retained earnings on January 1, 2014?
44. Victoria Company revealed the following errors in the financial statements: A. 365,000 C. 435,000
Ending inventory Depreciation B. 425,000 D. 450,000 FA © 2014
2013 200,000 understated 50,000 understated
2014 300,000 overstated 100,000 overstated Adjusted retained earnings, ending
At what amount should retained earnings be retroactively adjusted on January 1, 2014? 49. Natasha Company reported net income of P700,000 for 2015. The entity declared and paid
A. 400,000 decrease C. 200,000 decrease dividends of P150,000 in 2015 and P300,000 in 2014. In the financial statements for the year
B. 250,000 decrease D. 250,000 increase FA © 2014 ended December 31, 2014, the entity reported retained earnings of PI, 100,000 on January
1,2014. The net income for 2014 was P600,000. In 2015, after the 2014 financial statements
45. Extracts from the statement of financial position of Animus Company showed the following: were approved for issue, the entity discovered an error in the December 31,2013 financial
December 31, 2015 December 31, 2014 statements. The effect of the error was a P650,000 overstatement of net income for the year
Development costs 8,160,000 5,840,000 ended December 31,2013 due to underdepreciation. What amount should be reported as
Amortization (1,800,000) (1,200,000) retained earnings on December 31, 2015?
The capitalized development costs relate to a single project that commenced in 2012. It has A. 1,300,000 C. 1,650,000
now been discovered that one of the criteria for capitalization has never been met. What B. 1,400,000 D. 1,950,000 FA © 2014
adjustment is required to restate retained earnings on January 1,2015?
A. 0 C. 4,640,000 50. While preparing the financial statements for 2014, Dakila Company discovered computational
B. 1,720,000 D. 6,360,000 FA © 2014 errors in the 2012 and 2013 depreciation expense. These errors resulted in overstatement of
each year's income by P25,000, net of income tax. The net income for 2014 is correctly
46. On January 1, 2014, Black Company changed the inventory cost flow method to FIFO from reported at P500,000.
LIFO for both financial statement and income tax reporting purposes. The change resulted in The following amounts were reported in the previously issued financial statements:
a P600,000 increase in the beginning inventory on January 1, 2014. Ignoring income tax, the 2013 2012
accounting change should be reported in the 2014 Retained earnings, January 1 700,000 500,000
A. Income statement as a P600,000 debit Net income 150,000 200,000
B. Income statement as a P600,000 credit Retained earnings, December 31 850,000 700,000
C. Retained earnings statement as a P600,000 debit adjustment to the beginning balance What is the balance of retained earnings on December 31, 2014?
D. Retained earnings statement as a P600,000 credit adjustment to the beginning balance A. 1,300,000 C. 1,350,000
B. 1,325,000 D. 1,400,000 FA © 2014
Adjusted retained earnings, beginning
47. Conn Company reported a retained earnings balance of P4,000,000 on January 1, 2013. In 51. While preparing the 2014 financial statements, Dek Company discovered computational
2013, the entity determined that insurance premiums of P900,000 for the three-year period errors in the 2013 and 2012 depreciation expense. These errors resulted in overstatement of
beginning January 1, 2012 had been paid and fully expensed in 2012. The income tax rate is each year's income by P100,000, net of income tax. The following amounts were reported in
30%. What amount should be reported as corrected retained earnings on January 1, 2013? the previously issued financial statements:
A. 3,400,000 C. 4,420,000 2013 2012
B. 3,580,000 D. 4,600,000 P1 © 2014 Retained earnings, January 1 2,800,000 2,000,000
Net income 600,000 800,000
48. Conway Company reported retained earnings of P400,000 on January 1, 2014. In August Retained earnings-December 31 3,400,000 2,800,000
2014, the entity determined that insurance premium of P75,000 for the three-year period The net income for 2014 is correctly reported at P700,000. What is the correct balance of
beginning January 1, 2013 had been paid and fully expensed in 2013. The income tax rate is retained earnings on December 31, 2014?
 A. 3,900,000 C. 4,100,000 A. 0 3,000,000 decrease
B. 4,000,000 D. 4,300,000 P1 © 2014 B. 1,200,000 decrease 1,800,000 decrease
C. 3,000,000 decrease 0
52. Blonde Company provided the following comparative statements of income and retained D. 3,000,000 decrease 1,800,000 decrease
earnings:
2013 2012 Effect on current assets
Sales 4,600,000 4,350,000 55. Saturn Company reported the following errors:
Cost of goods sold 2,346,000 2,305,000 2012 2013
Gross profit 2,254,000 2,045,000 Ending inventory 60,000 understated 90,000 overstated
Expenses 1,598,000 1,533,000 Depreciation expense - 120,000 overstated 75,000 overstated
Net income 656,000 512,000 None of the errors were detected or corrected, and that no additional errors were made in
2014. By what amount would current assets on December 31,2014 be overstated or
Beginning retained earnings 1,441,000 1,077,000 understated?
Net income 656,000 512,000 A. 0 C. 90,000 overstated
Dividends (157,000) ( 148,000) B. 30,000 overstated D. 90,000 understated FA © 2014
Ending retained earnings 1,940,000 1,441,000
In 2014, Blonde Company discovered that ending inventory for 2012 was understated by Effect on working capital
P100,000 and the ending inventory for 2013 was overstated by P300,000. What is the 56. Shannon Company began operations on January 1,2012. Financial statements for the years
corrected balance of retained earnings on December 31, 2013? ended December 31, 2012 and 2013 contained the following errors:
A. 1,540,000 C. 2,240,000 2012 2013
B. 1,640,000 D. 2,340,000 P1 © 2014 Ending inventory 160,000 understated 150,000 overstated
Depreciation expense 60,000 understated
Comparative figures Insurance expense 100,000 overstated 100,000 understated
53. The draft financial statements for Savior Company, for 2014 revealed an overvaluation of the Prepaid insurance 100,000 understated
closing inventory of P2,000,000 on December 31, 2013. Further investigation showed that In addition, on December 31,2013, fully depreciated machinery was sold for PI08,000 cash,
there was an overvaluation on December 31, 2012 of P1,200,000. What adjustment should but the sale was not recorded until 2014. There were no other errors during 2012 or 2013 and
be made to the profit for 2013 presented as comparative figure in the 2014 financial no corrections have been made for any of the errors. Ignoring income tax, what is the total
statements? effect of the errors on the amount of working capital on December 31,2013?
A. 800,000 decrease C. 0 A. 42,000 overstated C. 60,000 understated
B. 200,000 decrease D. 800,000 increase FA © 2014 B. 58,000 understated D. 98,000 understated P1 © 2014

54. In reviewing the draft financial statements for the year ended December 31,2015, Bituin
Company decided that market conditions were such that the provision for inventory
obsolescence on December 31,2015 should be increased by P3,000,000. If the same basis
of calculating inventory obsolescence had been applied on December 31,2014, the provision
would have been PI,800,000 higher than the amount recognized in the statement of
comprehensive income. What adjustment should be made to the profit for 2015 and the profit
for 2014 presented as a comparative figure in the 2015 financial statements?
FA © 2014 Profit for 2015 Profit for 2014
Effect on cost of goods sold
57. On December 30, 2014, Astor Company sold merchandise for P75,000 to Day Company.
The terms of the sale were net 30, FOB shipping point. The merchandise was shipped on
December 31, 2014, and arrived at Day Company on January 5, 2015. Due to a clerical error,
the sale was not recorded until January 2015 and the merchandise, sold at a 25% markup on
cost was included in the inventory on December 31, 2014. What is the effect of the errors on
cost of goods sold for the year ended-December 31, 2014?
A. Correctly stated C. Understated by P60,000
 B. Understated by P15,000 D. Understated by P75,000 FA © 2014
62. Victoria Company revealed the following:
58. Bren Company discovered that beginning inventory was understated by P26,000 and ending Ending inventory Depreciation
inventory was overstated by P52,000. What is the effect of the errors on cost of goods sold 2012 200,000 understated 50,000 understated
for the year? 2013 300,000 overstated 90,000 overstated
A. 26,000 overstated C. 78,000 overstated At what amount should retained earnings be retroactively adjusted on January 1,2014?
B. 26,000 understated D. 78,000 understated FA © 2014 A. 210,000 decrease C. 260,000 increase
B. 260,000 decrease D. 410,000 decrease P1 © 2014
Effect on net income
59. Crescendo Company revealed the following errors in the financial statements: 63. Glory Company reported the following errors in the financial statements:
2013 2014 2013 2014
Ending inventory 140,000 overstated 200,000 understated Ending inventory 200,000 under 300,000 over
Rent expense 48,000 understated 66,000 overstated Depreciation 50,000 under
If none of the errors were detected or corrected, by what amount will 2014 net income be An insurance premium of P150,000 was prepaid in 2013 to cover 2013, 2014 and 2015. The
overstated or understated? entire amount was charged to expense in 2013. On December 31, 2014, fully depreciated
A. 134,000 overstated C. 358,000 understated machinery was sold for P250,000 cash but the sale was not recorded until 2015. There were
B. 278,000 understated D. 406,000 understated FA © 2014 no other errors during 2013 and 2014 and no corrections have been made for any of the
errors. Ignoring income tax, what is effect of the errors on retained earnings on December 31,
60. Holden Company reports on a calendar-year basis. The financial statements contained the 2014?
following errors: A. 250,000 understated C. 50,000 overstated
2013 2014 B. 50,000 understated D. 300,000 overstated FA © 2014
Over (under) statement of ending inventory (100,000) 40,000
Depreciation understatement 40,000 60,000 64. Emma Company revealed the following errors in the financial statements:
Failure to accrue salaries at year-end 80,000 120,000 December 31, 2013 inventory understated 500,000
As a result of the errors, what was the effect on net income for 2014? December 31, 2014 inventory overstated 800,000
A. 240,000 overstated C. 320,000 overstated Depreciation for 2013 overstated 250,000
B. 240,000 understated D. 320,000 understated FA © 2014 December 31, 2014 accrued rent income overstated 300,000
December 31, 2014 accrued salaries understated 150,000
Effect on retained earnings The understatement of the 2013 ending inventory pertains to goods in transit purchased FOB
61. During 2014, Paul Company discovered that the ending inventories reported in the financial shipping point which were not recorded in 2013 but paid in 2014. On December 31, 2014,
statements were incorrect by the following amounts: fully depreciated machinery was sold for P 100,000 cash but the sale was not recorded until
2013 60,000 understated 2015. What is the effect of the errors on retained earnings on December 31, 2014?
2014 75,000 overstated A. 900,000 overstated C. 1,150,000 overstated
The entity used the periodic inventory system to ascertain year-end quantities that are B. 900,000 understated D. 1,150,000 understated FA © 2014
converted to peso amounts using the FIFO cost method. Prior to any adjustments for these
errors and ignoring income tax, what is the effect of the errors on retained earnings on Correcting entries
January 1, 2015? 65. In January 2013, Campa Company charged to expense installation cost of P900,000 on new
A. Correct C. 75,000 overstated machinery. The cost of the machinery of P3,000,000 was correctly recorded and the
B. 15,000 overstated D. 135,000 overstated FA © 2014 machinery was depreciated using the straight line with useful life of 10 years and no residual
 value. On January 1,2014, the entity determined that the machinery had a remaining useful 2014 2013
life of 15 years. Depreciation expense had not yet been recorded for 2014. What is the Sales 4,600,000 4,350,000
correcting entry on December 31,2014? P1 © 2014 Cost of goods sold 2,346,000 2,305,000
A. Debit retained earnings P810,000 C. Debit retained earnings P900,000 Expenses 1,598,000 1,533,000
B. Credit retained earnings P810,000 D. Credit retained earnings P900,000 Beginning retained earnings 1,441,000 1,077,000
Dividends paid 157,000 148,000
66. In 2014, Cremas Company discovered that equipment purchased on January 1,2012 for In 2015, the entity discovered that ending inventory for 2013 was understated by P100,000 and the
P600,000 was expensed at that time. The equipment should have been depreciated over 5 ending inventory for 2014 was overstated by P300,000.
years with no residual value. The tax rate is 30%. What is the journal entry in 2014 to correct
the error? 69. What is the corrected income for 2013?
A. Credit retained earnings P252,000 C. Credit equipment P600,000 P1 © 2014 A. 412,000 C. 612,000
B. Credit retained earnings P360,000 D. Debit retained earnings P600,000 B. 512,000 D. 912,000

Comprehensive 70. What is the corrected income for 2014?

Questions 1 & 2 are based on the following information. FA © 2014 A. 256,000 C. 556,000
Rebecca Company is in the process of adjusting the accounts at the end of 2014. The records B. 356,000 D. 856,000
revealed the following information:
* The entity failed to accrue sales commissions at the end of each year as follows: 71. What is the corrected balance of retained earnings on December 31, 2014?
2012 220,000 A. 1,540,000 C. 2,240,000
2013 140,000 B. 1,640,000 D. 2,340,000
In each case, the sales commissions were paid and expensed in January of the following
year. Questions 1 thru 4 are based on the following information. FA © 2014
* Errors in ending inventories for the last three years were discovered to be as follows: Galaxy Company provided the following financial statement information:
2012 400,000 understated 2015 2014
2013 540,000 overstated Revenue 1,350,000 1,000,000
2014 150,000 understated Expenses 980,000 650,000
The unadjusted retained earnings balance on January 1, 2014 is P12,600,000 and the unadjusted Net income 370,000 350,000
net income for 2014 was P3,000,000. Dividends of PI,750,000 were declared during 2014. Total assets 1,570,000 1,050,000
Total liabilities 500,000 350,000
67. What is the adjusted net income for 2014? Total owners' equity 1,070,000 700,000
A. 3,150,000 C. 3,680,000 The entity failed to record P120,000 of accrued wages at the end of 2014. The wages were
B. 3,530,000 D. 3,830,000 recorded and paid in January 2015. The correct accruals were made on December 31, 2015.

68. What is the adjusted balance of retained earnings on December 31, 2014? 72. What is the corrected net income for 2014?
A. 11,000,000 C. 13,850,000 A. 230,000 C. 350,000
B. 13,320,000 D. 14,000,000 B. 250,000 D. 470,000

Questions 1 thru 3 are based on the following information. FA © 2014 73. What is the corrected net income for 2015?
Blonde Company provided the following information for each year: A. 250,000 C. 430,000
 B. 370,000 D. 490,000 ANSWER EXPLANATION

74. What is the correct amount of total liabilities on December 31, 2014?
A. 230,000 C. 470,000 1. Answer is (A).
B. 400,000 D. 500,000 FIFO inventory - January 1 7,100,000
Weighted average inventory - January 1 7,700,000
75. What is the correct amount of owners' equity on December 31, 2015? Cumulative effect 600,000
A. 950,000 C. 1,070,000 The change from FIFO to weighted average is a change in accounting policy.
B. 1,010,000 D. 1,190,000 The cumulative effect of the change accounting policy is an adjustment of retained earnings
as follows:
Questions 1 thru 4 are based on the following information. FA © 2014 Inventory 600,000
Shannon Company began operations on January 1, 2013. The financial statements contained the Retained earnings 600,000
following errors:
2013 2014 2. Answer is (B).
Ending inventory 16,000 understated 15,000 overstated Inventory – January 1, 2014:
Depreciation expense 6,000 understated Weighted average 7,700,000
Insurance expense 10,000 overstated 10,000 understated FIFO 7,200,000
Prepaid insurance 10,000 understated Effect of change – increase in inventory 500,000
On December 31, 2014, fully depreciated machinery was sold for P10,800 cash but the sale The adjustment on January 1, 2014 to reflect the change in inventory method is:
was not recorded until 2015. No corrections have been made for any of the errors. Ignoring Retained earnings 500,000
income tax, what is the total effect of the errors on Inventory 500,000

76. Net income for 2013? 3. Answer is (C).

A. 20,000 over C. 26,000 under Inventory, December 31, 2013
B. 20,000 under D. 0 FIFO 8,300,000
Weighted average 7,800,000
77. Net income for 2014? Decrease in inventory 500,000
A. 30,200 over C. 41,000 over The adjustment on January 1,2014 to reflect the change in inventory method is:
B. 30,200 under D. 41,000 under Retained earnings 500,000
Inventory 500,000
78. Retained earnings on December 31, 2014? Since the retained earnings account is a debit, it is shown as a deduction. Note that the
A. 10,200 over C. 20,000 over cumulative effect of a change in inventory method is determined by considering only the
B. 10,200 under D. 20,000 under ending inventory of the immediately preceding year which in this case is 2013. The inventory
balances in 2011 and 2012 are ignored because their effect on net income is
79. Working capital on December 31, 2014? counterbalancing.
A. 4,200 over. C. 6,000 under
B. 5,800 under D. 9,800 under 4. Answer is (A).
Income before tax for 2014 - Average 2,000,000
Understatement of beginning inventory ( 200,000)
 Understatement of ending inventory 500,000 Accumulated depreciation (6,000,000 / 6 x 3) 3,000,000
Income before tax for 2014 - FIFO 2,300,000 Carrying amount - January 1, 2014 3,000,000
Income tax - 30% ( 690,000) Depreciation (3,000,000 / 5 years) 600,000
Net income for 2014 - FIFO 1,610,000 Revised life 8 years
Years expired 3 .
5. Answer is (D). Remaining revised life 5 years
Percentage of completion 9,000,000 This is a change in accounting estimate. The procedure is to allocate the remaining
Cost recovery method 7,000,000 depreciable amount over the remaining revised life.
Cumulative effect – understatement of income 2,000,000
Tax (30% x 2,000,000) (600,000) 12. Answer is (C).
Net cumulative effect 1,400,000 Fixed rate (100% / 4 x 2) 50%
Cost 6,000,000
6. Answer is (C). Depreciation for 2013 (50% x 6,000,000) 3,000,000
Cumulative gross profit for 2012 and 2013 – percentage of completion 3,500,000 Carrying amount – 1/1/2014 3,000,000
Cumulative gross profit for 2012 and 2013 - cost recovery (2,200,000) Residual value (600,000)
Cumulative increase 1,300,000 Maximum depreciation in 2014 2,400,000
Tax effect (1,300,000x30%) ( 390,000) Fixed rate in 2014 (100% / 2 x 2) 100%
Addition to retained earnings on January 1,2014 910,000 This means that the computers should be fully depreciation in 2014/ Since there is no
residual value of P600,000, the maximum depreciation for 2014 is equal to the carrying
7. Answer is (B). (38,000,000-32,000,000) 6,000,000 amount of P3,000,000 minus the residual value of P600,000 or P2,400,000.
Percentage of completion Cost recovery method
2011 15,000,000 7,000,000 13. Answer is (B).
2012 16,000,000 13,000,000 Building Machinery Furniture
2013 7,000,000 12,000,000 Cost-January 1,2011 15,000,000 10,500,000 3,500,000
Total 38,000,000 32,000,000 Accumulated depreciation:
(15,000,000/ 15 x 3) 3,000,000
8. Answer is (A). No entry is necessary on January 1,2014 because a change in the useful life (10,500,000/ 10 x 3) 3,150,000
of an asset is a change in accounting estimate. ( 3,500,000/ 7 x 3) 1,500,000
Carrying amount - January 1, 2014 12,000,000 7,350,000 2,000,000
9. Answer is (A). Change in estimated useful life is not a prior period error subject to prior year Depreciation for 2014
adjustment. Building (12,000,000/10) 1,200,000
Machinery ( 7,350,000 / 7) 1,050,000
10. Answer is (B). (750,000 / 5) = 150,000 Furniture (2,000,000 / 5) 400,000
Machine - January 1, 2011 1,500,000 2,650,000
Accumulated depreciation (1,500,000 / 6 x 3) 750,000
Carrying amount - January 1, 2014 750,000 14. Answer is (A).
Correct cost - January 1, 2008 6,000,000
11. Answer is (C). Accumulated depreciation - January 1, 2014 (6,000,000 /15 x 6 years) (2,400,000)
Cost 6,000,000 Carrying amount - January 1,2014 3,600,000
 Depreciation for 2014 (3,600,000 - 800,000 /14 years) ( 200,000) Carrying amount-January 1,2014 1,500,000
Carrying amount - December 31, 2014 3,400,000 Amortization of patent for 2014 (1,500,000 / 3) 500,000
Remaining useful life (20 minus 6 years expired) 14 Depreciation for 2014 (4,600,000-200,000/10) 440,000
Total charge against income for 2014 940,000
15. Answer is (A).
Cost 2,640,000 21. Answer is (B).
Accumulated depreciation (2,640,000 / 8 x 3) 990,000 Straight-line depreciation for 2014 (1,536,0000 / 8) 192,000
Carrying amount – 1/1/2014 1,650,000
Accum. depreciation – 1/1/2014 990,000 22. Answer is (B).
Depreciation for 2014 (1,650,000 – 240,000) / 3) 470,000 Straight-line rate (100% / 5 years) 20%
Balance – 12/31/2014 1,460,000 Fixed rate (20% x 2) 40%
2012 depreciation (5,000,000 x 40%) 2,000,000
16. Answer is (A). 2013 depreciation (3,000,000 x 40%) 1,200,000
Acquisition cost - January 1,2011 5,280,000 Accum. depreciation, 12/31/2013 3,200,000
Accumulated depreciation for 2011, 2012 and 2013 (5,280,000/8x3) 1,980,000 Depreciation for 2014 – straight-line(5,000,000 – 3,200,000)/ 3 600,000
Carrying amount - January 1, 2014 3,300,000 Accum. depreciation, 12/31/2014 3,800,000
Accumulated depreciation - January 1,2014 1,980,000
Depreciation for 2014 (3,300,000-480,000/3) 940,000 23. Answer is (B).
Accumulated depreciation - December 31, 2014 2,920,000 Depreciation for 2014 (3,072,000 - 200,000 / 8) 359,000
Revised life 6 years Under PAS 16, paragraph 61, a change in depreciation method is accounted for as a change
Years expired 3 . in accounting estimate.
Remaining revised life 3 years
24. Answer is (C).
17. Answer is (B). (2,560,000 - 460,000) / 8 = 262,500 SYD (1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9+10) 55
Cost - January 1,2010 4,000,000 Cost - January 1,2013 2,750,000
Accumulated depreciation - January 1, 2014(4,000,000 - 400,000 / 10 x 4) 1,440,000 Accumulated depreciation – Jan. 1, 2014 (10 / 55 x 2,750,000) ( 500,000)
Carrying amount - January 1,2014 2,560,000 Carrying amount - January 1, 2014 2,250,000
Straight line depreciation for 2014 (2,250,000 / 9 years remaining) 250,000
18. Answer is (B). (5,460,000 - 800,000) / 10 = 466,000
Cost - January 1, 2012 6,000,000 25. Answer is (C).
Accumulated depreciation-January 1, 2014(6,000,000-600,000 / 20 x 2) 540,000 Cost - January 1, 2011 7,200,000
Carrying amount - January 1,2014 5,460,000 Accumulated depreciation-January 1, 2014 (7,200,000/10x3) 2,160,000
Carrying amount - January 1, 2014 5,040,000
19. Answer is (C). SYD for the remaining life of 7 years (1+2 + 3+4 + 5 + 6 + 7) 28
Depreciation 2014 (1,500,000 – 100,000) / 2 700,000 Depreciation for 2014 (5,040,000 x 7/28) 1,260,000

20. Answer is (C). 26. Answer is (B).

Patent - January 1, 2009 3,000,000 Depreciation for 2014 (2,000,000 / 5) 400,000
Accumulated amortization (3,000,000 /10 x 5) 1,500,000
27. Answer is (A). The entity committed an error of deferring advertising and promotion costs. A Accrued wages (25,000)
prior period error is not included in profit or loss but treated as an adjustment of the beginning Rent collected in advance (30,000)
balance of retained earnings. Interest receivable 50,000
Corrected income 1,415,000
28. Answer is (A).
After-tax effect of litigation loss (250,000 x 70%) 175,000 34. Answer is (D).
The depreciation error is treated retrospectively. The inventory error is counterbalancing. Net income per book 2,000,000
The loss on disposition is part of discontinued operation. January 1 inventory overstated 300,000
December 31 inventory understated 500,000
29. Answer is (A). Unrecorded insurance expense (50,000)
Net income per book 5,000,000 Advances from customer (100,000)
Unearned revenue (200,000) Proper net income for 2014 2,650,000
Loss on sale of equipment (150,000)
Adjusted net income 4,650,000 35. Answer is (B).
2012 2013
30. Answer is (A). Net income per book 6,000,000 6,500,000
Net income per book 9,000,000 Omission of prepaid insurance
Understated of 2013 ending inventory (500,000) 2012 100,000 (100,000)
Insurance for 2014 (300,000) 2013 150,000
Revenue received in advance (1,000,000) Omission of accrued salaries
Interest payable unrecorded (2,000,000) 2012 (50,000) 50,000
Corrected net income for 2014 5,200,000 2013 (200,000)
Omission of unearned rental income
31. Answer is (A). 2012 (250,000) 250,000
Income before income tax 3,000,000 2013 (450,000)
Inventory loss (400,000) Omission of accrued interest receivable
Adjusted income before tax 2,600,000 2012 300,000 (300,000)
2013 . 400,000
32. Answer is (A). Corrected net income 6,100,000 6,300,000
Income before tax per book 5,000,000
Prepaid insurance 200,000 36. Answer is (B).
Accrued wages (250,000) Net income per book 6,500,000
Rent revenue collected in advance (300,000) Unrecorded purchase of 2014 (1,000,000)
Interest receivable 100,000 Merchandise shipment not included in December 31, 2014 inventory 1,500,000
Corrected income before tax 4,750,000 Unrecorded advertising for December 2014 ( 500,000)
Unearned rent income (300,000 x 4/6) (200,000)
33. Answer is (D). Prepaid insurance (200,000 x 6/12) 100,000)
Unadjusted income 1,400,000 Corrected income before tax 6,400,000
Prepaid insurance 20,000
37. Answer is (C). change in accounting estimate.
2012 2013
Net income per book 4,000,000 5,000,000 41. Answer is (A). The inventory on December 31,2014 was understated resulting to
Overstatement of inventory overstatement of cost of goods sold and understatement of net income for 2014. Thus, the
2012 (50,000) 50,000 retained earnings should be increased and credited directly.
2013 (150,000) Inventory - January 1,2015 150,000
Revenue received in advance (250,000) 200,000 Retained earnings 150,000
Gain on sale of plant asset . 400,000 The settlement of the litigation in 2015 is included in the profit or loss of 2015.
Corrected net income 3,700,000 5,500,000 Litigation loss 500,000
Cash 500,000
38. Answer is (B).
2013 2014 42. Answer is (B). The reduction in the carrying amount of inventory on December 31, 2014 of
Income before tax 3,700,000 5,200,000 P280,000 is a prior period error to be presented in the statement of retained earnings for
Ending inventory of 2013 understated (5,000 x 36) 180,000 (180,000) 2015. The provision for uncollectible accounts receivable is a change in accounting estimate
Purchase in transit in 2013, FOB shipping and therefore has no effect on retained earnings.
point, excluded from inventory 175,000 ( 175,000)
Merchandise sold in 2013 incorrectly included in inventory ( 30,000) 30,000 43. Answer is (B). Only the unrecorded sale of P600,000 on December 31, 2013 is treated as
Unrecorded purchase in 2013 ( 15,000) 15,000 prior period error in the financial statements for 2014. The write-off of the inventory of
Purchase on December 29, 2013 P800,000 is included in profit or loss for 2014.
incorrectly excluded from inventory 15,000 (15,000)
Corrected income 4,025,000 4,875,000 44. Answer is (B).
R.E.
39. Answer is (C). 2013 2014 1/1/2015
Invoice price 3,600,000 2013 inventory understated 200,000 (200,000) -
Cash discount (2% x 360,000) (72,000) 2014 inventory overstated (300,000) (300,000)
Net amount 3,528,000 2013 depreciation understated (50,000) . (50,000)
Irrevocable purchase taxes 150,000 2014 depreciation overstated 100,000 100,000
Freight charge 70,000 Net decrease (250,000)
Installation 252,000
Correct cost 4,000,000 45. Answer is (C).
Correct depreciation for 2013 (4,000,000/ 10) 400,000 Development costs - December 31, 2014 5,840,000
Recorded depreciation for 2013 (3,528,000 x 10) 352,800 Amortization (1,200,000)
Under-depreciation for 2013 47,200 Carrying amount 4,640,000
Net income for 2013 5,000,000 The entity committed an error in capitalizing development costs. Thus, the carrying amount of
Under-depreciation for 2013 (47,200) P4,640,000 on December 31, 2014 is treated as a prior period error in the statement of
Corrected net income for 2013 4,952,800 retained earnings for 2015.
The remainder of the carrying amount of the development costs on December 31,2015
40. Answer is (C). Only the unrecorded warranty cost of PI 00,000 on December 31,1 2013 should be expensed in 2015.
should be accounted for as a prior period error. The change in depreciation method is a Carrying amount - December 31, 2015 (8,160,000 - 1,800,000) 6,360,000
 Carrying amount - December 31, 2014 4,640,000 51. Answer is (A).
Remaining carrying amount 1,720,000 Retained earnings - January 1,2014 3,400,000
Prior period error: Under-depreciation in 2013 and 2012 ( 200,000)
46. Answer is (D). Corrected beginning balance 3,200,000
Inventory 600,000 Net income for 2014 700,000
Retained earnings 600,000 Retained earnings - December 31, 2014 3,900,000

47. Answer is (C). 52. Answer is (B).

Retained earnings - January 1, 2013 4,000,000 Retained earnings - December 31,2013 1,940,000
Understatement of prepaid insurance Overstatement of 2013 ending inventory (300,000
on 12/31/2012 (900,000 x 2/3) 600,000 Corrected balance - December 31, 2013 1,640,000
Tax effect (30% x 600,000) (180,000) 420,000 The inventory error in 2012 is counterbalanced in 2013 and there: has no effect on retained
Corrected retained earnings - January 1, 2013 4,420,000 earnings on December 31,2013.

48. Answer is (C). 53. Answer is (A).

Retained earnings – 1/1/2014 400,000 Overvaluation of 12/31/2013 inventory (2,000,000)
Understatement of prep. insurance on 12/31/2013 (75,000 x 2/3) 50,000 Overvaluation of 12/21/2012 inventory 1,200,000
Tax effect (50,000 x 30%) (15,000) 35,000 Net decrease in 2013 profit (800,000)
Adjusted retained earnings – 1/1/2014 435,000
54. Answer is (C). The increase in the provision for inventory obsolescence on December
49. Answer is (A). 31,2015 of P3,000,000 is included in the 2015 profit or loss. However, the increase of PI
Retained earnings - January 1,2014 1,100,000 ,800,000 in 2014 is ignored because this is a change in accounting estimate.
Net income for 2014 600,000
Dividend declared and paid in 2014 (300,000) 55. Answer is (A). The current assets on December 31,2014 are no longer affected because the
Retained earnings - December 31, 2014 1,400,000 overstatement of 2013 ending inventory would affect 2014 cost of goods sold. The
Net income for 2015 700,000 depreciation error does
Prior period error in 2013 due to underdepreciation ( 650,000)
Dividend declared and paid in 2015 ( 150,000) 56. Answer is (A).
Retained earnings - December 31,2015 1,300,000 Working capital
2012 2013 12/31/2013
50. Answer is (A). 2012 inventory understated 160,000 (160,000)
Retained earnings, 1/1/2014 850,000 2013 inventory overstated (150,000) (150,000)
Prior period errors – underdepreciation: 2012 depreciation understated (60,000)
2012 (25,000) Prepaid insurance understated 100,000 (100,000)
2013 (25,000 Gain on sale of machinery . 108,000 108,000
Corrected beginning balance 800,000 Net correction 200,000 (302,000) ( 42,000)
Net income for 2014 500,000 Incidentally, the 2012 net income was understated by P200,000 and the 2013 net income
Retained earnings – 12/31/2014 1,300,000 was overstated by P302,000 or a net decrease of P102,000 in retained earnings on January
1, 2014.
 Net correction to retained earnings (75,000)
57. Answer is (C). The December 31, 2014 inventory was overstated. Therefore the cost of
goods sold was understated by P60,000 (P75,000 / 125%). 62. Answer is (B).
2012 2013
58. Answer is (D). 2012 inventory understated 200,000 (200,000)
January 1 inventory understated 26,000 2012 depreciation understated ( 50,000)
December 31 inventory overstated 56,000 2013 inventory overstated (300,000)
Cost of goods sold understated 78,000 2013 depreciation overstated . 90,000
If beginning inventory is understated, cost of goods sold is also understated. If ending Net correction to income 150,000 (410,000)
inventory is overstated, cost of goods sold is understated.
Net correction to 2012 net income 150,000
59. Answer is (D). Net correction to 2013 net income (410,000)
2013 2014 Net correction to retained earnings (260,000)
Ending inventory:
2013 (140,000) 140,000 63. Answer is (C).
2014 200,000 2013 2014
Rent expense: 2013 ending inventory under 200,000 (200,000)
2013 ( 48,000) 2014 ending inventory over (300,000)
2014 . 66,000 2013 depreciation under (50,000) -
Net correction to income (188,000) 406,000 Insurance premium 100,000 (50,000)
Gain on sale of machinery - 250,000
60. Answer is (A). Net correction to income 250,000 (300,000)
2013 2014 Net correction to 2013 net income 250,000
2012 ending inventory - under 100,000 (100,000) Net correction to 2014 net income (300,000)
2013 ending-inventory-over ( 40,000) Net correction to retained earnings ( 50,000)
Depreciation – under ( 40,000) ( 60,000) The net income of 2012 was understated by P250,000 and the net income of 2013 was
Accrued salaries unrecorded: overstated by P300,000. Accordingly, the net effect is overstatement of retained earnings of
2012 ( 80,000) 80,000 P50,000.
2013 . (120,000)
Net correction to income (20,000) (240,000) 64. Answer is (A).
2013 2014
61. Answer is (C). 12/31/2013 inventory – under 500,000 (500,000)
2013 2014 Unrecorded purchase in 2013 (500,000) 500,000
2013 inventory understated 60,000 (60,000) 12/31/2014 inventory – over - (800,000)
2014 inventory overstated . (75,000) 2013 depreciation – over 250,000
Net correction to income 60,000 (135,000) 12/31/2014 accrued rent income – over - (300,000)
12/31/2014 accrued salaries – under - (150,000)
Net correction to 2012 net income 60,000 Unrecorded gain in 2014 - 100,000
Net correction to 2013 net income (135,000) Net corrections 250,000 (1,150,000)
 Net income for 2013 3,830,000
Effect on 2013 net income 250,000 Dividends declared in 2013 (1,750,000)
Effect on 2014 net income (1,150,000) Retained earnings - December 31,2013 14,000,000
Net effect on retained earnings – 12/31/2014 (900,000)
69. Answer is (C).
65. Answer is (B). Net income per book 512,000
Machinery 900,000 Ending inventory 2013 over 100,000
Accumulated depreciation (900,000 / 10) 90,000 Corrected income 612,000
Retained earnings 810,000
70. Answer is (A).
66. Answer is (A). Net income per book 656,000
Equipment 600,000 Ending inventory: 2013 under (100,000)
Accumulated depreciation (600,000/5 x 2) 240,000 2014 over (300,000)
Income tax payable (360,000 x 30%) 108,000 Corrected income 256,000
Retained earnings 252,000
71. Answer is (B).
67. Answer is (D). 2013 2014
2012 2013 2014 Retained earnings, 1/1 1,077,000 1,541,000
Unrecorded commissions: Net income 612,000 256,000
2012 (220,000) 220,000 Dividend paid (148,000) (157,000)
2013 (140,000) 140,000 Retained earnings – 12/31 1,541,000 1,640,000
Ending inventory:
2012 under 400,000 (400,000) 72. Answer is (A).
2013 over (540,000) 540,000 Net income for 2014 per book 350,000
2014 under 150,000 Unrecorded accrued wages - December 31, 2014 (120,000)
Net correction to income 180,000 (860,000) 830,000 Corrected net income for 2014 230,000

Net income per book for 2014 3,000,000 73. Answer is (D).
Net correction to income of 2014 830,000 Net income for 2015 per book 370,000
Adjusted net income of 2014 3,830,000 Accrued wages on 12/31/2014 recorded in 2015 120,000
Corrected net income for 2015 490,000
68. Answer is (D).
Net correction to income of 2011 180,000 74. Answer is (C).
Net correction to income of 2012 (860,000) Total liabilities - December 31,2014 350,000
Net correction to income of prior years (680,000 Unrecorded accrued wages - December 31, 2014 120,000
Correct amount of total liabilities-December 31, 2014 470,000
Retained earnings - January 1,2013 12,600,000
Prior period errors-2011 and 2012 (680,000) 75. Answer is (C).
Corrected beginning balance 11,920,000 Total owners' equity - December 31, 2015 1,070,000
 The owners' equity on December 31, 2015 is not affected because the nonaccrual of the
wages on December 31, 2014 is counterbalanced in 2015.

76. Answer is (B).

N.I. 2013 N.I. 2014 W.C. 12/31/14
2013 inventory understated 16,000 (16,000)
2014 inventory overstated (15,000) (15,000)
2013 depreciation understated (6,000) - -
2013 prepaid insurance understated 10,000 (10,000)
2014 gain on sale of machinery . 10,800 10,800
Net correction 20,000 (30,200) (4,200)

77. Answer is (A).

78. Answer is (A).

Effect on 2013 net income 20,000
Effect on 2014 net income (30,200)
Net effect on retained earnings (10,200)

79. Answer is (A).