Chapter 11 Accounting Changes Change in accounting policy prior period errors Problem 11-1 On January 1, 2019, Black Company changed the inventory cost flow method to FIFO from LIFO for both financial statement and income tax reporting purposes. The change resulted in a P600,000 increase in the beginning inventory on January 1, 2019. Ignoring income tax, the accounting change should be reported in the 2019. a. Income statement as a P600,000 debit b. Retained earings statement as a P600,000 debit adjustment to the beginning balance c. Income statement as a P600,000 credit d. Retained earnings statement as a P600,000 credit adjustment to the beginning balance. Problem 11-2 During 2019, Orca Company decided to change from the FIFO method of inventory valuation to the weighted average method. Inventory balances under each method were as follows: FIFO Weighted average January 1 7,200,000 7,700,000 December 31 7,900,000 8,300,000 What amount should be reported as the pretax effect of the accounting change in the statement of changes in equity for 2019? 500,000 addition 500,000 deduction 900,000 addition 900,000 deduction poopAnswer: FIFO inventory - January 1 7,200,000 Weighted average inventory — January 1 7,700,000 Increase in beginning inventory 500,000 Problem 11-3 Goddard Company had used the FIFO method of inventory valuation since it began operations in 2016. The entity decided to change to the weighted average method for determining inventory cost at the beginning of 2019. The entity provided the following year-end inventory balances under FIFO and weighted average method: Year FIFO Weighted average 2016 4,500,000 5,400,000 2017 7,800,000 7,100,000 2018 8,300,000 7,800,000 What pretax amount should be reported in the 2019 statement of changes in equity as the cumulative effect of the change in accounting policy? 500,000 decrease 300,000 decrease 500,000 increase 300,000 increase aogp Answer: FIFO inventory- 2017 8,300,000 Weighted average inventory — 2017 7,800,000 Decrease in inventory (500,000)Problem 11-4 On January 1, 2019, Poe Construction Company changed to the percentage of completion method from cost recovery method of income recognition. On December 31, 2018 the entity compiled data showing that income under the cost recovery method aggregated P7,000,000. If the percentage of completion method had been used, the accumulated income through December 31, 2018 would have been P9,000,000. The income tax rate is 30%. The cumulative effect of the accounting change should be reported in the 2019. a. Retained earings statement as P2,000,000 credit adjustment to the beginning balance. b. Income statement as P2,000,000 credit. c. Retained earnings statement as a P1,400,000 credit adjustment to the beginning balance d. Income statement as a P1,400,000 credit. Answer: Percentage of completion 9,000,000 Cost recovery method 7,000,000 Total 2,000,000 Tax (30% x 2,000,000) (600,000) Total 1,400,000 Problem 11-5 Banko Construction Company has used the cost recovery method of accounting since it began operations in 2016. In 2019, for justifiable reasons, management decided to adopt the percentage of completion method. The following schedule, reporting income for the past 3 years, has been prepared by the entity.2016 2017 2018 Total revenue from completed contracts 25,000,000 42,000,000 40,000,000 Less: Cost of completed contracts 18,000,000 29,000,000 28,000,000 Income from operations 7,000,000 13,000,000 12,000,000 Casualty loss 0 0 (2,000,000) Income 7,000,000 13,000,000 10,000,000 Analysis of the accounting records disclosed the following income by contracts, earned in the years 2016-2018 using the percentage of completion method. 2016 2017 2018 Contract 1 7,000,000 Contract 2 5,000,000 8,000,000 Contract 3 3,000,000 7,000,000 2,000,000 Contract 4 1,000,000 6,000,000 Contract § (1,000,000) What pretax amount should be reported as the cumulative effect of change in accounting policy in the statement of retained earnings for 2019? a. 6,000,000 b. 8,000,000 c. 7,000,000 a. 0 Answer: Percentage of completion Cost recovery method 2016 (7m+5m+3m) 15,000,000 7,000,000 2017 (8m+7m+1m) 16,000,000 13,000,000 2018 (2m+6m-1m) 7,000,000 12,000,000 Total 38,000,000 32,000,000 Cumulative effect (88m-32m) 6,000,000Problem 11-6 While preparing the financial statement for 2019, Dakila Company discovered computational errors in the 2017 and 2018 depreciation expense. These errors resulted in overstatement of each year's income by P25,000, net of income tax. The net income for 2019 is correctly reported at P500,000. The following amounts were reported in the previously issued financial statements: 2017 Retained earings, January 1 700,000 Net income 150,000 Retained earnings, December 31 850,000 What is the balance of retained earnings on December 31, 20197 1,300,000 1,350,000 1,400,000 1,325,000 aocp Answer: Retained earings — January 1, 2019 Prior period errors -depreciation: 2017 2018 Corrected beginning balance Net income for 2019 Retained earnings — December 31, 2019 Problem 11-7 2018 500,000 200,000 700,000 850,000 (25,000) 25,000) 800,000 500,000 1,300,000 Effective January 1, 2019, King Company adopted the accounting policy of expensing advertising and promotion costs when incurred. Previously, advertising and promotion costs applicable to future periods were recorded in prepaid expenses. The entity can justify the change which was made for both financial statement and income tax reporting purposes. The prepaid advertising and promotion costs totaled P600,000 on December 31, 2018. The income tax rate is 30%.What is the adjustment for the effect of the change in accounting policy that should result in a net charge against income for 2019? a. 600,000 b. 180,000 c. 420,000 da. oO Answer: The company committed an error of deferring advertising and promotion costs. A prior period error is not included in profit or loss but treated as an adjustment of retained earnings. Problem 11-8 During the year ended December 31, 2019, the following events occurred at Harbor Company: + Itwas decided to write off P800,000 from inventory which was over two years old as itwas obsolete. + Sales of P1,000,000 had been omitted from the financial statements for the year ended December 31, 2018. What amount should be reported as a prior error in the financial statements for 2019? a. 1,800,000 b. 1,000,000 c. 800,000 d. 200,000 Problem 11-9 In reviewing the draft financial statements for the year ended December 31, 2019, Bituin Company decided that market conditions were such that the provision for inventory obsolescence on December 31, 2019 should be increased by P3,000,000. If the same basis of calculating inventory obsolescence had been applied on December 31, 2018, the provision would have been P1,800,000 higher than the amount recognized in statement of comprehensive income.1. What adjustment should be made to net income of 2019? 3,000,000 decrease 3,000,000 increase 1,200,000 decrease 1,200,000 increase poop Answer: Overvaluation of December 31, 2019 inventory (3,000,000) Overvaluation of December 31, 2018 inventory 1,800,000 Net decrease in 2019 profit (4,200,000) 2. What adjustment should be made to net income of 2018 presented as comparative figure in 2019? a. 1,800,000 decrease b. 1,800,000 increase ©. 3,000,000 decrease d. 0 Problem 11-10 Animus Company provided the following information at year-end: December 31, 2019 December 31, 2018 Development costs 8,160,000 5,840,000 Amortization (1,800,000) (1,200,000) The capitalized development costs relate to a single project that commenced in 2016. It has now been discovered that ane of the criteria for capitalization has never been met. 1. What adjustment is required to restate retained earnings on January 1, 2019? a. 6,360,000 b. 1,720,000 ¢. 4,640,000 d 0 Answer: Development costs — December 31, 2018 5,840,000 Amortization (1.200.000) Total 4,640,0002. What amount of the development costs should be expensed in 2019? 5,840,000 6,360,000 1,720,000 0 poop Problem 11-11 During 2019, Build Company changed from the cost recovery method to the percentage of completion method. The tax rate is 30%. Gross profit figures are: 2017 2018 2019 Cost recovery method 950,000 1,250,000 1,400,000 Percentage of completion 1,600,000 1,900,000 2,100,000 How should this accounting change be reported in 2019? a. 1,300,000 increase in profit or loss. b. 1,300,000 increase in retained earnings c. 910,000 increase in profit or loss d. 910,000 increase in retained earnings Answer: Percentage of completion 2,100,000 Cost recovery method 11,400,000 Total 700,000 Add Tax rate (80%x 700,000) 210,000 Net cumulative effect 910,000 Problem 11-12 During the year December 31, 2018, Samar Company revealed the following events: * Accounting error relating to inventory on December 31, 2018 was discovered. This required a reduction in the carrying amount of inventory on that date of P280,000. * The provision for uncollectible accounts receivable on December 31, 2018 was 300,000. During 2019, an amount of P50,000 was written off the December 31, 2018 accounts receivable.What adjustment is required to restate retained earnings on January 1, 2019? 280,000 300,000 580,000 ° aecp Answer: The reduction in the carrying amount of inventory in December 31, 2018 of P280,000 is a prior error in the 2019 statement of retained earnings. The provision for uncollectible accounts receivable is a change in accounting estimate and therefore has no effect on retained earnings. Problem 11-13 After the issuance of the 2018 financial statements, Narra Company discovered a computational error of P'150,000 in the calculation of the December 31, 2018 inventory. The error resulted in a P150,000 overstatement in the cost of goods sold for the year ended December 31, 2018. In October 2019, the entity paid the amount of P500,000 in settlement of litigation instituted against it during 2018. In the 2019 financial statements, what is the pretax adjustment to retained earnings on January 1, 2019? 150,000 credit 350,000 debit 500,000 debit 650,000 credit eoop Answer: Inventory — January 1, 2019 150,000 Retained earnings 150,000Problem 11-14 Natasha Company reported net income of P700,000 for 2019. The entity declared and paid dividends of P150,000 in 2019 and P300,000 in 2018 In the financial statements for the year ended December 31, 2018, the entity reported retained earings of P1,100,000 on January 1, 2018. The net income for 2018 was 600,000. In 2019, after the 2018 financial statements were approved for issue, the entity discovered an error in the December 31, 2019 financial statements The effect of the error was a P650,000 overstatement of net income for the year ended December 31, 2018 due to underdepreciation. 1. What amount was reported as retained earnings on December 31, 2018? a. 1,400,000 b. 1,700,000 ©. 2,000,000 d. 2,100,000 Answer: Retained earnings ~ January 1, 2018 1,100,000 Net income 600,000 Dividend declared and paid in 2018 (300,000) Retained earings — December 31, 2018 1,400,000 2. What amount should be reported as retained earnings on December 31, 20197 a. 1,300,000 b. 2,900,000 c. 1,650,000 d. 1,950,000 Answer: Retained earnings — January 1, 2019 1,400,000 Net income 700,000 Prior period error (650,000) Dividend declared and paid in 2019 (150,000) Retained earnings — December 31, 2019 1,300,000Problem 11-15 1. Which is the first step within the hierarchy of guidance when selecting accounting policies? a. Apply a standard from IFRS if it specifically relates to the transaction b. Apply the requirements in IFRS dealing with similar and related issue c. Consider the applicability of the definitions, recognition criteria and measurement concepts in the Conceptual Framework d. Consider the most recent pronouncements of other standard setting bodies 2. In the absence of an accounting standard that applies specifically to a transaction, what is the most authoritative source in developing and applying an accounting policy? a. The requirement and guidance in the standard or interpretation dealing with similar and related issue b. The definition, recognition criteria and measurement of asset, liability, income and expense in the Conceptual Framework ¢, Most recent pronouncement of other standard-setting body d. Accounting literature and accepted industry practice 3. Achange in accounting policy shall be made when |. Required by law ll. Required by an accounting standard or an interpretation of the standard. lll The change will result in more relevant or reliable information about the financial Position, financial performance and cash flows of the entity. Vand Ill only Mand Ill only Vand Il only I, Wand il eoge 4, Allof the following should be treated as a change in accounting policy, except a. A new accounting policy of capitalizing development cost as a project has become eligible for capitalization for the first time. b. Anew policy resulting from a new IFRS. ¢. To provide more relevant information, investment property is now being measured at fair value, having previously been measured at cost. d. All of these qualify as change in accounting policy.5. Achange in accounting policy includes alll of the following except a. The initial adoption of a policy to carry assets at revalued amount. b. The change from cost model to fair value method of measuring investment property. c. The change in inventory valuation from FIFO to weighted average. d. The change in depreciation method from sum of years’ digits to straight 6. Which statement is correct concerning application of a change in accounting policy? |. An entity shall account for a change in accounting policy resulting from the initial application of a standard or an interpretation in accordance with any transitional provision. IL When an entity changes an accounting policy upon initial application of a standard or an interpretation that does not include specific transitional provision, applying to that change, the change shall be applied retrospectively. I, When an entity changes an accounting policy voluntarily, the change shall be applied retrospectively. a. land it b. Land Ill c. |,lland Ill d. Mand tl 7. A change in accounting policy requires that the cumulative effect of the change should be shown as an adjustment to Beginning retained earnings for the earliest period presented. Net income for the current period Comprehensive income for the earliest period presented. Shareholders’ equity for the period in which the change occurred eocp 8. Which is the best explanation why accounting changes are classified into change in accounting policy and change in accounting estimate? a. The materiality of the changes involved b. The accounting changes involve different method of recognition in the financial statements c. The fact that some methods are considered GAAP d. Management decision9. Which of the following is not a change in reporting entity? a. Changing the entities included in combined financial statements b. Disposition of a subsidiary or other business unit ¢. Presenting consolidated statements in place of the statements of individual entities d. Changing specific subsidiaries that constitute the group of entities for which consolidated financial statements are presented 10. Prior period errors a. Do not include the effect of a mistake in the application of accounting policy b. Do not affect the presentation of prior period comparative financial statements. c. Do not require further disclosure in the body of the financial statements. d. 1g balance of retained earnings of |. Are reflected as adjustments of the oper the earliest period presented.