CHAPTER 8 CHANGE IN ACCOUNTING POLICY Problem 8-1 (AICPA Adapted) During 2019, Orca Company decided to change from the FIFO . inventory valuation to the weighted average method. The income tax rate is 30%, FIFO Weighted average January | inventory 7,100,000 7,700,000 December 31 inventory 7,900,000 8,200,000 What amount should be reported as the cumulative effect of the accounting change for 2019? a. 420,000 increase b. 420,000 increase c. 600,000 increase d. 600,000. decrease Solution 8-1 Answer a . FIFO inventory - January 1 7,100,000 Weighted average inventory - January | 7,700,000 Cumulative effect Cumulative effect after tax (70% x ,000) 420,000 The change from FIFO toveigedaenge’ isa change in accounting policy. The cumulative effect of the change accounting policy is an adjustment of retained earnings. Inventory 600,000 Retained earnings 420,000 Increase tax payable 180,000 96 Scanned with CamScannerProblem 8-2 (AICPA Adapted) Goddard Company had used the FIFO method of inventory valuation since it began operations jn 2016. The entity decided to change to the weighted average method for measuring inventory at the beginning of 2019. The income tax rate is 30%. The following schedule shows year-end inventory balances: 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 amount should be reported for 2019 asthe cumulative effect of the change in accounting policy? : a. 500,000 decrease. b. 350,000 decrease . c. 500,000 increase d. 350,000 increase Solution 8-2 Answer b Inventory, December 31, 2018 FIFO . 8,300,000 Weighted average 7,800,000 Decrease in inventory : 500,000 . The adjustment on January 1,2019 to reflect the change in inventory method is: Retained earnings (70% x 500,000) 350,000 Income tax payable (30% x 500,000) 150,000 Inventory 500,000 Since the retained earnings account is a debit, it is shown as a deduction. Note that the cumulative effect of a change’in inventory method is determined by considering only the ending inventory of the immediate preceding year which in this case is 2018. v ‘The inventory balances in 2016 and 2017 are ignored because the effect on net income is counterbalancing. “97 Scanned with CamScannerProblem 8-3 (IAA) Banko Company used the cost recovery method of accounting since it began operations in 2016. In 2019, management decided to adopt the percentage of completion method. 2016 2017 | 2018 Revenue from completed contracts 25,000,000 42,000,000 40,000,000 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 _ 13,000,000 000 Analysis of the accounting records disclosed the following income by contracts 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 5 (1,000,600) What amount of; pretax cumulative effect of change in accounting policy should be reported in the statement of retained earnings for 2019? : 6,000,000 8,000;000 7,000,000 0 ae gp Solution 8-3 Answera _ (38,000,000—32,000,000) 6,000,000 Percentage of completion Cost recovery method 2016 15,000,000 7,000,000 217 ° 16,000,000 13,000,000 2018 7,000,000 12,000,000 Total 5: 38, 0 ‘32,000,000 98 Scanned with CamScannerProblem 8-4 (IAA) During 2019, Build Company changed from the cost recovery method tothe Screentage of completion method. The tax rate is 30%. The entity revealed the following gross income under the cost recovery and percentage of completion method: . 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. 1,400,000 increase in income b. 1,400,000 increase in retained earnings c. 910,000 increase in income d. 910,000: increase in retained earnings Solution 8-4 Answer d Cumulative gross income for 2017 and 2018 — percentage of completion 3,500,000 Cumulative gross income for 2017 and 2018 —cost recovery (2,200,000) Cumulative increase : 1,300,000 Tax effect (1,300,000 x 30%) : (390,000) Addition to retained earnings on January 1, 2019 910,000 Journal entry on January 1, 2019 . Construction in progress 1,300,000 Retained earnings . 910,000 Income tax payable 390,000 . 99 Scanned with CamScannerProblem 8-5 (AICPA Adapted) ABC Company provided the following net income and inventory: 2019 2020 Net income using LIFO 2,750,000 3,000,000 Year-end inventory - FIFO 1,400,000 2,000,000 Year-end inventory - LIFO 900,000 1,600,000 What amount should be reported as net income for 2020 using the FIFO cost flow? 2,900,000 2,600,000 3,500,000 3,100,000 BPP Solution 8-5 Answer a 2019 2020 Net income - LIFO 2,750,000 3,000,000 Understatement of inventory: 2019 (1,400,000 - 900,000) 500,000 ( 500,000) 2020 (2,000,000 - 1,600,000) = 400,000 Net income - FIFO 250,000 2,900,000 Scanned with CamScanner