Accounting Changes and Errors

Problem Solving
1. Depreciation expense for the most recent fiscal year on equipment purchased a few years ago is P10,000. The balance sheet
at the end of the same year disclosed the following:

Equipment P300,000
Accumulated depreciation ( 40,000)
Book value P260,000

Originally, the asset was not expected to have a salvage value and the firm depreciates the asset on the straight-line basis. In
January of the next year (the year of change), the firm decided to reduce the original total useful life by 20% and that a
salvage value of P30,000 is a reasonable estimate. What is depreciation in the year of the change?
a. P10,000
b. P11,500
c. P12,000
d. P12,500

Depreciable book value:

Book value 260,000
New salvage value (30,000) 230,000

Remaining useful life:

Original useful life (300,000 ÷ 10k annual dep.) 30 years
Reduced by 20% x 80%
Reduced useful life 24 years
Expired years (40k accum. dep. ÷ 10k annual dep) (4 years) ÷ 20 years
Depreciation for current year P 11,500

2. On December 31, 2022, Carbon Company appropriately changed its inventory valuation method to the FIFO cost method from
the average cost method for financial statement and income tax purposes. The change will result in an P350,000 increase in
the beginning inventory at January 1, 2022. Assuming an income tax rate of 25%, how much should be adjusted to the
beginning balance of the retained earnings for the year 2022?
a. None
b. P122,500
c. P262,500
d. P350,000

As if beginning inventory is understated or ending inventory is understated, net income of 2022 is understated
= retained earnings beginning is understated, thus retained earnings is credited for P350,000 net of 25%
tax.

3. Jaguar Company has recorded bad debts expense in the past at a rate of 1.5% of net sales. In 2023, Jaguar decides to
increase its estimate to 2%. If the new rate had been used in prior years, cumulative bad debts expense would have been
P380,000 instead of P285,000. In 2023, bad debts expense will be P120,000 instead of P90,000. If Jaguar’s tax rate is 25%,
what amount should be adjusted to the beginning balance of the retained earnings in 2023?
a. none
b. 64,600
c. 95,000
d. 120,000

No adjustment is made on the beginning balance of retained earnings for changes involving estimates. For 2023, the
company will report a bad debt expense of P 120,000.

4. On January 1, 2022, Pasar Company purchased a machine for P2,750,000. The machine was depreciated using the sum of
year’ digits method based on a useful life of 10 years with no residual value. On January 1, 2023, the entity changed to the
straight line method of depreciation. The entity can justify the change. What is the depreciation of the machine for 2023?
a. 180,000
b. 220,000
c. 250,000
d. 275,000

SYD (1 +2 +3 + 4 + 5 + 6 + 7 + 8 + 9 + 10) 55

Cost - January 1, 2022 2,750,000

Accum. Depreciation - Dec 31, 2022 (2,750,000*10/55) (500,000)
Carrying amount - January 1, 2023 2,250,000
Straight line depreciation 2023 (10 years - 1 year exp) ÷ 9 years
Depreciation expense 2023 250,000

5. Cramming Company had used the FIFO method of inventory valuation since it began operations in 2020. The entity decided to
change to the weighted average method for determining inventory costs at the beginning of 2023. The following schedule
shows year-end inventory balances under the FIFO and weighted average method:

Year FIFO Weighted Average

2020 4,500,000 5,400,000
2021 7,800,000 7,100,000
2022 8,300,000 7,800,000

What amount, before income tax, should be reported in the 2023 statement of retained earnings as the cumulative effect of
the change in accounting policy?
a. 500,000 decrease
b. 300,000 decrease
c. 500,000 increase
d. 300,000 increase
 Inventory, December 31, 2022:
FIFO 8,300,000
Weighted average (7,800,000)
Decrease in inventory 500,000

6. Imong Mama Company failed to accrue warranty cost o P100,000 on December 31, 2022. In addition, a change from straight
line to accelerated depreciation made at the beginning of 2023 resulted in a cumulative effect of P60,000 on retained
earnings. What amount before tax should be reported as prior period error in 2023?
a. 100,000
b. 160,000
c. 60,000
d. zero

Only the unrecorded warranty cost of P100,000 on December 31, 2022 should be accounted for as a prior period
error. The change in depreciation method is a change in accounting estimate.

7. The draft financial statements for Kulbaan Company for the year ended December 31, 2014 had been prepared. A final review
of the draft revealed an overvaluation of the ending inventory of P2,000,000 on December 31, 2013. Further investigation
showed that there was an overvaluation of ending inventory on December 31, 2012 of P1,200,000. What adjustment should
be made to the profit for the year ended December 13, 2013 presented as the comparative figure in the 2014 financial
statements?
a. 2,000,000 decrease
b. 1,200,000 decrease
c. 800,000 decrease
d. zero

Overvaluation of December 31, 2013 inventory (2,000,000)

Overvaluation of December 31, 2012 inventory 1,200,000
Net decrease in 2023 profit ( 800,000)

8. In reviewing the company’s draft financial statements for the year ended December 31, 2022, management decided that
market decisions were such that the provision for inventory obsolescence on December 31, 2022 should be increased by
P3,000,000. If the same basis of calculating inventory obsolescence had been applied on December 31, 2021, the provision
would have been P1,800,000 higher than the amount recognized in the statement of financial position. What adjustment
should be made to the profit for 2022 and the profit for 2021 presented as a comparative figure in the 2022 FS?
a. 3,000,000 decrease in 2022 1,800,000 decrease in 2021
b. 1,200,000 decrease in 2022 1,800,000 decrease in 2021
c. zero in 2022 3,000,000 decrease in 2021
d. 3,000,000 decrease in 2022 zero in 2021

The increase in the provision of inventory obsolescence on 2022 of 3,000 is included in the 2022 profit or loss.
However the increase of 1,800,000 in 2021 is ignored because this is a change in accounting estimate.

9. After the issuance of the 2022 financial statements, Narattle Company discovered a computational error of 150,000 in the
calculation of December 31, 2022 inventory. The error resulted in a 150,000 overstatement in the cost of goods sold for the
year ended December 31, 2022. In October 2023, the entity paid the amount of 500,000 in settlement of litigation instituted
against it during 2022. In the 2023 financial statements, what is the adjustment of the retained earnings on January 1, 2023?
a. 150,000 credit
b. 350,000 debit
c. 500,000 debit
d. 650,000 credit

Inventory - January 1, 2023 150,000

Retained Earnings 150,0000

Litigation expense 500,000

Cash 500,0000

10. After the issuance of the 2022 financial statements, Narattle Company discovered a computational error of 150,000 in the
calculation of December 31, 2022 inventory. The error resulted in a 150,000 overstatement in the cost of goods sold for the
year ended December 31, 2022. In October 2023, the entity paid the amount of 500,000 in settlement of litigation instituted
against it during 2022. In the 2023 financial statements, how much is recognized in profit or loss in 2023?
a. 150,000 credit
b. 350,000 debit
c. 500,000 debit
d. 650,000 credit

Inventory - January 1, 2023 150,000

Retained Earnings 150,0000

Litigation expense 500,000

Cash 500,0000