1. Golda Company had used the FIFO method of inventory valuation since it began operations in 2017.

Golda decided to change to the weighted average method for determining inventory costs at the
beginning of 2020. The following schedules shows year-end inventory balances under FIFO and
weighted average method:

Year FIFO Weighted average

2017 4,500,000 5,400,000

2018 7,800,000 7,100,000

2019 8,300,000 7,800,000

What amount, before income tax, should be reported in the 2020 statement of retained earnings as the
cumulative effect of the change in accounting policy?

A. P500,000 decrease

B. P300,000 decrease

C. P500,000 increase

D. P300,000 increase

2. On January 1, 2021, Prince Construction Company changed to the percentage of completion method
from cost recovery method of income recognition. As of December 31, 2020, Prince compiled data
showing that income under the cost recovery method aggregated P7,000,000. If the percentage of
completion had been used, the accumulated income through December 31, 2010, would have been
P9,000,000. The income tax rate is 30%.

The cumulative effect of this accounting change should be reported by Prince in the 2021

A. Retained earnings 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.

3. On January 1, 2019, Ford Company purchased for P2,400,000 a machine with a useful life of 10 years
and a residual value of P100,000. The machine was depreciated by the double declining balance
method and the carrying amount of the machine was P1,536,000 on December 31,2020. Ford changed
to the straight line method on January 1, 2021. The residual value did not change.

What should be the depreciation expense on this machine for the year ended December 31, 2021?

A. P143,600
 B. P192,000

C. P230,000

D. P179,500

4. On January 1, 2019, Andres Company acquired a machine at a cost of P1,000,000. The machine

is depreciated on the straight line method over a five-year period with no residual value.

Because of a bookkeeping error, no depreciation was recognized in Andres 2019 financial

statements. The oversight was discovered during the preparation of Andres 2020 financial

statements.

Depreciation expense on this machine for 2020 should be

A. P400,000

B. P200,000

C. P250,000

D. P 0

5. Hans Company failed to accrue warranty cost of P200,000 in its December 31, 2020 financial
statements. In addition, a change from straight line to accelerated depreciation made at the beginning of
2021 resulted in a cumulative effect of P120,000 on Hans retained earnings.

What amount before tax should Hans report as prior period error in 2020?

A. P200,000

B. P320,000

C. P120,000

D. P 0

6. During the year ended December 31, 2010, the following events occurred at Hans Company:

 It was decided to write off P400,000 from inventor which was over two years old as it was
obsolete.

 Sales of P300,000 had been omitted from financial statements for the year ended December
31, 2009.
 How much should be shown as prior period error in the financial statements for the year ended
December 31, 2020?

A. P700,000

B. P300,000

C. P400,000

D. P100,000

7. During the year ended December 31,2020, the following events occurred in relation to Star Co.

 Accounting error relating to the inventory at December 31, 2019 was discovered. This
required a reduction in the carrying amount of inventory at that date of P140,000.

 The provision for uncollectible receivables at December 31, 2019 was P150,000. During
2010, P250,000 was written off the December 31, 2019 receivables.

What adjustment is required to restate retained earnings at December 31, 2020?

A. P140,000

B. P150,000

C. P290,000

D. P 0

8. Pacific Company’s depreciation policy on machinery is as follows:

 A full year’s depreciation is taken in the year of an asset’s acquisition.

 No depreciation is taken in the year of an asset’s disposition.

 The estimated useful life is five years.

 The straight line method is used.

On June 30, 2020, Pacific sold for P2,300,000 a machine acquired in 2017 for P4,200,000. The

estimated residual value was P600,000.

 How much gain on the disposal should Pacific record in 2020?

A. P140,000 C. P620,000

B. P260,000 D. P980,000

9. Rupert Company owns a noncurrent asset which is damaged and is to be reviewed for

impairment. The following information relates to the noncurrent asset:

Current carrying amount P2,000,000

Fair value 2,200,000

Expected disposal costs 100,000

Value in use 2,050,000

What should be the carrying amount of the net asset after the impairment review?

A. P2,000,000

B. P2,200,000

C. P2,100,000

D. P2,050,000

10. Hills Company provided the following information with respect to its building.

 The building was acquired January 1, 2015 at a cost of P7,800,000 with an estimated useful life of
40 years and residual value of P200,000. Yearly depreciation was computed on the straight line
method.

 The building was renovated on January 1, 2017 at a cost of P760,000. This was considered as
improvement. Residual value did not change.

 On January 1, 2020, the management decided to change the total life of the building to 30 years.

What is the depreciation of the building for 2020?

A. P292,400 C. P334,400

B. P266,000 D. P294,000
ImportanteBuhi Company’s December 31, year end financial statement contained the following errors:

December 31,2005 December 31,2006

Ending inventory P100,000 understated P90,000 overstated

Depreciation expense 20,000 understated

An insurance premium of P75,000 was prepaid in 2005 covering the years 2005, 2006, and 2007. The same
was charged to expense in full in 2005. In addition, on December 31, 2006, a fully depreciated machinery
was sold for P160,000 cash, but the sale was not recorded until 2007. There were no other errors during
2005, 2006 and 2007 and no corrections have been made for any of the errors. Ignore income tax
considerations.

QUESTIONS:

answer the following:

11. What is the total effect of the errors on the 2005 net income?

a. Understated by P130,000 c. Overstated by P70,000

b. Understated by P155,000 d. No effect

12. What is the total effect of the errors on the 2006 net income?

a. Overstated by P55,000 c. Overstated by P215,000

b. Overstated by P30,000 d. Understated by P45,000

13. What is the total effect of the errors on the company’s working capital at December 31,2006?

a. Understated by P95,000 c. Overstated by P90,000

b. Understated by P70,000 d. No effect

14. What is the total effect of the errors on the balance of the company’s retained earnings at December 31,
2006?

a. Understated by P75,000 c. Overstated by P110,000

 b. Understated by P50,000 d. No effect

15. What is the total effect of the errors on the company’s working capital at December 31,2007?

a. Overstated by P65,000 c. Understated by P160,000

b. Understated by P95,000 d. No effect

You were engaged by Hihihilak Company to examine its financial statements for the first time. In examining
the books, you found out that certain adjustments had been overlooked at the end of 2005 and 2006. You
also discovered that other items had been improperly recorded. These omissions and other failures for each
year are summarized below:

12/31/06 12/31/05

Salaries payable P780,000 P873,600

Interest receivable 213,000 259,200

Prepaid insurance 307,800 384,000

Advances from customers (Collections from 561,000 470,400

customers had been recorded as sales but
should have been recognized as advances
from customers because goods were not
shipped until the following year)

Machinery 522,000 564,000

(Capital expenditures had been recorded as
repairs but should have been charged to
Machinery; the depreciation rate is 10% per
year, but depreciation in the year of
expenditure is to be recognized at 5%)

QUESTIONS:

Based on the above , answer the following:

16. What is the total effect of the errors on the 2005 net income?

a. Understated by P775,800 c. Understated by P1,236,600

 b. Overstated by P165,000 d. Overstated by P80,400

17. What is the total effect of the errors on the 2006 net income?

a. Understated by P376,500 c. Understated by P320,100

b. Overstated by P324,300 d. Overstated by P380,700

18. What is the total effect of the errors on the company’s working capital at December 31,2006?

a. Understated by P301,800 c. Understated by P265,800

b. Overstated by P119,400 d. Overstated by P820,200

19. What is the total effect of the errors on the balance of the company’s retained earnings at December 31,
2006?

a. Understated by P155,100 c. Understated by P265,800

b. Overstated by P930,900 d. Understated by P855,900

20. Which of the following types of errors will not self-correct in the next year?

A.Accrued expenses not recognized at year-end

B.Accrued revenues that have not been collected not recognized at year-end

C.Depreciation expense overstated for the year

D.Prepaid expenses not recognized at year-end

21. On December 27, 2008, Johnson Company ordered merchandise for resale from Quantum, Inc., that
cost $7,000 (terms cash within 10 days). Quantum shipped the merchandise f.o.b. shipping point on
December 28, 2008, and the goods arrived on January 2, 2009. The invoice was received on December
30, 2008. Johnson Company did not record the purchase in 2008 and did not include the goods in ending
inventory. The effects on Johnson Company’s 2008 financial statements were

A.income and owners’ equity were correct; liabilities were incorrect, assets were correct.

B.income and owners’ equity were correct; assets and liabilities were incorrect.

C.income, assets, liabilities, and owners’ equity were correct.

D.income, assets, liabilities, and owners’ equity were incorrect.

22. Which of the following should not be reported retroactively?

 A.Use of an unacceptable accounting principle, then changing to an acceptable accounting principle.

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.

D.Change from a good faith but erroneous estimate to a new estimate.

23. Which of the following is a counterbalancing error?

A.Understated depletion expense

B.Bond premium under-amortized

C.Prepaid expense adjusted incorrectly

D.Overstated depreciation expenses

24. Which of the following, if discovered by James Company in the accounting period subsequent to the
period of occurrence, requires the company to report the correction of an error?

A.The estimate of the useful life of a depreciable asset should have been

revised.

B.A change from declining-balance depreciation method to straight-line method

C.Capitalization of an expense

D.Change in percentage of sales used for determining bad debt expense

25. BJ Company uses a periodic inventory system. If the company’s beginning inventory in the current year
is overstated, and that is the only error in the current year, then the company’s income for the current
year will be

A.understated and assets correct.

B.understated and assets overstated.

C.overstated and assets overstated.

D.understated and assets understated.

26. Which of the following is not an example of an accounting error, as distinguished from a change in
accounting principle or change in accounting estimate?

A.Misstatement of assets, liabilities, or owners’ equity

B.Incorrect classification of an expenditure as between expense and an asset

C.Failure to recognize accruals and deferrals

 D.Recognition of a gain on disposal of fully depreciated property

27. The September 30, 2008, physical inventory of Baxter Corporation appropriately included $3,800 of
merchandise purchased on account that was not recorded in purchases until October 2008. What effect
will this error have on September 30, 2008, assets, liabilities, retained earnings, and earnings for the year
then ended, respectively?

A.Understate; no effect; overstate; overstate

B.No effect; overstate; understate; understate

C.No effect; understate; overstate; overstate

D.No effect; understate; understate; overstate

28. If, at the end of a period, Matthew Company erroneously excluded some goods from its ending inventory
and also erroneously did not record the purchase of these goods in its accounting records, these errors
would cause

A.no effect on the company’s net income, working capital, and retained earnings.

B.the company’s cost of goods available for sale, cost of goods sold, and net income to be
understated.

C.the company’s ending inventory, cost of goods available for sale, and retained earnings to be
understated.

D.the company’s ending inventory, cost of goods sold, and retained earnings to be understated.

29. Justin Corporation uses a periodic inventory system and neglected to record a purchase of merchandise
on account at year-end. This merchandise was omitted from the year-end physical count. How will these
errors affect Justin’s assets, liabilities, and stockholders’ equity at year-end and net earnings for the
year?

Stockholders’

Assets Liabilities Equity Net Earnings

A.Understate Understate No effect No effect

B.Understate No effect Understate Understate

C.No effect Understate Overstate Overstate

D.No effect Overstate Understate Understate

April Company showed income before income tax of P6,500,000 on December 31, 2009.
During the year-end verification of the transactions of the company, the following errors are
 discovered:
 P1,000,000 worth of merchandise was purchased in 2009 and included in the ending inventory.
However, the purchase was recorded only in 2010.
 A merchandise shipment valued at P1,500,000 was properly recorded as purchase at year-end.
Since the merchandise was still at the port area, it was inadvertently omitted from the inventory
balance at December 31, 2009.
 Advertising for December 2009, amounting to P500,000, was recorded when payment was made
by the firm in January, 2010.
 Rental of P300,000 on an equipment, applicable for six months, was received on November 1,
2009. The entire amount was reported as income upon receipt.
 Insurance premium covering the period from July 1, 2009 to July 1, 2010, amounting to P200,000
was paid and recorded as expense on July 31, 2009. The company did not make any adjustment
at the end of the year.

30. The corrected income before tax for 2009 should be

A. P6,900,000
B. P6,400,000
C. P6,500,000
D. P6,300,000

31. June Company failed to recognize accruals and prepayments since the inception of its
business three years ago. The earnings before tax, accrual and prepayments at the end of
the current year are

Earnings before tax P1,400,000

Prepaid insurance 20,000
Accrued wages 25,000
Rent revenue collected in advance 30,000
Interest receivable 50,000

The corrected earnings before tax should be

A. P1,385,000
B. P1,415,000
C. P1,400,000
D. P1,375,000

Universal Company had the following financial statement information:

2010 2009
Revenue P1,350,000 P1,000,000
Expenses 980,000 650,000
Net income 370,000 350,000

12/31/2010 12/31/2009
Total assets P1,570,000 P1,050,000
Total liabilities 500,000 350,000
Total owners’ equity P1,070,000 P 700,000

Universal failed to record P120,000 of accrued wages at the end of 2009. The wages were
recorded and paid in January 2010. The correct accruals were made on December 31, 2010.

32. What is the corrected net income for 2009?

A. P230,000
B. P350,000
C. P470,000
D. P250,000

33. What is the corrected net income for 2010?

A. P490,000
B. P370,000
 C. P250,000
D. P430,000

34. The corrected total liabilities on December 31, 2009 should be

A. P470,000
B. P230,000
C. P400,000
D. P500,000

35. The corrected total owners’ equity on December 31, 2010 should be
A. P1,070,000
B. P1,190,000
C. P1,010,000
D. P 950,000

36. Cola Company reported a retained earnings balance of P4,000,000 at January 1, 2009. Cola
determined that insurance premiums of P900,000 for the three-year period beginning
January 1,2008, had been paid and fully expensed in 2008. The entity has a 30% income tax
rate.

What amount should Cola report as corrected beginning retained earnings in its 2009
statement of retained earnings?
A. P3,400,000
B. P4,420,000
C. P4,600,000
D. P3,580,000

37. Victory Company’s statements for 2008 and 2009 included errors as follows:
Year Ending Inventory Depreciation
2008 P200,000 understated P50,000 understated
2009 P300,000 overstated P90,000 overstated

How much should retained earnings be retroactively adjusted at January 1, 2010?

A. P260,000 increase
B. P260,000 decrease
C. P410,000 decrease
D . P210,000 decrease

38. On December 31, 2009, Blue Company sold merchandise forP750,000 to Red Company. The
terms of the sale were net 30, F.O.B shipping point. The merchandise was shipped on
December 31, 2009, and arrived at Red on January 5, 2010. Due to a clerical error, the sale
was not recorded until January 2010 and the merchandise sold at a 25% markup on cost was
included in Blue’s inventory at December 31, 2009.

As a result, Red’s cost of goods sold for the year ended December 31, 2009 was
A. Understated by P750,000
B. Understated by P600,000
C. Understated by P150,000
D. Correctly stated

June Company began operations on January 1, 2008. Financial statements for the years
2008 and 2009 contained the following errors:

2008 2009
Ending inventory P800,000 under P400,000 over
Depreciation 150,000 under
Insurance expense 50,000 over 50,000 under
Prepaid insurance 50,000 under

In addition, On December 31, 2009, a fully depreciated equipment was sold for P100,00 cash
 but the sale was not recorded until 2010. Ignoring income tax, what is the total effect of the
errors on Net income for 2008?

A. P700,000 under
B. P700,000 over
C. P650,000 under
D. P650,000 over

39. Net income for 2009?

A. P1,350,000 under
B. P1,350,000 over
C. P1,150,000 under
D. P1,150,000 over

40. Working capital on December 31, 2009?

A. P300,000 under
B. P300,000 over
C. P400,000 under
D. P400,000 over

41. Retained earnings on December 31, 2009?

A. P1,150,000 over
B. P 700,000 under
C. P 450,000 over
D. P 450,000 under

42. The ending inventory for Wattis Company was overstated by $6,000 in 2008. The overstatement will
cause Wattis Company’s
A. retained earnings to be understated on the 2008 balance sheet.
B. cost of goods sold to be understated on the 2009 income statement.
C. cost of goods sold to be overstated on the 2008 income statement.
D. 2009 balance sheet not to be misstated.

43. Which of the following would cause income of the current period to be understated?
A. Capitalizing research and development costs
B. Failure to recognize unearned rent revenue
C. Changing from LIFO to FIFO for merchandise inventory
D. Understating estimates of asset residual values

44. For a company with a periodic inventory system, which of the following would cause income to be
overstated in the period of occurrence?
A. Overestimating bad debt expense
B. Understating beginning inventory
C. Overstated purchases
D. Understated ending inventory

45. Barker, Inc. receives subscription payments for annual (one year) subscriptions to its magazine.
Payments are recorded as revenue when received. Amounts received but unearned at the end of each of
the last three years are shown below:

2006 2007 2008

Unearned revenues ............. $120,000 $150,000 $176,000

Barker failed to record the unearned revenues in each of the three years. As a result of the omission, 2008
income was

a. overstated by $146,000.

b. understated by $146,000.

c. understated by $26,000.

d. overstated by $26,000.

46. Barker, Inc. receives subscription payments for annual (one year) subscriptions to its magazine.
Payments are recorded as revenue when received. Amounts received but unearned at the end of each of
the last three years are shown below.

2006 2007 2008

Unearned revenues ............. $120,000 $150,000 $176,000

Barker failed to record the unearned revenues in each of the three years. The entry needed to correct the
above errors is

a. Retained Earnings .................. 150,000

Subscription Revenues .............. 26,000

Unearned Revenues ............... 176,000

b. Retained Earnings .................. 30,000

Subscription Revenues .............. 26,000

Unearned Revenues ............... 56,000

c. Subscription Revenues .............. 176,000

Unearned Revenues ............... 176,000

d. Subscription Revenues .............. 150,000

Retained Earnings .................. 26,000

Unearned Revenues ............... 176,000

47. Koppell Co. made the following errors in counting its year-end physical inventories:
2006 .................................. $ 60,000 overstatement

2007 .................................. 108,000 understatement

2008 .................................. 90,000 overstatement

As a result of the above undetected errors, 2008 income was

a. understated by $18,000.

b. overstated by $198,000.

c. overstated by $18,000.

d. understated by $198,000.

48. Badger Corporation purchased a machine for $150,000 on January 1, 2007. Badger will depreciate the
machine using the straight-line method using a five-year period with no residual value. As a result of an
error in its purchasing records, Badger did not recognize any depreciation for the machine in its 2007
financial statements. Badger discovered the problem during the preparation of its 2008 financial
statements. What amount should Badger record for depreciation expense on this machine for 2008?

a. $0

b. $30,000

c. $37,500

d. $60,000

49. Koppell Co. made the following errors in counting its year-end physical inventories:

2006 ................................... $ 60,000 overstatement

2007 ................................... 108,000 understatement

2008 ................................... 90,000 overstatement

The entry to correct the accounts at the end of 2008 is

a. Retained Earnings ................... 48,000

Cost of Goods Sold .................. 42,000

Inventory ........................ 90,000

b. Retained Earnings ................... 18,000

 Cost of Goods Sold .................. 72,000

Inventory ........................ 90,000

c. Inventory .......................... 90,000

Cost of Goods Sold ............... 18,000

Retained Earnings ............... 72,000

d. Cost of Goods Sold .................. 198,000

Retained Earnings ................ 108,000

Inventory ........................ 90,000

50. On December 31, 2008, Prince Company appropriately changed to the FIFO cost method from the
weighted-average cost method for financial statement and income tax purposes. The change will result in
a $700,000 increase in the beginning inventory at January 1, 2008. Assuming a 40 percent income tax
rate and that no comparative financial statements for prior years are reported, the cumulative effect of
this accounting change reported for the year ended December 31, 2008, is

a. $700,000.

b. $350,000.

c. $420,000.

d. $280,000.

51. On January 2, 2006, McKell Company acquired machinery at a cost of $640,000. This machinery was
being depreciated by the double-declining-balance method over an estimated useful life of eight years,
with no residual value. At the beginning of 2008, McKell decided to change to the straight-line method of
depreciation. Ignoring income tax considerations, the cumulative effect of this accounting change is

a. $0.

b. $120,000.

c. $130,000.

d. $280,000.

52. On January 1, 2005, Grayson Company purchased for $240,000 a machine with a useful life of ten years
and no salvage value. The machine was depreciated by the double-declining-balance method, and the
carrying amount of the machine was $153,600 on December 31, 2006. Grayson changed to the straight-
line method on January 1, 2007. Grayson can justify the change. What should be the depreciation
expense on this machine for the year ended December 31, 2008?

a. $15,360

b. $19,200

c. $24,000
d. $30,720

53. Tyson Company bought a machine on January 1, 2006, for $24,000, at which time it had an estimated
useful life of eight years, with no residual value. Straight-line depreciation is used for all of Tyson's
depreciable assets. On January 1, 2008, the machine's estimated useful life was determined to be only
six years from the acquisition date. Accordingly, the appropriate accounting change was made in 2008.
Tyson's income tax rate was 40 percent in all the affected years. In Tyson's 2005 financial statements,
how much should be reported as the cumulative effect on prior years because of the change in the
estimated useful life of the machine?

a. $0

b. $1,200

c. $2,000

d. $2,800

54. On January 1, 2005, Carnival Shipping bought a machine for $1,500,000. At that time, this machine had
an estimated useful life of six years, with no salvage value. As a result of additional information, Carnival
determined on January 1, 2008, that the machine had an estimated useful life of eight years from the
date it was acquired, with no salvage value. Accordingly, the appropriate accounting change was made in
2008. How much depreciation expense for this machine should Carnival record for the year ended
December 31, 2008, assuming Carnival uses the straight-line method of depreciation?

a. $125,000

b. $150,000

c. $187,500

d. $250,000

55. Coombs, Inc. is a calendar-year corporation whose financial statements for 2007 and 2008 included
errors as follows:

Ending Depreciation

Year Inventory Expense

2007 $30,000 overstated $25,000 overstated

2008 $10,000 understated $ 8,000 understated

Assume that purchases were recorded correctly and that no correcting entries were made at December 31,
2007, or December 31, 2008. Ignoring income taxes, by how much should Coombs' retained earnings be
retroactively adjusted at January 1, 2009?

a. $27,000 increase
b. $27,000 decrease

c. $7,000 decrease

d. $3,000 decrease

56. A change from an accelerated depreciation method to the straight-line depreciation method should be
accounted for as a

a. change in accounting estimate.

b. change in accounting estimate effected by a change in accounting principle.

c. correction of an error.

d. a prior period adjustment.

57. A change in the unit depletion rate would be accounted for as a

a. correction of an accounting error.

b. change in accounting principle.

c. change in accounting estimate.

d. change in accounting estimate effected through a change in accounting principle.

58. Which of the following statements is not correct?

a. A change from an inappropriate accounting principle to a proper one should be accounted

for as an accounting error.

b. A change from an inappropriate accounting principle to a proper one should be accounted

for as a change in accounting principle.

c. A change from an inappropriate accounting principle to a proper one should be accounted

for retrospectively.

d. A change from an inappropriate accounting principle to a proper one may require an

adjustment to beginning retained earnings for the earliest year reported.

59. Which of the following would not be accounted for as a change in accounting principle?

a. Change from the first-in, first-out method to the last-in, first-out method of inventory pricing

b. Change from the last-in, first-out method to the first-in, first-out method of inventory pricing

c. Change from completed-contract accounting to percentage-of-completion

d. Change from straight-line method to accelerated method of depreciation

60. Which of the following is characteristic of a change in accounting estimate?

a. Requires the reporting of pro forma amounts for prior periods

b. Does not affect the financial statements of prior periods

c. Never needs to be disclosed

d. Should be reported by retrospectively adjusting the financial statements for all years
reported, and reporting the cumulative effect of the change in income for all preceding
years as an adjustment to the beginning balance of retained earnings for the earliest year
reported.