CHAPTER 12 ANSWER KEY

CHANGE IN ACCOUNTING POLICY

Problem 1

MJCT 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 measuring inventory at the beginning of 2019.

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 pretax amount should be reported in the statement of retained earnings for
2019 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

SOLUTION:

Inventory December 31, 2018

FIFO 8,300,000
Weighted Average 7,800,000
---------------------
Decrease in inventory 500,000 A
----------------------

The adjustment on January 1, 2019 to reflect the change in inventory method is:

Retained earnings 500,000

Inventory 500,000

Note that the cumulative effect of a change in inventory method is determined by

considering only the ending inventory of the immediately preceding year which in
this case is 2018. The inventory balances in 2016 and 2017 are ignored because the
effect on net income is counterbalancing.
Problem 2

Kiwi Company has been using FIFO method of inventory valuation. Come year 2019,
the entity decided to change from FIFO to Weighted Average Method for measuring
its inventory.

The following schedule shows year-end inventory balances:

YEAR WEIGHTED AVERAGE FIFO

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 statement of retained earnings for
2019 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

SOLUTION:

Inventory December 31, 2018

FIFO 7,800,000
Weighted Average 8,300,000
---------------------
Increase in inventory 500,000 C
----------------------

The adjustment on January 1, 2019 to reflect the change in inventory method is:

Inventory 500,000
Retained Earnings 500,000
Problem 3

During 2019,Peaches Company the decided to change from FIFO method of

inventory valuation to the weighted average method for measuring its inventory.

The following schedule shows year-end inventory balances:

FIFO WEIGHTED AVERAGE

January 1 inventory 7,100,000 7,700,000

December 31 inventory 7,900,000 8,300,000

In the statement of retained earnings for 2019, what amount should be reported as
the pretax cumulative effect of this accounting change?
a. 1,000,000 addition
b. 1,000,000 deduction
c. 600,000 addition
d. 600,000 deduction

SOLUTION:

FIFO inventory – Jan 1 7,100,000

Weighted Ave inventory – Jan 1 7,700,000
---------------------
Increase in inventory 600,000 C
----------------------

Adjustment to retained earnings:

Inventory 600,000
Retained Earnings 600,000
CHANGE IN ACCOUNTING ESTIMATE

Problem 1

Chico company purchased a machinery on January 1, 2015 for P7,200,000.

The machinery had a useful life of 10 years with no residual value and was
depreciated using the straight line method.

In 2018, a decision was made to change the depreciation method from straight line
to sum of the years’s digit method. The useful life and residual value remained
unchanged.

1. What is the carrying amount of the machinery on January 1, 2018?

a. 7,200,000
b. 5,040,000
c. 5,760,000
d. 6,480,000

2. What is the depreciation for 2018?

a. 1,260,000
b. 1,440,000
c. 916,360
d. 720,000

SOLUTION:

Cost – Jan 1, 2015 7,200,000

Accumulated depreciation – Jan 1, 2018
(7,200,000 / 10 x 3) 2,160,000
--------------------
Carrying amount – Jan 1, 2018 5,040,000 B
--------------------

SYD for the remaining life of 7 years

(1+2+3+4+5+6+7) = 28

Depreciation for 2017 (5,040,000 x 7/28) 1,260,000 A

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Problem 2

On January 1, 2015, Frostie Company purchased an equipment for P7,000,000. The

equipment’s useful life is 10 years, no residual value and depreciated using straight
line method. The entity decided to change the depreciation method from straight line
to sum of the years’s digit method in 2018. The useful life and residual value
remained unchanged.

1. What is the carrying amount of the machinery on January 1, 2018?

a. 7,000,000
b. 4,900,000
c. 5,040,000
d. 2,100,000

2. What is the depreciation for 2018?

a. 1,260,000
b. 1,225,000
c. 2,100,000
d. 4,900,000

SOLUTION:

Cost – Jan 1, 2015 7,000,000

Accumulated depreciation – Jan 1, 2018
(7,000,000 / 10 x 3) 2,100,000
--------------------
Carrying amount – Jan 1, 2018 4,900,000 B
--------------------

SYD for the remaining life of 7 years

(1+2+3+4+5+6+7) = 28

Depreciation for 2017 (4,900,000 x 7/28) 1,225,000 B

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Problem 3

On January 1, 2015, Umpong Company bought a large machinery for

P7,200,000.The machinery had a useful life of 8 years, it was depreciated using the
straight line method. The machinery has no residual value. In the year 2018, the
company decided to change its depreciation method; from straight line to sum of the
years’s digit method. The useful life and residual value remained the same.

1. What is the carrying amount of the machinery on January 1, 2018?

a. 7,200,000
b. 5,040,000
c. 4,500,000
d. 6,480,000

2. What is the depreciation for 2018?

a. 1,260,000
b. 1,440,000
c. 1,500,000
d. 2,700,000

SOLUTION:

Cost – Jan 1, 2015 7,200,000

Accumulated depreciation – Jan 1, 2018
(7,200,000 / 8 x 3) 2,700,000
--------------------
Carrying amount – Jan 1, 2018 4,500,000 C
--------------------

SYD for the remaining life of 5 years

(1+2+3+4+5) = 15

Depreciation for 2017 (4,500,000 x 5/15) 1,500,000 C

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PRIOR PERIOD ERRORS

Problem 1

While preparing the 2017 financial statements. Carbo Company discovered

computational errors in the 2015 and 2016 depreciation expense.

These errors resulted in overstatement of each year’s income by P100,000, net of

income tax.

The following amounts were reported in the previously issued financial statements:

2015 2016

Retained earnings, January 1 2,000,000 2,800,000

Net income 800,000 600,000
_______________________
Retained earnings – December 31 2,800,000 3,400,0000
----------------------------------------

The net income for 2017 is correctly reported at P700,000.

What is the correct balance for retained earnings on December 31, 2017?
a. 3,900,000
b. 4,100,000
c. 4,300,000
d. 4,000,000

Retained earnings – January 1, 2017 3,400,000

Prior period error:
Underdepreciation in 2015 & 2016 (100,000x2yrs) (200,000)
____________
Corrected beginning balance 3,200,000
Net income for 2017 700,000
____________
Retained earnings – December 31, 2017 3,900,000 A
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Problem 2

During 2017 financial statement preparation. Reese Company discovered errors in

their 2015 and 2016 depreciation expense. These errors resulted in overstatement of
100,000 and 120,000 for years 2015 and 2016, respect net of income tax.

The following amounts were reported in the previously issued financial statements:

2015 2016

Retained earnings, January 1 2,000,000 2,800,000

Net income 800,000 600,000
_______________________
Retained earnings – December 31 2,800,000 3,400,0000
----------------------------------------

The net income for 2017 is correctly reported at P700,000.

What is the correct balance for retained earnings on December 31, 2017?
a. 3,900,000
b. 3,880,000
c. 4,300,000
d. 4,000,000

Retained earnings – January 1, 2017 3,400,000

Prior period error:
Underdepreciation in 2015 & 2016 (100,000+120,000) (220,000)
____________
Corrected beginning balance 3,180,000
Net income for 2017 700,000
_____________
Retained earnings – December 31, 2017 3,880,000 B
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Problem 3

While preparing the 2017 financial statements. Oreo Company discovered

computational errors in the 2015 and 2016 depreciation expense.

These errors resulted in overstatement of each year’s income by P100,000, net of

income tax.

The following amounts were reported in the previously issued financial statements:

2015 2016

Retained earnings, January 1 3,000,000 2,800,000

Net income 800,000 700,000
_______________________
Retained earnings – December 31 3,800,000 3,500,0000
----------------------------------------

The net income for 2017 is correctly reported at P700,000.

What is the correct balance for retained earnings on December 31, 2017?
a. 3,900,000
b. 4,100,000
c. 4,300,000
d. 4,000,000

Retained earnings – January 1, 2017 3,500,000

Prior period error:
Underdepreciation in 2015 & 2016 (100,000x2yrs) (200,000)
____________
Corrected beginning balance 3,300,000
Net income for 2017 700,000
____________
Retained earnings – December 31, 2017 4,000,000 D
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