CHAPTER 10: ACCOUNTING CHANGES

Questions:
1. What are the two main categories of accounting changes?
2. Define a change in accounting estimate.
3. Give examples of items in the financial statements that may require
estimate.
4. How is a change in accounting estimate reported?
5. Explain a change in depreciation method
6. Define accounting policies.
7. Define a change in accounting policy.
8. Give examples of change in accounting policy.
9. When is a change in accounting policy allowed?
10. How is a change in accounting polity reported?
11. Explain the retrospective application of a change in accounting policy.
12. Explain the limitation of retrospective application of a change in
accounting policy.
13. What is prospective application of a change in accounting policy?
14. Explain the adoption of an accounting policy in the absence of an
accounting standard.
15. What is a change in reporting entity?
16. Define prior period errors.
17. Explain the treatment of prior period error, 18. Explain retrospective
restatement in relation to prior period errors.
19. What are the necessary disclosures related to prior period errors?
20. State whether the following changes should be accounted for
retrospectively or prospectively. Briefly explain your answer.
a. A change in accounting policy made voluntarily.
b. A change in accounting policy required by an accounting standard.
c. A change in the residual value of an item of property, plant and
equipment.
d. An immaterial error discovered in the current year relating to a
transaction recorded two years ago.

e. A material error discovered in the current year relating to a transaction

two years ago. Management has determined that retrospective application
would, cause undue cost and effort.

Problem 10-1 Multiple choice (PAS 8)

1. It is an adjustment of the carrying amount of an asset or a liability or the amount
of the periodic consumption of an asset that results from the assessment of the
present status and expected future benefit and obligation associated with the asset
and liability.
a. Change in accounting estimate
b. Change in accounting policy
c. Correction of a prior period error
d. Change in reporting entity
2. The effect of a change in accounting estimate shall be recognized prospectively
by including it in profit or loss of
a. Current period
b. Future periods
c. Prior periods
d. Current period and future periods if the change affects both
3. Prospective recognition of the effect of a change in an accounting estimate
means that the change is applied to transactions from the
a. Date of the change in accounting estimate
b. End of the current reporting period
c. Beginning of the year of change
d. Date of issuance of financial statements
4. The effect of a change in the expected pattern of consumption of economic
benefit of a depreciable asset shall be
a. Included in the determination of income or loss in the period of change.
b. Included in the determination of income or loss in the period of change and future
periods.
c. Included in the statement of retained earnings as an adjustment of the beginning
balance.
d. Included in other comprehensive income.

5. Which of the following statement is incorrect concerning a change in accounting

estimate
a. The use of a reasonable estimate statements is an essential part of the
preparation of the financial statements changes and does not undermine their
reliability
b. An estimate may have to be revised if changes occur regarding the
circumstances on which the. estimate was based or as a result of new information,
more experience or subsequent development.
c. By its nature, the revision of an estimate does not relate to prior periods but may
be accounted for as as correction of an error.
D. As the result of the uncertainties in business activities, many items in financial
statements cannot be measured with precision but can only be estimated.
Problem 10-2 Multiple choice (PAS 8)
1. These are the specific principles, bases, conventions, rules and practices applied
in preparing and presenting financial statements.
a. Accounting policies
b. Accounting principles
c. Accounting standards
d. Accounting concepts
2. A change in accounting policy includes
I. Adoption of an accounting policy for events or transactions that differ in
substance from previously occurring events or transactions.
II. The adoption of a new accounting policy for events or transactions which did not
occur previously or that were immaterial.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
3. A change in accounting Policy includes all of the following,
a. The initial adoption of a policy to carry assets at revalued amount.
b. The change from cost model to revaluation model of measuring property, plant
and equipment.
c. The change in inventory valuation from FIFO to weighted average.
d. The change in depreciation method from sum of years' digits to straight line.

4. A change in accounting policy shall be made when

I. Required by an accounting standard or an interpretation of the standard.
II. The change will result in more relevant and faithfully represented information
about the financial position, financial performance and cash flows of the entity.
a. I only
b. II only
c. Either I or II
d. Neither I nor II

5. In the absence of an accounting standard that applies specifically to a transaction

or event, 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.
c. Most recent pronouncement of other standard-setting body.
d. Accounting literature and accepted industry practice.
6. A change in measurement basis is
a. change in accounting estimate.
b. A change in accounting policy
c. A correction of an error
d. Not an accounting change
7. This means "applying a new accounting policy to transactions, other events and
conditions as if that policy had always been applied".
a. Retrospective application
b. Retrospective restatement
c. Prospective application
d. Prospective restatement
8. This means "correcting the recognition, measurement and disclosure of amounts
of elements of financial statements as if a prior period error had never occurred".
a. Retrospective application

b. Retrospective restatement
c. Prospective application
d. Prospective restatement
9. This means "applying a new accounting policy to transactions and events
occurring after the dat :it which the policy is changed".
a. Retrospective application
b. Prospective application
c. Retrospective restatement
d. Prospective restatement

10. How is a change in accounting policy reported?

I. A change in accounting policy required by PFRS shall be reported in accordance
with the transitional provisions therein.
II. If the PFRS contains no transitional provisions or if an accounting policy is
changed volunthrily, the change shall be reported retrospectively.
a. I only
b. I only
c. Either I or II
d. Neither I nor II
Problem 10-3 Multiple choice (IFRS)
1. Which of the following should be treated as a change in accounting policy?
I. A new accounting policy of capitalizing development costs as a project has
become eligible for capitalization for the first time.
II. A new policy resulting from the requirement of a new PFRS.
III. To provide more relevant information, property, plant and equipment are now
being measured at fair value, whereas they had previously been measured at cost.
IV. An entity engaging in construction contracts for the first time needs an
accounting policy to deal with this.
a. I, II, III and IV
b. I and II only
c. II and III only
d. I and IV only

2. When the residual value of property, plant, and equipment had drastically
changed and the change is material, the entity should
a. Retrospectively change the depreciation charge based on the revised residual
value.
b. Change the depreciation charge and treat it as a correction of an error.
C. Change the annual depreciation for the current year and future years.
d. Ignore the effect of the change on annual depreciation because change in
residual value would normally affect the future only since this is expected to be
recovered in the future.
3. An entity that changed the method of inventory valuation from weighted
average to first-in, first-out should account for the change as
a. A change in accounting estimate and account for it prospectively.
b. A change in accounting policy and account for it prospectively.
c. A change in accounting policy and account for it retrospectively.
d. A correction of an error and account for it retrospectively.
4. Which of the following statements in relation to a change in accounting estimate
is true?
I. Changes in accounting estimate are accounted for retrospectively.
IL Changes in accounting estimate result from new information or new
development.
a. I only
b. II only
c. Both I and II
d. Neither I nor II
6. Which of the following terms best describes applying new accounting
policy to transactions as if that policy had always been applied.
a.
b.
c.
d.

Retrospective application
Retrospective restatement
Prospective application
Prospective restatement

7. An entity changes an accounting policy when

a.It is required by law.
b.The change would result in providing reliable and more relevant information
about
financial position, performance and cash flows.
c.The management decides to do so.

d.It is required by IFRS or the change would result in providing reliable and
more relevant information about financial position, performance and cash
flows.
8. A public entity that changed an accounting policy voluntarily should
a.Inform shareholders prior to taking the decision.
b. Account for the change retrospectively.
c. Treat the effect of the change as component of other comprehensive income.
d.Treat the change prospectively and adjust the effect of the change in the
current period and future periods.
9. Which of the following changers should be treated retrospectively?
I. A change in the method of calculating the provision for uncollectible accounts
receivable.
II. Investment properties are now measured at fair value having previously been
measured at cost.
a.
b.
c.
d.

I only
II only
Both I and II
Neither I nor II

10. When it is difficult to distinguish a change in an accounting policy from a change

in an accounting estimate, the change is treated as
a.

Change in accounting estimate with appropriate disclosure

b.

Change in accounting policy

c.

Correction of an error

d.

Initial adoption of an accounting policy.

Problem 10-4 Multiple choice (IAA)

1. Accounting changes are often made and the monetary impact is reflected in the
financial statements of an entity the even though in theory this may be a violation
of accounting concept of
a. Materiality
b. Consistency
c. Prudence
d. Objectivity
2. Which of the following is not classified as an accounting change?
a. Change in accounting policy
b. Change in accounting estimate

c. Error in the financial statements

d. All of these are classified as an accounting change
3. Which is the best explanation why accounting change 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.
4. Which of the following is the proper time period to record the effect of a change
in accounting estimate?
a. Current period and prospectively
b. Current period and retrospectively
c. Retrospectively
d. Current period
5. Why is retrospective treatment of changes in accounting estimate prohibited?
a. Changes in estimate are normal recurring corrections and adjustments which are
the natural result of the accounting process.
b. The retrospective treatment for any type of presentation is not allowed.
c. Retrospective treatment of changes in accounting estimate is required by PFRS.
d. PFRS does not prohibit retrospective treatment of changes in accounting
estimate.
6. Which of the following would be a reason why an entity is permitted to change an
accounting policy?
a. The change would allow the entity to present a more favorable financial
performance.
b. The change would result in providing more reliable and relevant information
about financial position, financial performance and cash flows
c. The change is made by the internal auditor.
d. The change is made by the external auditor.
7. A change in accounting policy require what kind of adjustment to the financial
statements.
a. Current period adjustment

b. Prospective adjustment
c. Retrospective adjustment
d. Current and prospective adjustment
8. A change in accounting policy require that the cumulative effect of the change
should be shown as an adjustment to
a. Beginning retained earnings for the earliest period presented
b. Net income for the period in which the change presented.
c. Comprehensive income for the earliest period occurred.
d. Shareholders' equity for the period in which the change occurred.
9. Which of the following is not treated as a change in accounting policy?
a. A change from average cost to FIFO
b. A change to a different method of depreciation
c. A change from full cost to successful effort method in the extractive industry
d. A change from cost recovery to percentage of completion method
10. Which of the following is accounted for as a change in accounting policy?
a. A change in the estimated useful life of plant asset
b. A change from cash basis to accrual basis
c. A change from expensing immaterial expenditures to deferring and amortizing
them
d. A change in valuation from FIFO to average cost
Problem 10-5 Multiple choice (IAA)
1. Which of the following statements is incorrect in relation to accounting
changes?
a. A change in accounting estimate is reflected in the current and future
periods.
b. A change in depreciation method is classified as a change in accounting
estimate.
c. A change in depreciation method is classified as a change in accounting
policy.
d. Generally, there is a preferences for restating prior results to improve
comparability
2. Which accounting change always be accounted for in current and future
periods?
a. Change in accounting policy
b. Change in reporting entity
c. Change in accounting estimate

d. Correction of an error
3. Which of the following is required for a change from sum of years digits to
straight line?
a. The cumulative effect on prior years is reported in the statement of
retained earnings
b. Retrospective restatement
c. Recompilation of depreciation for current and future years
d. All of these are required
4. Which of the following statements in relation to accounting changes is true?
a. Changes in accounting policy are always handled in the current and
prospective period.
b. Prior statements should be restated for changes in accounting estimate.
c. A change from expensing certain costs to capitalizing such costs due to a
change in the period benefited should be handled as a change in
accounting estimate
d. Correction of a prior period error should be considered as an adjustment of
current net income.
5. A change in accounting policy does not include.
a. Change in the estimated useful life of an asset.
b. Change in method of inventory valuation from FIFO to weighted average.
c. Change in method of inventory valuation from weighted average to FIFO.
d. Change from the practice of paying as Christmas bonus one months
salary to the new practice of paying one-half months salary.
6. A change from the straight line method of depreciation to sum of years digits
is accounted for as
a. Change in accounting policy
b. Change in accounting estimate
c. Prior period error
d. Accounting error
7. Which of the following is not a justification for a change in depreciation
method?
a. A change in the estimated useful life of an assets as a result of
unexpected obsolescence
b. A change in the pattern of receiving the future benefit from an asset
c. To conform with the depreciation method prevalent in a particular industry
d. A change in the future benefit from the asset
8. A change in the estimated useful life of a building
a. Is not allowed by GAAP
b. Affects the depreciation on the building beginning with the year of the
change
c. Must be handled as a retroactive adjustment
d. Creates a new account to be recognized in the income statement
reflecting the difference in net income

9. A change in the unit depletion rate is accounted for as

a. Correction of an accounting error
b. Change in accounting policy
c. Change in accounting estimate
d. Change in accounting estimate effected through a change in accounting
policy
10.Which of the following should be reported as a change in accounting
estimate?
a. Change in the beginning inventory due to a discovery of a bookkeeping
error
b. Change in the revenue recognition for long-term construction contract
c. Increase in the rate applied to net credit sales from one percent to two
percent in determining provision for uncollectible accounts receivable
d. Change made to comply with a new PFRS

Problem 10-6 Multiple Choice (IAA)

1. A change in reporting entity is actually a change in
a.
b.
c.
d.

Accounting
Accounting
Accounting
Accounting

policy
estimate
method
concept

2. Which of the following does not represent a change in reporting entity?

a. Changing the entities included in combined financial statements
b. Disposition of a subsidiary or other business unit
c. 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.
3. Which of the following accounting treatment is proper for a change in
reporting entity?
a. Restatement of all financial statements presented
b. Restatement of current period financial statements
c. Note disclosure and supplementary schedule
d. Adjustment to retained earnings and note disclosure
4. An entity has included in the consolidated financial statements this year a
subsidiary acquired several years ago that was appropriately excluded from
consolidated last year. How should this change be reported?
a. An accounting change that should be reported prospectively
b. An accounting change that should be reported retrospectively
c. A correction of an error
d. Neither an accounting change nor a correction of an error

5. Which of the following statements is correct regarding accounting changes

that result in financial statements that are in effect the statements of a
different reporting entity?
a. Cumulative-effect adjustment should be reported as separate item in the
financial statements pertaining to the year of change.
b. No restatements or adjust are required if the changes involve consolidated
method of accounting for subsidiaries.
c. No restatements or adjustments are required if the changes involve the
cost or equity method of accounting for investments.
d. The financial statements of all prior periods presented are adjusted
retrospectively.
Problem 10-7 Multiple Choice (AICPA Adapted)
1. Which of the following is a characteristic of a change in accounting estimate?
a. It usually needs not be disclosed.
b. It does not affect the financial statements of prior period.
c. It should not affect the financial statements
d. It makes necessary the reporting of proforma amounts for prior periods.
2. How should the effect of a change in accounting estimate be accounted for?
a. By restating amounts reported in financial statements of prior periods.
b. By reporting pro forma amounts for prior periods.
c. As a prior period adjustment to beginning retained earnings.
d. In the period of change and future periods if the change affects both.
3. The estimated life of a building that has been depreciated thirty years of an
originally estimated life of fifty years has been revised to a remaining life of
ten years. What is the treatment of the accounting change?
a. Continue to depreciate the building over the original 50- year life.
b. Depreciate the carrying amount over the remaining life of the asset.
c. Adjust accumulated depreciation to its appropriate balance, through net
income, based on a 40-year life and then depreciate the adjusted carrying
amount as though the estimated life had always been 40 years.
d. Adjust accumulated depreciation to its appropriate balance, through
retained earnings, based on a 40-year life and then depreciate the
adjusted carrying amount as though the estimated life had always been
40 years.

4. A change in the periods benefited by a deferred cost because additional

information has been obtained is
a. An accounting change that should be reported by restating the period
of change and future periods if the change affects both
b. An accounting change that should be reported by restating the financial
statements of all prior periods presented
c. A correction of an error
d. Not an accounting change

5. A change a in the residual value of an asset arising because additional

information has
been obtained is
a. An accounting change that should be reported in the period of change
and future periods if the change affects both
b. An accounting change that should be reported by restating the financial
statements of all prior periods presented
c. A correction of an error
d. Not an accounting change
6. During the current year, an entity increased the estimated quantity of copper
recoverable form the mine. The entity used the units of production method.
As a result of the change, which of the following should be reported in the
financial a statements for the current year?
a. Cumulative effect of change in accounting policy
b. Retroactive application of new depletion base
c. Cumulative effect of change in accounting policy and retroactive
application of new depletion base
d. Neither cumulative effect of change in accounting policy nor retroactive
application of new depletion base?
7. A change in the warranty liability requires
a. Presenting prior period financial statements as previously reported.
b. Presenting the effect of proforma data on income and earnings per share
for all prior periods presented.
c. Restating the financial statements of all prior periods presented.
d. Reporting current and future financial statements on the new basis.
8. The effect of a change in accounting policy that is inseparable from the
effect of a change in accounting estimate should be presented
a. By restating the financial statements of all prior periods presented.
b. As a correction of an error.
c. As a component of income from continuing operations in the period of
change and future periods if the change effects both.
d. As a separate disclosure after income from continuing operations in the
period of change and future periods if the change effects both.

9. When an entity changed from the straight line to double declining

depreciation, which of the following should be reported?
a. Cumulative effect of change in accounting policy
b. Proforma effect of retroactive application
c. Prior period error
d. An accounting change that should be reported currently and
prospectively
10.When an entity changes the expected service life of an asset because
additional information has been obtained, which of the following should be
reported?
a. Cumulative effect of change in accounting policy

b. Proforma effect of retroactive application

c. Prior period error
d. An accounting change that should be reported in the period of change
and future if the change affects both
Problem 10-8 Multiple choice (AICPA Adapted)
1. Where financial statements for a single year are presented, prior period error
recognized in the current year ordinarily would.
a. Be shown as an adjustment of the balance of retained earnings at the
start of the current year
b. Affect net income of the current year
c. Be shown in the statement of changes in equity
d. Be included as other comprehensive income.
2. When an entity changed from an accounting principle that is not generally
accepted to one that is generally accepted the effect of the change shall be
reported in the current
a. Income statement as component of income from continuing operations
b. Income statement as component of discontinued operations.
c. Statement of retained earnings as an adjustment of the opening balance
d. Statement of retained earnings after net income but before dividends
3. When an entity change from the cash basis to the accrual basis during the
current yeaat, the cumulative effect of this change shall be reported as
a. Prior period adjustment resulting from the correction of an error.
b. Prior period adjustment resulting from the change in accounting policy.
c. Component of income from continuing operations.
d. Component of income from discontinued operations.
4. An example of a correction of an error in previously issued financial
statements is a change.
a. From FIFO method of inventory valuation to average cost method.
b. In the service life of plant asset based on change in the economic
environment.
c. From cash basis to accrual basis of accounting
d. In the tax assessment related to a prior period.
5. Prior period errors
a. Do not include the effect of a mistake in the application of accounting
policy as this is accounted for as a change in accounting policy as this is
accounted for as a change in accounting policy rather than as prior period
error.
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. Are reflected as adjustments of the opening balance of retained earnings
of the earliest period presented.

Problem 10-9 Multiple choice (IFRS)

1. Which of the following statements is true?
a. The effect of a change in accounting estimate is recognized
retrospectively.
b. To the extent practicable, an entity must correct a prior period error
prospectively in the first financial statements authorized for issue after the
discovery.
c. When an entity discovers an error in the financial statements of a prior
period, it must immediately withdraw those financial statements and
reissue them with the error corrected.
d. To the extent practicable, an entity must correct a prior period error
retrospectively in the first financial statements authorized for use after the
discovery.
2. During the current year, an entity discovered that ending inventory reported
in the financial statements for the prior year was understated. How should
the entity account for this understatement?
a. Adjust the beginning inventory in the prior year.
b. Restate the financial statements with corrected balances for all periods
presented.
c. Adjust the ending balance in retained earnings at current year-end.
d. Make no entry because the error will self-correct.
3. Prior period errors include all of the following except
a. Effect of mathematical mistake.
b. Mistake in applying accounting policy.
c. Oversight or misinterpretation of facts and fraud
d. Effect of a change in the estimated useful life of an asset.
4. On March 1,2015, the entity discovered that, as a result of computational
error, depreciation expense for 2014 was overstated. The 2014 financial
statements were authorized for issue on March 31, 2015. What must the
entity do?
a. Correct the 2014 financial statements before issuing them.
b. Reduce depreciation for 2015.
c. Restate the depreciation expense reported for 2014 in the comparative
figures of the 2015 statements as retrospective restatement of a prior
period error.
d. Do nothing.

5. On March 31, 2015, the entity discovered that, as a result of a computational

error, depreciation expense for 2014 was overstated. The 2014 financial
statements were authorized for issue on March 1,2015. What must the entity
do?
a. Reissue the 2014 financial statements with the correct depreciation
expense.
b. Reduce depreciation for 2015.

c. Restate the depreciation expense reported for 2014 in the comparative

figures of the 2015 financial statements as retrospective restatement of a
prior error.
d. Do nothing.

Problem 10-10 (PHILCPA Adapted)

Rodrigo Company had purchased an equipment on January 1, 2011 for
P2,400,000. The entity use the straight line depreciation based on ten
year estimated with no residual value. During 2014, the entity decided
that the equipment would be used only three more years and then
replaced with a technologically superior model. What entry should be
made on January 1, 2014 to reflect this change?
a. No entry
b. Debit other comprehensive income and credit accumulated depreciation
P480,000
c. Debit retained earnings and credit accumulated depreciation P480,000
d. Debit depreciation and credit accumulated depreciation P560,000
Problem 10-11 (AICPA Adapted)
During 2014, Kerr Company determined that machinery previously
depreciated over a seven-year life had a total estimated useful life of only
five years. An accounting change as made in 2014 to reflect the change in
estimate. If the change had been made in 2013, accumulated depreciation
aid have been P800,000 on December 31, 2013, instead of 00,000. As a
result of the change, the 2014 depreciation expense was P50,000 greater.
The tax rate was 30%. What tint should be reported in the income
statement for the ended December 31, 2014 as the cumulative effect on
Tears for changing the estimated useful life of the machinery?
a.
b.
c.
d.

200,000
130,000
150,000
0

Problem 10-12 (AICPA Adapted)

On January 1, 2011, Flair company purchased a machine for P2,640,000
and depreciated it by the straight line using an estimated life of 8 years
with no residual value. On January 1, 2014, the entity determined that the
machine had a useful life of 6 years from the date of acquisition with a
residual value of P240,000. What is the accumulated depreciation on
December 31, 2014?
a.
b.
c.
d.

1,460,000
1,540,000
1,600,000
1,760,000

Problem 10-13 (AICPA Adapted)

On January 1, 2012, Zee Company purchased for P2,400,000 a machine with a
useful life of ten years and no residual valor The machine was depreciated by the
double declining balance method and the carrying amount of the machine
P1,536,000 00 December 31, 2013. The entity changed to the straight line method
on January 1, 2014. What is the depreciation for 2014?
a.
b.
c.
d.

153,600
307,200
240,000
192,000

Problem 10-14 (PHILCPA Adapted)

On January 1, 2013, Kevin Company purchased a machine for P2,750,000. The
machine was depreciated using the sum of years' digits method based on a useful
life of 10 years with no residual value. On January 1, 2014, the entity the straight
line method of depreciation. What is the depreciation for 2014?
a. 180,000
b. 220,000
c. 250,000
d. 275,000

Problem 10-15 (AICPA Adapted)

Turtle Company purchased equipment on January 1, 2012 for P5,000,000.
The equipment had an estimated 5-year service life. The policy for 5-year
assets us to use the 200% double declining balance method for the first
two years and then switch to the straight line depreciation method. What
amount should be reported as accumulated depreciation in December 31,
2014?
a.
b.
c.
d.

3,000,000
3,800,000
3,920,000
4,200,000

Problem 10-16 (IAA)

Xavier Company purchased a machinery on January 1, 2011 for
P7,200,000. The machinery has a useful life of 10 years with no residual
value and was depreciated using the eight line method. In 2014, a decision
was made to change depreciation method from straight line to sum of
years digit. The estimate of useful life and residual value remained
clanged. What is the depreciation for 2014?

a. 1,260,000
b. 1,440,000
c. 916,360
d. 720,000
Problem 10-17 (AICPA Adapted)
On January 1, 2012, Brazil is Company purchased for P4,800,000 a
machine with a useful life of ten years and a residual value of P200,000.
The machine was depreciated by the double declining balance and the
carrying amount of the machine was P3,072,000 on December 31, 2013.
The entity changed to the straight line method on January 1, 2014. The
residual value did not change. What is the depreciation expense for 2014?
a. 287,200
b. 384,000
c. 460,000
d. 359,000
Problem 10-18 (IAA)
On January 1, 2013, London Company purchased a large quantity of
personal computers. The cost of these computers was P6,000,000. On the
date of purchase, the management estimated that the computers would
last approximately four years and would have a residual value at that time
of P600,000. The entity used the double declining balance method. During
January 2014, the management realized that technological advancements
had made the computers virtually obsolete and that they would have to be
replaced. The management changed the remaining useful life of the
computers to two years. What is the depreciation expense for 2014?
a.
b.
c.
d.

3,000,000
2,400,000
1,500,000
1,200,000

Problem 10-19 (IAA)

On January 1, 2014, Milan Company determined that a revision in January estimate
associated with the depreciation of storage facilities was appropriate. The facilities,
purchase, on January 1, 2012, for P6,000,000, had been depreciated using the
straight use method with an estimated residual value of P600,000 and an estimated
useful life of 20 years, The entity has determined that the expected remaining,
useful life of the storage facilities is 10 years with an estimated residual value of
P800,000. What is the depreciation for 2014?
a. 270,000
b. 546,000

c. 466,000
d. 582,500
Problem 10-20 (IFRS)
On January 1, 2010, Roma Company purchased heavy duty equipment for
P4,000,000. On the date of installation, it was estimated that the
equipment has a useful life of 10 years and a residual value of P400,000.
On January 1, 2014, the entity decided to review the useful life of the
equipment and the residual value. The entity determined that the useful
life of the equipment was 12 years from the date of acquisition and the
residual value was P460,000. What is the depreciation expense for 2014?
a.
b.
c.
d.

175,000
262,500
360,000
300,000

Problem 10-21 (IAA)

Canyon Company determined that the amortization rate on patent is
unacceptably low due to current advances in technology. The entity
decided at the beginning of 2014 to decrease the estimated useful life of
the patent from 10 years to 8 years. The patent was purchased on January
1, 2009 for P3,000,000. The estimated residual value is zero. The entity
decided on January 1, 2014 to change the depreciation method for
manufacturing equipment from an accelerated method to the straight line
method. On January 1, 2014, the historical cost of the equipment is
P8,000,000 and the accumulated depreciation is P3,400,000. The expected
remaining useful life of the equipment on January 1, 2014 is 10 years and
the expected residual value is P200,000. What is the total charge against
2014 income as a result of the accounting changes?
a. 940,000
b. 960,000
c. 627,500
d. 647,500
Problem 10-22 (IFRS)
Acute company was organized on January 1, 2011. In preparing the
financial statements for the year ended December 31, 2013, the entity
used the following original cost and useful life for property, plant, and
equipment.
Original Cost
Building

15,000,000

Useful Life
15 Years

Machinery
Furniture

10,500,000
3,500,000

10 Years
7 Years

On January 1, 2014, the entity- decided to review the use nature life of the
property, plant and equipment. On such date the remaining life is 10 years
for the building, 7 years for the machinery and 5 years for the furniture.
The entity use the straight line method of depreciation with no residual
value, what is the total depreciation for 2014?
a.
b.
c.
d.

2,650,000
3,700,000
2,550,000
3,500,000

Problem 10-23 (IAA)

On January 1, 2011, Charisma Company bought a machinery for
P1,500,000. At that time, the machine had an estimated useful life of six
years with no residual value. As a result of additional information, the
entity determined on January 1, 2014, that the machine had an estimated
useful life of 8 years from the date it was acquired with no residual value.
The appropriate accounting change was made in 2014. What amount of
depreciation expense should be recorded for 2014 using the straight line
method of depreciation?
a.
b.
c.
d.

125,000
150,000
187,500
250,000

Problem 10-24 (AICPA Adapted)

Dawn Company Purchased a machine on January 1, 2011 for 3,000,000. At
the date of acquisition, the machine had a life of six years with no residual
value. The machine is depreciated on a straight line basis. On January 1,
2014, entity determined that the machine had a useful life of 4 years from
the date of acquisition with residual value of P100,000. What is the
depreciation for 2014?
a.
b.
c.
d.

700,000
500,000
750,000
600,000

Problem 10-25 (IFRS)

On January 1, 2008, paragon Company paid P6,000,000 to acquire a new
barge. In the belief that it was entitled to a refund of purchase taxes on
the acquisition of the barge, the entity claimed and was refunded
P600,000 by the local government. However, in late 2014 the 'entity
repaid the refund when it became apparent that it had made an error in

making the claim from the local government as it had not been entitled to
the refund of purchase taxes on acquisition of the barge. The 'useful life of
the barge is 15 years from the date of acquisition. The residual value of
the barge is NIL. In 2014, the period over which the barge is expected to
be economically usable increased from 15 to 26 years. However, the entity
expects to dispose of the barge after using it for 20 years from the date of
acquisition. On December 31, 2014, the entity assessed the residual value
of the barge at P800,000. What is the carrying amount of the barge on
December 31, 2014?
a.
b.
c.
d.

3,600,000
3,400,000
3,460,000
3,420,000

Problem 10-26 (AICPA Adapted)

On January 1, 2014, Black Company changed the inventory cost flow
method to FIFO from LIFO for both the financial statement and income tax
reporting purposes. The change resulted in a P600,000 increase in the
beginning inventory on January 1, 2014. Ignoring income tax, the
accounting change should be reported in the 2014
a. Income statement as a P600.000 debit
b. Retained earning's statement as a P600,000 debit adjustment to the
beginning balance
c. Income statement P600 000 credit
d. Retained earning's statement as a P600,000 credit adjustment to the
beginning balance
Problem 10-27 (AICPA Adapted)
During 2011, 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
January 1
December 31

Weighted Average

7,200,000

7,700,000

7,900,000

8,300,000

Ignoring income tax, what amount should be reported as the effect of the
accounting change in the statement of changes in equity for 2014?
a.
b.
c.
d.

500,000
400,000
900,000
600,000

Problem 10-28 (AICPA Adapted)

Goddard Company had used the FIFO method of inventory valuation since
it began operation in 2011. The entity decided to change to the weighted
average method for determining inventory cost at the beginning of 2014.
The entity provided the following year-end inventory balances under FIFO
and weighted average method:
Year

FIFO

2011

Weighted average

4,500,000
2012

5,400,000
7,800,000

7,100,000
2013
7,800,000

8,300,000

What amount before income tax should be reported in the 2014 statement
of retained earnings as the cumulative effect of the change in accounting
policy?
a.
b.
c.
d.

500,000
300,000
500,000
300,000

decreased
decreased
increased
increased

Problem 10-29 (AICPA Adapted)

On January 1, 2014, Poe Construction Company changed to the percentage
of completion method from cost recovery method of income recognition.
On December 31, 2013, 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, 2013 would have been P9,000,000. If the income tax rate is
30%, the cumulative effect of the accounting change should be reported in
the 2014
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.
Problem 10-30 (IAA)
Banko Construction Company has used the cost recovery method since it
began operations in 2011. In 2014, 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:

2011

2012

Total revenue from completed contracts

40,000.000

2013

25,000,000

42,000,000

Less: Cost of completed contracts

28,000,000

18 000 000

29,000,000

Income from operations

12,000,000

7,000,000

13,000,000

Casualty loss
( 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 2011-2013 using the percentage of
completion method.
2011

2012

2013

Contract I

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

(1,000,000)

What pretax amount should be reported as the cumulative effect of

change in accounting policy in the statement of retained earnings for
2014?
a.
b.
c.
d.

6,000,000
8,000,000
7,000,000
0

Problem 10-31 ( AICPA Adapted)

While preparing the financial statements for 2014, Dakila Company discovered
computational errors in the 2012 and 2013 depreciation expense. These errors
resulted in overstatement of each year's income by P25,000, net of income tax. The
net income for 2014 is correctly reported at P500,000.
The following amounts were reported in the previously issued financial statements:
2013
Retained Earnings, January 1
500,000

2012
700,000

Net Income

Retained Earnings, December 31

700,000

150,000

200,000

850,000

What is the balance of retained earnings on December 31, 2014?

a.
b.
c.
d.

1,300,000
1,350,000
1,400,000
1,325,000

Problem 10-32 (IAA)

Effective January 1, 2014, 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, 2013. 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 2014?
a.
b.
c.
d.

600,000
180,000
420,000
0

Problems 10-33 (IFRS)

During year ended December 31, 2014 the following events occurred at
Harbor Company:

It was decided to write off P800,000 from inventory which was

over two years old as it was obsolete.
Sales of P600,000 had been omitted from the statements for the
year ended December 31, 2013

What amount should be reported as a prior period error in the financial

statements for 2014?
a. 1,400,000
b. 600,000.
c. 800,000
d. 200,000

Problem 10-34 (IFRS)

The draft financial statements for Savior Company for 2011 revealed an
overvaluation of the closing inventory of P2,000,000 on December 31,
2013. Further investigation showed that there was an overvaluation on
December 31, 2012 of P1,200,000. What adjustment should be made to
the profit for 2013 presented as comparative figure in the 2014,
financial statements?
a. 800,000 increase
b. 200,000 decrease
c. 800,000 decrease
d. 0
Problem 10-35 (AICPA Adapted)
On January 1, 2013, Aker Company acquired a machine at cost of
P2,000,000. 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 2013. The
oversight was discovered during the preparation of the 2014 financial
statements. What is the depreciation expense for 2014?
a. 800,000
b. 400,000
c. 500 000
d. 0
Problem 10-36 (IFRS)
Animus Company provided the following information at year-end:
December 31, 2014

December

31, 2013
Development Cost
5,840,000
Amortization

8,160,000
(1,800,000)

(1,200,000)

The capitalized development costs relate to a single project

commenced in 2011. It has now been discovered that of the criteria for
capitalization has never been met. What Adjustment is required to
restate retained earnings on January 1, 2014?
a.
b.
c.
d.

6,360,000
1,720,000
4,640,000
0

Problem 10-37 (IFRS)

In reviewing Bituin Company's draft financial statements for the year
ended December 31, 2014, management decided that market
conditions were such that the provision for inventory obsolescence on
December 31, 2014 should be increased by P3,000,000 If the same
basis of calculating inventory obsolescence had been applied on
December 31, 2013, the provision would have been P1,800,000 higher
than the amount recognized in the statement of financial position.
What adjustments should be made to the profit for 2014 and profit for
2013 presented as a comparative figure in the 2014 financial
statements?
Profit for 2014
a. 3,000,000 decrease
decrease
b. 1,200,000 decrease
decrease
c. 0
d. 3,000,000 decrease

Profit for 2013

1,800,000
1,800,000
3,000,000 decrease
0

Problem 10-38 (IFRS)

During the year ended December 31, 2014 , Samar Company revealed the
following event
A counting error relating to inventory on December 31, 2013 was
discovered. This required a reduction carrying amount of inventory on that
date of P280,000.
The Provision for uncollectible accounts receivable on December 31,
2013 was P300,000. During 2014, an amount of P50,000 was written off
the December 31, 2013 account receivable.
What adjustment is required to restate retained earnings on January 1,
2014?
a.
b.
c.
d.

280,000
300,000
580,000
0

Problem 10-39 (PHILCPA Adapted)

After the issuance of the 2013 financial statements, Narra Company
discovered a computational error of P150,000 in the calculation of the
December 31, 2013 inventory. The error resulted in a P150,000
overstatement in the cost of goods sold for the year ended December 31,
2013. In October 2014, the entity paid the amount of P500,000 in
settlement of litigation instituted against it during 2013. In the 2014

financial statements, what is the pretax adjustment to retained earnings

on January 1, 2014?
a. 150,000 credit
b. 350,000 debit
c. 500,000 debit
d. 650,000 credit
Problem 10-40 (PHILCPA Adapted)
Universal Company failed to accrue warranty cost of P100,000 on
December 31, 2013. In addition, a change from straight line to accelerated
depreciation made at the beginning of 2014 resulted in a cumulative effect
of P60,000 on retained earnings. What amount before tax should be
reported as prior period error in 2014?
a. 100,000
b. 160,000
c. 60,000
d. 0
Problem 10-41 (AICPA Adapted)
On January 1, 2014, Folk Company changed from the average cost method
to the FIFO method to account for the inventory. Ending inventory for each
method was a follows:

2013
Average Cost
FIFO cost

2014

500,000
700,000

900,000
1,400,000

The income statement information calculated by the average cost method

was as follows:
2013
Sales

2014

10,000,000

Cost of goods sold

7,000,000

Operating expense
2,000,000

1,500,000

Tax expense 30%

600,000

450,000

13,000,000
9,000,000

What amount of net income should be reported in 2014 after the change
to the FIFO inventory method?
a.
b.
c.
d.

1,610,000
2,300,000
1,750,000
1,890,000

Problem 10-42 (IFRS)

Natasha Company reported net income of P700,000 for 20 The entity
declared and paid dividends of P150,000 in 2014 and P300,000 in 2013. In
the financial statements for the ye ended December 31, 2013, the entity
reported retain earnings of P1,100,000 on January 1, 2013. The net into
for 2013 was P600,000. In 2014, after the 2013 financial statements were
approved for issue, the entity discover an error in the December 31, 2013
financial statements. The effect of the error was a P650,000
overstatement of net into for the year ended December 31, 2013 due
underdepreciation. What amount should be reported retained earnings on
December 31, 2014?
a.
b.
c.
d.

1,300,000
1,400,000
1,650,000
1,950,000

Problem 10-43 (IAA)

Remy Company had the following events and transactions during 2014:
Depreciation for 2012 was found to be understated by P300,000.
A litigation settlement resulted in a loss of P250,000.
The inventory on December 31, 2012 was overstated by P400,000.
The entity disposed of the recreational division at a loss of P500,000.
The income tax rate is 30%. What is the effect of these events on the
income from continuing operations for 2014?
a. 175,000
b. 385,000
c. 665,000
d. 525,000