Module 11

Exercises/Assignments
Answer the following Problems.

For Problems 1 to 3: The following information was taken from the records of
JUGATE PAIRED Co.

Cash purchases – gross 1,200,000

Trade accounts payable – beg. 2,000,000
Trade accounts payable – end 1,600,000
Trade notes payable decreased by 800,000
Cash payments on payables 4,000,000
Purchase returns and discounts (inclusive of P60,000 receipts from
suppliers) 80,000
Inventory increased by 400,000

1. How much is the net purchases under cash basis of accounting?

a. 4,740,000
b. 2,820,000
c. 3,940,000
d. Some other answer 5,140,000

2. How much is the cost of goods sold under cash basis of accounting?
a. 3,960,000
b. 4,740,000
c. 3,960,000
d. Some other answer __________________

3. How much is the net purchases under accrual basis of accounting?

a. 3,960,000
b. 1,620,000
c. 3,940,000
d. Some other answer __________________

4. How much is the goods sold under accrual basis of accounting?

a. 2,820,000
b. 3,540,000
c. 3,960,000
d. Some other answer __________________

5. AMEN Co. provided the following data regarding its financial position:

January 1, 2020
Current Asset P 5,000,000
Current Liability 2,000,000
Noncurrent Asset 8,000,000
Noncurrent Liability 4,000,000

The following changes occurred during 2020:

1. Current Asset increased to P6,000,000.
2. Current Liability increased by P500,000.
 3. Noncurrent Asset decreased by P1,000,000.
4. Noncurrent Liability decreased to P2,500,000.
5. ADMU issued 100,000 ordinary shares with par value of P10 at
P20/share.
6. Cash dividends of P300,000 were declared during the year.

Note: No other transactions affect the equity except those stated.

What is the profit/(loss) for the year ended December 31,2020?

a. P1,700,000
b. (P700,000)
c. P2,700,000
d. (P1,700,000)

6. Incomplete accounting records using only a cash book is a characteristic of

a. Cash basis
b. Accrual basis
c. Single entry system
d. Double entry system

7. Compared to its cash basis net income for the current year, an entity's accrual
basis net income increased when it
a. Declared a cash dividend in the prior year that it paid in the current year
b. Wrote off more accounts receivable than it reported as uncollectible accounts
expense in the current year
c. Had lower accrued expenses on December 31 of the current year than on
January 1
d. Sold used equipment for cash at a gain in the current year

8. Compared to the accrual basis of accounting, the cash basis of accounting

understates income by the net decrease during the accounting period of
a. Both accounts receivable and accrued expenses.
b. Accrued expenses but not of accounts receivable
c. Neither accounts receivable nor of accrued expenses
d. Accounts receivable but not of accrued expenses

9. Prior to the current year, an entity used the cash basis of accounting. At the
current year-end, the entity changed to the accrual basis. The entity cannot
determine the beginning balance of supplies inventory. What is the effect of the
entity's inability to determine beginning supplies inventory on its accrual basis net
income and year-end accrual basis owners’ equity?
Net Income Owner’s equity
a. No effect No effect
b. No effect Overstated
c. Overstated No effect
d. Overstated Overstated

10. The premium on a three-year insurance policy expiring on December 31, 2014
was paid in total on January 1, 2012. The original payment was initially debited to
a prepaid asset account. The appropriate journal entry had been recorded on
 December 31, 2012. The balance in the prepaid asset account on December 31,
2012 should be
a. Zero
b. The same as it would have been if the original payment had been debited
initially to an expense account
c. The same as the original payment
d. Higher than if the original payment had been debited initially to an expense
account.

11. Under this basis of accounting, income is recognized when cash is collected
regardless of when earned and expense is recognized when paid regardless of
when incurred.
a. Simple basis
b. Modified basis
c. Accrual basis
d. cash basis

12. These are omissions from and misstatements in the financial statements for one
or more periods arising from a failure to use or misuse reliable information.
a. change in accounting policy
b. change in accounting estimate
c. prior period error
d. change in reporting entity

13. Prior period error should be reported in

a. Income statement of the current year
b. Income statement on the year of error
c. Statement of changes in equity of the current year
d. Statement of changes in equity of the year of error

Sales
Use the following information for the next two questions:
The following information was taken from the records of INCONDITE CRUDE Co.

Cash sales – gross 2,000,000

Trade accounts receivable – beg. 2,400,000
Trade accounts receivable – end 1,600,000
Trade notes receivable increased by 1,200,000
Collections on receivables 4,000,000
Sales returns and discounts (inclusive of ₱20,000 payments to
customers) 80,000
Write-offs of accounts receivable 40,000
Recoveries of accounts receivable written-off (included in
collections) 16,000
Trade notes receivable discounted (Note receivable was directly
credited) 120,000

14. How much is the net sales under cash basis of accounting?
a. 4,604,000
b. 5,980,000
c. 6,524,000
 d. 1,980,000

15. How much is the net sales under accrual basis of accounting?
a. 4,604,000
b. 5,980,000
c. 6,524,000
d. 1,980,000

Purchases and Cost of goods sold

Use the following information for the next four questions:
The following information was taken from the records of JUGATE PAIRED Co.

Cash purchases – gross 1,200,000

Trade accounts payable – beg. 2,000,000
Trade accounts payable – end 1,600,000
Trade notes payable decreased by 800,000
Cash payments on payables 4,000,000
Purchase returns and discounts (inclusive of P60,000 receipts from
suppliers) 80,000
Inventory increased by 400,000

16. How much is the net purchases under cash basis of accounting?
a. 4,740,000
b. 2,820,000
c. 3,940,000
d. 5,140,000

17. How much is the cost of goods sold under cash basis of accounting?
a. 3,960,000
b. 4,740,000
c. 3,960,000
d. 5,140,000

18. How much is the net purchases under accrual basis of accounting?
a. 3,960,000
b. 1,620,000
c. 3,940,000
d. 4,740,000

19. How much is the goods sold under accrual basis of accounting?
a. 2,820,000
b. 3,540,000
c. 3,960,000
d. 4,740,000

Other items of income

Use the following information for the next two questions:
INVETERATE HABITUAL Co. has the following information:
Accrued rent income – January 1 1,600,000
 Accrued rent income – December 31 800,000
Unearned rent, January 1 1,200,000
Unearned rent, December 2,000,000
Rental payments received 4,000,000

20. How much is the rent income under cash basis of accounting?
a. 4,000,000
b. 2,400,000
c. 5,600,000
d. 4,800,000

21. How much is the rent income under accrual basis of accounting?
a. 4,000,000
b. 2,400,000
c. 5,600,000
d. 4,800,000

Other items of income

22. The following information was taken from the records of KATZENJAMMER
DISTRESS Co.

Accrued rent income – January 1 1,600,000

Accrued rent income – December 31 800,000
Unearned rent, January 1 1,200,000
Unearned rent, December 2,000,000
Rent income under accrual basis 2,400,000

How much is the rent income under cash basis?

a. 4,000,000
b. 2,400,000
c. 5,600,000
d. 4,800,000

Other items of expense

23. OBNUBIATE OBSCURE Co. has the following information:

Prepaid insurance – January 1 1,600,000

Prepaid insurance – December 31 800,000
Insurance payable decreased by 1,200,000
Insurance payments 4,000,000

How much is the rent expense under accrual basis?

a. 4,000,000
b. 3,400,000
c. 3,600,000
d. 4,800,000

Other items of expense

24. The following information was taken from the records of LEGERITY AGILITY Co.
 Prepaid insurance – January 1 1,600,000
Prepaid insurance – December 31 800,000
Insurance payable decreased by 1,200,000
Rent expense under accrual basis 3,600,000

How much is the rent expense under cash basis?

a. 4,000,000
b. 2,400,000
c. 5,600,000
d. 4,800,000

Income tax
25. TOTEM REVERED SYMBOL Co. has the following information:

Payments made for income taxes 4,000,000

Income tax payable increased by 800,000
Deferred tax liability, January 1 1,200,000
Deferred tax liability, December 31 3,600,000
Deferred tax asset increased by 2,000,000

How much is the income tax expense to be presented in the statement of profit or
loss and other comprehensive income in accordance with PFRSs?
a. 9,200,000
b. 4,800,000
c. 400,000
d. 5,200,000

Comprehensive illustration
Use the following information for the next two questions:
On January 1, 20x1, APOTHEGM SHORT SAYING Co. started its operations
with initial cash investment of ₱400,000. APOTHEGM provided ₱1,200,000 of
services in January and received full payment in April. APOTHEGM incurred
expenses of ₱480,000 in January which were paid in March. During March,
dividends of ₱200,000 were paid.

26. How much is the profit or loss for the first quarter under cash basis?
a. (480,000)
b. 520,000
c. 720,000
d. (780,000)

27. How much is the profit or loss for the first quarter under accrual basis?
a. (480,000)
b. 520,000
c. 720,000
d. (780,000)
Comprehensive illustration
28. TUSSLE WRETLE Co. reported profit of ₱800,000 in 20x1 under cash basis.
The following items are relevant in converting the cash basis profit into accrual
basis.

Inventory, January 1 4,000,000

Inventory, December 31 2,400,000
Receivables, January 1 1,200,000
Receivables, December 31 3,600,000
Payables increased by 2,000,000

How much is the profit under accrual basis?

a. 2,000,000
b. (2,000,000)
c. 5,200,000
d. (400,000)

Comprehensive illustration
29. INSIPID TASTELESS Co.’s accrual basis profit is computed as follows:

Sales 10,000,000
Cost of sales:
Inventory, Jan. 1 2,400,000
Net purchases 5,600,000
Cost of goods available for sale 8,000,000
Inventory, Dec. 31 (1,600,000) (6,400,000)
Gross profit 3,600,000
Other income 400,000
Operating expenses (2,800,000)
Profit for the year 1,200,000

Additional information:
 Operating expenses include depreciation of ₱280,000.
 Other income includes interest income of ₱320,000, ₱40,000 of which
pertains to amortization of discount on investment in bonds.
 Accounts receivable decreased by ₱400,000, prepaid expenses increased
by ₱200,000; accrued expenses increased by ₱80,000; and accounts
payable decreased by ₱240,000;.

How much is INSIPID’s cash basis profit?

a. 2,280,000
b. 1,480,000
c. 1,840,000
d. 680,000

Comprehensive illustration
30. PITH IMPORTANCE Co. started its operations in 20x1. Its income statement
prepared under cash basis of accounting is provided below.

PITH IMPORTANCE Co.

 Income Statement
For the year ended December 31, 20x1

Revenue 10,000,000
Other income 80,000
Equipment (1,600,000)
Salaries expense (1,200,000)
Rent expense (720,000)
Utilities expense (320,000)
Insurance expense (160,000)
Commission expense (100,000)
Finance cost (120,000)
Profit before tax 5,860,000
Income tax expense (1,600,000)
Profit for the year 4,260,000

Additional information:
a. Amounts due from customers at year-end were ₱1,000,000. Of this amount,
₱80,000 is doubtful of collection.
b. Interest income of ₱80,000 on a note receivable from a customer was
recognized in other income. However, an amortization of discount on the note
receivable of ₱8,000 was not recorded.
c. The cost of equipment purchased to be used in business was expensed
immediately. The equipment has an estimated useful life of 10 years. PITH
uses the straight line method of depreciation.
d. Salaries of ₱120,000 incurred in December 20x1 were paid on January 4,
20x2.
e. PITH rents its office space for ₱48,000 a month, payable quarterly in
advance. The contract was signed on December 31, 20x0.
f. The bill for December’s utility costs of ₱40,000 was paid on January 9, 20x2.
g. A one-year insurance policy was obtained on July 1, 20x1. Premiums are paid
annually in advance.
h. Commissions of 1% of revenues are paid on the same day cash is received
from customers.
i. PITH borrowed ₱4,000,000 for one year on August 1, 20x1. Interest
payments based on an annual rate of 12% are made quarterly.
j. There are no unpaid income taxes as of year-end. However, deferred tax
asset of ₱13,200 and deferred tax liability of ₱20,000 were not recognized.

How much is the profit for the year under accrual basis of accounting?
a. 6,569,000
b. 7,256,000
c. 7,486,000
d. 6,596,000
 Module 12

Exercises/Assignments
Answer the following Problems.
The four types of accounting changes, including error correction, are:
Code
a. Change in accounting principle.
b. Change in accounting estimate.
c. Change in reporting entity.
d. Error correction.

Instructions Following are a series of situations. You are to enter a code letter to
the left to indicate the type of change.

C 1. Change from presenting nonconsolidated to consolidated financial

statements.
D 2. Change due to charging a new asset directly to an expense account.
B 3. Change from expensing to capitalizing certain costs, due to a change in
periods benefited.
A 4. Change from FIFO to LIFO inventory procedures.
D 5. Change due to failure to recognize an accrued (uncollected) revenue.
B 6. Change in amortization period for an intangible asset.
C 7. Changing the companies included in combined financial statements.
B 8. Change in the loss rate on warranty costs.
D 9. Change due to failure to recognize and accrue income.
B 10. Change in residual value of a depreciable plant asset.
D 11. Change from an unacceptable to an acceptable accounting principle.
B 12. Change in both estimate and acceptable accounting principles.
D 13. Change due to failure to recognize a prepaid asset.
B 14. Change from straight-line to sum-of-the-years'-digits method of
depreciation.
B 15. Change in life of a depreciable plant asset.
A 16. Change from one acceptable principle to another acceptable principle.
D 17. Change due to understatement of inventory.
B 18. Change in expected recovery of an account receivable.

TRUE OR FALSE

FALSE 1. A change in accounting principle is a change that occurs as the

result of new information or additional experience.
TRUE 2. Errors in financial statements result from mathematical mistakes or
oversight or misuse of facts that existed when preparing the
financial statements.
FALSE 3. Adoption of a new principle in recognition of events that have
occurred for the first time or that were previously immaterial is
treated as an accounting change.
TRUE 4. Retrospective application refers to the application of a different
accounting principle to recast previously issued financial
statements—as if the new principle had always been used.
FALSE 5. When a company changes an accounting principle, it should report
the change by reporting the cumulative effect of the change in the
current year’s income statement.
TRUE 6. One of the disclosure requirements for a change in accounting
 principle is to show the cumulative effect of the change on retained
earnings as of the beginning of the earliest period presented.
TRUE 7. An indirect effect of an accounting change is any change to current
or future cash flows of a company that result from making a change
in accounting principle that is applied retrospectively.
TRUE 8. Retrospective application is considered impracticable if a company
cannot determine the prior period effects using every reasonable
effort to do so.
FALSE 9. Companies report changes in accounting estimates retrospectively.
TRUE 10. When it is impossible to determine whether a change in principle or
change in estimate has occurred, the change is considered a
change in estimate.
FALSE 11. Companies account for a change in depreciation methods as a
change in accounting principle.
FALSE 12. When companies make changes that result in different reporting
entities, the change is reported prospectively.
TRUE 13. Changing the cost or equity method of accounting for investments
is an example of a change in reporting entity.
FALSE 14. Accounting errors include changes in estimates that occur because
a company acquires more experience, or as it obtains additional
information.
TRUE 15. Companies record corrections of errors from prior periods as an
adjustment to the beginning balance of retained earnings in the
current period.
TRUE 16. If an FASB standard creates a new principle, expresses preference
for, or rejects a specific accounting principle, the change is
considered clearly acceptable.
FALSE 17. Balance sheet errors affect only the presentation of an asset or
liability account.
FALSE 18. Counterbalancing errors are those that will be offset and that take
longer than two periods to correct themselves.
TRUE 19. For counterbalancing errors, restatement of comparative financial
statements is necessary even if a correcting entry is not required.
TRUE 20. Companies must make correcting entries for no counterbalancing
errors, even if they have closed the prior year’s books.

21. Accounting changes are often made and the monetary impact is reflected in the
financial statements of a company even though, in theory, this may be a violation
of the accounting concept of
a. materiality.
b. consistency.
c. conservatism.
d. objectivity.

22. Which of the following is not treated as a change in accounting principle?

a. A change from LIFO to FIFO for inventory valuation
b. A change to a different method of depreciation for plant assets
c. A change from full-cost to successful efforts in the extractive industry
d. A change from completed-contract to percentage-of-completion

23. Which of the following is not a retrospective-type accounting change?

a. Completed-contract method to the percentage-of-completion method for long-
term contracts
b. LIFO method to the FIFO method for inventory valuation
 c. Sum-of-the-years'-digits method to the straight-line method
d. "Full cost" method to another method in the extractive industry

24. Which of the following is accounted for as a change in accounting principle?

a. A change in the estimated useful life of plant assets.
b. A change from the cash basis of accounting to the accrual basis of accounting.
c. A change from expensing immaterial expenditures to deferring and amortizing
them as they become material.
d. A change in inventory valuation from average cost to FIFO.

25. A company changes from straight-line to an accelerated method of calculating

depreciation, which will be similar to the method used for tax purposes. The entry
to record this change should include a
a. credit to Accumulated Depreciation.
b. debit to Retained Earnings in the amount of the difference on prior years.
c. debit to Deferred Tax Asset.
d. credit to Deferred Tax Liability.

26. Which of the following disclosures is required for a change from sum-of-the-
years-digits to straightline?
a. The cumulative effect on prior years, net of tax, in the current retained
earnings statement
b. Restatement of prior years’ income statements
c. Recomputation of current and future years’ depreciation
d. All of these are required.

27. A company changes from percentage-of-completion to completed-contract,

which is the method used for tax purposes. The entry to record this change
should include a
a. debit to Construction in Process.
b. debit to Loss on Long-term Contracts in the amount of the difference on prior
years, net of tax.
c. debit to Retained Earnings in the amount of the difference on prior years, net
of tax.
d. credit to Deferred Tax Liability.

28. Which of the following disclosures is required for a change from LIFO to FIFO?
a. The cumulative effect on prior years, net of tax, in the current retained
earnings statement
b. The justification for the change
c. Restated prior year income statements
d. All of these are required.

29. Stone Company changed its method of pricing inventories from FIFO to LIFO.
What type of accounting change does this represent?
a. A change in accounting estimate for which the financial statements for prior
periods included for comparative purposes should be presented as previously
reported.
 b. A change in accounting principle for which the financial statements for prior
periods included for comparative purposes should be presented as previously
reported.
c. A change in accounting estimate for which the financial statements for prior
periods included for comparative purposes should be restated.
d. A change in accounting principle for which the financial statements for prior
periods included for comparative purposes should be restated.
30. Which type of accounting change should always be accounted for in current and
future periods?
a. Change in accounting principle
b. Change in reporting entity
c. Change in accounting estimate
d. Correction of an error

31. Which of the following is (are) the proper time period(s) to record the effects of a
change in accounting estimate?
a. Current period and prospectively
b. Current period and retrospectively
c. Retrospectively only
d. Current period only

32. When a company decides to switch from the double-declining balance method to
the straight-line method, this change should be handled as a
a. change in accounting principle.
b. change in accounting estimate.
c. prior period adjustment.
d. correction of an error.

33. The estimated life of a building that has been depreciated 30 years of an
originally estimated life of 50 years has been revised to a remaining life of 10
years. Based on this information, the accountant should
a. continue to depreciate the building over the original 50-year life.
b. depreciate the remaining book value 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 book value
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 book
value as though the estimated life had always been 40 years.

34. Which of the following statements is correct?

a. Changes in accounting principle are always handled in the current or
prospective period.
b. Prior statements should be restated for changes in accounting estimates.
c. A change from expensing certain costs to capitalizing these costs due to a
change in the period benefited, should be handled as a change in accounting
estimate.
d. Correction of an error related to a prior period should be considered as an
adjustment to current year net income.
35. Which of the following describes a change in reporting entity?
a. A company acquires a subsidiary that is to be accounted for as a purchase.
b. A manufacturing company expands its market from regional to nationwide.
c. A company divests itself of a European branch sales office.
d. Changing the companies included in combined financial statements.

36. Presenting consolidated financial statements this year when statements of

individual companies were presented last year is
a. a correction of an error.
b. an accounting change that should be reported prospectively.
c. an accounting change that should be reported by restating the financial
statements of all prior periods presented.
d. not an accounting change.

37. An example of a correction of an error in previously issued financial statements

is a change
a. from the FIFO method of inventory valuation to the LIFO method.
b. in the service life of plant assets, based on changes in the economic
environment.
c. from the cash basis of accounting to the accrual basis of accounting.
d. in the tax assessment related to a prior period.

38. Counterbalancing errors do not include

a. errors that correct themselves in two years.
b. errors that correct themselves in three years.
c. an understatement of purchases.
d. an overstatement of unearned revenue.

39. A company using a perpetual inventory system 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 assets, liabilities, and
stockholders' equity at year end and net income for the year?
Assets Liabilities Stockholders' Equity Net Income
a. No effect Understate Overstate Overstate
b. No effect Overstate Understate Understate
c. Understate Understate No effect No effect
d. Understate No effect Understate Understate
40. If, at the end of a period, a 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. the ending inventory and retained earnings to be understated.
b. the ending inventory, cost of goods sold, and retained earnings to be
understated.
c. no effect on net income, working capital, and retained earnings.
d. cost of goods sold and net income to be understated.

41. According to PAS 8, these are those adopted by an entity in preparing and
presenting its financial statements which shall be applied consistently.
a. Accounting estimates
b. Accounting policies
 c. PFRSs
d. Debit credit

42. Early application of a PFRS is

a. a voluntary change in accounting policy.
b. not a voluntary change in accounting policy.
c. an involuntary change in accounting policy.
d. a prior period error

43. If an asset-related account (e.g., prepaid insurance) is understated,

a. profit for the year is overstated
b. cost of sales for the year is also understated
c. working capital is overstated
d. profit for the year is also understated

44. Which of the following correctly relate to the effects of failure to recognize
adjustments?
Failure to Effect on profit Effect on statement of financial
Recognize position
I. Consumption of the Understates Overstates assets Overstates
benefits of an asset profit retained earnings
II. Earning of Understates Overstates Understates
previously profit liabilities retained earnings
unearned revenues
III. Accrual of assets Understates Understates Overstates
profit assets retained earnings
IV. Accrual of liabilities Overstates profit Overstates Overstates
liabilities retained earnings

a. IV b. I and III c. II d. II and III

For problems 44 and 45:

On January 10, 20x2, prior to the authorization of LIBERTINE IMMORAL Co.’s
December 31, 20x1 financial statements for issue, the accountant of LIBERTINE
Co. received a bill for an advertisement made in the month of December 20x1
amounting to ₱1,600,000. This expense was not accrued as of December 31,
20x1.

45. The correcting entry, if the books are still open, includes
a. a debit to advertising expense for ₱1,600,000
b. a credit to advertising income for ₱1,600,000
c. a debit to retained earnings for ₱1,600,000
d. a credit to retained earnings for ₱1,600,000

46. The correcting entry, if the books are already closed, includes
a. a debit to advertising expense for ₱1,600,000
b. a credit to advertising income for ₱1,600,000
c. a debit to retained earnings for ₱1,600,000
d. a credit to retained earnings for ₱1,600,000

47. On January 15, 20x3 while finalizing its 20x2 financial statements,
DIAPHANOUS TRANSPARENT Co. discovered that depreciation expense
 recognized in 20x1 is overstated by ₱1,600,000. Ignoring income tax, the entry to
correct the prior period error includes
a. a debit to depreciation expense for ₱1,600,000
b. a debit to retained earnings for ₱1,600,000
c. a credit to depreciation expense for ₱1,600,000
d. a debit to accumulated depreciation for ₱1,600,000

47. Items reported as a prior period adjustments

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 rather than as a prior
period error
b. Are reflected as adjustments of the opening balance of the retained earnings
of the earliest period presented.
c. Do not affect the presentation of prior period comparative financial statements.
d. Do not require further disclosure in the body of the financial statements

48. Arnold Company purchased a machine on January 1, 2010, for P300,000. At the
date of acquisition, the machine had an estimated useful life of six years with no
salvage. The machine is being depreciated on a straight-line basis. On January
1, 2013, Arnold determined, as a result of additional information, that the
machine had an estimated useful life of eight years from the date of acquisition
with no salvage. An accounting change was made in 2013 to reflect this
additional information. Assume that the direct effects of this change are limited to
the effect on depreciation and the related tax provision, and that the income tax
rate was 30% in 2010, 2011, 2012, and 2013. What should be reported in
Arnold's income statement for the year ended December 31, 2013, as the
cumulative effect on prior years of changing the estimated useful life of the
machine?
a. 105,000
b. 30,000
c. 20,000
d. 0

49. When changing an accounting policy, Accounting Policies, Changes in

Accounting Estimates and Errors requires which of the following to be applied
retrospectively?
a. All of the options are correct.
b. A voluntary change to improve the relevance of information presented.
c. A change due to the adoption of a new accounting standard
d. A change due to the adoption of a new interpretation.

50. On January 1, 2012, Meanne Company purchased a machine for P5,280,000

and depreciated it by the straight-line method using an estimated useful life of
eight years with 1no residual value. On January 1, 2015, Meanne determined
that the machine had a useful life of six years from the date of acquisition and will
have a residual value of P480,000. An accounting change was made in 2015 to
reflect these additional data. The accumulated depreciation for this machine
should have a balance at December 31, 2015 of
a. 3,200,000
b. 3,080,000
 c. 3,520,000
d. 2,920,000

51. During 2013, a construction company changed from the completed-contract

method to the percentageof-completion method for accounting purposes but not
for tax purposes. Gross profit figures under both methods for the past three years
appear below:
Completed-Contract Percentage-of-Completion

2011 P 475,000 P 800,000

2012 625,000 950,000
2013 700,000 1,050,000
P1,800,000 P2,800,000

Assuming an income tax rate of 40% for all years, the effect of this accounting
change on prior periods should be reported by a credit of
a. P600,000 on the 2013 income statement
b. P390,000 on the 2013 income statement
c. P390,000 on the 2013 retained earnings statement
d. P600,000 on the 2013 retained earnings statement

52. Why is it important for entities to report their accounting changes to the public?
a. Without the reporting of accounting changes, investors could believe all the
entity's income came from continuing operations.
b. Accounting changes affect dividends and investors want dividends.
c. Most accounting changes increase net income and investors need to know
why the increase in net income occurred.
d. Some accounting changes are more extraordinary than others.

53. Which method is the best explanation why accounting changes are classified
into different categories?
a. A survey of managers and their need to provide a favorable profit picture.
b. Each category involves different method of recognizing changes in the
financial statements.
c. The materiality of the changes involved.
d. The fact that some treatments are considered GAAP and some are not.

Use the following information for the next two questions:

On January 10, 20x2, prior to the authorization of LIBERTINE IMMORAL Co.’s
December 31, 20x1 financial statements for issue, the accountant of LIBERTINE
Co. received a bill for an advertisement made in the month of December 20x1
amounting to ₱1,600,000. This expense was not accrued as of December 31,
20x1.

54. The correcting entry, if the books are still open, includes
e. a debit to advertising expense for ₱1,600,000
f. a credit to advertising income for ₱1,600,000
g. a debit to retained earnings for ₱1,600,000
h. a credit to retained earnings for ₱1,600,000
55. The correcting entry, if the books are already closed, includes
e. a debit to advertising expense for ₱1,600,000
f. a credit to advertising income for ₱1,600,000
g. a debit to retained earnings for ₱1,600,000
h. a credit to retained earnings for ₱1,600,000

MODULE 13

Test Your Knowledge

Test your knowledge of the requirements for the accounting for hyperinflation in
accordance with the IFRS for SMEs by answering the questions below. Once you
have completed the test check your answers against those set out below this test.
Assume all amounts are material.

Mark the box next to the most correct statement.

1. An economy is deemed hyperinflationary when:

(a) the general population prefers to keep its wealth in non-monetary assets or in
a relatively stable foreign currency. Amounts of local currency held are
immediately invested to maintain purchasing power.
(b) the general population regards monetary amounts not in terms of the local
currency but in terms of a relatively stable foreign currency. Prices may be
quoted in that currency.
(c) sales and purchases on credit take place at prices that compensate for the
expected loss of purchasing power during the credit period, even if the period
is short
(d) interest rates, wages and prices are linked to a price index.
(e) the cumulative inflation rate over three years is approaching, or exceeds, 100
per cent.
(f) considering all available information including, but not limited to, (a)–(e)
above, the economy is judged to be hyperinflationary.

2. If the functional currency of an entity is that of a hyperinflationary economy, which

of the following items are restated for the effects of general inflation (ie using a
general price index)?
(a) Assets and liabilities linked by agreement to changes in prices.
(b) Assets and liabilities carried at fair value (fair value is determined at the end
of the reporting period).
(c) Non-monetary assets and non-monetary liabilities carried at cost (or cost less
depreciation) and all equity items.
(d) Monetary assets and monetary liabilities.

3. An entity farms beef cattle on farmland that it owns. The fair value of the entity’s
cattle is readily determinable without undue cost or effort. The farmland secures
a mortgage loan advanced to the entity from a local bank. The entity has two
employees, who receive their monthly salaries on the fifth day of the month
 following the month in which the service was provided to the entity. Which of the
following items are restated to the measuring unit that is current at the end of the
reporting period?
(a) bank loan (c) cattle
(b) farmland (d) salaries payable
4. An entity was incorporated on 31 December 20X7. It immediately issued equity
instruments in exchange for CU1,000,000 cash. The entity did not enter into any
other transactions in 20X7 and 20X8. The functional currency of the entity is the
currency of a hyperinflationary economy. Inflation during 20X8 is 40 per cent. In
its financial statements at 31 December 20X8 the entity must present cash at:
(a) CU1,000,000 at 31 December 20X8 and CU1,000,000 at 31 December 20X7.
(b) CU1,000,000 at 31 December 20X8 and CU1,400,000 at 31 December 20X7.
(c) CU1,400,000 at 31 December 20X8 and CU1,000,000 at 31 December 20X7.
(d) CU1,400,000 at 31 December 20X8 and CU1,400,000 at 31 December 20X7.

5. The facts are the same as Question 4. The gain or loss on the net monetary
position for the year ended 31 December 20X8 is:
(a) CU400,000 loss.
(b) CU400,000 gain.
(c) zero.
(d) It is impossible to measure the amount of the gain or loss with the information
provided.

6. The facts are the same as in Question 4. The entity’s retained earnings at 31
December 20X8 is:
(a) CU400,000 deficit.
(b) CU400,000.
(c) zero.
(d) It is impossible to determine retained earnings balances with the information
provided.

7. The facts are the same as in Question 4. However, in this example, the entity
received land (instead of cash) in exchange for the equity instruments issued.
The entity classifies the land as property, plant and equipment. The gain or loss
on the net monetary position for the year ended 31 December 20X8 is:
(a) CU400,000 loss.
(b) CU400,000 gain.
(c) zero.
(d) It is impossible to measure the amount of the gain or loss with the information
provided.

8. In 20X1 an entity recognised revenue of CU250,000 on the first day of each of the
twelve months. The entity’s functional currency is the currency of a
hyperinflationary economy. Inflation is 5 per cent per month. Revenue for the
year ended 31 December 20X1 is:
(a) CU3,000,000.
(b) CU4,178,246.
(c) CU3,150,000.
(d) CU2,857,143.
9. An entity’s functional currency is the currency of a hyperinflationary economy. The
entity’s financial position at 31 December 20X5 restated in accordance with
Section 31 of the IFRS for SMEs is:
• monetary assets: CU200,000
• land—property, plant and equipment: CU300,000
• monetary liabilities: CU150,000
• equity: CU350,000
The entity’s only transaction in 20X6 involved earning revenue of CU80,000 for a
service provided on 31 December 20X6. The customer settled in cash on 31
December 20X6. Inflation for the year ended 31 December 20X6 is 80 per cent.
The gain or loss on the entity’s net monetary position to be included in profit for
the year ended 31 December 20X6 is:
(a) gain of CU40,000.
(b) loss of CU40,000.
(c) gain of CU24,000.
(d) gain of CU80,000.

10. The facts are the same as in Question 9. The entity’s profit for the year ended
31 December 20X6 is:
(a) CU80,000.
(b) CU40,000.
(c) CU144,000.
(d) CU104,000.

APPLY YOUR KNOWLEDGE

Apply your knowledge of the requirements for accounting and reporting in
hyperinflationary economies in accordance with the IFRS for SMEs by solving
the case studies below. Once you have completed the case studies check your
answers against those set out below this test.
Case Study 1
SME A’s functional currency is the currency of a hyperinflationary economy. SME A
—Unrestated statement of financial position at 31 December 20X3 (in thousands of
currency units)
20X3 20X2
CU CU

Property, plant and equipment 1,325 1,375

Inventory 536 680
Account receivables 300 210
Cash and cash equivalents 50 60
Total 2,211 2,325
Share capital 400 400
Share premium 100 100
Retained earnings 250 250
Long-term debt 750 770
Accounts payable 711 805
Total 2,211 2,325

Historical general price

 index

Property, plant and equipment 125

Share capital 100
Share premium 110

The general price index on 31 December 20X2 and 31 December 20X3 is 625 and
807 respectively.

Information about the inventories for the year ended 31 December 20X2:
Cost General
CU price index

Raw material Purchased 22 November 100 610

Purchased 19 December 110 621
Work in progress Raw materials 7 October 95 595
Other direct + indirect costs 160 610
Finished goods Raw materials 10 September 95 585
Other direct + indirect costs 120 605

Information about the inventories for the year ended 31 December 20X3:
Cost General
CU price index

Raw material Purchased on 17 November 90 785

Purchased on 18 December 95 800
Work in progress Raw materials purchased on 13 80 771
October
Other direct and indirect costs 130 789
Finished goods Raw materials purchased on 16 50 757
September
Other direct and indirect costs 91 782

PART A: Prepare SME A’s statement of financial position restated to the measuring
unit that is current at 31 December 20X2.

SME A
Statement of Financial Position
As of December 31, 201x2

ASSETS
Current Assets
Cash & Cash Equivalents P 60
Accounts Receivable 210
Inventory 702.36
Non-current Assets
PPE ( 1,375 x 625/125) 6,875
TOTAL ASSETS P 7,847.36

LIABLITIES AND EQUITY

Current Liabilities
 Accounts Payable P 805
Non-current Liabilities
Long-term debt 770

EQUITY
Retained earnings 3,204.18
Share capital (400 x 625/100) 2,500
Share premium (100 x 625/110) 568.18
TOTAL LIABILITIES & EQUITY P 7,847.36

PART B: Prepare SME A’s statement of financial position restated to the measuring
unit that is current at 31 December 20X3, including comparative amounts
for 20X2.

SME A
Statement of Financial Position
As of December 31, 201x2 and 20x3

ASSETS 20x3 20x2

Current Assets
Cash & Cash Equivalents P 50 P 77.47 d
Accounts Receivable 300 271.15 e
Inventory 552.27 906.89 f
Non-current Assets
PPE 8,554.20 a 8,877 g
TOTAL ASSETS P 9,456.47 P 10,132.51

LIABLITIES AND EQUITY

Current Liabilities
Accounts Payable P 711 P 1,039.42 h
Non-current Liabilities
Long-term debt 750 994.22 i
EQUITY
Share capital 3,228 b 3,228
Share premium 733.64 c 733.64
Retained earnings 4033.83 4,137.24 j
TOTAL LIABILITIES & EQUITY P 9,456.47 P 10,132.51

a
PPE = 1325 x 807/125 = 8,554.20
b
Share capital = 400 x 807/100 = 3,228.00
c
Share premium = 100 x 807/110 = 733.64
d
Cash and cash equivalents = 60 x 807/625 = 77.47
e
Accounts receivable = 210 x 807/625 = 271.15
f
Inventory = 702.36 x 807/625 = 906.89
g
PPE = 6,875 x 807/625 = 8,877.00
h
Accounts payable = 805 x 807/625 = 1,039.42
I
Long-term debt = 770 x 807/625 = 994.22
j
Retained earnings = 3,204.18 x 807/625 = 4,137.24

Case study 2
SME A’s functional currency is the currency of a hyperinflationary economy. SME A
was incorporated on 31 December 20X1 when it issued shares in exchange for cash
and land (the land is classified as property, plant and equipment).

SME A’s statement of financial position on 31 December 20X1 is as follows:

 20X1
CU

Property, plant and equipment— land 10,000.00

Cash and cash equivalents 5,000.00
Total assets 15,000.00
Share capital 15,000.00
Total equity and liabilities 15,000.00

During 20X2 SME A entered into the following transactions:

Date Description
Recognition of revenues of CU1,500 from services
30 June 20X2 rendered during the first half of the year, due on 31
December 20X2.
Payment of expenses of CU1,900 incurred during the
30 June 20X2
first half of the year.
Cash receipt of revenues of CU1,500 earned in the first
31 December 20X2
half of the year
Recognition of revenues of CU1,800 from services
31December 20X2
rendered due on 31 January 20X3.
Payment of expenses of CU900 incurred during second
31 December 20X2
half of the year.

Consequently, the unrestated statement of financial position at 31 December 20X2

and its unrestated statement of income for year ended 31 December 20X2 are as
follows:

SME A—unrestated statement of financial position at 31 December 20X2

20X2
CU

Property, plant and equipment— land 10,000.00

Trade receivables 1,800.00
Cash and cash equivalents 3,700.00
Total assets 15,500.00
Share capital 15,000.00
Retained earnings 500.00
Total equity and liabilities 15,500.00

SME A—unrestated statement of income for the year ended 31 December 20X2
20X2
CU

Revenue 3,300.00
Expenses (2,800.00)
Profit for the year 500.00
The relevant general price index is as follows:

Date General price index

31 December 20X1 1.00
Average first half-year 1.50
30 June 20X2 2.00
Average second half-year 3.00
31 December 20X2 4.00

Prepare the statement of financial position at 31 December 20X2 and the statement
of income for the year ended 31 December 20X2, stated in terms of the measuring
unit that is current at 31 December 20X2.

SME A
Statement of Financial Position
As of December 31, 201x1 and 20x2

ASSETS 20x2 20x1

Current Assets
Cash & cash equivalents P 3,700 P 20,000 a
Trade receivables 1,800 -
Non-current Assets
PPE – Land (10,000 x 4/1) 40,000 40,000
TOTAL ASSETS P 45,500 P 60,000

LIABLITIES AND EQUITY

Equity
Share capital (15,000 x 4/1) P 60,000 P 60,000
Retained earnings ( 14,500) -
TOTAL LIABILITIES & EQUITY P 45,500 P 60,000
a
Cash and cash equivalents = 5,000 x 4/1 = 20,000

SME A
Statement of Financial Performance
For the year ended December 31, 20x2

Revenue P 6,400 a
Expenses ( 6,266.67) b
Net loss on monetary position ( 14,633.33) c
LOSS FOR THE PERIOD (P 14,500)

a
Revenue
1,500 x 4/1.50 = 4,000
1,800 x 4/3 = 2,400
6,400
b
Expenses
1,900 x 4/1.50 = 5,066.67
900 x 4/3 = 1,200
6,266.67
c
Net Loss on Monetary Position
PPE - 40,000 – 10,000 = 30,000
SC ----- 60,000 – 15,000 = (45,000)
Revenue -- 6,400 – 3,300 = (3,100)
Expenses - 6,266.67 – 2,800 = 3,466.67
14,633.33