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7235 - Accounting Changes and Prior Period Errors

The document outlines various accounting scenarios involving changes in estimates, depreciation methods, and inventory valuation methods, along with their implications on financial reporting. It includes multiple-choice questions that assess understanding of accounting changes and prior period errors. The scenarios cover topics such as changes in useful life, depreciation calculations, and the impact of inventory method changes on financial statements.

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dryhumorous321
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92 views2 pages

7235 - Accounting Changes and Prior Period Errors

The document outlines various accounting scenarios involving changes in estimates, depreciation methods, and inventory valuation methods, along with their implications on financial reporting. It includes multiple-choice questions that assess understanding of accounting changes and prior period errors. The scenarios cover topics such as changes in useful life, depreciation calculations, and the impact of inventory method changes on financial statements.

Uploaded by

dryhumorous321
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila
FINANCIAL ACCOUNTING AND REPORTING VALIX/VALIX/SANTOS
MAY 2024 CPALE BATCH 95

ACCOUNTING CHANGES AND PRIOR PERIOD ERRORS

1. On January 1, 2021, an entity purchased a machine for P5,280,000 and depreciated it by the straight line
method using an estimated useful life of eight years with no residual value. On January 1, 2024, the entity
determined that the machine had a useful life of six years from the date of acquisition and the residual
value was P480,000. An accounting change was made in 2024 to reflect this additional information.
I. The carrying amount of the machine on December 31, 2023 is P3,300,000.
II. The accumulated depreciation on December 31, 2024 should be reported at P2,920,000.
III. A change in estimated useful life of an asset is a change in accounting estimate and should be treated
currently and prospectively.
a. All statements are true
b. Only statements I and II are true.
c. All statements are not true
d. Only statement II is true.

2. On January 1, 2022, an entity purchased for P4,800,000 a machine with useful life of ten years and
residual value of P200,000. The machine was depreciated by the double declining balance method and
the carrying amount of the machine was P3,072,000 on December 31, 2023. The entity changed to the
straight line method on January 1, 2024 and the residual value did not change.
I. The depreciation for 2024 should be reported at P359,000.
II. The accumulated depreciation on December 31, 2024 should be reported at P2,087,000.
III. A change in depreciation method is a change in accounting policy.
a. All statements are true
b. Only statements I and II are true
c. All statements are not true
d. Only statement I is true.

3. On January 1, 2024, an entity decided to decrease the useful life of an existing patent from 10 years to 8
years. The patent was purchased on January 1, 2019 for P3,000,000 with no residual value. The entity
decided on January 1, 2024 to change the depreciation method from an accelerated method to the straight
line method. On January 1, 2024, the cost of an equipment was P8,000,000 and the accumulated
depreciation P3,400,000. The remaining useful life of the equipment on January 1, 2024 is 10 years and
the residual value P200,000.
What is the total charge against income for 2024 as a result of the accounting changes?
a. 940,000
b. 960,000
c. 627,500
d. 647,500

4. An entity was incorporated on January 1, 2021. In preparing the financial statements for the year ended
December 31, 2023, the entity used the following original cost and useful life:
Building 15,000,000 15 years
Machinery 10,500,000 10 years
Furniture 3,500,000 7 years
On January 1, 2024, the entity determined that the remaining useful life is 10 years for the building, 7
years for the machinery and 5 years for the furniture. The entity used the straight line method of
depreciation with no residual value.
What amount should be reported as total depreciation for 2024?
a. 2,650,000
b. 3,700,000
c. 2,550,000
d. 3,500,000

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5. During 2024, an entity decided to change from the FIFO method of inventory valuation to the weighted
average method. Inventory balances under each method were:
FIFO Weighted Average
December 31, 2021 4,500,000 5,400,000
December 31, 2022 7,800,000 7,100,000
December 31, 2023 8,300,000 7,800,000
The income tax rate is 25%.
I. The cumulative effect of the change is a decrease in retained earnings in 2024 at P375,000.
II. A change in inventory method is a change in accounting policy and should be treated retrospectively
as adjustment of the beginning retained earnings
III. A change in accounting policy may occur when required by IFRS or when it provides reliable and
more relevant information
a. All statements are true
b. Only statements II and III are not true
c. Only statement II is not true
d. All statements are not true
6. On January 1, 2024 an entity changed from average cost to FIFO to account for inventory. The entity
provided the following ending inventory:
2023 2024
Average cost 500,000 900,000
FIFO cost 700,000 1,400,000
The income statement reported the following using average cost method
2023 2024
Sales 10,000,000 13,000,000
Cost of goods sold 7,000,000 9,000,000
Operating expenses 1,500,000 2,000,000
Income tax rate 25%
What amount should be reported as net income for 2024 after the change from average cost method FIFO
method?
a. 1,725,000
b. 2,300,000
c. 2,700,000
d. 2,025,000
6. An entity reported the following events during 2024.
• It was decided to writeoff P1,000,000 from inventory which was over two years old as it was obsolete.
• Sales of P3,000,000 had been omitted from the financial statements of 2023.
What pretax amount should be reported a prior error in the financial statements for 2024?
a. 4,000,000
b. 1,000,000
c. 3,000,000
d. 2,000,000
7. An entity reported the following events during 2024:
* A counting error relating to the inventory on December 31, 2023 was discovered. This required a
reduction in the carrying amount of inventory at that date of P1,500,000.
* The provision for uncollectible accounts receivable on December 31, 2023 was P500,000. During
2024, P800,000 was written off related to the December 31, 2023 accounts receivable.
What pretax adjustment is required to restate retained earnings on January 1, 2024?
a. 1,500,000
b. 1,800,000
c. 2,300,000
d. 0
End
7235

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