CHAPTER 5

CHANGE IN ACCOUNTING POLICIES, CHANGE IN ACCOUNTING ESTIMATES

AND PRIOR PERIOD ERRORS

1. During 2019, Tuscany Company decided to change from the FIFO method of inventory costing to
the weighted average method and accordingly prepares a draft of its financial statements for
the year ended December 31, 2019 based on the weighted average method. It is now in the
process of restating comparative information for the year 2018 to give effect to the
retrospective treatment of the change from FIFO to weighted average. You are able to gather
the following information:

2018 (based
on 2018

issued FS)
2019

Sales P3,000,000 P2,540,000

Cost of goods sold 1,420,000 1,140,000
Selling expenses 350,000 210,000
General and administrative expenses 260,000 220,000
Income tax expense ? 291,000
Profit ? P679,000

Tuscany Company reported retained earnings of P600,000 and P879,000 at December 31, 2017
and December 31, 2018, respectively, in its 2018 financial statements. Dividends of P400,000
were declared and paid in 2018. No dividends were paid during 2019.

The company’s income tax rate is 30%.

The company has appropriately adjusted its 2019 beginning inventory but has not restated its
2018 financial statements to the weighted average method.

Inventory balances under FIFO and weighted average method for the year 2016 are as follows:

FIFO Weighted Average
January 1 P250,000 P210,000
 December 31 355,000 312,000

Required:

a. Prepare profit or loss section of the statement of comprehensive income for 2019 with
comparative figures for 2018, in full compliance with the requirements of IAS 8.

b. Prepare comparative statements of changes in equity for the years ended December
31, 2019 and 2018. Share capital has remained unchanged at P1,000,000 since December
31, 2017, and there is no other shareholders’ equity account.

SOLUTIONS:

1. (a) Note: Change of inventory costing procedure from FIFO to weighted average is considered a change in
accounting policy, as both methods are acceptable under the current PFRS. This is treated retrospectively,
meaning that the financial statements for the prior period (2018) have to be restated computing cost of goods sold
and presenting inventories based on weighted average amounts.

The beginning balance of retained earnings for 2018, should show adjustment for restating the January
1, 2018 inventories from FIFO to weighted average. Such adjustment is presented as an adjustment in
the statement of changes in equity.

Tuscany Company
Comparative Income Statements
For the Years Ended December 31, 2019 and 2018

2019 2018
Sales P3,000,000 P2,540,000
Cost of goods sold (1,420,000) (1,143,000)
Gross profit 1,580,000 1,397,000
Selling expenses (350,000) (210,000)
General and administrative expenses (260,000) (220,000)
Profit before income tax P970,000 P967,000
Income tax (291,000) (290,100)
Profit P 679,000 P 676,900

Ending inventory, 2018, as reported P 355,000
Cost of goods sold, as reported in 2018 1,140,000
Goods available for sale P1,495,000
Beginning inventory, as reported in 2018 250,000
Purchases in 2018 P1,245,000

Purchases P1,245,000
Inventory, beg (weighted average) 210,000
Inventory, end (weighted average) (312,000)
Restated cost of sales in 2018, weighted average P1,143,000








(b)
Tuscany Company
Statement of Changes in Equity
For the Years Ended December 31, 2019 and 2018
Share Capital Retained
Earnings Total
January 1, 2018, balances as previously reported P1,000,000 P 600,000 P1,600,000
Cumulative effect of changing from FIFO to weighted
average method of inventory costing, net of income tax
of P12,000* (28,000) (28,000)
January 1, 2018 balances, as restated P1,000,000 P572,000 P1,572,000
2018 Changes
Profit 676,900 676,900
Dividends (400,000) (400,000)
December 31, 2018 balances P1,000,000 P848,900 P1,848,900
2019 Transactions
Profit 679,000 679,000
Balances, December 31, 2019 P1,000,000 P1,527,900 P2,527,900
* based on 30% income tax rate

Cumulative effect shown on the statement of changes in equity
Difference in beginning inventory of 2018 (250,000-210,000) P40,000
Applicable tax (30% x 40,000) 12,000
Net adjustment (deduction) from retained earnings, January 1, 2018 P28,000


The cumulative effect, however, is taken up in the books during 2019 , when the change was decided upon by the
management. The following 2019 entry is made:
Retained earnings 30,100
Income tax payable 12,900
Inventory, beginning (or cost of sales) 43,000

Thus, the retained earnings at December 31, 2019 is P879,000 - 30,100 + 679,000 = P1,527,900.














Answers to Multiple Choice.

MC1 A change in accounting policy should not be made if

a. required by law.
b. required by an accounting standard.
c. the change will result in more appropriate presentation of events or
transactions.
d. required by shareholders.

MC2 A cumulative effect of change in an accounting policy is measured as the

a. the difference between the prior periods’ pre-tax profit under the old method and
what would have been reported if the new method had been used in the prior
years.
b. the post-tax difference between the prior periods’ profit under the old method and
what would have been reported if the new method had been used in the prior
years.
c. the difference between the total of the prior periods’ profit and current period’s
profit under the new method and the total of the prior periods’ profit and current
periods’ profit under the old method.
d. the post-tax difference between the total of the prior periods’ profit and current
period’s profit under the new method and the total of the prior periods’ profit and
current periods’ profit under the old method.

MC3 Which of the following does not require restatement of the comparative financial
information for the year 2016 in presenting financial statements for the year 2019?

a. Change in 2019 from average costing procedure to FIFO costing procedure

b. Change in 2019 of the estimated useful life of a significant amount of
equipment because there is a change in pattern of use for the asset
c. Discovery in 2019 of errors in the financial statements of 2018
d. All of the above


MC4 Which of the following items would not require restatement of comparative
prior period financial statements?

a. Prior period errors discovered in the current year

b. A change in accounting estimate
c. An involuntary change in accounting policy with no transitional
provision in the applicable IFRS
d. A voluntary change in accounting policy
MC5 Depreciating the remaining carrying value of an item of property, plant and
equipment over its remaining revised life is an example of

a. retrospective application of a change in accounting policy.

b. prospective application of a change in accounting policy.
c. prospective application of a change in accounting estimate.
d. a correction of prior period error.

MC6 IAS 1 Presentation of Financial Statements requires the presentation of a restated

statement of financial position at the beginning of the preceding period when
there is

I. Retrospective treatment of a change in accounting policy

II. Prospective treatment of a change in accounting policy
III. Correction of an accounting error committed before the earliest
comparative prior period
IV. Retrospective treatment of a change in accounting estimate

a. I, II, III and IV

b. I, III and IV
c. I and III
d. I and IV

MC7 On January 1, 2018, Plow Corporation acquired a machine at a cost of P200,000.

It was to be 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 Plow’s 2018 financial statements. The oversight was discovered
during the preparation of Plow’s 2019 financial statements.

What is the depreciation expense on this machine for 2017?

a. P 0
b. P 40,000
c. P 80,000
d. P120,000

MC8 The cumulative effects of changes from FIFO to weighted average inventory
costing are reported as

a. adjustments to the opening balance of retained earnings in the earliest

comparative period presented.
b. other operating expenses
c. adjustments to current period statements only.
d. adjustments to current and/or prior period statements.

MC9 A prior period adjustment is

 a. reported in the retained earnings statement as an adjustment to the
ending balance of retained earnings.
b. a correction of an error that is made directly to retained earnings.
c. reported in the statement of comprehensive income as a non-typical item.
d. reported directly in the shareholders’ equity section.

MC10 Which of the following items will not appear in the statement of changes in
equity?

a. Change in depreciation method

b. Correction of prior period error
c. Net loss
d. Dividends

M11 Royal Company started operations on January 1, 2017. Inventory was accounted
for by using the FIFO method. At the beginning of 2019, Royal changed to average
method. The following information relating to inventory for years 2018 and 2017
are as follows:

2018 2017
FIFO ending inventory P360,000 P440,000
Average ending inventory 320,000 350,000

Income tax rate was 30%.

What is the amount reported in Royal’s 2019 statement of changes in equity as

an adjustment to beginning retained earnings of 2018 (the only comparative prior
period presented)?

a. P28,000
b. P40,000
c. P63,000
d. P90,000

11. C Difference in FIFO and average 2017 ending inventory 90,000

Tax effect 27,000
Amount of adjustment 63,000

MC12 On July 1, 2017, Alexis Corporation acquired a machine at a cost of P400,000.

It was to be 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 Alexis’ 2017 financial statements. It is the company’s policy to
depreciate its property, plant and equipment items to the nearest month. The
oversight was discovered during the preparation of Alexis’ 2018 financial
statements.

What is the depreciation expense on this machine for 2018?

a. P40,000
 b. P80,000
c. P120,000
d. P160,000

12. B Depreciation expense for 2018 (400,000/5) 80,000

Depreciation shall be shown in its correct amount. Error in prior years will not be
absorbed by the current year. Prior year financial statements shall be restated.

MC13 At the beginning of 2017, EC Construction Corporation purchased equipment for

P230,000 with residual value of P30,000 and a useful life of 5 years. The
accountant used a 40% declining balance for depreciation but mistakenly
deducted the residual value for both 2017 and 2018. Assume a tax rate of 30%.
The error was discovered before the preparation of financial statements for 2018.

How much is the correct amount of depreciation expense reported in 2018 profit
or loss?

a. P92,000
b. P80,000
c. P55,200
d. P48,000

13. C 230,000 x 40% = 92,000

(230,000 – 92,000) x 40% 55,200

MC14 Use data of MC13. Assuming that EC Construction has a retained earnings
balance on January 1, 2018 of P240,000, how much is the restated retained
earnings on that date presented in the entity’s statement of changes in retained
earnings?

a. P231,600
b. P234,960
c. P245,040
d. P248,400

14. A Reported retained earnings, January 1, 2018 240,000

Correct depreciation for 2017 (230,000 x 40%) 92,000
Recorded depreciation for 2017 (200,000 x 40%) 80,000
Difference, reported as adjustment, net of tax 12,000 (8,400)
Restated amount of retained earnings, January 1, 2018 231,600

MC15 On January 1, 2014, Chu Company purchased a machine for P528,000 and
depreciated it by the straight line method using an estimated useful life of eight
years with no salvage value. During 2018, Chu determined that the machine
had a useful life of six years from the date of acquisition. An accounting change
was made in 2018 to reflect these additional data. Income tax rate is 30%.

How much depreciation is recorded for the year 2018?

 a. P66,000
b. P132,000
c. P264,000
d. P396,000

15. B Carrying amount, January 1, 2018 (528,000 x 4/8) 264,000

Estimated remaining useful life (6-4) 2 years
Depreciation expense for 2018 132,000

MC16 How much is the adjustment to the January 1, 2018 retained earnings as a result
of the accounting change?

a. P0
b. P61,600
c. P88,000
d. P92,400

16. A No retrospective adjustment is required as a result of change in

accounting estimate.