Accounting changes & Prior Period Error

Theories

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 result 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 only
B. Future period only
C. Prior period only
D. Current period and future period 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 estimate
B. End of the current reporting period
C. Beginning of the year of change
D. Date of issuance of financial statements

4. When it is difficult to distinguish between a change in estimate and a change in

accounting policy, an entity shall.
A. Treat the entire change as a change in estimate with appropriate disclosure.
B. Apportion on a reasonable basis the relative amounts of change in estimate and the
change in accounting policy and treat each one accordingly.
C. Treat the entire change as a change in accounting policy.
D. Ignore it in the year of the change and then wait for the following year to see how
the change develops and then treat it accordingly

5. An entity shall correct material prior period errors retrospectively in the first set of
financial statements after their discovery by.

I. Restating the comparative amounts for the prior period presented in which the error
occurred
II. Restating the opening balances of asset, liability and equity for the earliest prior
period presented if the error occurred before the earliest prior period presented

A. I only
B. II only
C. Either I or II
D. Neither I or II

6. These are the specific principles, bases, conventions, rules and practices applied in
the preparation and presentation of financial statements.
A. Accounting policies
B. Accounting principles
C. Accounting standards
D. Accounting concepts

7. A change in accounting policy includes all of the following except

A. The initial adoption of a policy to carry assets at revalued amount
B. The change from cost model to revaluation model in measuring property, plant and
equipment
C. The change in inventory valuation from FIFO to weighted average method
D. The change in depreciation method from sum of year’s digits to straight line

8. 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

9. 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 a component of other comprehensive income
D. Treat the change prospectively and adjust the effect of the change in the current
period and future periods

10. Which of the following statements in relation to a change in accounting estimate

is true?
I. Changes in accounting estimate are accounted for retrospectively
II. 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

11. An entity changes an accounting policy if

I. It is required by law
II. The change will result in providing reliable and more relevant information
A. I only
B. II only
C. Both I and II
D. Neither I nor II

12. A change 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

13. An entity decided to change from FIFO to weighted average method of inventory
valuation. The entity should report the effect of this accounting change as
A. Prior period error
B. Component of income from continuing operations
C. Retrospective application to previous years’ financial statement
D. Component of other comprehensive income

14. Which of the following should be considered a direct effect of a change in

accounting policy?
A. Deferred tax
B. Profit sharing
C. Royalty payment
D. None of these

15. Corrections of prior period errors are reported in

A. Other comprehensive income
B. Other income or expense
C. Retained earnings
D. Shareholders’ equity

16. A change in accounting policy requires what kind of adjustment to the financial
statements?
A. Current period adjustment
B. Prospective adjustment
C. Retrospective adjustment
D. Current and prospective adjustment

17. Which of the following is not treated as a change in accounting policy?

A. a change from average cost 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 effort method in the extractive industry
D. A change from cost recovery to percentage of completion

18. Which type of accounting change should 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

19. Which of the following disclosures is required for a change from sum of years
digits to straight line?
A. The effect on prior years, net of tax, in the current statement of retained earnings
B. Restatement of prior year’s income statements
C. Recomputation of current and future years’ depreciation
D. All of these are required

20. A change in reporting entity is actually a change in accounting

A. Policy
B. Estimate
C. Method
D. Concept

Problems
1. During 2016, King Company decided to change from the FIFO method of
inventory valuation to the weighted average method.Inventory balances under each
method were:

FIFO Average

December 31, 2014 9,000,000 8,500,000

December 31, 2015 8,000,000 8,600,000

December 31, 2016 7,000,000 7,900,000

Ignoring income tax, in its 2016 statement of changes in shareholders’ equity, what
amount should King report as an adjustment to retained earnings as a result of this
accounting change?
 a. 100,000 increase

b. 100,000 decrease

c. 600,000 increase

d. 600,000 decrease

2. On January 1, 2013, Lyle Company purchased for P5,000,000 a machine with a

useful life of ten years with noresidual. The machine was depreciated by the
straight-line method of depreciation. On January 1, 2016 the en-tity determined that
the residual value of this equipment at the end of its useful life is P500,000 and the
total life of the asset from acquisition was 15 years. What amount should be reported
as depreciation for 2016?

a. 250,000

b. 500,000

c. 292,000

d. 200,000

3. On January 1, 2014, Wesley Company purchased for P6,000,000 a machine with

a useful life of 5 years and a residual value of P600,000. The machine was
depreciated by the double declining balance method and the accumulated depreciation
of the machine was P3,840,000 on December 31, 2015. Wesley changed to the
straight-line method on January 1, 2016 and the residual value did not change. In its
2016 statement of finan-cial position, what amount should Wesley report as
accumulated depreciation for this machine?

a. 4,360,000

b. 4,560,000

c. 4,704,000

d. 3,840,000

4. While preparing its financial statements for 2016, June Company discovered
computational errors in its 2015 and 2014 depreciation expense. These errors
resulted in overstatement of each year’s income by P25,000, net of income taxes.
The following amounts were reported in the previously issued financial statements:

2015 2014

Retained earnings, January 1 700,000 500,000

Net income 150,000 200,000

Retained earnings, December 31 850,000 700,000

June’s net income for the year 2016 is correctly reported at P500,000 and dividends of
P100,000 were declared. What is the balance of retained earnings on December 31,
2016?
 a. 1,200,000

b. 1,250,000

c. 1,300,000

d. 1,225,000

5. Rubio Company failed to accrue warranty costs of P200,000 in its December 31,
2016 financial statements. In addition, a change from straight-line to accelerated
depreciation made at the beginning of 2017 resulted in a cumulative effect of
P400,000. Both the P200,000 and the P400,000 are before cumulative effect of
taxes amounts. What amount before tax should Rubio report as prior period error
in the 2017 statement of retained earnings?

a. 200,000 c. 400,000

b. 600,000 d. 0