Change of cost formulas

1. During 20x1, ALBEIT ALTHOUGH Company decided to change from the Average
cost formula for inventory valuation to the FIFO cost formula. Inventory balances
under each method were as follows:
Average FIFO
January 1 4,000,000 4,800,000
December 31 8,000,000 8,400,000

Income tax rate is 30%. What is the net cumulative effect of the accounting change in
ALBEIT’s opening retained earnings balance?
a. 400,000 increase c. 280,000 increase
b. 560,000 decrease d. 560,000 increase

Change in depreciation method, EUL, and salvage value

2. On January 1, 20x1, PRISTINE UNCORRUPTED Co. acquired an equipment for
₱4,000,000. The equipment will be depreciated using the straight-line method
over 20 years. The estimated residual value is ₱400,000.

In 20x6, following a reassessment of the realization of the expected economic

benefits from the equipment, PRISTINE Co. changed its depreciation method to sum-
of-the-years digits (SYD). The remaining useful life of the asset is estimated to be 4
years and the residual value is changed to ₱200,000. How much is the depreciation
expense in 20x6?
a. 1,160,000b. 1,140,000 c. 1,233,560 d. 1,110,669

Change in provisions
3. On December 31, 20x1, LIBERATED FREE Company recognized the following
provisions:
Dec. 31, Warranty expense 200,000
20x1 Estimated warranty obligation 200,000
Dec. 31, Probable loss on litigation 400,000
20x1 Estimated liability on pending litigation 400,000

In 20x2, LIBERATED incurred ₱260,000 in discharging its warranty obligation and

settled the pending lawsuit for ₱360,000. How much is the net effect of the
settlements of the provisions on profit or loss in 20x2?
a. 20,000 increase c. 60,000 decrease
b. 20,000 decrease d. 0

Current period error

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.
4. 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

5. 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

Prior period error

6. 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

Counterbalancing and non-counterbalancing errors

Use the following information for the next four questions:
GULOSITY GREEDINESS Co. reported profits of ₱4,000,000 and ₱8,000,000 in 20x1
and 20x2, respectively. In 20x3, the following prior period errors were discovered:
 The inventory on December 31, 20x1 was understated by ₱200,000.
 An equipment with an acquisition cost of ₱1,200,000 was erroneously charged as
expense in 20x1. The equipment has an estimated useful life of 5 years with no
residual value. GULOSITY Co. provides full year depreciation in the year of
acquisition.

The unadjusted balances of retained earnings are ₱8,800,000 and ₱16,800,000 as of

December 31, 20x1 and 20x2, respectively.

7. How much is the correct profit in 20x1?

a. 7,560,000 b. 5,610,000 c. 4,760,000 d. 5,160,000

8. How much is the correct profit in 20x2?

a. 7,560,000 b. 5,160,000 c. 5,720,000 d. 5,610,000

9. How much is the correct retained earnings in 20x1?

a. 9,960,000 b. 17,520,000 c. 9,860,000 d. 18,420,000
10. How much is the correct retained earnings in 20x2?
a. 9,960,000 b. 17,520,000 c. 9,860,000 d. 18,420,000

Counterbalancing and non-counterbalancing errors

Use the following information for the next four questions:
HELICAL SPIRAL Co. reported profits of ₱1,600,000 and ₱2,400,000 in 20x1 and
20x2, respectively. In 20x3, the following prior period errors were discovered:
 Prepaid supplies in 20x1 were overstated by ₱80,000.
 Accrued salaries payable in 20x1 were understated by ₱160,000.
 Repairs and maintenance expenses in 20x1 amounting to ₱400,000 were
erroneously capitalized and being depreciated over a period of 4 years.

The unadjusted balances of retained earnings are ₱6,400,000 and ₱8,800,000 as of

December 31, 20x1 and 20x2, respectively.

11. How much is the correct profit in 20x1?

a. 1,006,000 b. 1,610,000 c. 1,720,000 d. 1,060,000

12. How much is the correct profit in 20x2?

a. 2,704,000 b. 2,160,000 c. 2,740,000 d. 2,610,000

13. How much is the correct retained earnings in 20x1?

a. 5,806,000 b. 5,520,000 c. 5,860,000 d. 5,420,000

14. How much is the correct retained earnings in 20x2?

a. 8,960,000 b. 8,600,000 c. 8,860,000 d. 8,420,000

Counterbalancing and non-counterbalancing errors

Use the following information for the next sixteen questions:
THRALL SLAVE Company made the following errors:
a. December 31, 20x1 inventory was understated by ₱100,000.
b. December 31, 20x2 inventory was overstated by ₱160,000.
c. Purchases on account in 20x1 were understated by ₱400,000 (not included in
physical count).
d. Advances to suppliers in 20x2 totaling ₱520,000 were inappropriately charged
as purchases.
e. December 31, 20x1 prepaid insurance was overstated by ₱20,000.
f. December 31, 20x1 unearned rent income was overstated by ₱104,000.
g. December 31, 20x2 interest receivable was understated by ₱68,000.
h. December 31, 20x2 accrued salaries payable was understated by ₱120,000.
i. Advances from customers in 20x2 totaling ₱240,000 were inappropriately
recognized as sales but the goods were delivered in 20x3.
j. Depreciation expense in 20x1 was overstated by ₱28,800
k. In 20x2, the acquisition cost of a delivery truck amounting to ₱360,000 was
inappropriately charged as expense. The delivery truck has a useful life of five
 years. THRALL’s policy is to provide a full year’s straight line depreciation in the
year of acquisition and none in the year of disposal.
l. A fully depreciated equipment with no residual value was sold in 20x3 for
₱200,000 but the sale was recorded in the following year.

Profits before correction of errors were ₱492,000, ₱624,000, and ₱840,000 in 20x1,
20x2, and 20x3, respectively.

Retained earnings before correction of errors were ₱4,492,000, ₱5,116,000 and

₱5,956,000 in 20x1, 20x2, and 20x3, respectively.

15. What is the net effect of the errors on the 20x1 profit? (over) understatement
a. (187,200) b. 187,200 c. (164,200) d. 164,200

16. What is the net effect of the errors on the 20x2 profit? (over) understatement
a. (572,000) b. 572,000 c. 563,400 d. (563,400)

17. What is the net effect of the errors on the 20x3 profit? (over) understatement
a. (78,000) b. 78,000 c. (60,000) d. 60,000

18. How much is the correct profit (loss) in 20x1?

a. (348,000) b. 348,000 c. 324,800 d. 304,800

19. How much is the correct profit (loss) in 20x2?

a. 1,196,000 b. 1,296,000 c. 1,684,800 d. 1,286,000

20. How much is the correct profit (loss) in 20x3?

a. 900,000 b. 926,000 c. 968,400 d. 986,000

21. What is the net effect of the errors on the 20x1 retained earnings? (over)
understatement
a. (182,700) b. 182,700 c. (165,200) d. (187,200)

22. What is the net effect of the errors on the 20x2 retained earnings? (over)
understatement
a. 348,800 b. (348,800) c. (384,800) d. 384,800

23. What is the net effect of the errors on the 20x3 retained earnings? (over)
understatement
a. 444,800 b. (444,800) c. 524,800 d. (524,800)

24. How much is the correct retained earnings in 20x1?

a. 4,304,800 b. 4,404,800 c. 4,524,400 d. 4,340,800

25. How much is the correct retained earnings in 20x2?

 a. 5,500,800 b. 5,756,800 c. 5,246,400 d. 5,340,400

26. How much is the correct retained earnings in 20x3?

a. 6,340,800 b. 6,400,800 c. 6,479,800 d. 7,004,400

27. Assuming that the errors were discovered late in 20x3 when the books are still
open, the compound correcting entry will include
a. 384,400 net debit to retained earnings
b. 384,400 net credit to retained earnings
c. 444,800 net debit to retained earnings
d. 444,800 net credit to retained earnings

28. Assuming that the errors were discovered late in 20x3 when the books are still
open, the compound correcting entry will include
a. 444,800 net debit to retained earnings
b. 444,800 net credit to retained earnings
c. 60,000 net debit to retained earnings
d. 60,000 net credit to retained earnings

29. What is the net effect of the errors on the 20x1 working capital? (over)
understatement
a. (216,000) b. 216,000 c. 80,000 d. (80,000)

30. What is the net effect of the errors on the 20x2 working capital? (over)
understatement
a. 228,000 b. (228,000) c. (68,000) d. 68,000

31. What is the net effect of the errors on the 20x3 working capital? (over)
understatement
a. No effect b. 132,000 c. 200,000 d. (200,000)