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Change in Policy

Change in Accounting Policy
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943 views5 pages

Change in Policy

Change in Accounting Policy
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© © All Rights Reserved
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| CHAPTER 8 | CHANGE IN ACCOUNTING POLICY problem 8-1 (AICPA Adapted) puring 2017, Orca Company decided to change from the FIFO method of inventory valuation to the weighted average method. FIFO Weighted average 7,100,000 7,700,000. January 1 inventory 7,900,000 8,300,000 December 31 inventory In the statement of retained earnings for 2017, what amount should be reported as the pretax cumulative effect of this accounting change? a. 1,000,000 addition ». 1,000,000 deduction c. 600,000 addition d. 600,000 deduction Solution 8-1 Answer ¢ 7,100,000 FIFO inventory - January 1 Weighted average inventory - January | 7,700,000 Cumulative effect : 600,000 ‘Thechange from FIFO to weighted average is a change in accounting Policy. Before income tax, the cumulative effect of the change accounting policy isan adjustment of retained earnings as follows: laventory 600,000 000 Retained earnings 107 P, -2(AIcpA Adapted) thod of inventor oe Ped the FOMTe entity decided iy yer casuring inventory a Goddard Company had used ©, 2014. Valuation since it began operatiON C4 form change to the weighted avera the beginning of 2017. ao inventory balances; 4 The following schedule shows 7 agued average Year oi 5,400,000 2014 4,500,000 7,100,000 2015 7,800,000 7,800,000 2016 8,300,000 din the statement of retaineg What pretax amount should be report in accounti earings for 2017 as the cumulative effect of the change ranting policy? a. 500,000 decrease b. 300,000 decrease c. 500,000 increase d. 300,000 increase Solution 8-2 Answer a Inventory, December 31, 2016 FIFO 8, Weighted average 300m Decrease in inventory 500,000 ‘Theadjustment on Januat : methodis: ry 1,2017 toreflect the change in inventoy Retained earnings Inventory 500,000 Since the retained eamings ace sont unt is adebit. 43 . Note that the it, itis sho determined byconslenn® effet of achange ini pace adeuess ee YEH wbichin tise inven of he amet — Teineaioy asin aig i “vinerbalancng are ignored because ti 108 ——S eer TEC Problem 8-3 (AICPA Adapted) On January 1, 2017, Folk Company changed from the average cost methodto the FIFO method to account for inventory. The entity provided the following ending inventory for each method: 2016 2017 Average cost 500,000 900,000 FIFO cost 700,000 1,400,000 The entity reported the following income statement using the average cost method: 2016 2017 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 before tax 1,500,000 2,000,000 - Tax expense 450,000 600,000 ‘The entity accrued tax expense on December 31 of each year and paid the tax in April of the following year. The income tax rate is 30%. What amount of net income should be reported in 2017 after the change to the FIFO inventory method? a. 1,610,000 b. 2,300,000 c. 1,750,000 d. 1,890,000 Solution 8-3 Answer @ Income before tax for 2017 — Average 2,000,000 Understatement of beginning inventory ( 200,000) Understatement of ending inventory "500,000 2017 — FIFO 2,300,000 Income before tax for 790.000 Income tax — 30% Net income for 2017 — FIFO : 1,610,000 y ofaccounting since j Problem 8-4 (IAA) very method decided to adopt the wsed the cost eV" agement Banko Company used 917,00 began operations in 2014. Ino A 2016 ion percentage ofcompletion me Revenue from completed. 499,90 942,000,000 40,000,009 39,000,000 28,000,009 tracts 00 Cost of completed contracts _18,000,00° 13,000,000 12,000,009 : 0 Income from operations Casualty loss eerie Income 2,000,000 Analysis of the accounting records dist contracts using the percentage of comp! 7,000,008 9 (2,000,009 13000000 10,000,000 closed the following income by etion method. 2014 2015 2016 Contract 1 7,000,000 Contract 2 5,000,000 8,000,000 Contract 3 3,000,000 7,000,000 2,000,000 Contract 4 1,000,000 6,000,000 Contract 5 (1,000,000) Before income tax, what is the cumulative effect of change in accounting policy that should be reported in the statement of retained earings for 2017? a. 6,000,000 b. 8,000,000 ¢. 7,000,000 a 0 Solution 8-4 Answer 2 38,000,0 100 ~ 32 000, 0( : 000,000) i ‘ercentage of completion Co: a TBpooue “0st recovery metho ams 16.00 0:00 7,000,000 —7,000,009 ! a 000,009 3,000,000 3tson0 12,000,000 3: 2,000,000 uo problem 8-5 (IAA) puring 2017, Build Company changed Iefepeceiage con planer ee omit cot reery method profit figuresare: 18 30%. Gross se 2015 2016 3917 Cost recovery methor 95 percentage oFcompletion 1,600,999 135008 400 000 How should this accounting change be Teported in 2017? a. 1,400,000 increase in profit or loss b. 1,400,000 increase in retained earnings c. 910,000 increase in profit or loss d. 910,000 increase in retained earnings Solution 8-5 Answer d Cumulative gross profit for 2015 and 2016 — percentage of completion 3,500,000 Cumulative gross profit for 2015 and 2016 cost recovery (2.200.000) Cumulative increase 1,300,000 Tax effect (1,300,000 x 30%) ( 390.000) Addition to retained earnings on January 1,2017 910,000 Problem 8-6 (AICPA Adapted) During 2017, Foster Company appropriately changed to the FIFO method from the weighted average method for financial statement and . income tax purposes. The change will result in P150,000 increase in the beginning inventory on January 1, 2017. The tax rateis 30%. What is the prior period specific effect of this accounting change? a& 150,000 b. 105,000 & 45,000 d. 0 Solution 8-6 Answer b Journal entry on January 1, 2017 150,000 Inventory 000 Retained earnings (150,000 x 70%) vad Income tax payable (150,000 x 30%) Ki i

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