SOL. MAN. Chapter 7 Notes (PART 1) MILLAN 2021 PDF

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Chapter 7Notes (Part 1)I. Accounting Policies, Changes in Estimates andErrorsPROBLEM 1: TRUE OR FALSE1. FALSE 6. FALSE2. FALSE 7. FALSE3. TRUE 8. FALSE4. FALSE 9. TRUE5. TRUE 10. FALSE11. TRUEPROBLEM 2: FOR CLASSROOM DISCUSSION1. C2. B3. D4. C5. D6. B7. C8. C9. A10. E11. D12. C13. CExplanation: PAS ...

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Chapter 7 Notes (Part 1) Accounting Policies, Changes in Estimates and Errors

I.

PROBLEM 1: TRUE OR FALSE 1. FALSE 6. FALSE 2.

FALSE

7.

FALSE

3.

TRUE

8.

FALSE

4.

FALSE

9.

TRUE

5.

TRUE

10.

FALSE

11.

TRUE

PROBLEM 2: FOR CLASSROOM DISCUSSION 1.

C

2.

B

3.

D

4.

C

5.

D

6.

B

7.

C

8.

C

9.

A

10. E 11. D 12. C 13. C Explanation: PAS 8 requires an entity to account for a change in accounting policy in accordance with the transitional provision of the related standard. In

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the absence of a transitional provision, the entity shall account for the change in accounting policy by retrospective application. If retrospective application is impracticable, PAS 8 allows a change in accounting policy to be accounted for by prospective application. 14. Solutions: Requirement (a): 1st step: CA on 1/1/x5: (600,000 x 6/10) = 360,000; 2nd step: 360,000 ÷ 3 yrs. = 120,000 amortization expense in 20x5

Requirement (b): CA on 1/1/x5 360,000 – 120,000 = 240,000 CA on 12/31/x5 15. Solutions: Requirement (a): 140,000 increase in beginning inventory x 70% = 98,000 Requirement (b): Inventory – beg. 140,000 Retained earnings – beg. Deferred tax liability

98,000 42,000

16. Solutions: Requirement (a): 20x1 Under (Over) statement of ending inventory 20x1 Under (Over) statement of ending inventory 20x2 Depreciation understatement - 20x1 Depreciation understatement - 20x2 Failure to accrue salaries at year end - 20x1 Failure to accrue salaries at year end - 20x2 Effect on profit or loss - (Over) Under statement

10,000

20x2 (10,000) (4,000)

(4,000) (8,000) (2,000)

(6,000) 8,000 (12,000) (24,000)

Requirement (b): Effect on 12/31/x2 retained earnings = (2,000) + (24,000) = (26,000) 17. Solutions: Requirement (a): 20x1 4,000

Ending inventory - 20x1 Ending inventory - 20x2 Depreciation Insurance premium (3,600 x 2/3)

(800) 2,400

2

20x2 (4,000) (3,600)

Insurance premium (3,600 / 3) Gain on sale Effect on profit or loss - (Over) Under statement

(1,200) 6,400 5,600

(2,400)

Requirement (b): Effect on 12/31/x2 retained earnings = 5,600 + (2,400) = (3,200)

PROBLEM 3: EXERCISES 1.

Solutions:

Requirement (a): CA on 1/1/x4: (600,000 x 75% x 75% x 75%) = ₱253,125 Depreciation 20x4: (253,125 – 150,000) ÷ 5 = 20,625 DDB rate = 2/Life = 2/8 = 25%; (100% - 25% = 75%) Requirement (b): CA on 1/1/x4 253,125 – 20,625 depreciation = 232,500 CA on 12/31/x4 Requirement (c): (600,000 historical cost – 232,500 CA on 12/31/x4) = 367,500 accumulated depreciation 12/31/x4 2. Solution: CA on 1/1/x4: (46,000 - 2,000) x 7/10 + 2,000 = 32,800 Depreciation 20x4 = (32,800 – 500) ÷ 2 = 16,150 Depreciation Expense ........................ Accumulated Depreciation ..................

16,150 16,150

3. Solution: Historical cost: 124,000; Accumulated depreciation - 1/1/x4: (124,000 - 12,000) x [(8+7+6) / 36*] = 65,333; CA on 1/1/x4: (124,000 – 65,333) = 58,667 *SYD denominator = Life x [(Life + 1) ÷ 2] = 8 x (9 ÷ 2) = 36 Depreciation 20x4 = (58,667 – 12,000) ÷ 5 = 9,333 Depreciation Expense ......................... 9,333 Accumulated Depreciation ...................

9,333

4. Solution: Historical cost: 100,000; Accumulated depreciation - 1/1/x4: 100,000 x [(10+9+8) / 55*] = 49,090; CA on 1/1/x4: (100,000 – 49,090) = 50,909

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*SYD denominator = Life x [(Life + 1) ÷ 2] = 10 x (11 ÷ 2) = 55 Depreciation 20x4 = 50,909 ÷ 7 = 7,273 Adjusted net income 350,000 450,000 300,000

Year 20x1 20x2 20x3 20x4 (670K 7,273) 5.

662,727

Solutions:

Requirement (a): Bad Debt Expense (163,000 x 2%) Allowance for Bad Debts

3,260 3,260

Requirement (b): Allowance for bad debts Writeoffs: 20x1 20x2 20x3 20x4 End. 6.

1,200 2,850 3,222 3,720 2,978

2,610 3,690 4,410 3,260

Estimated bad debts: 20x1 20x2 20x3 20x4

Solutions:

Requirement (a): The change is an error (not a change in accounting policy or estimate) because it is a change from an unacceptable principle to an acceptable principle. The change shall be accounted for by retrospective restatement. Requirement (b): Retained Earnings – beg. ........................... 22,000 Allowance for Doubtful Accounts ........... 22,000 7.

Solutions:

Requirement (a): The beginning balance of retained earnings (Jan. 1, 20x2) shall be increased by ₱40,000 (400,000 – 360,000). Requirement (b):

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Inventory .................................... 40,000 Retained Earnings (1/1/x2) ..........................

8.

40,000

Solutions:

Requirement (a): Asset inappropriately charged as expense (120K + 50K) Unrecorded depreciation [(120K + 50K) - 20K] ÷ 5 yrs. Effect on profit or loss - (Over) Under statement

20x1 170,00 0 (30,000 ) 140,00 0

20x2 (30,000) (30,000)

Requirement (b): Effect on 12/31/x2 retained earnings = 140,000 + (30,000) = 110,000 under Requirement (c): i. books still open Machinery (150K + 20K) 170,000 Depreciation expense 30,000 Accumulated depreciation (30K x 2) Retained earnings – beg.

60,000 140,000

ii. books already closed Machinery (150K + 20K) 170,000 Accumulated depreciation (30K x 2) Retained earnings

60,000 110,000

9. Solution: (a) No journal entry is required. The error has already counterbalanced. (b) Sales ....................................... 4,000 Retained Earnings ......................... (c) Insurance Expense ........................... Retained Earnings ........................... Prepaid Insurance .........................

4,000

2,880 1,920 4,800

(d) Interest Revenue ............................ 240

5

Retained Earnings .........................

240

(e) Depreciation Expense ....................... 3,920 Retained Earnings .......................... 3,920 Accumulated Depreciation--Equipment ......

7,840

10. Solution: Unadjusted profit (loss) Accrued expenses

20x0 40,000 (2,900)

20x1 (15,000)

20x2 35,000

2,900 (3,000)

3,000 (3,400)

Prepaid expenses

2,000

(2,000) 2,800

(2,800) 1,500

Accrued revenue

2,750

(2,750) 2,500

(2,500) 2,700

Unearned revenue

Adjusted profit (loss)

(4,250)

37,600

4,250 (4,500)

4,500

(14,800)

(4,100) 33,900

PROBLEM 4: MULTIPLE CHOICE – THEORY 1. C 6. C 2. A 7. D 3. B 8. B 4. D 9. D 5. D 10. A

PROBLEM 5: MULTIPLE CHOICE – COMPUTATIONAL 1. B Solution: Carrying amt. on Dec. 31, 20x6: (100K – 10K) x 6/10 + 10K = 64,000 6

Carrying amt. on Dec. 31, 20x7: (64K – 4K) x 3/4 + 4K = 49,000 2.

D

Solution: Historical cost Divide by: Original estimate of useful life Original annual depreciation Multiply by: (20x6 to 20x8) Accumulated depreciation - Dec. 31, 20x8

264,000

Historical cost

264,000

Accumulated depreciation - Dec. 31, 20x8 Carrying amount - Dec. 31, 20x8

(99,000) 165,000

Less: New estimate of residual value

(24,000)

New depreciable amount Divide by: Revised estimate of useful life (6 - 3) Revised annual depreciation

141,000

Accumulated depreciation - Dec. 31, 20x8 Depreciation - 20x9 Accumulated depreciation - Dec. 31, 20x9

8 33,000 3 99,000

3 47,000 99,000 47,000 146,000

3.

D The change is a change in accounting estimate that is accounted for prospectively. Therefore, no cumulative effect shall be computed.

4.

D No deferred tax liability arises because the change did not give rise to any difference in the tax base and the carrying amount of the asset.

5.

C (700,000 x 70% net of tax rate) = 490,000

6.

A from 83,000 FIFO balance as of Dec. 31, 20x6 to 78,000 Weighted average = 5,000 decrease

7.

C Jan. 1, 20x1 balances: (77,000 – 71,000) x 70% = 4,200 7

8.

B The best answer is “retrospective application” because the transaction is a change in accounting policy.

9.

D

Solution: Unadjusted profit Unrealized loss on decline in fair value of investments in FVOCI Adjustment to profits of prior years for errors in depreciation (net of ₱ 3,750 tax effect) Adjusted profit

74,100 5,400 7,500 87,000

10. B Amortization expense = (100,000 ÷ 5) = 20,000;

Retained earnings = (20,000 x 2 yrs. from 20x3 to 20x4) = 40,000

II.

Events After the Reporting Period

PROBLEM 6: IDENTIFICATION 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

ADJUSTING ADJUSTING NON-ADJUSTING ADJUSTING ADJUSTING NON-ADJUSTING NON-ADJUSTING ADJUSTING NON-ADJUSTING NON-ADJUSTING

PROBLEM 7: FOR CLASSROOM DISCUSSION 1.

D The application of a letter of guarantee is not an obligating event. An obligating event would be the application and granting of loan. Moreover, the application of a letter of guarantee need not be disclosed by the grantee (ABC Ltd.). However, the guarantor (not ABC Ltd.) may disclose the guarantee if it is deemed a significant commitment.

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2.

C Before a liability is recognized, all of the following conditions must first be met: a. The item meets the definition of a liability (i.e., present obligation arising from past events); b. Probable outflow of resources embodying economic benefits; and c. The outflow can be measured reliably.

If not all the conditions are met, no liability is recognized. However, the entity may disclose a contingent liability if the outflow is deemed reasonably possible. In the problem above, the fact that a lawsuit is filed cannot be presumed that the outflow is probable. 3.

B

4.

D Only a disclosure shall be made because there is no present obligation as of the end of the reporting period, i.e., the fire happened subsequent to year-end.

5.

C Changes in fair values, market prices and exchange rates after the end of the reporting period are non-adjusting events.

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PROBLEM 8: EXERCISES 1. Solution: Unadjusted profit (a) Impairment loss (c) Additional write-down of inventory (120K - 100K) Adjusted profit 2.

1,000,000 (100,000) (20,000) 880,000

Solution:

Unadjusted profit

2,000,000

(c) Impairment loss Adjusted profit

(500,000)

3.

1,500,000

Solutions: Current assets

Noncurrent assets

Unadjusted balances 3,000,000 (300,000) (a) (b) (e) Adjusted balances 2,700,000 4. Solutions:

7,000,000 300,000

Liabilitie s

4,000,00 0 500,000

160,000 7,460,000

4,500,00 0

Equity

Profit

6,000,000 2,000,000 (500,000) 160,000 5,660,000

(500,000) 160,000 1,660,00 0

Requirement (a): McMaster, Inc. Statement of financial position As of December 31, 2001 and 2000 ASSETS

2001

Current assets Cash and cash equivalents Trade and other receivables Held for trading securities Inventories Total current assets Noncurrent assets: Property, plant and equipment (1) TOTAL ASSETS

10

2000

₱550,000 874,000 156,000 820,000 2,400,000

₱300,000 720,000 770,000 1,790,000

384,000

192,000

₱2,784,000

₱1,982,000

LIABILITIES & EQUITY Current liabilities: Trade and other payables Note payable Total current liabilities

₱340,000 100,000 440,000

₱194,000 194,000

Noncurrent liabilities: Note payable

500,000

600,000

TOTAL LIABILITIES

940,000

794,000

420,000 260,000 1,164,000 1,844,000

420,000 260,000 508,000 1,188,000

₱2,784,000

₱1,982,000

Common stock, ₱10 par Additional paid-in capital Retained earnings (2) TOTAL EQUITY TOTAL LIABILITIES & EQUITY (1)

(620,000 – 300,000 + (80,000 x 4/5) = 384,000

(2)

Retained earnings, unadjusted (b) Overstatement of ending inventory (c) Asset charged as expense (80K x 4/5) (d) Contingent liability Retained earnings, adjusted

930,000 (30,000) 64,000 200,000 1,164,000

Requirement (b): McMaster, Inc. Statements of profit or loss For the years ended December 31, 2001 and 2001 ASSETS Net sales Cost of sales (1.510M + 30K overstatement of EI)

Gross profit Selling costs Administrative expenses (984K - 295K + 80K) Depreciation [58K + (80K/5)] Unrealized gain on held for trading securities

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2001 3,160,000 (1,540,000) 1,620,000 (295,000) (609,000) (74,000) 14,000

2000 2,500,000 (1,380,000 ) 1,120,000 (219,000) (511,000) (36,000)

Profit for the year

656,000

354,000

Requirement (c): 

Summary of significant accounting policies. A description of accounting principles and methods used in recognizing revenues and allocating asset costs to current and future periods. Specifically, McMaster should disclose accounting policies relating to measurement of financial assets, inventories, and depreciable assets and any other policies that would influence the decisions of users.



Information regarding loss contingency. A description of the pending legal action, including information and data to assist users in evaluating the risk of potential loss. Based on the opinion of McMaster's counsel, the estimated loss of ₱200,000 should not be reported in the financial statements, but the contingency should be described in a note, since the incurrence of a loss is "reasonably possible."



Information regarding the bankruptcy of a major customer. This type of subsequent event does not affect the amounts reported in the financial statements, because the casualty giving rise to the bankruptcy occurred after McMaster's balance sheet date.



Additional information to support totals in financial statements. For example, McMaster might present additional detail for trade and other receivables, property, plant and equipment, and trade and other payables.

PROBLEM 9: MULTIPLE CHOICE – THEORY 6. A 1. B 7. B 2. A 8. D 3. A 9. C 4. B 10. D 5. A

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