ACC412 Problem 1 Change in Accounting Policy At the beginning of 2020, Lion Company decided to change from the average cost inventory cost flow assumption to the FIFO cost flow assumption for financial reporting purposes. The following data are available in regard to Lion Company’s pretax operating income and cost of goods sold. Year Reported Income Before Income Taxes Prior to 2019 2019 2020 Adjusted Income Before Income Taxes P2,000,000 Difference Between Average Cost of Goods Sold and FIFO Cost of Goods Sold 150,000 1,000,000 50,000 1,050,000 1,100,000 P2,150,000 The income tax rate is 30%. The company has a simple capital structure with 100,000 shares of common stock outstanding. The company computed its 2020 income before taxes using the newly adopted inventory cost flow method. Lion Company’s 2019 and 2020 revenues were P2,500,000 and 2,800,000, respectively. Its retained earnings balances at the beginning of 2019 and 2020 (unadjusted) were P1,400,000 and P2,100,000, respectively. The company paid no dividends in any year. Prepare (a) the journal entry necessary at the beginning of 2020 to reflect the change in accounting principle and (b) the income statements and statement of changes in equity (retained earnings column only) for 2019 and 2020. a. Entry Entry at January 1, 2020 to record the cumulative effect of change in accounting policy: b. Comparative income statements as adjusted. 2020 Revenues 2019 ACC412 Expenses Income before income taxes Income tax expense Net income Earnings per share c. Statement of changes in equity (retained earnings column only Share capital Share premium Retained Other earnings comprehensi ve income Tot al January 1, 2019 before adjustment Cumulative effect of accounting policy change from average to FIFO January 1, 2019 as adjusted Net income 2019 as adjusted December 31, 2019 Net income 2020 December 31, 2020 Problem 2 Accounting Errors For each of the following errors, indicate the effect (over, under, or no effect) on the current year’s and next year’s net income. Description of Error (a) 12/31/21 inventory overstated Net Income 2021 Net Income 2022 ACC412 (b) 12/31/21 inventory understated (c) Prepaid insurance 12/31/22 overstated (d) Depreciation expense (straight-line) for 2021 understated (e) Understatement of 12/31/21 unearned revenue (f) Failure to accrue 12/31/21 revenue (g) Understatement of 12/31/21 prepaid expense Problem 3 Accounting Errors The Al Right Company made the following errors that were discovered by the auditors in connection with preparation of the December 31, 2020, income statement. It reported net income of P70,000 for 2019 and P100,000 for 2020. Ignore income taxes. (1) On January 1, 2019, the company recorded the P30,000 acquisition cost of equipment with a ten-year life as maintenance expense. Straight-line depreciation is usually used and no residual value is expected at the end of the useful life. (2) On January 1, 2019, Al Right Company collected P10,000 for two years’ rental income in advance and failed to set up an unearned revenue account at year-end. It credited all the rent to Rent Revenue when received. (3) A three-year insurance policy costing P12,000 was charged to expense when paid in advance on January 1, 2019. (4) Ending inventory was overstated by P7,000 on December 31, 2019, and understated by P3,000 on December 31, 2020, due to computational errors. (5) Accrued wages expense was omitted in the amount of P7,000 on December 31, 2019, and P8,000 on December 31, 2020. Complete the schedule below to show the computation of the correct income for 2019 and 2020: Net income as reported Purchase of equipment erroneously recorded 2020 P100,00 0 2019 P 70,000 ACC412 as expense on January 1, 2019 Depreciation on purchase of equipment Omission of unearned rent December 31, 2019 Omission of prepaid insurance December 31, 2019 Overstatement of December 31, 2019, inventory Understatement of December 31, 2020, inventory Failure to accrue wages expense on December 31, 2019 Failure to accrue wages expense on December 31, 2020 Net income as corrected Problem 4 Accounting Errors and change in estimate Cloud Company was recently acquired by a new owner who has decided to correct the prior accounting records during the current reporting period ending December 31, 2020. The accounts have been partially adjusted but have not been closed for 2020. The following items have been discovered: 1. The merchandise inventory at December 31, 2019, was overstated by P10,000; the company uses a periodic inventory system. Answer: 2. During January 2018, extraordinary repairs on machinery were debited to repair expense; the P15,000 amount should have been debited to machinery, which is being depreciated 15 percent per year on cost, with no residual value. ACC412 3. A patent that cost P9,350 has been amortized using the straight-line method for the past 10 years (excluding 2020) over its legal life of 20 years. Management has determined that the economic life will not be more than 15 years from the initial acquisition date. 4. At the end of 2019, sales revenue collected in advance of P3,000 was included in 2019 sales revenue, despite the fact that the amount was earned in 2020. 5. The company paid P8,000 during January 2018 for ordinary repairs on a machine that was acquired during January 2018. The repairs were incorrectly capitalized. The machine has an estimated life of five years and no residual value. The company plans to use straight-line depreciation for this machine. 6. The rate used for bad debts has been 1/2 percent of credit sales, which has proved to be too low. As a result, for 2014 and thereafter, the rate used will be 1 percent of credit sales. The amount of expense per year recorded under the old rate was P800 in 2018 and P1,000 in 2019. The amount for 2020 has not been entered into the accounts since the adjusting entries have not been made. Credit sales for 2020 exceeded 2019 credit sales by 20 percent. 7. During January 2018, a five-year insurance premium of P750 was paid. This amount was debited in full to insurance expense at that time. ACC412 8. At the end of 2019, accrued wages payable of P1,800 were not recorded. These wages were first recorded when paid in early 2020. Unpaid wages at the end of 2020 were P2,100. Required: Provide the appropriate entry to record any change or correction and give any adjusting entry needed in each instance at the end of 2020. Show computations for entries made, and provide explanations for situations for which no entry is required.
