Blue Company purchased a machine on January 1, 2015, for P6,000,000. At the date of acquisition, the
machine had a life of six years with no residual value. The machine was depreciated on a straight-line
basis.
On January 1, 2018, the entity determined that the machine had a useful life of eight years from the
date of acquisition with no residual value.
What is the depreciation of the machine for 2018?
a. 750,000
b. 600,000
c. 375,000
d. 500,000
Answer: b
Solution:
Purchased price= P6,000,000
Residual value= 0
Useful life= 6 years
Depreciation (SLM)= 6,000,000-0/6 years
= 1,000,000
WDV as of (1/1/2018) 6,000,000 ->1,000,000 * 3 years
= 3,000,000
Depreciation per annum = Remaining WDV/Remaining useful life
= 3,000,000/ 8 years – 3 years
= 3,000,000/5 years
= P 600,000
On January 1, 2015, Flax Company purchased a machine for P5,280,000 and depreciated it by the
straight-line method using an estimated useful life of eight years with no residual value.
On January 1, 2018, the entity determined that had a useful life of six years from the date of acquisition
and the residual value was P480,000.
An accounting change was made in 2018 to reflect this additional information.
What is the accumulated depreciation for the machine on December 31, 2018?
a. 2,920,000
b. 3,080,000
c. 3,200,000
d. 3,520,000
Answer: a
Acquisition cost- January 1, 2015
5,280,000
Accumulated depreciation for 2015, 2016 & 2017 (5,280,000/8*3)
1,980,000
Carrying amount- January 1, 2018
3,300,000
Accumulated depreciation- January 1, 2018
1,980,000
Depreciation for 2018 (2,820,000/3 years)
940,000
Accumulated Depreciation – December 31,2018
2,920,000
Carrying amount- January 1, 2018
3,300,000
Residual value
(480,000)
Depreciation amount
2,820,000
During 2018, Orca Company decided to change from the FIFO inventory valuation to the weighted
average method. The income tax rate is 30%.
FIFO
Weighted Average
January 1 inventory
7,100,000
7,700,000
December 31 inventory
7,900,000
8,200,000
What amount should be reported as the cumulative effect of this accounting change for 2018?
a. 420,000 increase
b. 420,000 increase
c. 600,000 increase
d. 600,000 decrease
Answer: a and b
Solution:
FIFO inventory- January 1
7,100,000
Weighted average inventory- January 1
7,700,000
Cumulative effect
600,000
Cumulative effect after tax (70%*600,000)
420,000
The change from FIFO to weighted average is a change in accounting policy. The cumulative effect
change accounting policy is an adjustment of retained earnings.
Inventory
600,000
Retained earnings
420,000
Increase tax payable
180,000
Goddard Company had used the FIFO method of inventory valuation since it began operations in 2015.
The entity decided to change to weighted average method for measuring inventory at the beginning of
2018. The income tax rate is 30%.
The following schedule shows year-end inventory balances:
Year
FIFO
Weighted Average
2015
4,500,000
5,400,000
2016
7,800,000
7,100,000
2017
8,300,000
7,800,000
What amount should be reported for 2018 as cumulative effect of the change in accounting policy?
a. 500,000 decrease
b. 350,000 decrease
c. 500,000 increase
d. 350,000 increase
answer: b
FIFO inventory- 2017
8,300,000
Weighted average inventory- 2017
Decrease in inventory
7,800,000
(500,000)
Cumulative effect after tax (70%*500,000)
350,000 decrease