COLLEGE OF ACCOUNTANCY
m C-AE17, Module No.1
Second Semester | AY 2020-2021
Course : C-AE17: Intermediate Accounting 3
Module : Module No. 1: Accounting Changes Part 1
Time Frame : (6 hours)
A. Overview
This learning material provides a discussion of PAS 8. An accounting change is
a change in accounting principle, accounting estimate, or the reporting entity.
Accounting estimates may occur as frequently as every reporting period. A change in
reporting entity is a change that results in financial statements that are effectively those
of a different reporting entity. Changes in accounting and financial reporting are
inevitable. Most happen because in preparing periodic financial statements, companies
must make estimates and judgments to allocate costs and revenues. Other changes arise
from management decisions about the appropriate accounting methods for preparing
these statements.
This module will focus on the accounting procedures for change in accounting
estimate.
B. Desired Learning Outcomes
At the end of the learning session, you should be able to:
a) Enumerate the two main categories of accounting changes.
b) Explain what a change in accounting estimate is.
c) Give examples of items in the financial statements that may require estimates.
d) Discuss the accounting treatments for a change in accounting estimate.
C. Values Integration
In studying this module, it is hoped that you will be able to develop and manifest the
following UA Core Value/s:
✓ Servant Leadership
✓ Integrity
✓ Excellence
✓ Service Orientation
✓ Teamwork
✓ Obedience
✓ Open Communication
D. Content/Discussion
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COLLEGE OF ACCOUNTANCY
m C-AE17, Module No.1
Second Semester | AY 2020-2021
Lesson 1 – Change in Accounting Estimate
A change in accounting estimate is an adjustment of the carrying amount of an asset
or liability, or related expense, resulting from reassessing the expected future benefits and
obligations associated with that asset or liability. A change in accounting estimate is a normal
recurring correction or adjustment of an asset or liability which is the natural result of the use
of an estimate. The use of reasonable estimates is an essential part of the preparation of the
financial statements and does not undermine their reliability.
Examples of changes in estimate include:
● Change in useful life and salvage value of a fixed asset or intangible asset
● Change in provision for bad debts
● Change in provision for obsolescence of inventories
● Change in defined benefit obligation
● Allowance for doubtful accounts
● Reserve for obsolete inventory
● Changes in the amount of expected warranty obligations
An estimate may need revision if changes occur regarding the circumstances on which
the estimate was based or as a result of new information, more experience or subsequent
development. The effect of a change in accounting estimate shall be recognized currently and
prospectively by including it in income or loss of:
a. The period of change if the change affects that period only.
b. The period of change and future periods if the change affects both.
A change in an accounting estimate shall not be accounted for by restating amounts reported in
financial statements of the prior period. Changes in accounting estimates are to be handled
currently and prospectively, if necessary. Prospective recognition of the effect of change in
accounting estimates means that the change is applied to transactions, other events, and
conditions from the date of the change in estimate.
A change in depreciation method is accounted for as a change in accounting estimate.
ILLUSTRATIVE EXAMPLE:
CAE, Inc. is an airline that owns an XYZ aircraft that it bought in 2016 for P300 million.
At the time of recognition of the aircraft as a fixed asset, i.e. on 1 January 2016, the company
estimated its useful life to be 15 years and expected it to fetch P50 million at the end of its useful
life. The company uses a straight-line depreciation method for the aircraft.
Regulatory changes introduced in November 2023 barred the company from flying this
aircraft after the end of 2025. The company cannot fly it on any alternate route either. The
management is forced to sell it and acquire an upgraded aircraft by the end of 2025. It revised
the useful life of the aircraft down to 10 years and increased its salvage value to P90 million.
Illustrate how the company will account for the developments in the financial year
ending 31 December 2024.
Solution
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COLLEGE OF ACCOUNTANCY
m C-AE17, Module No.1
Second Semester | AY 2020-2021
From 2016 to 2023, the company must have recorded yearly depreciation expense of P16.67
million [= (P300 million - P50 million) ÷ 15].
By end of 2023, the aircraft served 8 years of its 15-year useful life. Its book value at the end of
2023 comes out to be P166.6 [= P300 million - P16.67 million × 8].
The regulatory changes forced the company to reduce useful life down to 10 years. It
means the remaining useful life as at 1 January 2024 was 2 years.
Depreciation expense for 2024 = (P166.6 million – P90 million) ÷ 2 = P38.32 million
Please note that the change in estimate is reflected only in periods subsequent to the
change. It doesn’t affect any of the historical depreciation expense or book values.
E. Evaluation
For numbers 1 to 3:
The December 31 year-end financial statements of S Company contained the following errors:
Dec. 31, 2019 Dec.31, 2020
Ending inventory P70,000 understated P40,000 overstated
Depreciation expense 11,500 understated ---------
An insurance premium of P750,000 was prepaid in 2019 covering the years 2019, 2020, and
2021. The entire amount was charged to expense in 2019. In addition, On December 31, 2020,
a fully depreciated machinery was sold for P100,000 cash, but the sale was not recorded until
2021. There were no other errors during 2019 and 2020, and no corrections have been made
for any errors. Ignore income tax effects.
1. What is the total effect of the errors on S Company’s 2020 net income?
a. P123,500 overstated
b. P260,000 overstated
c. P240,000 understated
d. P280,000 understated
2. What is the total effect of the errors on S Company’s 2020 working capital?
a. P190,000 overstated
b. P140,000 overstated
c. P310,000 understated
d. P210,000 understated
3. What is the total effect of the errors on S Company’s December 31, 2020 financial position?
a. P198,500 understated
b. P 298,500 overstated
c. P133,000 understated
d. P 298,500 understated
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COLLEGE OF ACCOUNTANCY
m C-AE17, Module No.1
Second Semester | AY 2020-2021
4. The ending inventory for an entity was overstated in 2019. The overstatement will cause the
entity’s
a. Retained earnings to be understated in the 2019 statement of financial position.
b. Cost of goods sold to be understated in the 2020 income statement.
c. Cost of goods sold to be understated in the 2019 income statement.
d. 2020 statement of financial position not be misstated.
5. In the middle of the year, an entity paid for insurance premiums for the current year and debited
the amount to prepaid insurance. At the year-end, the bookkeeper forgot to record the amount
expired. In the financial statements prepared at year-end, the omission
a. Overstates owner’s equity
b. Understates assets
c. Understates net income
d. Overstates liabilities
6. If at end of the period an entity erroneously excluded some goods from its ending inventory and
also erroneously did not record the purchase of these goods in its accounting records, these
errors would cause
a. The ending inventory, cost of goods available for sale and retained earnings to be
understated.
b. The ending inventory, cost of goods sold, and retained earnings to be understated.
c. No effect on net income, working capital, and retained earnings.
d. Cost of goods available for sale, cost of goods sold and net income to be understated.
7. Failure to record depreciation expense at the end of an accounting period results in
a. Understated income
b. Understated assets
c. Overstated expenses
d. Overstated assets
8. The draft financial statements for an entity for the year ended December 31, 2019, have been
prepared. A final review of the draft reveals that closing inventory on December 31, 2018,
included items that had been sold in December 2018. What is the effect of the adjustment to be
made to the profit for the year ended December 31, 2019, and to the profit for the year ended
December 31, 2018, presented as the comparative figure in the 2009 financial statements?
Draft profit for 2019 Profit for 2018
a. Increase Decrease
b. Increase Increase
c. Decrease Increase
d. Decrease Decrease
9. The effect of a change in accounting policy that is inseparable from the effect of a change in
accounting estimate shall be reported
a. By restating the financial statements of all prior periods presented.
b. As a correction of an error
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COLLEGE OF ACCOUNTANCY
m C-AE17, Module No.1
Second Semester | AY 2020-2021
c. As a component of income from continuing operations, in the period of change and future
periods if the change affects both.
d. As a separate disclosure after income from continuing operations, in the period of change
and future periods if the change affects both.
10. On January 2, 2019, G Company purchased computer hardware for P600,000. On the date of
acquisition, G Company’s management estimated that the computers would have an estimated
useful life of 4 years and would have a residual value of P60,000. The company used the double
declining-balance method to depreciate the computer hardware.
In January 2020, G Company’s management realized that technological advancements had made
the computers virtually obsolete and that they would have to be replaced. Management decided
to change the estimated useful life of the computer hardware to 2 years.
How much depreciation on computer hardware should be recorded in 2020?
a. P144,000
b. P240,000
c. P300,000
d. P360,000
For numbers 11to 12:
11. W Company decided on January 2, 2020, to review its accounting practices. This is due to
changing economic conditions and to make its financial statements more comparable to those
of other companies in its industry.
The following changes will be effective as of January 1, 2020:
a. W Company decided to change its allowance for bad debts from 2% to 4% of its
outstanding receivables balance. W’s receivable balance at December 31, 2020, was
P890,000. Allowance for bad debts had a debit balance of P2,000 before adjustment.
b. W decided to use the straight-line method of depreciation on its equipment instead of the
sum-of-the-years’ digits method. It was also decided that this asset has 10 more years of
useful life as of January 2, 2020. The equipment was purchased on January 1, 2010, at a
cost of P1,100,000. On the acquisition date, it was estimated that the equipment would
have a 15-year useful life with no residual value.
The entry to record the current year provision for bad debts is
a. Bad debts expense 37,600
Allowance for bad debts 37,600
b. Allowance for bad debts 37,600
Bad debts expense 37,600
c. Bad debts expense 33,600
Allowance for bad debts 33,600
d. Allowance for bad debts 33,600
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COLLEGE OF ACCOUNTANCY
m C-AE17, Module No.1
Second Semester | AY 2020-2021
Bad debts expense 33,600
12. What is the amount of depreciation on equipment for the current year?
a. P45,833
b. P9,167
c. P13,750
d. P32,083
For numbers 13 to 14:
13. In the past, P Company has depreciated its computer hardware using the straight-line method.
The computer hardware has a 10% salvage value and an estimated useful life of 5 years. As a
result of the rapid advancement in information technology, the management of P Company has
determined that it receives most of the benefits from its computer facilities in the first few years
of ownership. Hence, as of January 1, 2020, P proposes changing to the sum-of-the-years’ digits
method for depreciating its computer hardware. The following computer purchases were made
by P at the beginning of each year.
2017 P90,000
2018 50,000
2019 60,000
How much depreciation expense was recorded by P Company in 2017, 2018, and 2019?
2017 2018 2019
a. P18,000 P28,000 P40,000
b. 36,000 36,000 36,000
c. 16,200 36,000 36,000
d. 16,200 25,200 36,000
14. What is the amount of depreciation expense to be recognized in 2020?
a. P21,240
b. P63,280
c. P52,380
d. P34,200
15. How should the following changes be treated?
I. A change is to be made in the method of calculating the provision for uncollectible
receivables.
II. Investment properties are now measured at fair value, having previously been measured at
cost.
Change I Change II
a. Change in accounting policy Change in accounting policy
b. Change in accounting policy Change in accounting estimate
c. Change in accounting estimate Change in accounting policy
d. Change in accounting estimate Change in accounting estimate
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COLLEGE OF ACCOUNTANCY
m C-AE17, Module No.1
Second Semester | AY 2020-2021
References
Millan, Zeus Vernon B. (2019) Intermediate Accounting, Part 3, Baguio City, Philippines: Bandolin
Enterprise.
Conrado T. Valix, Jose F. Peralta, Christian Aris M. Valix, Intermediate Accounting, Part 3, Manila,
Philippines: GIC Enterprises & Co. Inc.
F. Assessment of Learning
For the self-regulated assessment of what you had learned from this module, please
accomplish the progress check/activity posted in our Google Classroom and submit it on or
before due date.
G. References
Millan, Zeus Vernon B. (2019) Intermediate Accounting, Part 3, Baguio City, Philippines: Bandolin
Enterprise.
Conrado T. Valix, Jose F. Peralta, Christian Aris M. Valix, Intermediate Accounting, Part 3, Manila,
Philippines: GIC Enterprises & Co. Inc.
Congratulations for having completed this module!
See you in the next module!
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