This document contains several problems related to accounting for changes in accounting policies and inventory methods. Specifically:
1) Problem 8-1 asks about the cumulative effect of changing from FIFO to weighted average inventory valuation. The cumulative effect is a $420,000 increase to retained earnings.
2) Problem 8-2 asks about the cumulative effect of changing inventory methods for Goddard Company. The cumulative effect is a $350,000 decrease to retained earnings.
3) Problem 8-3 asks about the cumulative effect of changing from the cost recovery to percentage of completion method for construction contracts. The cumulative effect is a $6,000,000 increase to retained earnings.
This document contains several problems related to accounting for changes in accounting policies and inventory methods. Specifically:
1) Problem 8-1 asks about the cumulative effect of changing from FIFO to weighted average inventory valuation. The cumulative effect is a $420,000 increase to retained earnings.
2) Problem 8-2 asks about the cumulative effect of changing inventory methods for Goddard Company. The cumulative effect is a $350,000 decrease to retained earnings.
3) Problem 8-3 asks about the cumulative effect of changing from the cost recovery to percentage of completion method for construction contracts. The cumulative effect is a $6,000,000 increase to retained earnings.
This document contains several problems related to accounting for changes in accounting policies and inventory methods. Specifically:
1) Problem 8-1 asks about the cumulative effect of changing from FIFO to weighted average inventory valuation. The cumulative effect is a $420,000 increase to retained earnings.
2) Problem 8-2 asks about the cumulative effect of changing inventory methods for Goddard Company. The cumulative effect is a $350,000 decrease to retained earnings.
3) Problem 8-3 asks about the cumulative effect of changing from the cost recovery to percentage of completion method for construction contracts. The cumulative effect is a $6,000,000 increase to retained earnings.
This document contains several problems related to accounting for changes in accounting policies and inventory methods. Specifically:
1) Problem 8-1 asks about the cumulative effect of changing from FIFO to weighted average inventory valuation. The cumulative effect is a $420,000 increase to retained earnings.
2) Problem 8-2 asks about the cumulative effect of changing inventory methods for Goddard Company. The cumulative effect is a $350,000 decrease to retained earnings.
3) Problem 8-3 asks about the cumulative effect of changing from the cost recovery to percentage of completion method for construction contracts. The cumulative effect is a $6,000,000 increase to retained earnings.
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CHAPTER 8
CHANGE IN ACCOUNTING POLICY
Problem 8 -1 (AICPA Adapted)
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 decrease c. 600,000 increase d. 600,000 decrease
Solution 8 – 1 Answer a FIFO inventory – January 1 7,100,000 Weighted average inventory – January 1 7,700,000 Cumulative effect 600,000 Cumulative effect after tax (70% x 600,000) 420,000
The change from FIFO to weighted average is a change in accounting policy. The cumulative effect of the change in accounting policy is an adjustment of retained earnings.
Goddard Company had used the FIFO method of inventory valuation since it began operations in 2015. The entity decided to change to the weighted average method for measuring inventory at the beginning of 2018. The income tax rate is 30%.
The following schedule shows a 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 the cumulative effect of the change in accounting policy? a. 500,000 decrease b. 350,000 decrease c. 500,000 increase d. 350,000 increase
Solution 8 – 2 Answer b Inventory, December 31, 2017 FIFO 8,300,000 Weighted average 7,800,000 Decrease in inventory 500,000
The adjustment on January 1, 2018 to reflect the change in inventory method is:
Retained earnings (70% x 500,000) 350,000
Income tax payable (30% x 500,000) 150,000 Inventory 500,000
Since the retained earnings accounts is debit, it is shown as a deduction.
Note that the cumulative effect of a change in inventory method is determined by considering only the ending inventory of the immediately preceding year which in this case is 2017.
The inventory balances in 2015 and 2016 are ignored because the effect on net income is counterbalancing.
Problem 8 – 3 (IAA)
Banko Company used the cost recovery method of accounting since it began operations in 2015. In 2018, management decided to adopt the percentage of completion method.
2015 2016 2017
Revenue from completed contracts 25,000,000 42,000,000 40,000,000 Cost of completed contracts 18,000,000 29,000,000 28,000,000 Income from operations 7,000,000 13,000,000 12,000,000 Casualty cost 0 0 ( 2,000,000) Income 7,000,000 13,000,000 10,000,000
Analysis of the accounting records disclosed the following income by contracts using the percentage of completion method. 2015 2016 2017 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 earnings for 2018? a. 6,000,000 b. 8,000,000 c. 7,000,000 d. 0
Solution 8 – 3 Answer a (38,000,000 – 32,000,000) 6,000,000
Problem 8 – 4 (IAA) During 2018, Build Company changed from the cost recovery method to the percentage of completion method. The tax rate is 30%. Gross profit figures are:
How should this accounting change be reported in 2018?
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 – 4 Answer d Cumulative gross profit for 2016 and 2017 – percentage of completion 3,500,000 Cumulative gross profit for 2016 and 2017 – 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, 2018 910,000 Problem 8 – 5 (AICPA Adapted) During 2018, 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 P2,000,000 increase in the beginning inventory on January 1, 2018. The tax rate is 30%.
What is the prior period specific effect of this accounting change?
