CHAPTER 9

CHANGE IN ACCOUNTING ESTIMATE

Problem 9-1 (IAA)

Blue company purchased 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

Solution 9-1 answer b

Cost 6,000,000
Accumulated depreciation (6,000,000/6 x 3) 3,000,000
Carrying amount- January 1, 2018 3,000,000
Depreciation for 2018 (3,000,000/5 years) 600,000
Revised life 8 years
Years expired 3 years
Remaining revised life 5 years

This is a change in accounting estimate.

The procedure is to allocate the remaining depreciable amount over the remaining life.

Problem 9-2 (AICPA Adapted)

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 the machine had a useful life of six years from the
date of acquisition and the residual value was P480,000.

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

Solution 9-2 Answer a

Acquisition cost – January 1, 2015 5,280,000
Accumulated depreciation for 2015,2016 and
2017(5,280,000/8x3) 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)
Depreciable amount 2,820,000
Revised life 6 years
Years expired 3 years
Remaining revised life 3 years

Problem 9 – 3 (IFRS)
On January 1, 2014, Roma Company purchased equipment for P4,000,000. The equipment has a
useful life of 10 years and a residual value of P400,000.

On January 1, 2018, the entity determined that the useful life of the equipment was 12 years
from the date of acquisition and the residual value was P480,000.

1. What is the carrying amount of the equipment on January 1, 2018?

a. 2,560,000
b. 2,920,000
c. 2,400,000
d. 2,800,000

2. What is the depreciation of the equipment for 2018?

a. 175,000
b. 260,000
c. 360,000
d. 300,000
Solution 9 – 3
Question 1 Answer a
Cost – January 1, 2014 4,000,000
Accumulated depreciation – January 1, 2018 (4,000,000 – 400,000/10 x 4) 1,440,000
Carrying amount – January 1, 2018 2,560,000

Question 2 Answer b

Carrying amount – January 1, 2018 2,560,000

Residual value (480,000)
Depreciable amount 2,080,000
Depreciation for 2018 (2,080,000/8 years) 260,000
Revised useful life 12 years
Expired ( 4 years)
Remaining useful life 8 years

Problem 9 – 4 (IFRS)
Acute Company was incorporated on January 1, 2015. In preparing the financial statements for
the year ended December 31, 2017, the entity used the following original cost and useful life for
the property, plant and equipment.
Original Cost Useful life
Building 15,000,000 15 years
Machinery 10,500,000 10 years
Furniture 3,500,000 7 years

On January 1, 2018, the entity determined that the remaining useful life is 10 years for the
building, 7 years for the machinery and 5 years for the furniture.

The entity used the straight line method of depreciation with no residual value.

What is the total depreciation for 2018?

a. 2,650,000
b. 3,700,000
c. 2,550,000
d. 3,500,000

Building Machinery Furniture

Cost – January 1, 2015 15,000,000
Accumulated Depreciation:
(15,000,000/15 x 3) 3,000,000
(10,500,000/10 x 3) 3,150,000
(3,500,000/ 7 x 3) 0 0 1,500,000
Carrying amount – January
1,2018 12,000,000 7,350,000 2,000,000

Depreciation for 2017

Building (12,000,000/10) 1,200,000
Machinery (7,350,000/7) 1,050,000
Furniture (2,000,000/5) 400,000
Total depreciation for 2018 2,650,000

Problem 9 –5 (IAA)

On January 1, 2018, Canyon Company decided to decrease the estimated useful life of an existing
patent from 10 years to 8 years.

The patent was purchased on January 1, 2013 for P3,000,000. The estimated residual value is
zero.

The entity decided on January 1, 2018, the cost of an equipment is P8,000,000 and the
accumulated depreciation is P3,400,000.

The remaining useful life of the equipment on January 1, 2018 is 10 years and the residual value
is P200,000.

What is the total charge against income for 2018 as a result of the accounting changes?
a. 940,000
b. 960,000
c. 627,500
d. 647,500

Solution 9 – 5 Answer a

Patent – January 1, 2013 3,000,000

Accumulated amortization (3,000,000/10 x 5) 1,500,000
Carrying amount – January 1, 2018 1,500,000
Amortization of patent for 2018 (1,500,000/3) 500,000
Depreciation for 2018 (4,600,000 – 200,000/10) 440,000
Total charge against income for 2018 940,000
Revised estimated life of patent 8 years
Years expired (5)
Remaining revised life of patent 3 years

Problem 9 – 6 (AICPA Adapted)

On January 1, 2016, Brazilia Company purchased for P4,800,000 a machine with useful life of ten
years and a residual value of P200,000.
The machine was depreciated by the double declining balance and the carrying amount of the
machine was P3,072,000 on December 31, 2017.

The entity changed to the straight line method on January 1, 2018. The residual value did not
change.

What is the depreciation expense on this machine for 2018?

a. 287,200
b. 384,000
c. 450,000
d. 359,000

Solution 9 – 6 Answer d

Depreciation for 2018 (2,872,000/8 years remaining) 359,000

Carrying amount – January 1, 2018 3,072,000

Residual value ( 200,000)
Depreciable amount 2,872,000

Straight line rate (100%/10) 10%

Double declining rate (10% x 2) 20%

Acquisition cost – January 1, 2016 4,800,000

Accumulated depreciation – January 1, 2018
2016 (20% x 4,800,000) 960,000
2017 (20% x 3,840,000) 768,000 1,728,000
Carrying amount – January 1, 2018 3,072,000

Under PAS 16, paragraph 61, a change in depreciation method is accounted for as a change in
accounting estimate.

Problem 9 – 7 (AICPA Adapted)

On January 1, 2017, Miller Company purchased a machine for P2,750,000. The machine was
depreciated using the sum of years’ digits method based on a useful life of 10 years with no
residual value.

On January 1, 2018, the entity changed to the straight line method of depreciation. The entity
can justify the change.

1. What is the carrying amount of the machine on January 1, 2018?

a. 2,750,000
b. 2,250,000
c. 2,475,000
d. 1,800,000

2. What is the depreciation for 2018?

a. 180,000
b. 220,000
c. 250,000
d. 275,000

Solution 9 – 7
Question 1 Answer b
S Y D (1 + 2 +3 + 4 +5 + 6 + 7 + 8 + 9 + 10) 55

Cost – January 1, 2017 2,750,000

Accumulated depreciation – January 1, 2018 (10/55 x 2,750,000) (500,000)
Carrying amount – January 1, 2018 2,250,000

Question 2 Answer c

Straight line depreciation for 2018

( 2,250,000/9 years remaining) 250,000

Problem 9 – 8 (IAA)
Xavier Company purchased a machinery on January 1, 2015 foe P7,200,000.

The machinery had useful life of 10 years with no residual value and was depreciated using the
straight line method.

In 2018, a decision was made to change the depreciation method from straight line to sum of
years’ digits method. The useful life and residual value remained unchanged.

1. What is the carrying amount of machinery on January 1, 2018?

a. 7,200,000
b. 5,040,000
c. 5,760,000
d. 6,480,000

2. What is the depreciation for 2018?

a. 1,260,000
b. 1,440,000
c. 916,360
d. 720,000

Solution 9 – 8
Question 1 Answer b

Cost – January 1, 2015 7,200,000

Accumulated depreciation – January 1, 2018
(7,200,000/10 x 3) 2,160,000
Carrying amount – January 1, 2018 5,040,000

Question 2 Answer a

S Y D for the remaining life of 7 years ( 1 + 2 + 3 + 4 + 5 + 6 + 7) 28

Depreciation for 2018 (5,040,000 x 7/28) 1,260,000