Solution Manual: Chapter 7 Notes to FS

Chapter 7

Notes (Part 1)

I. Accounting Policies, Changes in Estimates and
Errors

PROBLEM 1: TRUE OR FALSE
1. FALSE 6. FALSE
2. FALSE 7. FALSE
3. TRUE 8. FALSE
4. FALSE 9. TRUE
5. TRUE 10. FALSE
11. TRUE

PROBLEM 2: FOR CLASSROOM DISCUSSION
1. C

2. B

3. D

4. C

5. D

6. B

7. C

8. C

9. A

10. E

11. D

12. C

13. C

Explanation: PAS 8 requires an entity to account for a change in accounting
policy in accordance with the transitional provision of the related standard. In

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, the absence of a transitional provision, the entity shall account for the change
in accounting policy by retrospective application. If retrospective application is
impracticable, PAS 8 allows a change in accounting policy to be accounted
for by prospective application.

14. Solutions:
Requirement (a):
1st step: CA on 1/1/x5: (600,000 x 6/10) = 360,000;
2nd step: 360,000 ÷ 3 yrs. = 120,000 amortization expense in 20x5


Requirement (b):
CA on 1/1/x5 360,000 – 120,000 = 240,000 CA on 12/31/x5

15. Solutions:
Requirement (a):
140,000 increase in beginning inventory x 70% = 98,000

Requirement (b):
Inventory – beg. 140,000
Retained earnings – beg. 98,000
Deferred tax liability 42,000

16. Solutions:

Requirement (a):
20x1 20x2
Under (Over) statement of ending inventory -
10,000
20x1 (10,000)
Under (Over) statement of ending inventory -
(4,000)
20x2
Depreciation understatement - 20x1 (4,000) -
Depreciation understatement - 20x2 (6,000)
Failure to accrue salaries at year end - 20x1 (8,000) 8,000
Failure to accrue salaries at year end - 20x2 (12,000)
Effect on profit or loss - (Over) Under
(2,000) (24,000)
statement

Requirement (b):
Effect on 12/31/x2 retained earnings = (2,000) + (24,000) = (26,000)

17. Solutions:

Requirement (a):
20x1 20x2
Ending inventory - 20x1 4,000 (4,000)
Ending inventory - 20x2 (3,600)
Depreciation (800)
Insurance premium (3,600 x 2/3) 2,400

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