Reference no: EM132579780
A Corporation purchased a production equipment on March 1,2016 for P 2,000,000. Initially the equipment was estimated to have a useful life of 5 years with salvage value of P 200,000 and was depreciated using the straight-line method.The company practice is to take up exact depreciation based on the number of amounts used in a given year.
- At the beginning of 2018, the company changed the depreciation method for production equipment from straight-line to units-of-production method and has estimated that for 2 more years, it can produce 250,000 units of product B. For the current year, the production equipment has produced 150,000 units of the said product. It was further estimated that the salvage value at the end of its life will only be 150,000.
- At the end of 2017, the company failed to record the accrual of its interest on its bond liability which has a face value of P 1,000 per bond certificate. The 500 bond certificates were issued on July 1, 2017 with nominal interest rate of 5% which is also the effective interest rate. Payment was made on January 1,2018 with a debit to a nominal account and a credit to cash.
On December 15, 2018, the entity paid P100,000 for a whole year coverage of property insurance. The period covered is from December 1, 2018 to December 1, 2019. Upon payment the entity made the following entry:
Prepaid Insurance P 100, 000
Cash P 100, 000
To record advance payment of insurance.
At the end of the year, the entity made an adjusting entry in relation to its insurance as follows:
Insurance Expense P 4, 167
Cash P 4, 167
To record year insurance expense.
At the beginning of the current year, the entity changed its method of inventory costing from FIFO to Weighted average. Opening ledger balances of the inventories in 2018 under FIFO are as follows:
Finished Goods Inventory P 1, 250, 000
Work-in-process Inventory 350, 000
Raw Materials Inventory 500, 000
Question a: Using the data above, compute for the following (Show your solutions in chronological order) :
- Opening book value of production equipment.
- Depreciation rate per unit of production equipment in 2018.
- Current year depreciation expense of the production equipment.
- Effect of change in depreciation method to the beginning balance of Retained Earnings.
- Effect of failure to record the interest on bond liability in 2017 net income (indicate whether it is an understatement or overstatement).
- Effects of change in inventory valuation method from FIFO to Weighted Average on the beginning balance of Retained Earnings.
Provide the following :
8. Entries to correct the error(s) or effect the change(s) assuming the current year books are still open.
9. Entries to correct the error(s) or effect the change(s) assuming the current year books were closed.