Aquatic Equipment Corporation decided to switch from the LIFO method of costing inventories to the FIFO method at the beginning of 2018. The inventory as reported at the end of 2017 using LIFO would have been $60,000 higher using FIFO. Retained earnings at the end of 2017 was reported as $780,000 (reflecting the LIFO method). The tax rate is 40%. Required: 1. Calculate the balance in retained earnings at the time of the change (beginning of 2018) as it would have been reported if FIFO had been used in prior years. 2. Prepare the journal entry at the beginning of 2018 to record the change in accounting principle.

Question

Panther

Business

10 June, 11:31

Aquatic Equipment Corporation decided to switch from the LIFO method of costing inventories to the FIFO method at the beginning of 2018. The inventory as reported at the end of 2017 using LIFO would have been $60,000 higher using FIFO. Retained earnings at the end of 2017 was reported as $780,000 (reflecting the LIFO method). The tax rate is 40%. Required: 1. Calculate the balance in retained earnings at the time of the change (beginning of 2018) as it would have been reported if FIFO had been used in prior years. 2. Prepare the journal entry at the beginning of 2018 to record the change in accounting principle.

+5

Answers (1)

Know the Answer?

Cara Harmon · Answer 1

1. The computation of the balance in retained earnings is shown below:

= Beginning retained earning balance + adjusted net income

where,

Beginning retained earning balance is $780,000

And, the adjusted net income is = Inventory * (1 - tax rate)

= $60,000 * (1 - 40%)

= $36,000

Now put these values to the above formula

So, the value would equal to

= $780,000 + $36,000

= $816,000

2. The journal entry is shown below:

Inventory A/c Dr $60,000

To Retained earning A/c $36,000

To Tax payable A/c $24,000

(Being inventory is adjusted and the remaining balance is credited to tax payable account)