Question

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 $53,000 higher using FIFO. Retained earnings at the end of 2017 was reported as $710,000 (reflecting the LIFO method). The tax rate is 35%. 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.

Answer 1

Solution:

If FIFO used in prior years then Ending inventory under FIFO for 2017 is higher by $53,000, it means cost of goods sold is lower by $53,000 and net income is higher by $53,000 in 2017.

Therefore tax is also increased for 2017 = $53,000 * 35% = $18,550

Computation of Retained earning balance at beginning of 2018 using FIFO
Particulars	Amount
Balance at Jan 1, 2018 using LIFO	$710,000.00
Pretax income to be higher using FIFO	$53,000.00
Less: Income taX (35%)	$18,550.00
Balance at Jan 1, 2018 using FIFO	$744,450.00

Journal Entries
Particulars	Debit	Credit
Inventory Dr	$53,000.00
To Retained Earnings		$34,450.00
To Income tax payable		$18,550.00
(To record adjustment entry for change in accounting principle)