Question

Goddard Company has used the FIFO method of inventory valuation since it began operations in 2015....

Goddard Company has used the FIFO method of inventory valuation since it began operations in 2015. Goddard decided to change to the average cost method for determining inventory costs at the beginning of 2018. The following schedule shows year-end inventory balances under the FIFO and average cost methods:

Year FIFO Average Cost
2015 $ 46,600 $ 57,200
2016 82,800 72,600
2017 89,400 82,800


Required:
1. Ignoring income taxes, prepare the 2018 journal entry to adjust the accounts to reflect the average cost method.
2. How much higher or lower would cost of goods sold be in the 2017 revised income statement?

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Answer #1
1
Account Titles and Explanation Debit Credit
Retained Earnings $ 6,600
Inventory $            6,600
($89,400 - $82,800)
(being adjustment entry recorded)
2
FIFO - Average cost
2016 $ 82,800 - $         72,600 = $ 10,200 (a)
2017 $ 89,400 - $         82,800 = $   6,600 (b)
Higher or lower cost of goods sold = $   3,600 (a) - (b)
Therefore, Cost of goods sold is lower by $3,600 in year 2017.
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