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 $70,000 higher using FIFO. Retained earnings at the end of 2017 was reported as $880,000 (reflecting the LIFO method). The tax rate is 34%.

Required:
1. Calculate the balance in retained earnings at the time of the change (beginning of 2013) as it would have been reported if FIFO had been used in prior years.
2. Prepare the journal entry at the beginning of 2013 to record the change in accounting principle. (If no entry is required for a particular transaction, select "No journal entry required" in the first account field.)

Answer 1

1. Adjusted net income = Ending inventory higher by amount * (1-Tax rate) = $70,000*(1-34%) = $70,000 * 66% = $46,200

Details Amount

Beginning retained earnings for the year 2017 $880,000

Add: Adjusted net income $46,200

Beginning adjusted retained earnings for year 2017 $926,200

2. Tax payable = Inventory * Tax rate = $70,000*34% = $23,800

Date Account Titles and Explanation Debit Credit

Inventory $70,000

Retained earnings $46,200

Tax payable $23,800

(To record adjustment of ending inventory)