Question

aquatic equipment corporation decided to switch from the lifo method of costing inventories to the fifo method at the beginning of 2024. the inventory as reported at the end of 2023 using lifo would have been $50,000 higher using fifo. retained earnings at the end of 2023 was reported as $680,000 (reflecting the lifo method). the tax rate is 35%. required: calculate the balance in retained earnings at the time of the change (beginning of 2024) as it would have been reported if fifo had been used in prior years. prepare the journal entry at the beginning of 2024 to record the change in accounting principle.

Answer 1

The Aquatic Equipment Corporation's retained earnings at the beginning of 2024 would need to be adjusted from $680,000 reported under LIFO to $712,500 under FIFO, after accounting for the tax effects. A journal entry would be made debiting Inventory and crediting both Deferred Tax Liability and Retained Earnings for the respective amounts.

Step-by-step explanation:

When Aquatic Equipment Corporation switches from the LIFO method to the FIFO method at the beginning of 2024, the effect on retained earnings needs to be calculated. Since inventory would have been $50,000 higher using FIFO, we need to adjust the retained earnings for this change. However, because this increase in inventory would have resulted in higher taxes in prior years, we also must account for the 35% tax rate.

To calculate the adjusted beginning retained earnings for 2024, we take the LIFO reported retained earnings of $680,000 and add the post-tax inventory difference. The inventory difference is $50,000, which would be reduced by 35% for taxes ($50,000 x 0.35 = $17,500), leaving us with $32,500 ($50,000 - $17,500) to add to retained earnings.

Adjusted retained earnings = $680,000 + $32,500 = $712,500.

The journal entry to record this change at the beginning of 2024 would be:

• Debit Inventory $50,000
• Credit Deferred Tax Liability $17,500
• Credit Retained Earnings $32,500