Question

Weaver Company changes from the LIFO method to the FIFO method in 2015. The increase in pre-tax income as a result of the difference in the two methods prior to 2013 is $ 100,000 and for the year 2013 is $40,000 and for the year 2014 is $30,000. The

estimated tax effect is 40%. The entry to record the change at the beginning of 2014 should include.
A. A debit to Deferred Tax Liability of $68,000.
B. A credit to Deferred Tax Liability of $68,000.
C. A debit to Deferred Tax Liability of $56,000.
D. A credit to Deferred Tax Liability of $56,000.

Answer 1

The correct accounting entry for the change from LIFO to FIFO that includes the deferred tax liability is a credit of $68,000, as this represents the future tax obligation on the increased income reported under the FIFO method.

Step-by-step explanation:

The student's question pertains to the accounting treatment for a change in inventory valuation method from LIFO (Last-In, First-Out) to FIFO (First-In, First-Out). Specifically, the question asks for the correct journal entry in terms of deferred tax liability when Weaver Company makes this change. The cumulative pre-tax income increase from the change prior to 2013 is $100,000, and for the years 2013 and 2014, the increases are $40,000 and $30,000 respectively. With an estimated tax effect of 40%, we calculate the total tax effect on increased income before the change ($100,000 + $40,000 + $30,000) × 40% = $68,000. Therefore, the correct entry at the beginning of 2014 includes a credit to Deferred Tax Liability to recognize the future tax obligation arising from the higher income reported under the FIFO method.