a) Journal Entry (FIFO in 2026):
- Dr. Inventory $10,930
- Cr. Retained Earnings $10,930
b) Net Income after Change (2023-2025):
- Unchanged: 2023 - $19,020, 2024 - $21,180, 2025 - $25,010
c) Journal Entry (LIFO to FIFO in 2026):
- Dr. Inventory $22,030
- Cr. Retained Earnings $22,030
a) Journal Entry for Change from Average Cost to FIFO in 2026:
- Dr. Inventory: This represents the increase in inventory value due to the switch to FIFO. You correctly calculated this difference as the sum of all FIFO net incomes minus the sum of all average-cost net incomes for the years 2023-2025.
- Cr. Retained Earnings: This represents the adjustment to retained earnings to reflect the higher inventory value under FIFO.
b) Net Income after Change in Accounting Principle:
You're also correct that the net income reported for 2023-2025 should be adjusted for the change in accounting principle. Since FIFO results in higher net income than average cost in periods of rising prices, the adjusted net income will be:
- 2023: $19,020 (unchanged, as FIFO income is already used)
- 2024: $21,180 (unchanged, as FIFO income is already used)
- 2025: $25,010 (unchanged, as FIFO income is already used)
c) Journal Entry for Change from LIFO to FIFO in 2026:
If Nash used LIFO instead of average cost from 2023-2025, the adjustment in 2026 would be larger. Here's the journal entry:
- Dr. Inventory $22,030
- Cr. Retained Earnings $22,030
The calculation for the difference is:
- Sum of all FIFO net incomes (2023-2025) - Sum of all LIFO net incomes (2023-2025) = $22,030
Remember, LIFO typically results in lower net income than FIFO in periods of rising prices, leading to a larger adjustment when switching to FIFO