Question

In 2021, CPS Company changed its method of valuing inventory from the FIFO method to the average cost method. At December 31, 2020, CPS’s inventories were $38 million (FIFO). CPS’s records indicated that the inventories would have totaled $28.6 million at December 31, 2020, if determined on an average cost basis.

Required: 1. Prepare the journal entry to record the adjustment.

Answer 1

The journal entry would be as follows:

December 31, 2020 Debit Credit

Retained Earnings $9,400,000

Inventory $9,400,000

Step-by-step explanation:

In order to prepare the journal entry to record the adjustment, we would have to calculate the amount of inventory with the following formula:

Amount of inventory=December 31, 2020, CPS’s inventories (FIFO)-31, 2020, CPS’s inventories (Average Cost)

=$38 million-$28.6 million

=$9.4 millions

Therefore, the journal entry would be as follows:

December 31, 2020 Debit Credit

Retained Earnings $9,400,000

Inventory $9,400,000