Question

Aquatic Equipment Corporation decided to switch from the LIFO method of costing inventories to the FIFO method at the beginning of 2021. The inventory as reported at the end of 2020 using LIFO would have been $59,000 higher using FIFO. Retained earnings at the end of 2020 was reported as $770,000 (reflecting the LIFO method). The tax rate is 35%. Required: 1. Calculate the balance in retained earnings at the time of the change (beginning of 2021) as it would have been reported if FIFO had been used in prior years. 2. Prepare the journal entry at the beginning of 2021 to record the change in accounting principle.

Answer 1

1. The balance in retained earnings at the time of the change is $808,350

2. The journal entry at the beginning of 2021 to record the change in accounting principle woud be as follows:

Inventoty $59,000

Retained Earnings $38,350

Tax Payable $20,650

Step-by-step explanation:

1. In order to calculate the balance in retained earnings at the time of the change (beginning of 2021) as it would have been reported if FIFO had been used in prior years we would have to make the following calculation:

balance in retained earnings at the time of the change=Begining Retained earnings of 2021+Adjusted net income

Adjusted net income=Ending inventory higher by amount×(1-tax rate)

Adjusted net income=$59,000×(1-0.35)

Adjusted net income=$38,350

balance in retained earnings at the time of the change=$770,000+$38,350

balance in retained earnings at the time of the change=$808,350

2. The journal entry at the beginning of 2021 to record the change in accounting principle woud be as follows:

Inventoty $59,000

Retained Earnings $38,350

Tax Payable $20,650= $59,000×0.35