Question

Rhode, Inc., began business in Year 1. Inventory reported in the Year 3 year-end balance sheet, determined using the average cost method, was $170,000. In Year 4, the company decided to change its inventory method to FIFO. If the company had used the FIFO method in Year 3, ending inventory would have been $220,000. Prepare the appropriate journal entry to record this change.

Answer 1

Dr Inventory 50,000

Cr Retained Earnings 50,000

Step-by-step explanation:

Preparation of Journal entry

Based on the information given we were told that in Year 3 the inventory was determined using the average cost method at the amount of $170,000 while in Year 4, the company change the inventory method to FIFO. Therefore if the company used the FIFO method in Year 3 the company ending inventory would have been the amount of $220,000 which means that the Journal entry will be recorded as :

Dr Inventory 50,000

Cr Retained Earnings 50,000

(220,000-170,000)

(To record change in inventory from average cost method to FIFO method )