Question

Goddard Company has used the FIFO method of inventory valuation since it began operations in 2018. Goddard decided to change to the average cost method for determining inventory costs at the beginning of 2021. The following schedule shows year-end inventory balances under the FIFO and average cost methods: Year FIFO Average Cost 2018 $ 45,700 $ 55,400 2019 80,100 71,700 2020 85,800 80,100 Required: 1. Ignoring income taxes, prepare the 2021 journal entry to adjust the accounts to reflect the average cost method. 2. How much higher or lower would cost of goods sold be in the 2020 revised income statement

Answer 1

1. Adjusting to Average Cost

DR Retained Earnings ........................................................$5,700

CR Inventory .......................................................................................$5,700

Working

Inventory = FIFO Ending Inventory 2020 - FIFO Ending Inventory 2019

= 85,800 - 80,100

= $5,700

2. The beginning inventory for 2020 will be lower by;

= 2019 FIFO Inventory - 2019 Average Cost inventory

= 80,100 - 71,700

= $8,400

The ending inventory will be lower by;

= 2020 FIFO Inventory - 2020 Average Cost inventory

= 85,800 - 80,100

= $5,700

Cost of Goods sold = Beginning inventory + purchases - ending inventory

= -8,400 - (-5,700)

= $2,700

Cost of Goods sold in 2020 income statement will be $2,700 lower.