Question

The management of Novak Company has asked its accounting department to describe the effect upon the company’s financial position and its income statements of accounting for inventories on the LIFO rather than the FIFO basis during 2020 and 2021. The accounting department is to assume that the change to LIFO would have been effective on January 1, 2020, and that the initial LIFO base would have been the inventory value on December 31, 2019. The following are the company’s financial statements and other data for the years 2020 and 2021 when the FIFO method was employed. Financial Position as of 12/31/19 12/31/20 12/31/21 Cash $ 115,200 $166,400 $197,120 Accounts receivable 102,400 128,000 153,600 Inventory 153,600 179,200 225,280 Other assets 204,800 217,600 256,000 Total assets $576,000 $691,200 $832,000 Accounts payable $ 51,200 $ 76,800 $ 102,400 Other liabilities 89,600 102,400 140,800 Common stock 256,000 256,000 256,000 Retained earnings 179,200 256,000 332,800 Total liabilities and equity $576,000 $691,200 $832,000 Income for Years Ended 12/31/20 12/31/21 Sales revenue $1,152,000 $1,728,000 Less: Cost of goods sold 646,400 967,680 Other expenses 262,400 389,120 908,800 1,356,800 Income before income taxes 243,200 371,200 Income taxes (40%) 97,280 148,480 Net income $145,920 $ 222,720 Other data: 1. Inventory on hand at December 31, 2019, consisted of 51,200 units valued at $3.00 each. 2. Sales (all units sold at the same price in a given year): 2020-192,000 units @ $6.00 each 2021-230,400 units @ $7.50 each 3. Purchases (all units purchased at the same price in given year): 2020-192,000 units @ $3.50 each 2021-230,400 units @ $4.40 each 4. Income taxes at the effective rate of 40% are paid on December 31 each year. Name the account(s) presented in the financial statements that would have different amounts for 2021 if LIFO rather than FIFO had been used, and state the new amount for each account that is named.

Answer 1

Workings:				FIFO		LIFO	Diff.
12/31/2019	Ending inventory	51200*3=		153600		153600
2020	Purchases	192000*3.50=		672000		672000
	COGAS			825600		825600
2020	Sales/COGS	192000	51200*3=	153600	192000*3.50=	672000
			140800*3.5=	492800			25600
12/31/2020	Ending inventory	51200*3.50		179200	51200*3=	153600	-25600
2021	Purchases	230400*4.40=		1013760		1013760
	COGAS			1192960		1167360
2021	Sales/COGS		51200*3.50	179200	230400*4.40=	1013760
			179200*4.40=	788480			46080
	Ending inventory		51200*4.40=	225280	51200*3=	153600	-71680

With Reference to above workings:
Journal entries to be passed for change from FIFO to LIFO
Tax Asset(25600*40%)	10240
Retained earnings(25600*60%)	15360
Inventory (decrease due to LIFO)		25600
(for 2020)
Tax Asset(46080*40%)	18432
Retained earnings(46080*60%)	27648
Inventory(decrease due to LIFO)		46080
(for 2021)

As the change is effective Jan 1, 2020, Income statement figures except net income & tax are for that year only & 2021 balance sheet figures are cumulative.

So, we need to change only the above 3 accounts in the balance sheet given.

As income tax has already been paid , we create a tax asset a/c like prepaid asset to be adjusted against future tax liability.

The re-casted Income statement &

Balance sheet are given as under:

Income for Years Ended
	12/31/2020	12/31/2021
Sales	1152000	1728000
Less: COGS	672000	1013760
Other expenses	262400	389120
	934400	1402880
Income before Income taxes	217600	325120
Income taxes (40%)	87040	130048
Net Income	130560	195072

Financial Position as at	12/31/2020	12/31/2021
Cash	166400	197120
Accounts receivable	128000	153600
Inventory	153600	153600
Other assets	217600	256000
Deferred tax asset	10240	28672
Total assets	675840	788992
Liabilities & Equity
Accounts payable	76800	102400
Other liabilities	102400	140800
Common stock	256000	256000
Retained earnings	240640	289792
Total liabilities and equity	675840	788992