Question

Joey Co. decided to switch from LIFO method of costing inventories to the FIFO method at the beginning of 2018 [1/1/2019]. The inventory as reported at the end of 2016 using LIFO would have been $60,000 higher using FIFO. Retained earnings had been reported at 12/31/2018 as $780,000 [reflecting the LIFO method]. The Tax rate is 40% 1). Calculate the balance in retained earnings at the time of the change [beginning of 20191 as it would have been reported if FIFO had been used in prior years 2). Prepare the journal entry at the beginning of 2019 to record this change in accounting principle

Answer 1

1)

	This means, Net Income is understated by $ 60000 before tax
	After tax, Net income is understated by ($ 60000 x 60%) $ 36000
	Therefore, Retained Earnings is also understated by $ 36000
	Adjustments
	Retained Earnings, as reported				$ 780,000.00
Add:	Inventory understatement, net of tax				$   36,000.00
	Retained Earnings, under FIFO				$ 816,000.00

2)

Journal Entry
Particulars			Debit	Credit
Inventory			$ 60,000.00
To Income Tax Payable				$ 24,000.00
To Retained Earnings				$ 36,000.00