Question

Problem 2 In 20x6, after the financial statements for 20x5 were published, a Hilton & Sons Co. decided to switch from the FIFO method to Weighted Average in order to provide more relevant financial statement presentation. Inventory balances under both methods are as follows: Weighted FIFO Average December 31, 20x4 $857,000 $797,000 December 31, 20x5 1,114,000 1,014,000 The tax rates for 20x4 and 20x5 were 35% and 34%, respectively. Required – Prepare the adjusting journal entry that would be recorded in 20x6, to adjust the accounts at the beginning of 20x6.

Answer 1

Solution:

Cost of goods sold Net Profit Tax Payable Retained Earnings 35% $60,000 - $60,000 -$21,000 -$39,000 Effect of Change in Inventory Method 1) In 20X4 Ending Inventory decreases by $60,000 2) In 20x5 Beginning Inventory decreases by $60,000 Ending Inventory decreases by $100,000 Net Effect 34% -$60,000 $60,000 $20,400 $39,600 $1,00,000 -$1,00,000 -$34,000 -$66,000 $1,00,000 $1,00,000 $34,600 -$65,400 Note: Negative signs shows decrease in value Credit Adjusting Journal Entry Date Accounts Title Jan 1, 20X6 Retained Earnings Income Tax Payable Inventory Debit $65,400 $34,600 $1,00,000