Question

Change in Inventory Method Instructions Chart of Accounts General Journal Analysis Shaded cells have feedback. X Instructions In 2020, Frost Company, which began operations in 2018, decided to change from LIFO to FIFO because management believed that FIFO better represented the flow of their inventory. Management prepared the following analysis showing the effect of this change: General Journal How does grading work? PAGE 1 GENERAL JOURNAL Score: 37/37 Ending Inventory LIFO FIFO Cumulative Difference DATE ACCOUNT TITLE DEBIT POST, REF CREDIT 12/31/2018 $239,600 $32,000 $271,600 1 Jan. 1 Inventory 55,400.00 12/31/2019 246,400 301,800 55,400 12/31/2020 255,000 2 328,700 73,700 Deferred Tax Liability 22,160.00 3 Retained Earnings 33,240.00 Frost reported net income of $2,487,000, $2,332,000, and $2,057,000 in 2018, 2019, and 2020, respectively. The tax rate is 40%. Points: 17/7 Required: 1. Prepare the journal entry necessary to record the change. 2. What amount of net income would Frost report in 2018, 2019, and 2020? Feedback Analysis Shaded cells have feedback. X 2. What amount of net income would Frost report in 2018, 2019, and 2020 after the change and restatement? 2019 2020 2018 $2,506,200 Net income under FIFO $2,346,040 $2,067,980 X Points: 2/3 Feedback Check My Work If a company makes an accounting change, one of the two possible methods GAAP allows is the Retrospective Adjustment Method. The retrospective adjustment method requires that any previously issued financial statements reported for comparative purposes be revised to reflect the impact of the accounting change. Therefore, you must compute the cumulative effect of the change to the new accounting principle as of the beginning of the first period presented.

Answer 1

In 2020, the company has already changed the inventory valuation method, therefore, the net income computed is in accordance to FIFO only. So the net income for the year 2020 is $ 2,057,000, no need to make any adjustments as its already computed under FIFO.