Question

Hondo Company began operations several years ago and has used the average-cost method of inventory valuation since its inception. In 2019, it decides to switch to the FIFO method. You are provided with the following information.

                                   

Net Income                 Excess of Average

Under                         Cost over FIFO Cost Net Income

Average Cost              Goods Sold (Pretax) FIFO Basis

Years Prior to 2017      $370,000                   $72,000

      2017                         340,000                   60,000

      2018                          320,000                     44,000

      2019                                                                                                          $380,000        

Instructions:

1. Prepare the journal entry to record the change from the Average Cost method to the FIFO method on January 1, 2019.

2. Before the change from Average Cost to FIFO, the Retained Earnings balance on January 1, 2017, was $370,000. The tax rate for all years is 30%. No dividends were paid during the years. Prepare the comparative statement of retained earnings, reflecting the change to FIFO, for 2017, 2018, and 2019. Assume any tax liability/asset associated with the change is recorded as an adjustment to deferred taxes.

Answer 1

Answer:-

Ques 1
Accounts	debit	credit
Inventory	$            176,000
(72000+60000+44000)
Retained earnings		$        123,200
Income tax payable		$          52,800
176000*0.3
Ques 2
Schedule for retained earnings
Jan 1 2017	$            370,000
Net income	$            298,000
(revised to FIFO)
Dividends	$                        -
Dec 31 2017	$            668,000
Net income	$            280,000
(revised to FIFO)
Dividends	$                        -
Jan 1 2018	$            948,000
Net income	$            276,000
(revised to FIFO)
Dividends	$                        -
Jan 1 2019	$        1,224,000
Net income	$            380,000
Dividends	$                        -
dec 31 2019	$        1,604,000

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