Question

Aquatic Equipment Corporation decided to switch from the LIFO method of costing inventories to the FIFO method at the beginning of 2018. The inventory as reported at the end of 2017 using LIFO would have been $64,000 higher using FIFO. Retained earnings at the end of 2017 was reported as $820,000 (reflecting the LIFO method). The tax rate is 34%.

Required:
1. Calculate the balance in retained earnings at the time of the change (beginning of 2018) as it would have been reported if FIFO had been used in prior years.
2. Prepare the journal entry at the beginning of 2018 to record the change in accounting principle.

Answer 1

1
	Retain earnings, Ending balance	=	$       8,20,000
Add:	Understated Inventory (Net of tax) [$64000*(1-0.34)]	=	$           42,240
	Retained Earnings as per FIFO Method	=	$       8,62,240
	Therefore, Balance of Retained earnings if FIFO method used in prior years is $862,240
2	Account Titles and Explanation	Debit	Credit
	Inventory	$      64,000
	Income tax payable		$           21,760
	Retained earnings		$           42,240
	(Being effect of change in accounting principle recorded)