Question

Pharoah Company began operations on January 1, 2015, and uses the average-cost method of pricing inventory. Management is contemplating a change in inventory methods for 2018. The following information is available for the years 2015–2017. Net Income Computed Using Average-Cost Method FIFO Method LIFO Method 2015 $15,990 $19,120 $12,040 2016 17,880 20,820 14,130 2017 20,090 24,750 16,970 (a) Prepare the journal entry necessary to record a change from the average cost method to the FIFO method in 2018. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Account Titles and Explanation Debit Credit (b) Determine net income to be reported for 2015, 2016, and 2017, after giving effect to the change in accounting principle. Net Income 2015 $ 2016 $ 2017 $ (c) Assume Pharoah Company used the LIFO method instead of the average cost method during the years 2015–2017. In 2018, Pharoah changed to the FIFO method. Prepare the journal entry necessary to record the change in principle. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.) Account Titles and Explanation Debit Credit

Answer 1

Answer

a)

Particulars Debit credit

Inventory 10,730

( 19120 + 20820 + 24750) -

(15990 + 17880 + 20090)

Retained Earnings 10730

b)  

Net Income (FIFO)

2015 2016 2017

19120 20820 24750

c)

Inventory 21,550

(19,120 + 20820 + 24,750) -

(12,040 + 14,130 + 16970)

Retained Earnings 21550

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