Question

n 2017, Frost Company, which began operations in 2015, 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:

Ending Inventory	LIFO	FIFO	Cumulative Difference
12/31/2015	$240,000	$273,000	$33,000
12/31/2016	245,000	301,000	56,000
12/31/2017	256,000	328,000	72,000

Frost reported net income of $2,500,000, $2,400,000, and $2,100,000 in 2015, 2016, and 2017, respectively. The tax rate is 30%.

Required:

1.	Prepare the journal entry necessary to record the change.
2.	What amount of net income would Frost report in 2015, 2016, and 2017?

Answer 1

since there has been a increase in the closing inventory value we need to debit the inventory account and credit back the expense that has been previously recognized.

Date	Particulars	DR	CR
12.31.2015	Inventory AC DR	33000
	TO cost of goods sold		33000
	[being there has been increase in the closing inventory]
12.31.2016	Inventory AC DR	56000
	TO cost of goods sold		56000
	[being there has been increase in the closing inventory]
12.31.2017	Inventory AC DR	72000
	TO cost of goods sold		72000
	[being there has been increase in the closing inventory]

since there has been an increase in the inventory and reduction in expense, the profit will increase

	Profit	Adjustment	new profit
2015	2,500,000	33,000	2,533,000
2016	2,400,000	56,000	2,456,000
2017	2,100,000	72,000	2,172,000