Question

Below is the net income of Riverbed Instrument Co., a private corporation, computed under the three inventory methods using a periodic system. FIFO Average Cost LIFO 2018 $27,400 $24,700 $20,800 2019 31,300 26,700 21,400 2020 26,900 25,100 22,000 2021 36,300 32,400 28,400 (Ignore tax considerations.) (a) Assume that in 2021 Riverbed decided to change from the FIFO method to the average-cost method of pricing inventories. Prepare the journal entry necessary for the change that took place during 2021, and show net income reported for 2018, 2019, 2020, and 2021. (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 Entry field with correct answer Entry field with incorrect answer now contains modified data Entry field with correct answer Entry field with correct answer Entry field with correct answer Entry field with incorrect answer now contains modified data 2021 2020 2019 2018 Net income $Entry field with correct answer $Entry field with correct answer $Entry field with correct answer $Entry field with correct answer (b) Assume that in 2021 Riverbed, which had been using the LIFO method since incorporation in 2018, changed to the FIFO method of pricing inventories. Prepare the journal entry necessary to record the change in 2021 and show net income reported for 2018, 2019, 2020, and 2021. (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 Entry field with correct answer Entry field with incorrect answer now contains modified data Entry field with correct answer Entry field with correct answer Entry field with correct answer Entry field with incorrect answer now contains modified data 2021 2020 2019 2018 Net income $Entry field with correct answer $Entry field with correct answer $Entry field with correct answer $Entry field with correct answer

Answer 1

ANSWER:

Given in the question:

	FIFO	Average cost	LIFO
2018	27,400	24,700	20,800
2019	31,300	26,700	21,400
2020	26,900	25,100	22,000
2021	36,300	32,400	28,400

Requirement a)

Change from the FIFO method to the average-cost method of pricing inventories in 2021

Particulars	Amount (2021) (in $)
New method - Average cost (A)	32,400
Old method - FIFO method (B)	36,300
Change (A - B)	(3,900)

Required Journal Entries:

Date	Particulars	Debit (in $)	Credit (in $)
2021	Profit & Loss A/C	3,900
	To Inventory A/C		3,900
	(Being due to change in method, inventory value decrease, and profit also declined)

Note: Change in the year 2021 doesn't effect the past data.

Net income reported for 2018, 2019, 2020, and 2021

Year	2018	2019	2020	2021
FIFO	27,400	31,300	26,900	36,300
Change				(3,900)
Net income	27,400	31,300	26,900	32,400

Requirement b)

Change from the LIFO method to the FIFO method of pricing inventories in 2021

Particulars	Amount (2021) (in $)	Amount (2020) (in $)	Amount (2019) (in $)	Amount (2018) (in $)	Total
New method - FIFO method (A)	36,300	26,900	31,300	27,400	121,900
Old method - LIFO method (B)	28,400	22,000	21,400	20,800	92,600
Change (A - B)	7,900	4,900	9,900	6,600	29,300

Required Journal Entries:

Date	Particulars	Debit (in $)	Credit (in $)
2021	Inventory A/C	29,300
	To Profit and loss A/C		29,300
	(Being due to change in method, inventory value increase, and profit also increased)

Note: Change from the time of incorporation

Net income reported for 2018, 2019, 2020, and 2021

Year	2018	2019	2020	2021
FIFO	27,400	31,300	26,900	36,300
Change	6,600	9,900	4,900	7,900
Net income	34,000	41,200	31,800	44,200