Question

Below is the net income of Blue Instrument Co., a private corporation, computed under the three inventory methods using a periodic system.

		FIFO		Average Cost		LIFO
2018		$25,900		$22,900		$19,900
2019		27,400		21,900		19,200
2020		29,200		27,400		24,200
2021		37,100		33,500		29,600

(Ignore tax considerations.)

(a) Assume that in 2021 Blue 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.

(b) Assume that in 2021 Blue, 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.

Answer 1

SOLUTION

A. Journal entry-

Account titles and Explanation	Debit ($)	Credit ($)
Retained earnings	10,300
Inventory		10,300
(To record the change in method of inventory valuation)

Amount of retained earnings to be changed-

Year	FIFO (A)	Average cost (B)	Difference off net income (A-B)
2018	25,900	22,900	3,000
2019	27,400	21,900	5,500
2020	29,200	27,400	1,800
	Total		10,300

Net income

	2021	2020	2019	2018
Net income	33,500	27,400	21,900	22,900

* The method of valuation has changed to average cost, thus the net income will be reported as per average cost method.

B. Journal entry-

Account titles and Explanation	Debit ($)	Credit ($)
Inventory	19,200
Retained earnings		19,200
(To record the change in method of inventory valuation)

Amount of retained earnings to be changed-

Year	LIFO (A)	FIFO (B)	Difference off net income (A-B)
2018	19,900	25,900	(6,000)
2019	19,200	27,400	(8,200)
2020	24,200	29,200	(5,000)
		Total	(19,200)

Net income

	2021	2020	2019	2018
Net income	37,100	29,200	27,400	25,900

* The method of valuation has changed to FIFO, thus the net income will be reported as per FIFO method.