Question

Shown below are net income amounts as they would be determined by Weihrich Steel Company by each of three different inventory costing methods ($ in thousands). 

 

Required: 

1. Assume that Weihrich used FIFO before 2021, and then in 2021 decided to switch to average cost. Prepare the journal entry to record the change in accounting principle and briefly describe any other steps Weihrich should take to appropriately report the situation. (Ignore income tax effects.) 

2. Assume that Weihrich used FIFO before 2021, and then in 2021 decided to switch to LIFO. Assume accounting records are inadequate to determine LIFO information prior to 2021. Therefore, the 2020 ($540) and pre-2020 ($2,280) data are not available. Prepare the journal entry to record the change in accounting principle and briefly describe any other steps Weihrich should take to appropriately report the situation. (Ignore income tax effects.) 

3. Assume that Weihrich used FIFO before 2021, and then in 2021 decided to switch to LIFO cost. Weihrich’s records of inventory purchases and sales are not available for several previous years. Therefore, the pre-2020 LIFO information ($2,280) is not available. However, Weihrich does have the information needed to apply LIFO on a prospective basis beginning in 2020. Prepare the journal entry to record the change in accounting principle, and briefly describe any other steps Weihrich should take to appropriately report the situation. (Ignore income tax effects.)

Answer 1

Change in inventory costing method; comparative income statements:

 

(1)

Calculation of inventory value:

It is given that the inventory cost at book is $3,550 million and average cost of inventory is $3,140 million. Now, calculate the inventory value by deducting the average cost of inventory from the inventory cost at book value as shown below:

 

Inventory value = (Inventory cost at book – Average cost of inventory)

                            = $3,550 million - $3,140 million

                            = $410 million

 

Hence, the calculated inventory value is $410 million.

 

Adjustment journal ($ in millions): 

Date	Account Title and Explanation	Post Ref.	Debit	Credit
	Retained earnings		$410
	Inventory			$410
	(To record adjusting the inventory)

 

• Retained earnings are liability. There is a decrease in liability value. Therefore, it is debited.

• Inventory is an asset. There is a decrease in asset value. Therefore, it is credited.

 

(2)

Other inventory method to Last-In, First-Out method:

The accounting records are inadequate to find out the cumulative income because of changes in last in first out method to any other inventory valuation methods.

 

The balance sheet retained earnings should not be changed for last in first out method change, because the last in first out method beginning inventory adopts base year inventory value for all its future calculation. Therefore, no entry is required.

 

The company should disclose a note that justifies the changes in its inventory valuation method.

 

(3)

Calculation of inventory value:

It is given that the inventory cost at book is $750 million and average cost of inventory is $540 million. Now, calculate the inventory value by deducting the average cost of inventory from the inventory cost at book value as shown below:

 

Inventory value = (Inventory cost at book – Average cost of inventory)

                             = $750 million - $540 million

                             = $210 million

 

Hence, the calculated inventory value is $210 million.

 

Adjustment journal ($ in millions): 

Date	Account Title and Explanation	Post Ref.	Debit	Credit
	Retained earnings		$210
	Inventory			$210
	(To record adjusting the inventory)

 

• Retained earnings are liability. There is a decrease in liability value. Therefore, it is debited.

• Inventory is an asset. There is a decrease in asset value. Therefore, it is credited.