Question

Linfei Ltd. has a 31 December year-end, and a tax rate of 25%. Management has asked you to respond to the following situations:

1. The company has always used the FIFO method of determining inventory costs; starting in 2017, it will now use average cost. Opening and closing inventories for 2017 under FIFO are $540,000 and $671,100, respectively. Opening and closing inventories under average cost are $427,200 and $529,000, respectively.

Provide the journal entry to record the change. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

2. Refer to the requirement 1. Additional information is as follows: In 2017, opening retained earnings was $888,300. Net income, before any adjustment due to the change in inventory method, was $325,400. Dividends were $47,900. In 2016, opening retained earnings was $817,300, net income was $115,100, and dividends were $42,900. For 2016, opening inventory was $490,200 under FIFO and $408,400 under average cost.

Prepare a comparative retained earnings section of the statement of changes in equity, giving retrospective effect to the change in accounting policy.

 

3. Return to your retained earnings statement in requirement 2. Prepare a comparative retained earnings statement assuming that comparative balances could not be restated; that is, the only information you have to work with, in addition to the income, retained earnings, and dividend information, is that provided about opening and closing inventory balances in requirement 1. 4. An asset was acquired in 2014 at a cost of $88,000. The salvage value of $8,800 was estimated. The asset has been depreciated on the declining-balance method at a rate of 20% in each of 2014, 2015, and 2016. On 1 October of this year, 2017, management decided to change depreciation methods and will now use the straight-line method. This change is made on the basis of usage information that indicates that the asset is used about the same amount in each year of life. The new estimates are a total life of 11 years and a salvage value of $6,100. Depreciation expense has not yet been recorded for 2017.

Provide the appropriate journal entry. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Answer 1-3
The company has always used the FIFO method of determining inventory costs; starting in 2017, it will now use average cost. Opening and closing inventories for 2017 under FIFO are $540,000 and $671,100, respectively. Opening and closing inventories under average cost are $427,200 and $529,000, respectively.

Required

Provide the journal entry to record the change.

Inventory (FIFO) 540,000
Inventory (Average cost) 427,200
Cost of goods sold (FIFO) 671,100
Retained earnings 888,300

Net income 325,400
Dividends 47,900

Comparative retained earnings

Retained earnings, beginning of year 817,300
Net income 115,100
Dividends 42,900

Retained earnings, end of year 888,300

Inventory (FIFO) 540,000
Inventory (Average cost) 427,200
Cost of goods sold (FIFO) 671,100
Retained earnings 888,300

Net income 325,400
Dividends 47,900

Comparative retained earnings

Retained earnings, beginning of year 817,300
Net income 115,100
Dividends 42,900

Retained earnings, end of year 888,300

4. An asset was acquired in 2014 at a cost of $88,000. The salvage value of $8,800 was estimated. The asset has been depreciated on the declining-balance method at a rate of 20% in each of 2014, 2015, and 2016. On 1 October of this year, 2017, management decided to change depreciation methods and will now use the straight-line method. This change is made on the basis of usage information that indicates that the asset is used about the same amount in each year of life. The new estimates are a total life of 11 years and a salvage value of $6,100. Depreciation expense has not yet been recorded for 2017.

Required

Provide the appropriate journal entry.

Depreciation expense 22,727
Accumulated depreciation 66,182

The asset will be depreciated on the straight-line method over its 11-year useful life, for a total of $11,000 in depreciation expense each year.

Depreciation expense 11,000
Accumulated depreciation 77,000

The salvage value of the asset has been revised downward from $8,800 to $6,100.

Loss on disposal of asset 2,700
Accumulated depreciation 74,300

The asset will be depreciated on the straight-line method over its 11-year useful life, for a total of $11,000 in depreciation expense each year.

Depreciation expense 11,000
Accumulated depreciation 85,000

The salvage value of the asset has been revised downward from $8,800 to $6,100.

Loss on disposal of asset 2,700
Accumulated depreciation 82,300

Accumulated depreciation 82,300