Question

Following is the information of Huntington Co. income statement

                                      2018 2019
Sales                        $15.000 $12.300
COGS                          12.000 7.500
Gross profit                3.000 5.000
Operating expenses 2.000 3.000
Income before taxes 1.000 2.000
Income taxes (30%) 300 700
Net income                 700 1.400
In 2018 Huntington applied FIFO method for its inventory, and starting in 2019 Huntington
decised to change the method to the average method. Following is the inventory in 2018
according to FIFO and average:
                       31/12/2018
                      FIFO Average
Inventory $3.400 $3.600

On 1 January 2018 retained earnings balance was reported $ 1.750

Instructions:
a. Compute the inventory available for sale in 2018 according to FIFO and average,
determine the effect to the COGS (average).
b. Prepare the restatement the 2018 income statement.
c. Prepare the correction journal needed in 1/1/2019.
d. Prepare the restatement of retained earnings.

Answer 1

a.

Increase in the closing stock will decrease the COGS or Cost of Goods sold and ultimately increase the net income, because COGS or cost if Goods sold=

= Opening stock+ Purchases during the year - Closing stock.

-Cost of Inventory available for sale is otherwise known as the COGS or cost of goods sold.

-As in 2018, the company was applying FIFO hence COSG is 2018 is $12000 as per FIFO method.

-Closing stock a per Average method is $3600 , which is $200 more tahn the closing stock as per FIFO.

-Hence due to increase in closing stock now the COGS will decrease by $200.

-Hence revised COGS as per average stock = $12000-$200 =$11800

	FIFO	Average cost	Net change
Closing stock 31/12/2018	$3400	$3600	+$200
COGS or Cost of Inventory available for sale	$12000	=$12000-$200 =$11800	-$200

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b.

	Original Income statement 2018	Restated Income statement 2018	Change
Sales	$15000	$15000	---
Less-COGS	($12000)	($11800)	-$200
Gross Profit	$3000	$3200	+$200
Less-Operating Expenses	($2000)	($2000)	---
Income Before taxes	$1000	$1200	+$200
Less-Income Taxes@30%	($300)	($360)	+$60
Net Income	$700	$840	+$140

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C.

Correction Journal entry on 1/1/2019

Date	Particulars	Debit	Credit
01/01/2019	Inventory	$200
	Income Tax Payable		$60
	Retined Earnings		$140

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D.

Restated Retained Earnings on 01.01.2019

Opening Retained Earnings 01.01.2018	$1750
Add-Net income during 2018	$700
Retained Earnings 01.01.2019	$2450
Add-Addition due to change in accounting policy for inventory valuation	$140
Restated Retained Earnings on 01.01.2019	$2590