Intermediate Chapter 22: Change in Accounting Principle Problem Whalen Incorporated began operations in 2014, at which...

Intermediate Chapter 22: Change in Accounting Principle Problem

Whalen Incorporated began operations in 2014, at which time they opted to account for inventory
using the LIFO cost-flow method. They issued 102,750 shares of $25-par value common stock; no
further shares have been issued. Dividends of $0.50 and $0.75 per share were declared and paid
in 2016 and 2017, respectively. The corporate tax rate is 30%.

In 2017 Whalen decided to change its inventory cost-flow method from LIFO to FIFO. Using the
following information, prepare the journal entry necessary to record the change in principle. Also
prepare Comparative Income Statements and Comparative Statements of Retained Earnings for
fiscal 2017 (two-year presentation).


			Expenses (including COGS)
	Year	Revenues	LIFO	FIFO

	2014	$2,381,745	$2,042,670	$1,857,720
	2015	2,409,488	2,183,438	2,060,138
	2016	2,877,000	2,209,125	2,260,500
	2017	3,082,500	2,568,750	2,363,250
	Totals	$10,750,733	$9,003,983	$8,541,608

Expert Solution

Assuming whalen changes its inventory valuation basis from LIFO to FIFO in the beginning of 2017

the following solution is provided

year	Revenues	LIFO	FIFO
2014	$2,381,745	$2,042,670	$1,857,720
2015	2,409,488	2,183,438	2,060,138
2016	2,877,000	2,209,125	2,260,500
TOTAL	$7,668,233	$6,435,233	$6,178,358

YOU CAN SEE THE EXPENSES OF INVENTORY UNDER FIFO ARE LESSER THAN LIFO BY

$256,875($6,435,233-$6,178,358)

THEREFORE YOUR RETAINED EARNINGS WILL INCREASE BY $256,875

YOUR JOURNAL ENTRY WOULD BE

PARTICULARS	REF NO.	DEBIT	CREDIT
COST OF GOODS SOLD/INVENTORY		$256,875
RETAINED EARNINGS			$256,875

COMAPRATIVE INCOME STATEMENT
	2016	2017
REVENUES	$2,877,000	$3,082,500
LESS:COST OF GOODS SOLD	$2,209,125	$2,363,250
GROSS PROFIT	$667,875	$719,250
LESS;OPERATING EXPENSES	0	0
OPERATING INCOME	$667,875	$719,250
LESS:TAX@30%	$200,363	$215,775
EARNINGS AFTER TAX	$467,512	$503,475

NOTE: RETAINED EARNINGS OPENING 2016

2014
REVENUES	$2,381,745
LESS:COST OF GOODS SOLD	$2,042,670
OPERATING INCOME	$339,075
LESS:TAX @ 30%	$101,723
EARNINGS AFTER TAX(A)	$237,352

2015
REVENUES	2,409,488
LESS:COST OF GOODS SOLD	2,183,438
OPERATING INCOME	226,050
LESS:TAX @ 30%	67,815
EARNINGS AFTER TAX(B)	158,235

RETAINED EARNINGS(A+B) JAN1,2016	395,587

COMAPARATIVE STATEMENT OF RETAINED EARNINGS
	2016	2017
RETAINED EARNINGS,JAN 1	$395,587	$811,724
ADD:NET INCOME FOR THE YEAR	$467,512	$503,475
ADD:PRIOR PERIOD ADJUSTMENTS		$256,875
TOTAL	$863,099	$1,572,074
LESS:DIVIDENDS
-ON COMMON STOCK	51,375(0.50)	77,063(0.75)
TOTAL	$811,724	$1,495,011

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