In: Accounting
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 | |||||
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 |