Question

Aquatic Equipment Corporation decided to switch from the LIFO method of costing inventories to the FIFO method at the beginning of 2018. The inventory as reported at the end of 2017 using LIFO would have been $56,000 higher using FIFO. Retained earnings at the end of 2017 was reported as $740,000 (reflecting the LIFO method). The tax rate is 35%.

Required:
1. Calculate the balance in retained earnings at the time of the change (beginning of 2018) as it would have been reported if FIFO had been used in prior years.
2. Prepare the journal entry at the beginning of 2018 to record the change in accounting principle.

Answer 1

If FIFO used in prior years then Ending inventory under FIFO for 2017 is higher by $56,000, it means cost of goods sold is lower by $56,000 and net income is higher by $56,000 in 2017.
Therefore tax is also increased for 2017 = $56,000 * 35% = $19,600
Computation of Retained earning balance at beginning of 2018 using FIFO
Particulars	Amount($)
Balance at Jan 1, 2018 using LIFO	7,40,000
Pretax income to be higher using FIFO	56,000
Less: Income taX (35%)	19,600
Balance at Jan 1, 2018 using FIFO	7,76,400
Journal Entries
Accounts titles and Explanation	Debit ($)	Credit ($)
Inventory Dr	56,000
Retained Earnings		36,400
Income tax payable		19,600
(To record adjustment entry for change in accounting principle)