Below is the net income of James Laboratories computed under the three inventory
ID: 2418999 • Letter: B
Question
Below is the net income of James Laboratories computed under the three inventory methods.
FIFO Average-Cost LIFO
2012 $75,000 $50,000 $30,000
2013 55,000 50,000 38,000
2014 58,000 50,000 42,000
2015 60,000 50,000 40,000
Instructions
(Ignore tax considerations.)
(a) Assume that in 2015 James decided to change from the average-cost method to the FIFO method
of pricing inventories. Prepare the journal entry necessary for the change that took place during
2015 and show net income reported for 2013, 2014, and 2015.
3
(b) Assume that in 2015 James, which had been using the LIFO method since incorporation in 2012,
changed to the average-cost method of pricing inventories. Prepare the journal entry necessary for
the change in 2015 and show net income reported for 2013, 2014, and 2015.
Explanation / Answer
a)
Year
Average cost
FIFO
Net Increase/ decrease
2012
50000
75000
25000
2013
50000
55000
5000
2014
50000
58000
8000
2015
50000
60000
10000
48000
Debit
Credit
Inventory
48000
Retained earnings
48000
Income reported in
2013= 50000
2014=50000
2015= 108000
b)
Year
Average cost
LIFO
Net Increase/ decrease
2012
50000
30000
(20000)
2013
50000
38000
(12000)
2014
50000
42000
(8000)
2015
50000
40000
(10000)
(50000)
Debit
Credit
Retained earnings
50000
Inventory
50000
Income reported in
2013= 50000
2014=50000
2015= 0
Year
Average cost
FIFO
Net Increase/ decrease
2012
50000
75000
25000
2013
50000
55000
5000
2014
50000
58000
8000
2015
50000
60000
10000
48000
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