Intermediate Chapter 22: Change in Accounting Principle Problem Whalen Incorpora

Question

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 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

Explanation / Answer

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

the following solution is provided

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

NOTE: RETAINED EARNINGS OPENING 2016

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

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