1.) Aquatic Equipment Corporation decided to switch from the LIFO method of cost

Question

1.) 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 $54,000 higher using FIFO. Retained earnings at the end of 2017 was reported as $720,000 (reflecting the LIFO method). The tax rate is 34%. 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. Balance in retained earnings 2. Prepare the journal entry at the beginning of 2018 to record the change in accounting principle. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) Date General Journal Debit Credit 1-Jan-18 2.)The Peridot Company purchased machinery on January 2, 2016, for $940,000. A five-year life was estimated and no residual value was anticipated. Peridot decided to use the straight-line depreciation method and recorded $188,000 in depreciation in 2016 and 2017. Early in 2018, the company revised the total estimated life of the machinery to eight years. Required: 1. What type of change is this? a.) CHANGE FROM FIFO TO LIFO b) CHANGE IN ACCOUNTING ESTIMATE c.) CHANGE IN ACCOUNTING METHOD d.) CHANGE IN ACCOUNTING PRINCIPLE e.) CHANGE IN ACCOUNTING ENTITY 2. Determine depreciation for 2018. 1.) 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 $54,000 higher using FIFO. Retained earnings at the end of 2017 was reported as $720,000 (reflecting the LIFO method). The tax rate is 34%. 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. Balance in retained earnings 2. Prepare the journal entry at the beginning of 2018 to record the change in accounting principle. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) Date General Journal Debit Credit 1-Jan-18 2.)The Peridot Company purchased machinery on January 2, 2016, for $940,000. A five-year life was estimated and no residual value was anticipated. Peridot decided to use the straight-line depreciation method and recorded $188,000 in depreciation in 2016 and 2017. Early in 2018, the company revised the total estimated life of the machinery to eight years. Required: 1. What type of change is this? a.) CHANGE FROM FIFO TO LIFO b) CHANGE IN ACCOUNTING ESTIMATE c.) CHANGE IN ACCOUNTING METHOD d.) CHANGE IN ACCOUNTING PRINCIPLE e.) CHANGE IN ACCOUNTING ENTITY 2. Determine depreciation for 2018.

Explanation / Answer

Answer 1

Part 1

Retained earnings as reported 720,000

Add: Inventory understatement, net of tax (54000*(1-34%)) 35640

Retained earnings under FIFO 755,640

Part 2

Answer 2

Part 1

Answer is option B change in accounting estimate (The Corporation revised its estimate of the useful lives of certain machinery and equipment.)

Part 2

Asset’s cost 940000

Less: accumulated till date (188000*2)=376000

Book value = 564000

Depreciation 2018 =564000/6= 94000

Date account titles and explanation debit credit 1 January 2018 inventory 54000 Income tax payable (54000*34%) 18360 Retained earnings (54000*66%) 35640

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