Aquatic Equipment Corporation decided to switch from the LIFO method of costing

Question

Aquatic Equipment Corporation decided to switch from the LIFO method of costing inventories to the FIFO method at the beginning of 2016. The inventory as reported at the end of 2015 using LIFO would have been $70,000 higher using FIFO. Retained earnings at the end of 2015 was reported as $880,000 (reflecting the LIFO method). The tax rate is 34%.

Calculate the balance in retained earnings at the time of the change (beginning of 2016) as it would have been reported if FIFO had been used in prior years.

Prepare the journal entry at the beginning of 2016 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.)

Aquatic Equipment Corporation decided to switch from the LIFO method of costing inventories to the FIFO method at the beginning of 2016. The inventory as reported at the end of 2015 using LIFO would have been $70,000 higher using FIFO. Retained earnings at the end of 2015 was reported as $880,000 (reflecting the LIFO method). The tax rate is 34%.

Explanation / Answer

Retained earnings before change = $880,000

It is mentioned that closing inventory will be higher by $70,000 if we use FIFO method, and while calculating Cost of goods sold, closing Inventory is deducted so Lower Closing inventory means High cost and Low Profit.

So if we Increase the closing inventory, then Cost will Decrease and Profit will increase i.e. Retained earnings will increase.

We know that Increase in Inventory value i.e. profit is before tax so we will add the after taxed profit in Retained earnings.

Increase in Retain earnings = $70,000 – 34%

Increase in Retain earnings = $46,200

Opening Retain earnings = Previous balance + Increase in retain earnings

= $880,000 + $46,200

Opening Retain earnings = $926,200

2.

So this will increase inventory and retained earnings and income tax.

Inventory (Dr.) 70,000

Retained earnings (Cr.) 46,200

Income tax payable (Cr.) 23,800

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