Ones Corporation switched from the LIFO method of costing inventories to the FIFO method at the beginning of 2017. The LIFO inventory at the end of 2016 would have been $80,000 higher using FIFO. Reported retained earnings at the end of 2016 were $1,750,000. Jones's tax rate is 30%. Tax law requires a company using LIFO for tax purposes to use it for financial reporting as well. So, when Jone changes from LIFO to FIFO, it will have to do the same for tax purposes. Further, Jones must recognize taxable income equal to the amount by which it increases the inventory valuation when it makes the change. As a result, Jones will pay tax on an additional $80,000 of taxable income in 2017.

Required:

1. Calculate the balance in retained earnings at the time of the change (beginning of 2017) as it would have been reported had FIFO been previously used.

2. Prepare the journal entry to record the change in accounting principle at the beginning of 2017.

Question

Business

Annika Compton

17 June, 13:38

Ones Corporation switched from the LIFO method of costing inventories to the FIFO method at the beginning of 2017. The LIFO inventory at the end of 2016 would have been $80,000 higher using FIFO. Reported retained earnings at the end of 2016 were $1,750,000. Jones's tax rate is 30%. Tax law requires a company using LIFO for tax purposes to use it for financial reporting as well. So, when Jone changes from LIFO to FIFO, it will have to do the same for tax purposes. Further, Jones must recognize taxable income equal to the amount by which it increases the inventory valuation when it makes the change. As a result, Jones will pay tax on an additional $80,000 of taxable income in 2017.

Required:

1. Calculate the balance in retained earnings at the time of the change (beginning of 2017) as it would have been reported had FIFO been previously used.

2. Prepare the journal entry to record the change in accounting principle at the beginning of 2017.

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Answers (1)

Know the Answer?

Kiara Gallegos · Answer 1

If LIFO inventory at the end of 2016 would have been $80,000 higher using FIFO, it means that when using FIFO the cost of goods sold would have been 80,000 lower.

Which would mean that the reproted retained earnings would have been 1,750,000 + 80,000=1,830,000

Debit Credit

Inventory 80,000

Costs of good sold 80,000