Below is the net income of Blu
Below is the net income of Blue Instrument Co., a privatecorporation, computed under the three inventory methods using aperiodic system.
|
FIFO |
Average Cost |
LIFO |
||||
| 2018 | $25,900 | $22,900 | $19,900 | |||
| 2019 | 27,400 | 21,900 | 19,200 | |||
| 2020 | 29,200 | 27,400 | 24,200 | |||
| 2021 | 37,100 | 33,500 | 29,600 |
(Ignore tax considerations.)(a) Assume that in 2021 Blue decided to changefrom the FIFO method to the average-cost method of pricinginventories. Prepare the journal entry necessary for the changethat took place during 2021, and show net income reported for 2018,2019, 2020, and 2021.
(b) Assume that in 2021 Blue, which had beenusing the LIFO method since incorporation in 2018, changed to theFIFO method of pricing inventories. Prepare the journal entrynecessary to record the change in 2021 and show net income reportedfor 2018, 2019, 2020, and 2021.
Answer:
SOLUTION
A. Journal entry-
| Account titles and Explanation | Debit ($) | Credit ($) |
| Retained earnings | 10,300 | |
| Inventory | 10,300 | |
| (To record the change in method of inventory valuation) |
Amount of retained earnings to be changed-
| Year | FIFO (A) | Average cost (B) | Difference off net income (A-B) |
| 2018 | 25,900 | 22,900 | 3,000 |
| 2019 | 27,400 | 21,900 | 5,500 |
| 2020 | 29,200 | 27,400 | 1,800 |
| Total | 10,300 |
Net income
| 2021 | 2020 | 2019 | 2018 | |
| Net income | 33,500 | 27,400 | 21,900 | 22,900 |
* The method of valuation has changed to average cost, thus thenet income will be reported as per average cost method.
B. Journal entry-
| Account titles and Explanation | Debit ($) | Credit ($) |
| Inventory | 19,200 | |
| Retained earnings | 19,200 | |
| (To record the change in method of inventory valuation) |
Amount of retained earnings to be changed-
| Year | LIFO (A) | FIFO (B) | Difference off net income (A-B) |
| 2018 | 19,900 | 25,900 | (6,000) |
| 2019 | 19,200 | 27,400 | (8,200) |
| 2020 | 24,200 | 29,200 | (5,000) |
| Total | (19,200) |
Net income
| 2021 | 2020 | 2019 | 2018 | |
| Net income | 37,100 | 29,200 | 27,400 | 25,900 |
* The method of valuation has changed to FIFO, thus the netincome will be reported as per FIFO method.
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