Pharoah Incorporated decided to change from the FIFO method to value Inventory t

Question

Pharoah Incorporated decided to change from the FIFO method to value Inventory to the weighted average method In July 2017. The cumulative effect on prior years of retrospective application of the new Inventory costing method was determined to be $21,500 net of $7,000 tax. As prices are decreasing, cost of sales would be lower and ending inventory higher for the preceding period. Retained earnings on January 1. 2017 was $243,500 . (a1) Prepare a partial statement of retained earnings illustrating the adjusted balance af retained earnings. Statement of Retained Earnings (Partial)

Explanation / Answer

Answer

Account title & Explanation

Debit

Credit

Inventory

$                                   28,500.00

     Income tax payable

$                    7,000.00

     Retained earnings

$                  21,500.00

(adjusting entry for change in accounting policy)

Statement of Retained earnings (PARTIAL)

Beginning Balance

$                                 243,500.00

Prior Period adjustments:

Adjustment of Inventory

$                                   28,500.00

Adjustment of Income taxes payable

$                                   (7,000.00)

Balance after affecting changes

$                                 265,000.00

Account title & Explanation

Debit

Credit

Inventory

$                                   28,500.00

     Income tax payable

$                    7,000.00

     Retained earnings

$                  21,500.00

(adjusting entry for change in accounting policy)

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