Gordon Company started operations on January 1, 2009, and has used the FIFO meth
ID: 2423303 • Letter: G
Question
Gordon Company started operations on January 1, 2009, and has used the FIFO method of inventory valuation since its inception. In 2014, it decides to switch to the average cost method. You are provided with the following information. What is the beginning retained earnings balance at January 1, 2011, if Gordon prepares comparative financial statements starting in 2011? Retained earnings, January 1 What is the beginning retained earnings balance at January 1, 2014, if Gordon prepares comparative financial statements starting in 2014? Retained earnings, January 1 What is the beginning retained earnings balance at January 1, 2015, if Gordon prepares single-period financial statements for 2015? Retained earnings, January 1 What is the net income reported by Gordon in the 2014 income statement if it prepares comparative financial statements starting with 2012?Explanation / Answer
Beginning retained earnings balance at January 1, 2011:
Retained earnings, January 1, 2011
$ 159,080
(b)
Beginning retained earnings balance at January 1, 2014:
Retained earnings, January 1, 2014
$ 589,160
(c)
Beginning retained earnings balance at January 1, 2015:
(In 2014, it decides to switch to the average cost method)
Retained earnings, January 1, 2015
$ 780,980
Change in method adjustment (See below)
$ (19,540)
Adjusted Retained earnings, January 1, 2015
$ 761,440
Change in method adjustment:
Year
Net Income
Net Income
Under FIFO
Under Average-Cost
2009
$ 100,590
$ 92,770
2010
$ 70,750
$ 64,660
2011
$ 89,540
$ 80,910
2012
$ 120,730
$ 130,040
2013
$ 299,950
$ 293,640
Total
$ 681,560
$ 662,020
Adjustment in Profits =
$ 19,540
(d) What is the net income reported by Linden in the 2014 income statement if it prepares comparative financial statements starting with 2012?
Net Income:
2012 $130,800
2013 $292,190
2014: $310630
Beginning retained earnings balance at January 1, 2011:
Retained earnings, January 1, 2011
$ 159,080
(b)
Beginning retained earnings balance at January 1, 2014:
Retained earnings, January 1, 2014
$ 589,160
(c)
Beginning retained earnings balance at January 1, 2015:
(In 2014, it decides to switch to the average cost method)
Retained earnings, January 1, 2015
$ 780,980
Change in method adjustment (See below)
$ (19,540)
Adjusted Retained earnings, January 1, 2015
$ 761,440
Change in method adjustment:
Year
Net Income
Net Income
Under FIFO
Under Average-Cost
2009
$ 100,590
$ 92,770
2010
$ 70,750
$ 64,660
2011
$ 89,540
$ 80,910
2012
$ 120,730
$ 130,040
2013
$ 299,950
$ 293,640
Total
$ 681,560
$ 662,020
Adjustment in Profits =
$ 19,540
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