Joey Co. decided to switch from LIFO method of costing inventories to the FIFO m

Question

Joey Co. decided to switch from LIFO method of costing inventories to the FIFO method at the beginning of 2015 [1/1/2015]. The inventory as reported at the end of 2014 using LIFO would have been $60,000 higher using FIFO. Retained earnings had been reported at 12/31/2014 as $780,000 [reflecting the LIFO method]. The Tax rate is 40%.

1). Calculate the balance in retained earnings at the time of the change [beginning of 2015] as it would have been reported if FIFO had been used in prior years.

2). Prepare the journal entry at the beginning of 2015 to record this change in accounting principle.

Explanation / Answer

Date Details Amt $ Dec31.2014, Increase in Inventory Value due to change from LIFO to FIFO                          60,000 Reduction in COGS of 2014                          60,000 Effective Increase in Revenue                          60,000 Effective Increase in Tax Payable @40%                          24,000 Effect on retained earning-Addition                          36,000 1 So revised retained earning balance =                        816,000 2 Journal entry Account Dr $ Cr $ Inventory                          60,000 Income Tax payable              24,000 Retained Earning              36,000

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