Aquatic Equipment Corporation decided to switch from the LIFO method of costing

Question

Aquatic Equipment Corporation decided to switch from the LIFO method of costing inventories to the FIFO method at the beginning of 2013. The inventory as reported at the end of 2012 using LIFO would have been $67,000 higher using FIFO. Retained earnings at the end of 2012 was reported as $850,000 (reflecting the LIFO method). The tax rate is 34%.

Calculate the balance in retained earnings at the time of the change (beginning of 2013) as it would have been reported if FIFO had been used in prior years.

balance in retained earnings=

Prepare the journal entry at the beginning of 2013 to record the change in accounting principle.

Aquatic Equipment Corporation decided to switch from the LIFO method of costing inventories to the FIFO method at the beginning of 2013. The inventory as reported at the end of 2012 using LIFO would have been $67,000 higher using FIFO. Retained earnings at the end of 2012 was reported as $850,000 (reflecting the LIFO method). The tax rate is 34%.

Explanation / Answer

Use of FIFO would have made the ending inventory at the beginning of 2013 higher by $67000.

That means inventory ending balance was understated by $67000 because of use of LIFO The cost of goods sold was higher by $67000 (as COGS = Beginning Inventory + Purchase - ending inventory)

This implies income before tax in 2012 was understated by $67000

So, if FIFO were used in 2012, the balance in the retained earnings at the end of 2012 would have been =$ 850000 + $67000 (1 - 34%) = $894220

Increase in inventory = $894220 - $850000 = $44220

2)

AccounTitle and Explanations Debit($) Credit($) Inventory 67000 Retained earnings 44220 Deferred tax (67000x34%) 22780

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