E22-7B (L03) (Various Changes in Principle-Inventory Methods) Below is the net i
ID: 2528623 • Letter: E
Question
E22-7B (L03) (Various Changes in Principle-Inventory Methods) Below is the net income of Jonesey Laboratories com- puted under the three inventory methods. FIFO LIFO 2015 2016 2017 2018 $75,000 55,000 58,000 60,000 $50,000 50,000 50,000 50,000 $30,000 38,000 42,000 40,000 Instructions (Ignore tax considerations.) (a) Assume that in 2018 Jonesey decided to change from the average-cost method to the FIFO method of pricing invento- ries. Prepare the journal entry necessary for the change that took place during 2018 and show net income reported for 2016, 2017, and 2018 (b) Assume that in 2018 Jonesey, which had been using the LIFO method since incorporation in 2015, changed to the average- cost method of pricing inventories. Prepare the journal entry necessary for the change in 2018 and show net income reported for 2016, 2017, and 2018Explanation / Answer
Answer (a)
Note :
1 ) There is difference in net incomes for the years under average cost method & FIFO. It is due to change in method of inventory. Thus in 2018, the entry should be passed for the difference in net incomes for the years 2015 , 2016 , 2017. The adjustment entry for net incomes difference is passed through Retained Earnings A/c & Inventory A/c .
Computation of difference in Net incomes (NI) when Inventory method changes from average cost method to FIFO
Inventory method changing from average cost method to FIFO indicates increase in net income by $38,000 will thus Retained earnings should be credited & Inventory should be debited.
Journal Entry
Net Incomes to be reported ( ie NI under FIFO)
Answer b
Computation of difference in Net incomes (NI) when Inventory method changes from LIFO to average cost method
Inventory method changing from LIFO to average cost method indicates increase in net income by $40,000 will thus Retained earnings should be credited & Inventory should be debited.
Journal Entry
Net Incomes to be reported ( ie NI under average cost method)
Year NI under average cost method [a] NI under FIFO [b] Difference [a- b] 2015 $50,000 $75,000 - $25,000 2016 $50,000 $55,000 - $5,000 2017 $50,000 $58,000 - $8,000 Total Difference - $38,000Related Questions
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