Grady changed to LIFO at the beginning of 2017. December 31 inventories at LIFO
ID: 2530419 • Letter: G
Question
Grady changed to LIFO at the beginning of 2017. December 31 inventories at LIFO were $14,000 for 2016 and $20,000 for 2017. The beginning inventory of 2016 was zero.
Recast the above Income and Retained Earnings statement for 2017 under LIFO, assuming that 2017 will be shown alone and without any comparison to 2016.
Journalize the prior period correction at January 1, 2017.
1. (20 pts) The financial statements using FIFO of Grady Company for 2016 and 2017 appear below: Dec 31, 2017 Dec 31, 2016 Cash Receivables Inventories (FIFO) Other Assets $10,000 12,000 21,000 30,000 $73,000 $15,000 10,000 18,000 20,000 $63,000 $30,000 $73,000 $ 10,000 $30,000 33,000 $63,000 Capital Stock Retained Earnings 43,000 Income $ 10,000 Retained Earnings 1/1 33,000 0 Retained Earnings 12/31$ 43,000 $ 33,000 10,000 $ 33,000 DividendsExplanation / Answer
Conversion from FIFO to LIFO or the other way round causes a change in “Cost of Goods Sold”, which will in turn change the Net income and Retained earnings. So, the income statement and balance sheet needs to be adjusted accordingly.
Change in 2016:
As given that there was no beginning inventory in 2016 and ending inventory after FIFO to LIFO conversion dropped by $4,000 ($18,000 - $14,000), COGS for 2016 will increase by $4,000 dragging the Net income down for the same amount.
So, Net income in 2016 = $10,000 - $4,000 = $6,000
Since company distributed $10,000 as dividends during the year, Retained earnings will also get adjusted to reflect the impact and it will also go down by $4,000. So, the retained earnings in 2016 post conversion will be $29,000 ($33,000 - $4,000).
Change in 2017:
Ending inventory in 2017 goes down by $1,000 ($21,000 - $20,000) post FIFO to LIFO conversion whereas beginning inventory in 2017 dropped by $4,000. It means that the COGS were decreased by $3,000 ($4,000 - $1,000). This will increase the income by $1,000 and Net income post conversion will be $13,000 ($10,000 + $3,000). The new statement will be as given below:
Dec 31, 2017
Cash
10000
Receivable
12000
Inventories (LIFO)
20000
Other Assets
30000
72000
Capital Stock
30000
Retained Earnings
42000
72000
Income
13000
Retained Earnings 1/1
29000
Dividends
0
Retained Earnings 12/31
42000
Journal Entry:
Date
Account
Debit
Credit
01-Jan-17
Cost of Goods Sold
$4,000
LIFO Reserves Account
$4,000
Dec 31, 2017
Cash
10000
Receivable
12000
Inventories (LIFO)
20000
Other Assets
30000
72000
Capital Stock
30000
Retained Earnings
42000
72000
Income
13000
Retained Earnings 1/1
29000
Dividends
0
Retained Earnings 12/31
42000
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