Heller Company began operations in 2016 and used the LIFO method to compute its

Question

Heller Company began operations in 2016 and used the LIFO method to compute its $300,000 cost of goods sold for that year. At the beginning of 2017, Heller changed to the FIFO method. Heller determined that its cost of goods sold under FIFO would have been $250,000 in 2016. For 2017, Heller's cost of goods sold under FIFO was $360,000, while it would have been $410,000 under LIFO. Heller is subject to a 30% income tax rate.

Compute the cumulative effect of the retrospective adjustment on prior year's income (net of taxes) that Heller would report on its retained earnings statement for 2017.

$_________________

Explanation / Answer

Cost of goods sold reported by LIFO method in Year 2016 was $300,000

Cost of goods sold reported by FIFO method in Year 2016 was $250,000

Increase in Income (Before tax) $50,000

Tax rate 30%

Adjustment on prior's year income will be 50,000*.7 = 35,000

The cumulative effect of the retrospective adjustment on prior year's income (net of taxes) that Heller would report on its retained earnings statement for 2017 will be $35,000.

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