Royal Inc. began operations on January 1, 2015, and uses the FIFO method of pric
ID: 2555306 • Letter: R
Question
Royal Inc. began operations on January 1, 2015, and uses the FIFO method of pricing inventory. Management is contemplating a change to Average-Cost method for 2018. The following information is available for the years 2015–2017. Ignore income tax. Net Income Computed Using:
20. The cumulative effect of this accounting change on beginning retained earnings in 2018 is
a. $60,200.
b. $40,000.
c. $15,000.
d. $12,800.
21. The net income for 2017 on comparative financial statements issued in 2018 is
a. $60,200.
b. $70,000.
c. $150,000.
d. $165,000.
Average Cost Method FIFO Method 2015 $105,000 $120,000 2016 $70,000 $80,000 2017 $150,000 $165,000Explanation / Answer
Question 20:
The Total Income for three years under FIFO was $365000. As per Average cost method it is $325000.
So the effect on retaining earnings will be 365000-325000 = $40000. Option B.
Question 21:
Even though the policy is changed from FIFO to average cost we should not make any adjustments to last years financial statements. Any adjustments are to be made to current year financial statements. So we gave an effect to retained earnings for $40000. So the comparitives will be as per FIFO i,e., $165000 (Option D).
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