n 2018, CPS Company changed its method of valuing inventory from the FIFO method

Question

n 2018, CPS Company changed its method of valuing inventory from the FIFO method to the average cost method. At December 31, 2017, CPS's inventories were $46 million (FIFO). CPS's records indicated that the inventories would have totaled $35.0 million at December 31, 2017, if determined on an average cost basis. Required: 1. Prepare the journal entry to record the adjustment. (Ignore income taxes.) (Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5). If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) View transaction list Journal entry worksheet Record the adjustment necessary to reflect the average cost method Note: Enter debits before credits.

Explanation / Answer

Journal Entry for rectification: Accounts title and explantions Debit $ Credit $ Case-1 Retained Earnings Account Dr. 11,000,000      Inventory Account 11,000,000 (As Inventory has been recorded at higher value in previous year. This has beenn reduced and also COGS have been shown lesser which has increased the income The same has been adjusted in Retained earnings) Case-2 Inventory Accout Dr. 5,500,000      Retained Earnings Account 5,500,000 (As inventory purchased has been recorded in 2007 without increasing the inventory. Therefore, the COGS of prior year has been increased resulting in decrease in net income. The same has been rectified through credit in retained earninngs. However, the Inventory of Current year shall be increased for purchases made and not included)

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