Question

Flint Company began operations on January 1, 2015, and uses the average-cost method of pricing inventory. Management is contemplating a change in inventory methods for 2018. The following information is available for the years 2015–2017.

Net Income Computed Using

Average-Cost Method

FIFO Method

LIFO Method

2015 $16,080 $18,980 $11,940
2016 17,980 20,800 14,020
2017 19,920 24,890 17,050

(a) Prepare the journal entry necessary to record a change from the average cost method to the FIFO method in 2018. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation

Debit

Credit

Inventory





Retained Earnings






(b) Determine net income to be reported for 2015, 2016, and 2017, after giving effect to the change in accounting principle.

Net Income

2015 $


2016 $


2017 $



(c) Assume Flint Company used the LIFO method instead of the average cost method during the years 2015–2017. In 2018, Flint changed to the FIFO method. Prepare the journal entry necessary to record the change in principle. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation

Debit

Credit

Answer 1

Answer: Please refer to Explanation

Explanation:

When using FIFO (First In First Out), a company sells it's earlier Stock first before it sells the latter one.

When using LIFO ( Last In First Out), a company sells it's latter Stock first before it sells the earlier one.

The Average Cost averages the both.

a) To record a change from the Average Cost method to the FIFO method, first take the difference between the total revenues from the two methods and then credit the difference to the Retained Earnings account if FIFO is higher to signify the increase in Retained Earnings as a result of the change. The corresponding entry should be to the Inventory account to show the rise in Inventory associated with the prices of goods rising and therefore later inventory being priced higher.

Total for Average Cost Method.

= 16,080 + 17,980 + 19,920

= $53,980

Total for FIFO

= 18,980 + 20,800 + 24,890

= $64,670

Difference is,

= $64,670 - $53,980

= $10,690

Journal Entry will be,

DR Inventory $10,690

CR Retained Earnings $10,690

( To record change of Accounting Method to FIFO)

b) The change has been from the Average Cost to the FIFO method. The question already gives the numbers related with calculating the Net Income using the FIFO method.

The answer is therefore,

FIFO

2015 - $18,980

2016 - $20,800

2017 - $24,890

c) Going by the same method as in A, you first take the difference between the totals of using LIFO and FIFO. The difference will be credited to the Retained Earnings account if FIFO is higher to signify the increase in Retained Earnings as a result of the change. The corresponding entry should be to the Inventory account to show the rise in Inventory associated with the prices of goods rising and therefore later inventory being priced higher.

FIFO Total

= 18,980 + 20,800 + 24,890

= $64,670

LIFO Total

= 11,940 + 14,020 + 17,050

= $43,010

Difference will be,

= 64,670 - 43,010

= $21,660

Journalizing it,

DR Inventory $21,660

CR Retained Earnings $21,660

(To record change on Accounting Method to FIFO)