At the beginning of 2011, the Flynne Company decided to change from the LIFO to the FIFO inventory cost flow assumption. The following data are available:

The tax rate is 30%. The company has a simple capital structure and 10,000 shares of common stock outstanding. Assume that the balance in retained earnings is the sum of the company’s reported income amounts (net of tax) and that the reported income before income taxes in 2011 uses the newly adopted method. Flynne’s revenues for 2010 and 2011 were $225,000 and $230,000, respectively. Flynne’s operating expenses (other than cost of goods sold) for 2010 and 2011 were $32,000 and $40,000, respectively.

1. Prepare the journal entry at the beginning of 2011 to reflect the change.
2. At the end of 2011, prepare comparative income statements for 2011 and 2010.
3. At the end of 2011, prepare comparative retained earnings statements for 2011 and 2010.
4. Prepare a note to the comparative financial statements that discusses the nature and reason for the change from LIFO to FIFO and discloses the effects of the change on the company’s income statements for 2010 and 2011. (Ignore the effects on the balance sheet and statement of cash flows because there is insufficient information to calculate these changes.)
5. Explain how your answer to Requirement 2 would change if the employees received a bonus of 10% of income before deducting the bonus and income taxes, and the company paid additional bonuses for prior years in2011.

  • CreatedDecember 09, 2013
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