Problem #1  Co J in 2019 decides to change the method of accounting for inventory from the weighted average cost method to FIFO.  Auditors have deemed it impractical to “re-create” the differences in inventory values beyond 2014.  Below is the schedule showing ending inventory under the weighted average method for the years 2014 through 2018.  Assume the applicable tax rate each year (under both methods) is 30%.

2018 Ending RE $800,000; 2019 Net Income (FIFO) = $320,000. No Dividends paid in 2019.

 WEIGHTED AVERAGE METHOD 

                              Ending Inventory             COGS    

2014                          $120,000                       $340,000                           

2015                          $140,000                       $360,000                          

2016                          $150,000                       $400,000                           

2017                          $160,000                       $440,000                           

2018                          $220,000                       $530,000                           

 

The following table presents what FIFO Ending Inventory would have been had FIFO been applied since 2014.

 FIFO METHOD

Ending Inventory

2014                          $140,000                      

2015                          $170,000                      

2016                          $190,000       

2017                          $210,000

2018                          $280,000       

REQUIRED:

1.What direction should R/E be adjusted (increase or decrease)?

2.Calculate the yearly difference between the two methods pre-tax.

3.Calculate the total difference between the two methods for the five-year period affected pre-tax and after tax.

4.Make the required journal entry in the current year.

5. Show the 2019 Statement of R/E section showing the PP Adj.

Answer rating: 100% (QA)

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