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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Refer to RE22-2. Assume the pretax cumulative effect adjustment is $50,000. Prepare the journal entry that Heller Company would make at the beginning of 2020 to record the cumulative effect of the change from LIFO to FIFO.

RE22-2

Heller Company began operations in 2019 and used the LIFO method to compute its $300,000 cost of goods sold for that year. At the beginning of 2020, Heller changed to the FIFO method. Heller determined that its cost of goods sold under FIFO would have been $250,000 in 2019. For 2020, Heller’s cost of goods sold under FIFO was $360,000, while it would have been $410,000 under LIFO. Heller is subject to a 21% income tax rate. Compute the cumulative effect of the retrospective adjustment on prior year’s income (net of taxes) that Heller would report on its retained earnings statement for 2020.

To determine

Journalize the cumulative effect of the retrospective adjustment of $50,000 increase in pretax income, on Company H’s prior year income that would be reported in 2020.

Explanation

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

  • Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
  • Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Journalize the cumulative effect of the retrospective adjustment of $50,000 increase in pretax income, on Company H’s prior year income that would be reported in 2020.

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
  Inventory 50,000 
   Deferred Tax Liability  10,500
   Retained Earnings  39,500
  (Record the cumulative effect of pretax income due to change from LIFO to FIFO)   

Table (1)

Description:

  • Inventory is an asset account...

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