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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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Change in Inventory Cost Flow Assumption At the beginning of 2020, Brett Company decided to change from the FIFO to the average cost inventory cost flow assumption for financial reporting purposes. The following data are available in regard to its pretax operating income and cost of goods sold:

Chapter 22, Problem 4E, Change in Inventory Cost Flow Assumption At the beginning of 2020, Brett Company decided to change

The income tax rate is 21%, and the company received permission from the IRS to also make the change for income tax purposes. Brett has a simple capital structure, with 100,000 shares of common stock outstanding. Brett computed its reported income before income taxes in 2020 using the newly adopted inventory cost flow method. Brett’s 2019 and 2020 revenues were $1,500,000 and $1,750,000, respectively. Its retained earnings balances at the beginning of 2019 and 2020 (unadjusted) were $1,120,000 and $1,540,000, respectively. Brett paid no dividends in any year.

Required:

  1. 1. Prepare the journal entry at the beginning of 2020 to reflect the change.
  2. 2. At the end of 2020, prepare comparative income statements for 2020 and 2019. Notes to the financial statements are not necessary.
  3. 3. At the end of 2020, prepare comparative retained earnings statements for 2020 and 2019.

1.

To determine

Journalize the cumulative effect of the retrospective adjustment of decrease in pretax income, on Company B’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 decrease in pretax income, on Company B’s prior year income that would be reported in 2020.

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
  Retained Earnings 142,200 
  Deferred Tax Asset 37,800 
   Inventory  180,000
  (Record the cumulative effect of pretax income due to change from FIFO to average cost)   

Table (1)

Description:

  • Retained Earnings is an equity account. Earnings decreased due to decrease in pretax income due to decrease in cumulative difference out of the change from FIFO to average cost, and decreases in equity are debited...

2.

To determine

Prepare comparative income statements of Company B for the years 2019 and 2020.

3.

To determine

Prepare comparative statement of retained earnings of Company B for the years 2020 and 2019.

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