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Intermediate Accounting: Reporting...
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Intermediate Accounting: Reporting...
Fava Company began operations in 2018 and used the LIFO inventory method for both financial reporting and income taxes. At the beginning of 2019, the anticipated cost trends in the industry had changed, so that it adopted the FIFO method for both financial reporting and income taxes. Fava reported revenues of $300,000 and $270,000 in 2019 and 2018, respectively. Fava reported expenses (excluding income tax expense) of $125,000 and $120,000 in 2019 and 2018, which included cost of goods sold of $55,000 and $45,000, respectively. An analysis indicates that the FIFO cost of goods sold would have been lower by $8,000 in 2018. The tax rate is 21%. Fava has a simple capital structure with 15,000 shares of common stock outstanding during 2018 and 2019. It paid no dividends in either year.
Required:
- 1. Prepare the journal entry to reflect the change.
- 2. At the end of 2019, prepare the comparative income statements for 2019 and 2018. Notes to the financial statements are not necessary.
- 3. At the end of 2019, prepare the comparative retained earnings statements for 2019 and 2018.
1.
Journalize the cumulative effect of the retrospective adjustment of $8,000 increase in income, on Company F’s prior year income that would be reported in 2019.
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 $8,000 increase in income, on Company F’s prior year income that would be reported in 2019.
| Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | ||
| Â | Â | Inventory | Â | 8,000 | Â | |
| Â | Â | Â | Deferred Tax Liability | Â | Â | 1,680 |
| Â | Â | Â | Retained Earnings | Â | Â | 6,320 |
| Â | Â | (Record the cumulative effect of income due to change from LIFO to FIFO) | Â | Â | Â | |
Table (1)
Description:
- Inventory is an asset account...
2.
Prepare comparative income statements of Company F for the years 2018 and 2019.
3.
Prepare comparative statement of retained earnings of Company F for the years 2019 and 2018.
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