BuyFindarrow_forward

Intermediate Accounting: Reporting...

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

Solutions

Chapter
Section
BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
24 views

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. 1. Prepare the journal entry to reflect the change.
  2. 2. At the end of 2019, prepare the comparative income statements for 2019 and 2018. Notes to the financial statements are not necessary.
  3. 3. At the end of 2019, prepare the comparative retained earnings statements for 2019 and 2018.

1.

To determine

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.

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 $8,000 increase in income, on Company F’s prior year income that would be reported in 2019.

DateAccount Titles and ExplanationsPost. Ref.Debit ($)Credit ($)
  Inventory 8,000 
   Deferred Tax Liability  1,680
   Retained Earnings  6,320
  (Record the cumulative effect of income due to change from LIFO to FIFO)   

Table (1)

Description:

  • Inventory is an asset account...

2.

To determine

Prepare comparative income statements of Company F for the years 2018 and 2019.

3.

To determine

Prepare comparative statement of retained earnings of Company F for the years 2019 and 2018.

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Additional Business Solutions

Find more solutions based on key concepts

Show solutions add

How are inflation and unemployment related in the short run?

Essentials of Economics (MindTap Course List)

For a stock to be in equilibrium, what two conditions must hold?

Fundamentals of Financial Management, Concise Edition (MindTap Course List)

Why is a call provision advantageous to a bond issuer? When would the issuer be likely to initiate a refunding ...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)

What is the accounting rate of return?

Cornerstones of Cost Management (Cornerstones Series)