X industries has used the LIFO inventory since it started business 10 years ago.
It has decided that it would comply with the IFRS standard and would switch to the FIFO method effective January 1, 2014 for the 2014 financial year.
International uses a periodic inventory system.
Records are not available such that years prior to 2013 can be restated. That means that the difference in the January 1, 2013 inventory is an adjustment to January 1, 2013 retained earnings (net of tax)
The tax rate for all periods is 40%
X uses a periodic inventory method
Here are the end products needed;
Restated income statement and retained earnings statement for 2013
Income and retained earnings earning statement for 2014, using FIFO ( the RE for 2013 will include inventory adjustment as of 1/1/13, the RE for 1/1/14 will include the inventory adjustment as of 1/1/14
Entries to adjust inventory, retained earnings and taxes as of January 1, 2014
Journal entries to close purchases and adjust inventories and to create a cost of goods sold for 2014
If it’s suggested you create cost of goods T-accounts for 2013 under both LIFO and FIFO to calculate the number for 2013
For 2014 you really only need a cost of goods sold using the FIFO method since the change will be effective for 2014
These are the inventory values on January 1, 2013
LIFO FIFO
300 @ 20 6,000 500 @ 28 14,000
200 @ 23 4,600
Transaction for 2013;
Purchases
800 @ 32 25,600
700 @ 35 24,500
Sold
1200 @ 60 72,000
Transactions for 2014
Purchases
1,000 @ 38 38,000
1,200 @ 40 48,000
Sold
1,800 @ 79 142,200
Income statement (2014 has not been issued it is tentative)
2013
Sales 72,000
Cost of goods sold 40,500
Gross profit 31,500
S&A expenses 19,000
Income before tax 12,500
Tax provision -5,000
Net income 7,500
Retained earnings
Balance 1/1/13 130,000
Balance 12/31/13 137,500
Net income 7,500
2014
sales 142,200
cost of goods sold 70,800
gross profit 71,400
S&A expenses 45,000
income before tax 26,400
tax provision -10,560
gross profit 71,400
net income 15,840
Retained earnings
balance 1/1/14 137,500
net income 15,840
balance 12/31/14 153,340