Question
Change in Inventory Methods: Entries and Reporting Pier2 Company computed net income under the following two inventory methods for the recent four years, listed chronologically.
Change in Inventory Methods: Entries and Reporting Pier2 Company computed net income under the following two inventory methods for the recent four years, listed chronologically. Ignore income taxes.
Net Income Using | ||
---|---|---|
Average Cost | FIFO | |
Calendar Year | Inventory | Inventory |
Year 1 | $144,000 | $156,000 |
Year 2 | 148,000 | 152,000 |
Year 3 | 152,000 | 160,000 |
Year 4 | 160,000 | 164,000 |
Note: If a journal entry isn't required on any of the dates shown for the requirements below, select "N/Adebit" and "N/Acredit" as the account names and leave the Dr. and Cr. answers blank (zero).
- Average Cost to FIFO
- FIFO to Average Cost
- FIFO to LIFO
a. Prepare the journal entry on January 1 of Year 4, assuming the company changed from average cost to FIFO at the beginning of Year 4.
Date | Account Name | Dr. | Cr. |
---|---|---|---|
Jan. 1, Year 4 | CashAccounts ReceivableInventoryAllowance to Reduce Inventory to Net Realizable ValueAllowance to Reduce Inventory to Market ValueAccounts PayableBonus PayableEstimated Liability on Purchase CommitmentRetained EarningsSalesCost of Goods SoldCompensation ExpenseHolding Loss on InventoryEstimated Loss on Purchase CommitmentN/AdebitN/Acredit | ||
CashAccounts ReceivableInventoryAllowance to Reduce Inventory to Net Realizable ValueAllowance to Reduce Inventory to Market ValueAccounts PayableBonus PayableEstimated Liability on Purchase CommitmentRetained EarningsSalesCost of Goods SoldCompensation ExpenseHolding Loss on InventoryEstimated Loss on Purchase CommitmentN/AdebitN/Acredit | |||
To record accounting change. |
b. Assuming the change in part a, compute net income only as reported in comparative income statements for Year 4, Year 3, and Year 2.
Income Statement | Year 4 | Year 3 | Year 2 |
---|---|---|---|
Net income |
c. Prepare the journal entry on January 1 of Year 4, assuming the company changed from FIFO to average cost at the beginning of Year 4.
Date | Account Name | Dr. | Cr. |
---|---|---|---|
Jan. 1, Year 4 | CashAccounts ReceivableInventoryAllowance to Reduce Inventory to Net Realizable ValueAllowance to Reduce Inventory to Market ValueAccounts PayableBonus PayableEstimated Liability on Purchase CommitmentRetained EarningsSalesCost of Goods SoldCompensation ExpenseHolding Loss on InventoryEstimated Loss on Purchase CommitmentN/AdebitN/Acredit | ||
CashAccounts ReceivableInventoryAllowance to Reduce Inventory to Net Realizable ValueAllowance to Reduce Inventory to Market ValueAccounts PayableBonus PayableEstimated Liability on Purchase CommitmentRetained EarningsSalesCost of Goods SoldCompensation ExpenseHolding Loss on InventoryEstimated Loss on Purchase CommitmentN/AdebitN/Acredit | |||
To record accounting change. |
d. Assuming the change in part c, compute net income only as reported in comparative income statements for Year 4, Year 3, and Year 2.
Income Statement | Year 4 | Year 3 | Year 2 |
---|---|---|---|
Net income |
e. Instead, assume that the company changes from FIFO to LIFO at the beginning of Year 4. The company is unable to estimate the LIFO amounts for earlier years. What entry does the company record for the change in accounting method on January 1 of Year 4?
Date | Account Name | Dr. | Cr. |
---|---|---|---|
Jan. 1, Year 4 | CashAccounts ReceivableInventoryAllowance to Reduce Inventory to Net Realizable ValueAllowance to Reduce Inventory to Market ValueAccounts PayableBonus PayableEstimated Liability on Purchase CommitmentRetained EarningsSalesCost of Goods SoldCompensation ExpenseHolding Loss on InventoryEstimated Loss on Purchase CommitmentN/AdebitN/Acredit | ||
CashAccounts ReceivableInventoryAllowance to Reduce Inventory to Net Realizable ValueAllowance to Reduce Inventory to Market ValueAccounts PayableBonus PayableEstimated Liability on Purchase CommitmentRetained EarningsSalesCost of Goods SoldCompensation ExpenseHolding Loss on InventoryEstimated Loss on Purchase CommitmentN/AdebitN/Acredit | |||
To record accounting change. |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started