The Lawrence Company began its operations on January 1, 2010, and used the LIFO method of accounting for its inventory.On January 1, 2012, Lawrence Company adopted FIFO in accounting for its inventory.The following information is available regarding cost of goods sold for each method: $\begin{array}{rrr}
& \text {LIFO Cost of}& \text {FIFO Cost of}\
\text { Year }& \text {Goods Sold}& \text {Goods Sold}\
2010 & \$ 470,000 & \$ 350,000 \
2011 & 690,000 & 450,000 \
2012 & 700,000 & 540,000
\end{array}$

Assuming a tax rate of 30% and the same accounting change adopted for tax purposes, how would the effect of the accounting change be reported in opening retained earnings on the 2012 financial statements?
A)+$360, 000 restatement
B)+$252, 000 restatement
C)no restatement
D)($700, 000)restatement

Question

The Lawrence Company began its operations on January 1, 2010, and used the LIFO method of accounting for its inventory.On January 1, 2012, Lawrence Company adopted FIFO in accounting for its inventory.The following information is available regarding cost of goods sold for each method: $\begin{array}{rrr}
& \text {LIFO Cost of}& \text {FIFO Cost of}\
\text { Year }& \text {Goods Sold}& \text {Goods Sold}\
2010 & \$ 470,000 & \$ 350,000 \
2011 & 690,000 & 450,000 \
2012 & 700,000 & 540,000
\end{array}$

Assuming a tax rate of 30% and the same accounting change adopted for tax purposes, how would the effect of the accounting change be reported in opening retained earnings on the 2012 financial statements?
A)+$360, 000 restatement
B)+$252, 000 restatement
C)no restatement
D)($700, 000)restatement

Quizplus · Accepted Answer

To calculate the effect of the accounting change on opening retained earnings, we need to calculate the difference in cost of goods sold between LIFO and FIFO and then adjust for the tax savings from using LIFO.

Difference in cost of goods sold = Cost of goods sold under FIFO - Cost of goods sold under LIFO
= $4,800,000 - $4,548,000
= $252,000

Tax savings from using LIFO = (Inventory under LIFO - Inventory under FIFO) x Tax rate
= ($1,350,000 - $1,200,000) x 0.3
= $45,000

Therefore, the total effect of the accounting change on opening retained earnings would be:
$252,000 + $45,000 = $297,000

Since the tax savings increase retained earnings, we add this amount to the difference in cost of goods sold. Therefore, the opening retained earnings would be restated by $297,000, which is closest to option B.

The Lawrence Company Began Its Operations on January 1, 2010