The Jack Company began its operations on January 1, 2016, and used the LIFO method of accounting for its inventory. On January 1, 2018, Jack Company adopted FIFO in accounting for its inventory. The following information is available regarding cost of goods sold for each method: LIFO Cost of FIFO Cost of
Year Goods Sold Goods Sold
2016 $470,000 $350,000
2017 690,000 450,000
2018 700,000 540,000
Assuming a tax rate of 35% 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 2018 financial statements?
A) +$360,000 restatement
B) +$234,000 restatement
C) -$700,000 restatement
D) no restatement

Question

Quizplus · Accepted Answer

The effect of the accounting change on opening retained earnings is calculated by adjusting the previous years' cost of goods sold from LIFO to FIFO, net of tax. For 2016 and 2017, the differences are $120,000 (470,000 - 350,000) and $240,000 (690,000 - 450,000), respectively. The total pre-tax difference is $360,000. After applying the 35% tax rate, the net effect is $360,000 * (1 - 0.35) = $234,000. This amount is added to opening retained earnings because the FIFO method would have resulted in higher net income in those years compared to LIFO.

The Jack Company Began Its Operations on January 1, 2016