# Below is the net income of Blu

Below is the net income of Blue Instrument Co., a privatecorporation, computed under the three inventory methods using aperiodic system.

 FIFO Average Cost LIFO 2018 \$25,900 \$22,900 \$19,900 2019 27,400 21,900 19,200 2020 29,200 27,400 24,200 2021 37,100 33,500 29,600

(Ignore tax considerations.)(a) Assume that in 2021 Blue decided to changefrom the FIFO method to the average-cost method of pricinginventories. Prepare the journal entry necessary for the changethat took place during 2021, and show net income reported for 2018,2019, 2020, and 2021.

(b) Assume that in 2021 Blue, which had beenusing the LIFO method since incorporation in 2018, changed to theFIFO method of pricing inventories. Prepare the journal entrynecessary to record the change in 2021 and show net income reportedfor 2018, 2019, 2020, and 2021.

SOLUTION

A. Journal entry-

 Account titles and Explanation Debit (\$) Credit (\$) Retained earnings 10,300 Inventory 10,300 (To record the change in method of inventory valuation)

Amount of retained earnings to be changed-

 Year FIFO (A) Average cost (B) Difference off net income (A-B) 2018 25,900 22,900 3,000 2019 27,400 21,900 5,500 2020 29,200 27,400 1,800 Total 10,300

Net income

 2021 2020 2019 2018 Net income 33,500 27,400 21,900 22,900

* The method of valuation has changed to average cost, thus thenet income will be reported as per average cost method.

B. Journal entry-

 Account titles and Explanation Debit (\$) Credit (\$) Inventory 19,200 Retained earnings 19,200 (To record the change in method of inventory valuation)

Amount of retained earnings to be changed-

 Year LIFO (A) FIFO (B) Difference off net income (A-B) 2018 19,900 25,900 (6,000) 2019 19,200 27,400 (8,200) 2020 24,200 29,200 (5,000) Total (19,200)

Net income

 2021 2020 2019 2018 Net income 37,100 29,200 27,400 25,900

* The method of valuation has changed to FIFO, thus the netincome will be reported as per FIFO method.

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