[jessanqi]

Hi,

Can someone please help this question, accourding to Yaeger CPA review, the correct is C.

But why answer B is not correct??

Thank you in advance!

On January 1, 20X9, Jay Company changed to the weighted average cost method from the first-in, first-out (FIFO) cost method for inventory cost flow purposes. Jay can justify the change and it is practical to determine the period-specific effects of an accounting change, which was made for both financial statement and income tax reporting purposes. The change will result in a $120,000 decrease in the beginning inventory at January 1, 20X9. Ignoring income taxes, the cumulative effect of changing to the weighted-average method from the FIFO method must be reported by Jay in the 20X9

A. Income statement at December 31, 20X9 should be $120,000 less.
B. Retained earnings statement as a $120,000 debit adjustment to the beginning balance.
C. Income statement at December 31, 20X9 should be $120,000 more.
D. Retained earnings statement as a $120,000 credit adjustment to the beginning balance.

[Katie]

Choice B is correct because this is a change in accounting principle which is accounted for retrospectively. Because it is accounted for retrospectively, you must record the cumulative effect at the beginning of 20X9, and the only way to do this is to DR Retained Earnings 120,000 and CR Inventory 120,000. The exception to this rule is changing from any inventory costing method to LIFO, which then means you can account for the change prospectively (similar to a change in estimate) even though it is still technically a change in principle. Hope this helps!

[Lentilcounter]

Look at the call of the question again. “Ignoring income taxes, the cumulative effect of changing to the weighted-average method from the FIFO method must be reported by Jay in the 20X9… ”

I think B is correct but C is “more” correct. This is a tricky question.

Step 1: do the journal entry that Katie mentions in her post above.
Step 2: How does the journal entry affect things? A reduction in inventory is going to reduce cost of goods sold which affects net income by increasing it.

As Katie said, U.S. GAAP does have an impracticability exception when converting from an inventory valuation method to LIFO where you can handle the change prospectively (not the case here). IFRS similarly allows an impracticability exception for error corrections.

BEC = 72 (6/08/16)
FAR = ?
REG = ?
AUD = ?

[Author]

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