Question

Nidal Company reported inventory in the 2017 year-end balance sheet, using the FIFO method, as $185,000. In 2018, the company decided to change its inventory method to average cost. If the company had used the average cost method in 2017, ending inventory would have been $171,000. What adjustment would Nidal make for this change in inventory method?

Answer 1

Answer:

Retained Earnigns 14,000 debit

       Inventory                      14,000 credit

Explanation:

It will need to adjust the inventory for the difference. In this case:

171,000 new method - 185,000 old method = 14,000 decrease

As a lower inventory will be faces with a higher cost of good sold the net incoem of the prevous year will also decrease by 14,000.

The net income is "stored" on retained earnings account. Therefore, we must decrease retained earnings as well.

After this adjustment the 2017 books will be like if the average cost mehod was used.