Question

In 2018, CPS Company changed its method of valuing inventory from the FIFO method to the average cost method. At December 31, 2017, CPS's inventories were $32 million (FIFO). CPS's records indicated that the inventories would have totaled $23.8 million at December 31, 2017, if determined on an average cost basis.
Prepare the journal entry to record the adjustment. (Ignore income taxes.) (Enter your answers in millions (i.e., 5,500,000 should be entered as 5.5). Round your answers to 1 decimal place. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Answer:

Dr Retained earnings $8.2

Cr Inventory $8.2

Explanation:

By changing method of an inventory valuation, the company should apply it retrospectively based on IAS 8 guidelines on change in accounting estimates and errors. Thus, the said difference from FIFO method to Weighted Average method of valuation should be credited directly against Retained earnings account because, accounts are already closed right after the year ended.

$32-$23.8= $8.2 million

To record the said adjustment you have to

Debit Retained earnings and credit Inventory in the amount of $8.2 million.