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Q4E

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Intermediate Accounting (Kieso)
Found in: Page 1309

Short Answer

Gordon Company started operations on January 1, 2012, and has used the FIFO method of inventory valuation since its inception. In 2018, it decides to switch to the average-cost method. You are provided with the following information.

Net Income Retained Earnings (Ending Balance) Under FIFO Under Average-Cost Under FIFO 2012 $100,000 $ 90,000 $100,000 2013 70,000 65,000 160,000 2014 90,000 80,000 235,000 2015 120,000 130,000 340,000 2016 300,000 290,000 590,000 2017 305,000 310,000 780,000

Instructions (a) What is the beginning retained earnings balance at January 1, 2014, if Gordon prepares comparative financial statements starting in 2014?

(b) What is the beginning retained earnings balance at January 1, 2017, if Gordon prepares comparative financial statements starting in 2017?

(c) What is the beginning retained earnings balance at January 1, 2018, if Gordon prepares single-period financial statements for 2018?

(d) What is the net income reported by Gordon in the 2017 income statement if it prepares comparative financial statements starting with 2015?

Retained earnings at 2014 is $145,000, 2017 is $565,000, 2018 is $760,000.Net income to be reported in 2015 is $130,000, 2016 is $290,000, and 2017 is $310,000.

See the step by step solution

Step by Step Solution

Step 1: Retained earnings at Jan 1, 2014

Calculations

Amount ($)

Retained Earnings, Jan 1 as reported

160,000

Cumulative effect of change in accounting principle to average cost

100,000-90,000+70,000-65,000

-15,000

Retained earnings, Jan 1 as adjusted

160,000-15,000

145,000

Step 2: Retained earnings at Jan 1, 2017

Calculations

Amount ($)

Retained Earnings, Jan 1 as reported

590,000

Cumulative effect of change in accounting principle to average cost

100,000-90,000+70,000-65,000+90,000-80,000+120,000-130,000+300,000-290,000

-25,000

Retained earnings, Jan 1 as adjusted

590,000-25,000

565,000

Step 3 Retained earnings at Jan 1, 2018

Calculations

Amount ($)

Retained Earnings, Jan 1 as reported

780,000

Cumulative effect of change in accounting principle to average cost

25,000 at 12/31/2016 +

305,000-310,000

-20,000

Retained earnings, Jan 1 as adjusted

780,000-20,000

76,000

Step 4 Net Income to be reported

Year

Net Income ($)

2015

130,000

2016

290,000

2017

310,000

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