In 2020, Frost Company, which began operations in 2018, decided to change from LIFO to FIFO because management believed that FIFO better represented the flow of their inventory. Management prepared the following analysis showing the effect of this change:Ending InventoryLIFOFIFOCumulative Difference12/31/2018$240,000$273,000$33,00012/31/2019245,000301,00056,00012/31/2020256,000328,00072,000 Frost reported net income of $2,500,000, $2,400,000, and $2,100,000 in 2018, 2019, and 2020, respectively. The tax rate is 21%.Required:1.Prepare the journal entry necessary to record the change.2.What amount of net income would Frost report in 2018, 2019, and 2020?3.If Frost’s employees received a bonus of 10% of income before deducting the bonus and income taxes in 2018 and 2019, what would be the effect on net income for 2018, 2019, and 2020?

Journal entry is a primary entry that records the financial transactions initially.

Answered: In 2020, Frost Company, which began…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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In 2020, Frost Company, which began operations in 2018, decided to change from LIFO to FIFO because management believed that FIFO better represented the flow of their inventory. Management prepared the following analysis showing the effect of this change:

Ending Inventory	LIFO	FIFO	Cumulative Difference
12/31/2018	$240,000	$273,000	$33,000
12/31/2019	245,000	301,000	56,000
12/31/2020	256,000	328,000	72,000

Frost reported net income of $2,500,000, $2,400,000, and $2,100,000 in 2018, 2019, and 2020, respectively. The tax rate is 21%.

Required:

1.	Prepare the journal entry necessary to record the change.
2.	What amount of net income would Frost report in 2018, 2019, and 2020?
3.	If Frost’s employees received a bonus of 10% of income before deducting the bonus and income taxes in 2018 and 2019, what would be the effect on net income for 2018, 2019, and 2020?

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