Chapter 22, Problem 3RE

Refer to RE22-2. Assume the pretax cumulative effect adjustment is $50,000. Prepare the journal entry that Heller Company would make at the beginning of 2020 to record the cumulative effect of the change from LIFO to FIFO.

RE22-2

Heller Company began operations in 2019 and used the LIFO method to compute its $300,000 cost of goods sold for that year. At the beginning of 2020, Heller changed to the FIFO method. Heller determined that its cost of goods sold under FIFO would have been $250,000 in 2019. For 2020, Heller’s cost of goods sold under FIFO was $360,000, while it would have been $410,000 under LIFO. Heller is subject to a 21% income tax rate. Compute the cumulative effect of the retrospective adjustment on prior year’s income (net of taxes) that Heller would report on its retained earnings statement for 2020.