Bronson,
Inc. changed from the average cost formula to the FIFO cost formula in 2011.
The increase in the prior year’s income before taxes as a result of this change
is $435,000. The tax rate is 35%. Prepare Bronson’s 2011 journal entry to
record the change in accounting principle, assuming that the company’s
financial statements were determined to have better predictive value as a
result of the change.
Inventory*............................... 435,000
Income Tax
Payable................... 152,250
Retained
Earnings [$435,000 X (1 – 35%)] 282,750
* Assumes a periodic
system and that ending inventory of 2011 has not yet been recorded. If a
perpetual system is assumed, adjust to cost of goods sold.
CRA generally requires a company to use the same inventory
costing method for tax purposes as for financial reporting purposes. Therefore,
Bronson would have additional taxes payable on the increased income reported
rather than a future tax account. Also, the “better predictive value” from FIFO
inventory valuation is highly debatable, as older costs are used in the
computation of cost of goods sold.
