Question

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?

Short answer

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.

Step-by-step solution

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

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

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

Net Income to be reported

Year	Net Income ($)
2015	130,000
2016	290,000
2017	310,000