Question

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Goddard Company has used the FIFO method of inventory valuation since it began operations in 2018. Goddard decided to change to the average cost method for determining inventory costs at the beginning of 2021. The following schedule shows year-end inventory balances under the FIFO and average cost methods: Year 2018 2019 2820 FIFO $45,900 89,700 86,600 Average Cost $55,800 71,900 80,790 Required: 1. Ignoring income taxes, prepare the 2021 journal entry to adjust the accounts to reflect the average cost method. 2. How much higher or lower would cost of goods sold be in the 2020 revised income statement? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Ignoring income taxes, prepare the 2021 journal entry to adjust the accounts to reflect the average cost method. (If no entry is required for a transaction/event, select "No journal entry required in the first account field.) View transaction list Journal entry worksheet Record the adjustment necessary to reflect the average cost method. Note: Enter debits before credits. Event General Journal Debit Credit Record entry Clear entry View general journal < Required 1 Required 2 >

Answer 1

In 2018 average cost method shows higher value of stock. It means Cost of good sold must have been lower. So we will pass an entry to increase (debiting) the value of Inventory by $9,900 ($55,800-45,900) and decreasing the cost of goods sold by crediting. General Journal Inventory A/c Cost of Goods Sold Debit Event Credit 2018 9,900.00 9,900.00 In 2019 average cost method shows Lower value of stock. It means Cost of good sold must have been higher. So we will pass an entry to decrease (crediting) the value of Inventory by $8,800 ($80,700-71,900) and increasing the cost of goods sold by debiting. General Journal Cost of Goods Sold Debit Credit Event 2019 8,800.00 Inventory A/c 8,800.00 In 2020 average cost method shows Lower value of stock. It means Cost of good sold must have been higher. So we will pass an entry to decrease (crediting) the value of Inventory by $5,900 ($86,600-80, 700) and increasing the cost of goods sold by debiting. General Journal Cost of Goods Sold Inventory A/c Debit Credit Event 2020 5,900.00 5,900.00

Cost of goods sold will be higher by $4,800.

Change in cost of goods sold $55800-$45900 (9,900.00) 2018 Decrease in COGS 2019 Increase in COGS 2020 Increase in COGS $80700-$71900 8,800.00 $86600-$80700 5,900.00 Total Increase in COGS 4,800.00