Butler Products decided to change inventory methods on January 1, 2016 to more effectively report its results of operations. In the past, management has measured its ending inventories by the average-cost method and they now believe that FIFO is a better representation of its financial position and profitability. Butler's tax rate is 35% for all years
Year Ended
FIFO Inventory
Average-Cost Inventory
December 31, 2014
$250,000
$195,000
December 31, 2015
375,000
320,000
December 31, 2016
240,000
190,000
Which one of the following journal entries correctly records the change in the accounting principle?
A) No journal entry need for prospective application of the change in principle.
B)
Account
Debit
Credit
Retained Earnings
35,750
Deferred Tax Asset
19,250
Inventory 55,000
C)
Account
Debit
Credit
Inventory
55,000
Deferred Tax Liability
19,250
Retained Earnings-Prior Period Adj. 35,750
D)
Account
Debit
Credit
Retained Earnings
32,500
Deferred Tax Asset
17,500
Inventory 50,000
Answer: C
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