# Question & Answer: Southgate Inc. started business in 2011 and follows ASPE. Effective January 1, 2015, the company decided to change its method…..

Southgate Inc. started business in 2011 and follows ASPE. Effective January 1, 2015, the company decided to change its method of inventory from FIFO to moving weighted average. The company has a December 31 year end; a tax rate of 40%; and declared no dividends until 2015 when \$20,000 were declared and paid in December. Net income for 2015 was calculated to be \$70,000 using the moving weighted average method.

Year    Net income      Excess of COGS of FIFO over
as reported     moving weighted average
inventory methods
2011    87,000             13,000
2012   91,000             19,000
2013   94,000             20,000
2014   97,000             39,000

a) Prepare the statement of retained earnings for the year ended December 31, 2015 assuming that the change in accounting policy was implemented retroactively.

b) Calculate the income tax amount for retained earnings adjusting entry. Please make sure your final answer are accurate to 2 decimal place.

Reporting requirement: Adjusting entry is net of tax for \$ = ?

(a) Statement of Retained Earnings

For the year ended 31 December, 2015

Particulars Amount ( In \$ )

Net income as per moving weighted average method for year 2015 70,000

Less : Dividend declared and paid in December 2015 ( 20,000 )

Add : Excess of cost of goods sold of First in First out method over moving weighted average method after tax for various years is as follows :

Year 2011 = [ 13,000 – [ [ 40 * 13,000 ] / 100 ] ] 7,800

Year 2012 = [ 19,000 – [ [ 40 * 19,000 ] / 100 ] ] 11,400

Year 2013 = [ 20,000 – [ [ 40 * 20,000 ] / 100 ] ] 12,000

Year 2014 = [ 39,000 – [ [ 40 * 39,000 ] / 100 ] ] 23,400

Total 104,600

Explanation is as follows :

It must be noted that excess of cost of goods sold of First in First out method over moving weighted average method after tax is added in statement of Retained Earnings as on 31 December, 2015 because this excess of cost of goods sold for each of the year 2011, 2012, 2013, 2014 would have reduced the net income for each year by that amount hence this is added to Retained Earnings but after deducting tax at the rate of 40% on each of the amounts because when net income of each of the year 2011, 2012, 2013, 2014 increases due to change in accounting policy of inventory method then tax on each amount would be deducted and balance amount of each year is added to Retained Earnings for year ended 31 December, 2015 .

(b) Income tax amount for Retained Earnings adjusting entry is as follows :

For Year Calculation of amount of Income tax Amount ( In \$ )

2011 [ [ 40 * 13,000 ] / 100 ] 5,200

2012 [ [ 40 * 19,000 ] / 100 ] 7,600

2013 [ [ 40 * 20,000 ] / 100 ] 8,000

2014 [ [ 40 * 39,000 ] / 100 ] 15,600

Total 36,400

Income tax amount for Retained Earnings adjusting entry = \$ 36,400