Butler Products decided in 2016 to change inventory methods 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 profitability. Ignoring income tax,which one of the following journal entries correctly records the change in the accounting principle at January 1,2016?
A)No journal entry need for prospective application of the change in principle.

Question

Butler Products decided in 2016 to change inventory methods 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 profitability.  Ignoring income tax,which one of the following journal entries correctly records the change in the accounting principle at January 1,2016?
A)No journal entry need for prospective application of the change in principle.

Quizplus · Accepted Answer

According to the question, Butler Products changed its inventory method from average-cost to FIFO. This is a change in accounting principle that should be accounted for retroactively. Therefore, a journal entry is required to adjust the opening balance of retained earnings to reflect the cumulative effect of the change. The correct entry is shown in option C, which debits retained earnings for the total adjustment amount and credits inventory for the same amount. Option A is incorrect because a journal entry is needed for the retroactive adjustment. Option B is incorrect because it records the adjustment as an expense, which is not appropriate as it represents a prior period adjustment. Option D credits retained earnings twice, which is incorrect.

Butler Products Decided in 2016 to Change Inventory Methods to More