Question - In 20X1 the Novak Company changed its method of accounting for inventories used for financial statement purposes (but not for tax purposes) from the average cost method to the first in first out (FIFO) method. The tax rate is 40% for all years. If FIFO had been used in years prior to 20X1, income (after taxes) would have been higher by $320,000. In 20X1, cost of goods determined using FIFO was $40,000 lower than it was using average cost. The beginning balance of retained earnings in 20X1 was $723,000.
Required:
a. Prepare the journal entry required to record the change in accounting principle.
b. Discuss the computation and presentation of cost of goods sold in 20X1.