Question

Octavia Corporation uses perpetual FIFO throughout the year to maintain internal records but at the end of the year adjusts these amounts to LIFO for financial reporting purposes. The company began the year with a credit balance of $50,000 in its LIFO reserve account. By the end of the year, the difference between LIFO and FIFO inventory balances increased to $60,000. Prepare the appropriate adjusting journal entry dated as of the end of the year.

Answer 1

Answer:

The journal entry as at the end of the year will be

End of year   Debit Cost of Goods Sold   $110,000

                                  Credit LIFO Reserve account     $110,000

Explanation:

A FIFO method of inventory maintenance is when the first in first out(FIFO) method for inventory utilizations is followed. Here, the oldest inventory is used first followed by the next oldest inventory. Suppose I have in stock inventory purchased in March and May, when the demand for use of inventory arises, the March inventory purchased will be utilized first.

LIFO method works the opposite way. In the above case, when the demand for use of inventory arises, the May inventory purchased will be utilized first.

In this case, FIFO is changed to LIFO method which gives rise to and LIFO reserve account of $50,000/- at the beginning of the year. Through the year, the difference in inventory maintenance method, further increases the LIFO reserve by $60,000/-. Hence the total reserve created due to inventory method change is $50,000+$60,000 = $110,000/-.  The change in inventory maintenance will have a direct impact on cost of goods sold(COGS). Hence COGS is debited.

Answer 2

Answer:

End of year   Debit Cost of Goods Sold   $10,000

                                 Credit LIFO Reserve account     $10,000

Explanation:

It's the diffference to the contra