Nidal Company reported inventory in the 2020 year-end balance sheet, using the FIFO method, as $185,000. In 2021, the company decided to change its inventory method to average cost. If the company had used the average cost method in 2020, ending inventory would have been $171,000. What adjustment would Nidal make for this change in inventory method

It is to be noted that a lower inventory will have high costs associated with goods sold hence reduces profit/net income for the previous year by $14,000.

Also, the net income reports to retained earnings account hence decreases retained earnings.

Having made the above adjustment, we can assume that the average cost method was used for 2020 books.

abiolataiwo2015 abiolataiwo2015 · Answer 2 · 2020-07-23T04:58:15+02:00

Answer:

Dr Retained earnings for $14,000

Cr Inventory for $14,000

Explanation:

Calculation of the adjustment that Nidal would make for this change in inventory method

Based of the information given the adjustment will records the decrease in inventory of $14,000 which is calculated as ( Inventory of $185,000 − Ending inventory of $171,000) as well as the decrease in retained earnings, just as if average cost had been used in 2020.]

Therefore the adjustment that Nidal would make for this change in inventory method will be:

Dr Retained earnings for $14,000

Cr Inventory for $14,000.