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Rhode, Inc., began business in Year 1. Inventory reported in the Year 3 year-end balance sheet, determined using the average cost method, was $170,000. In Year 4, the company decided to change its inventory method to FIFO. If the company had used the FIFO method in Year 3, ending inventory would have been $220,000. Prepare the appropriate journal entry to record this change. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

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Answer:

Debit: Inventory $50,000

          Credit: Retained Earnings $50,000

To record change in inventory method from Average to FIFO by retrospective application.

Explanation:

The Difference between the Average Method and FIFO method will be recorded as a retrospective application, which means an increase or decrease in Retained Earnings with respect to Inventory, in the given situation.

The difference between FIFO and Average method is calculated as follows;

$220,000 - $170,000 = $50,000

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