P problem 8-5 (AICPA Adapted) on January 1, 2021, Folk Company changed from the average COs! method to the FIFO method to account for inventory. The entity provid the following ending inventory for each method: 2020 2021 900,000 average cost 500,000 FIFO cost 700,000" 1,400,000 Difference in ending inventory 200,000 500,000 ‘Theentity reported the following income statement using the average costmethod: \ 2020 2021 Sales 10,000,000 13,000,008 Cost of goods sold 7,000,000 Easy Operating expenses 1,500,000 2,0 00 Income before tax 1,500,000 2,000, aa Tax expense 450,000 600,0 The entity accrued tax expense on December 31 ofeach year and paid the tax in April of the following year. The income tax rate 1s 30%. What amount should be reported as net income in 2021 after the change from average to the FIFO inventory method? a. 1,610,000 b. 2,300,000 c. 1,750,000 . d. 1,890,000 Solution 8-5 Answer a Income before tax for 2021 — Average 2,000,000 Understatement of beginning inventory ( 200,000) Understatement of ending inventory 500,000 Income before tax for 2021 — FIFO Income tax — 30% 2,300,000 (690,000) 1,610,000 Net income for 2021 - FIFO