Inventories are listed on the balance sheet at $600,000, retained earnings are $1.9 Million. In the notes to financial statements, you find a LIFO reserve of $125,000. Also, the probability of a LIFO liquidation is high. Assuming a tax rate of 36%, what will be the adjusted value of retained earnings? I understand that The adjustment to retained earnings will be: $125,000 × (1 − 0.36) = 80000 This amount should be added or subtracted rom retained earnings ? To the best of my understanding, as the lifo liquidation is high it means old inventory is being used up and hence COGS sold figure would be low causing reported retained earnings to be high, so the 80000 should be subtracted. However the answer adds 80000 to reported retained earnings to come up with 1,980,000. Can someone where am I going wrong ?
This is not an adjustment question. It is asking you to estimate what the adjusted value of retained earnings would have been if the LIFO Liquidation occurred. If the LIFO Liquidation had occurred, the COGS would have been lower, and hence NI would have been higher by 125 * 0.64 = 80 Since this increased NI flows to RI - RI would now be 1900 + 80 = 1980 K = 1.98 Million.
Thanks for the explanation CP.
Looks familiar