Greene, Inc. uses the LIFO inventory method for external reporting and for income tax purposes but maintains its internal records using FIFO. The following disclosure note was included in a recent annual report: Inventories ($ in millions):
2021 2020
Total inventories $600 $580
LIFO reserve (75) (50)

The company's income statement reported cost of goods sold of $2,750 million for the fiscal year ended December 31, 2021.

Required:
a. Drew adjusts the LIFO reserve (Allowance to Reduce Inventory to LIFO) at the end of its fiscal year. Prepare the December 31, 2021, adjusting entry to record the cost of goods sold adjustment.
b. If Drew had used FIFO to value its inventories, what would cost of goods sold have been for the 2021 fiscal year?

a. Debit Cost of goods sold for $25; and Credit LIFO Reserve for $25.

b. Cost of goods sold in 2021 if FIFO is used would have been $2,775.

Explanation:

a. Greene adjusts the LIFO reserve (Allowance to Reduce Inventory to LIFO) at the end of its fiscal year. Prepare the December 31, 2021, adjusting entry to record the cost of goods sold adjustment.

Change in LIFO reserve =  Current year LIFO reserve = LIFO Reserve balance in 2021 - LIFO Reserve balance in 2020 = $75 - $50 = $25

The adjusting entry will therefore look as follows:

Date                   General Journal                Debit ($'m)       Credit ($'m)    

31 Dec 2021      Cost of goods sold               25

                             LIFO Reserve                                           25

                          (To record the cost of goods sold adjustment.)            

b. If Green had used FIFO to value its inventories, what would cost of goods sold have been for the 2021 fiscal year?

This can be calculated as follows:

Cost of goods sold in 2021 if FIFO is used = Cost of goods sold reported in the income statement + Change in LIFO reserve = $2,750 + $25 = $2,775

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