In 2021, CPS Company changed its method of valuing inventory from the FIFO method to the average cost method. At December 31, 2020, CPS’s inventories were $50 million (FIFO). CPS’s records indicated that the inventories would have totaled $38.2 million at December 31, 2020, if determined on an average cost basis.
Prepare the journal entry to record the adjustment (Ignore income taxes.) (Enter your answers in millions rounded to 1 decimal place (i. e., 5,500,000 should be entered as 5.5).

Cost of Goods Sold or Equity Account      Dr. $11.8

Inventory                                                      Cr. $11.8

Explanation:

Under FIFO method inventory was overvalued by $11.8 which needs to adjusted by lowering the inventory by $11.8. The corresponding effect of overvalued inventory  was reflected in income statement which ultimately became part of equity 9equity increased as result of this) which also needs to adjusted by debiting the equity/cost of goods sold.

This change from FIFO to average cost is called change of accounting policy which is retrospectively accounted for.

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