Drew Co. uses the average cost inventory method for internal reporting purposes and LIFO for financial statement and income tax reporting.  At December 31, 1992, the inventory was $375,000 using average cost and $320,000 using LIFO.  The unadjusted credit balance in the LIFO Reserve account on December 31, 1992, was $35,000.  What adjusting entry should Drew record to adjust from average cost to LIFO at December 31, 1992?

Debit Credit
a.Cost of Goods Sold$55,000 Inventory$55,000

b.Cost of Goods Sold$55,000 LIFO Reserve$55,000

c.Cost of Goods Sold$20,000 Inventory$20,000

d.Cost of Goods Sold$20,000 LIFO Reserve$20,000

Answer is D

Why is LIFO reserve account getting credited here?

bryris wrote: In real life, it would seem that this entry would need to be reversed or that these entries would be made in a separate area. For example, cut and paste the trial balance into a separate system and make the tax adjusting entries there. Someone with more experience than me on this might want to comment.

FYI - In real life the $5,000,000 + client that I have that uses this, keeps the liability on the books as a liability and each year we adjust it to the correct amount off set to an expense account.