Question

The Cecil-Booker Vending Company changed its method of valuing inventory from the average cost method to the FIFO cost method at the beginning of 2021. At December 31, 2020, inventories were $125,000 (average cost basis) and were $129,000 a year earlier. Cecil-Booker’s accountants determined that the inventories would have totaled $165,000 at December 31, 2020, and $170,000 at December 31, 2019, if determined on a FIFO basis. A tax rate of 25% is in effect for all years.

One hundred thousand common shares were outstanding each year. Income from continuing operations was $450,000 in 2020 and $575,000 in 2021. There were no discontinued operations either year.

Required:
1. Prepare the journal entry at January 1, 2021, to record the change in accounting principle. (All tax effects should be reflected in the deferred tax liability account.)
2. Prepare the 2021–2020 comparative income statements beginning with income from continuing operations (adjusted for any revisions). Include per share amounts.

Answer 1

All amounts are in $

(a)

Inventory 40,000 (165,000-125,000)

Income tax payable 10,000 (40,000x25%)

Retained Earnings 30,000

(Recording change in accounting policies)

(b) Comparitive Income Statement

Particulars	2021	2020
Income before taxes	575,000	450,000
Less : Income tax payable @25%	(143,750)	(112,500)
Net Income	431,250	337,500
EPS	4.3125	3.375

Note :

To calculate EPS, we do not have number of common shares available.

For computing EPS, we assumed the number of shares as 100,000 shares