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The Pyramid Company has used the LIFO method of accounting for inventory during its first two...

The Pyramid Company has used the LIFO method of accounting for inventory during its first two years of operation, 2019 and 2020. At the beginning of 2021, Pyramid decided to change to the average cost method for both tax and financial reporting purposes. The following table presents information concerning the change for 2019–2021. The income tax rate for all years is 25%. Income before Income Tax Using Average Cost Method Using LIFO Method Difference Income Tax Effect Difference after Tax 2019 $ 93,000 $ 62,000 $ 31,000 $ 7,750 $ 23,250 2020 47,500 38,000 9,500 2,375 7,125 Total $ 140,500 $ 100,000 $ 40,500 $ 10,125 $ 30,375 2021 $ 52,000 $ 46,500 $ 5,500 $ 1,375 $ 4,125 Pyramid issued 59,000 $1 par, common shares for $255,000 when the business began, and there have been no changes in paid-in capital since then. Dividends were not paid the first year, but $12,000 cash dividends were paid in both 2020 and 2021. Required

: 1. Prepare the journal entry at January 1, 2021, to record the change in accounting principle.

2. Prepare the 2021–2020 comparative income statements beginning with income before income taxes.

3. Prepare the 2021–2020 comparative statements of shareholders’ equity. [Hint: The 2019 statements reported retained earnings of $46,500. This is $62,000 – ($62,000 × 25%)].

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Answer #1
S.No General Journal Debit Credit
1 Inventory 40500
Income tax payable 10125
Retained earnings 30375
2
COMPARATIVE INCOME STATEMENTS
2021-20
2021 2020
Income before income taxes 52000 47500
Income tax expense 13000 11875
Net income 39000 35625
Earnings per share 0.66 0.60
39000/59000 0.603813559
3 PYRAMID COMPANY
Statement of Shareholders' Equity
For the Years Ended Dec. 31, 2021,2020
Common stock Additional Paid-inCapital RetainedEarnings Total Shareholders'Equity
Balance at jan 1 2020 59000 196000 69750 324750
Net Income 35625 35625
Cash Dividends -12000 -12000
Balance at Dec. 31,2020 59000 196000 93375 348375
Net income 39000 39000
Cash Dividends -12000 -12000
Balance at Dec. 31,2021 59000 196000 120375 375375
*255000-59000 = 196000
**46,500+23250 = 69750
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