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ABC Corp. used the FIFO method for 2017 (its first year of operations), then switch to...

ABC Corp. used the FIFO method for 2017 (its first year of operations), then switch to the average method in 2018. Beginning and ending inventory was $200,000 and $250,000, respectively, for FIFO; and $260,000 and $310,000, respectively for average method in 2017. Assume a tax rate of 35% for both years. Outstanding shares were 150,000 each year. Income from continuing operations was $600,000 in 2017 and $700,000 in 2018. There were no discontinued operations either year.

Make the journal entry to record the change in accounting principle. Also prepare summarized income statements, with EPS figures for 2018 and 2017 comparative financial statements. Finally, suppose the company started operations in 2016 using the average method. If 2016 statements are not presented with 2017 and 2018 statements, does that mean that there will be no 2016 inventory effect on the 2017-2018 statements? Explain and discuss

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Answer #1
NO ENTRY would be required for change in Inventory. Only closing Inventory would be Inventory would be reinstated, since it is change in estimate.
Summarized Income Statement
Particulars 2017 2018
Income from Continuing Operations $       6,00,000 $       7,00,000
Outstanding Shares 150000 150000
EPS $               4.00 $               4.67
Inventory in 2016 will not have effect on Financial Statements of 2017-18 as change in Estimate is recorded in 2018. 2016 Inventory levels would not require adjustment in 2018.
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