Question

The Pyramid Company has used the LIFO method of accounting for inventory during its first two years of operation, 2016 and 2017. At the beginning of 2018, 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 2016–2018. The income tax rate for all years is 40%.
	Income before Income Tax
	Average Cost Method	LIFO Method	Difference	Income	Difference
				Tax Effect	after Tax
2016	92,400	61,600	30,800	12,320	18,480
2017	47,000	37,600	9,400	3,760	5,640
Total	139,400	99,200	40,200	16,080	24,120
2018	51,800	46,400	5,400	2,160	3,240
Pyramid issued 57,000 $1 par, common shares for $250,000 when the business began, and there have been no changes in paid-in capital since then. Dividends were not paid the first year, but $11,000 cash dividends were paid in both 2017 and 2018.
Required:
1. Prepare the journal entry to record the change in accounting principle.
EVENT	GENERAL JOURNAL	DEBIT	CREDIT
1
2. Prepare the 2018–2017 comparative income statements beginning with income before income taxes.
COMPARATIVE INCOME STATEMENTS
	2018	2017
EARNINGS PER SHARE
3. Prepare the 2018–2017 comparative statements of shareholders’ equity. (Hint: The 2016 statements reported retained earnings of $36,960. This is $61,600 – [$61,600 × 40%]).
PYRAMID COMPANY
STATEMENT OF SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DEC. 31 2018 AND 2017
	COMMON STOCK	ADDITIONAL PAID IN CAPITAL	RETAINED EARNINGS	TOTAL SHAREHOLDER'S EQUITY
BALANCE AT JAN 1, 2017
NET INCOME
CASH DIVIDENDS
BALANCE AT DEC 31, 2017
NET INCOME
CASH DIVIDENDS
BALANCE AT DEC 31, 2018

Answer 1