Question

# The Cecil-Booker Vending Company changed its method of valuing inventory from the average cost method to...

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 2018. At December 31, 2017, inventories were \$127,000 (average cost basis) and were \$131,000 a year earlier. Cecil-Booker’s accountants determined that the inventories would have totaled \$169,000 at December 31, 2017, and \$174,000 at December 31, 2016, if determined on a FIFO basis. A tax rate of 40% is in effect for all years.

One hundred thousand common shares were outstanding each year. Income from continuing operations was \$470,000 in 2017 and \$595,000 in 2018. There were no discontinued operations either year.

Required:
1. Prepare the journal entry to record the change in accounting principle.
2. Prepare the 2018–2017 comparative income statements beginning with income from continuing operations. Include per share amounts.

1.

 General Journal Debit Credit Inventory 42000 Income tax payable 16800 Retained Earnings 25200

Explanation:

Inventory = \$169000 – 127000 = \$42000

Income tax payable = \$42000 × 40% = \$16800

2.

COMPARATIVE INCOME STATEMENTS

 2018 2017 Income before taxes \$595000 \$469000 Income tax expense (40%) (238000) (187600) Net Income \$357000 \$281400 Earnings per common Share \$3.57 \$2.81

Explanation:

Income before taxes (2017) = \$470000 less 1,000* = \$469000 if FIFO had been used

* Calculation of decrease in 2017 pretax income:

 \$174000 - \$ 131000 \$43000 increase in 2017 beginning inventory \$169000 - \$\$127000 (\$42000) increase in 2017 ending inventory \$1000 increase in cost of goods sold / decrease in income

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