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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