Question

The Rockwell Corporation uses a periodic inventory system and has used the FIFO cost method since inception of the company in 1979. In 2018, the company decided to change to the average cost method. Data for 2018 are as follows: Beginning inventory, FIFO (5,700 units @ $37.00) $ 210,900 Purchases: 5,700 units @ $43.00 $ 245,100 5,700 units @ $47.00 267,900 513,000 Cost of goods available for sale $ 723,900 Sales for 2018 (9,400 units @ $77.00) $ 723,800 Additional information: The company's effective income tax rate is 40% for all years. If the company had used the average cost method prior to 2018, ending inventory for 2017 would have been $188,100. 7,700 units remained in inventory at the end of 2018. Required: 1. Prepare the journal entry at the beginning of 2018 to record the change in principle. 2. In the 2018–2016 comparative financial statements, what will be the amounts of cost of goods sold and inventory reported for 2018?

Answer 1

1.

	Debit	Credit
Retained Earnings	13,680.00
Deferred Tax Asset	9,120.00
Inventory		22,800.00

Ending Inventory for Year 2017 as per FIFO	210,900.00
Ending Inventory for Year 2017 as per Average Cost	188,100.00
Decrease in Ending Inventory Due to Change	22,800.00

2.

Beginning inventory (5,700 Units)	188,100.00
Purchase of 5700@43	245,100.00
Purchase of 5700@47	267,900.00
Total Cost of 17,100 Units	701,100.00
Less: Ending Inventory	315,700.00
Cost of Goods Sold	385,400.00