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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 $125,000 (average cost basis) and were $129,000 a year earlier. Cecil-Booker’s accountants determined that the inventories would have totaled $165,000 at December 31, 2017, and $170,000 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 $450,000 in 2017 and $575,000 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.

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Answer #1

Answer:

1.) Journal Entry to record change in accounting principle

Date Particulars Debit ($) Credit ($)
Inventory 40000
Income tax payable 16000
Retained Earnings 24000

Working Notes:

Inventory = 165000-125000 = 40000
Income tax payable = 40000*40% = 16000
Retained Earnings = 40000-16000 = 24000

2.) Comparative Income Statement of 2018-2017

2018 2017
Income from Continuing Operations 575000 449000
Income tax payable (230000) (179600)
Net Income 345000 269400
Earnings Per Share 3.45 2.69

Calculations of decrease in 2017 pretax income

Increase in 2017 beginning inventory = 170000-129000 = 41000
Increase in 2017 ending inventory = 165000-125000= (40000)
So, 41000-40000 = 1000 decrease in income
Therefore, Income from continuing operations = 450000-1000 = 449000

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