Rockwell Corporation uses a periodic inventory system and has used the FIFO cost
ID: 2473387 • Letter: R
Question
Rockwell Corporation uses a periodic inventory system and has used the FIFO cost method since inception of the company in 1979. In 2016, the company decided to switch to the average cost method. Data for 2016 are as follows:
Beginning inventory, FIFO (6,000 units @ $30) = $180,000
Purchases:
6,000 units @ $36= 216,000
6,000 units @ $40= 240,000
Total= 456,000
Cost of goods available for sale= 636,000
Sales for 2016 (10,000 units @ $78)= 780,000
Additional Information:
a. The company's effective income tax rate is 40% for all years.
b. If the company had used the average cost method prior to 2016, ending inventory for 2015 would have been $156,000.
c. 8,000 units remained in inventory at the end of 2016.
Required:
1. Ignoring income taxes, prepare the 2016 journal entry to adjust the accounts to reflect the average cost method.
2. What is the effect of the change in methods on 2016 net income?
The effect of the change for the year 2016 is a _______ increase/decrease in cost of goods sold resulting in a _______ increase/decrease in income before taxes and a(n) increase/decrease in income after tax.
Explanation / Answer
Ans 1 2015 Ending Inventory under FIFO $180,000 2015 Ending Inventory under Average Cost 156000 Decrease in ending Inventory $24,000 Now if ending inventory decrase so there is decrease in net income which inturn decrease Retained earnings The reduced amount would be shown in Retained Earning after tax $24000*(1-.4) 14400 Dr Cr Retained earnings (24000*60%) 14400 Deferred tax Asset (24000*40%) 9600 Inventory 24000 (Now retained earning is debited as reduction in income and DTA is debited because now accounting income is less than taxable income so DTA created and will be reversed in future Ans 2 If the method was changed than accoring to average cost the ending inventory would have been $156000 Average Cost FIFO Beginning Inventory 156000 180000 Purchases of 6000 units 216000 216000 Purcahses of another 6000 units 240000 240000 Total 612000 636000 Less: Ending Inventory (8000*34) 272000 312000 Cost Of Good sold 340000 324000 Total Cost 612000 No. of units 18000 So for 1 unit 34 Ending Inventory in case of FIFO 6000*40 240000 2000*36 72000 Ending Inventory 312000 $16000(340000-324000) increase in Cost Of good sold resulting is a $16000 decrease in income before taxes decrease in Income after tax $9600 (16000*(1-.4)
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