Rockwell Corporation uses a periodic inventory system and has used the FIFO cost

Question

Rockwell Corporation uses a periodic inventory system and has used the FIFO cost method since inception of the company in 1976. In 2013, the company decided to switch to the average cost method. Data for 2013 are as follows:

The company's effective income tax rate is 40% for all years.

If the company had used the average cost method prior to 2013, ending inventory for 2012 would have been $132,500.

Prepare the 2013 journal entry to adjust the accounts to reflect the average cost method. (If no entry is required for an event, select "No journal entry required" in the first account field.)

What is the effect of the change in methods on 2013 net income?

Rockwell Corporation uses a periodic inventory system and has used the FIFO cost method since inception of the company in 1976. In 2013, the company decided to switch to the average cost method. Data for 2013 are as follows:

Explanation / Answer

2012 Ending Inventory under FIFO $169,600
2012 Ending Inventory under average cost 132,500
Decrease in ending inventory from change $ 37,100
If ending inventory would have decreased, net income and retained
earnings would have decreased. The reduction in retained earnings
would reflect the after tax amount, i.e., $37,100 x (1 – 40%).

Retained earnings ($37,100 x 60%) =$22,260
DTA ($37,100 x 40%) =$14,840
Inventory 37,100

Net income will change only because of change in cogs

FIFO cost of goods in 2013 is
=(5300*32)+(2700*38)=$272,200

AverAGE method cogs in 2013 is

=(169600+201400+22600)/(5300+5300+5300)
=593600/15900=$37.33

cogs=27.33*8000=$298,667

decrease in net income=(298667-272200)*.6=$15,880

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