the Cecil-Booker Vending Company changed its method of valuing inventory from th

ID: 2532639 • Letter: T

Question

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 $124,000 (average cost basis) and were $128,000 a year earlier. Cecil-Booker’s accountants determined that the inventories would have totaled $163,000 at December 31, 2017, and $168,000 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 $440,000 in 2017 and $565,000 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.

Explanation / Answer

Inventory: $163,000 - $124,000 = $39000

Income tax Payable : $39000 * 40% = $15,600

General journal

Debit

credit

Inventory

$39,000

Income tax Payable

$15,600

Retained earnings

$23,400

Comparative income statements

2018

2017

Income before taxes

565000

439000

Income tax expense at 40%

226000

175600

Net income

339000

263400

Earnings per common share

$3.39

$2.64

Calculation of Decrease in 2017 pre tax income

$168000-$128000

$40,000

Increase in beginning inventory

$16300- $124000

($39,000)

Increase in ending inventory

$1,000