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:

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 2013, ending inventory for 2012 would have been $84,000.

Prepare the 2013 journal entry to adjust the accounts to reflect the average cost method.

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

Beginning inventory, FIFO (4,000 units @ $29) $ 116,000   Purchases:      4,000 units @ $35 $ 140,000      4,000 units @ $40 160,000 300,000   Cost of goods available for sale $ 416,000   Sales for 2013 (5,000 units @ $70) $ 350,000

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 2013, ending inventory for 2012 would have been $84,000.

c. 7,000 units remained in inventory at the end of 2013. Required: 1.

Prepare the 2013 journal entry to adjust the accounts to reflect the average cost method.

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

Explanation / Answer

Answer:1

Retained earnings A/c Dr. $32000 (116000-84000)

         To inventory A/C                                 $32000

Answer:2 The effect of the change for the year 2013 is a $9,000 increase in cost of goods sold ($160,000 - 151,000) resulting in a $14,000 decrease in income before tax and a $5,400 decrease in income after tax [$9,000 x (1 - .40)].

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