The Pyramid Company has used the LIFO method of accounting for inventory during
ID: 342257 • Letter: T
Question
The Pyramid Company has used the LIFO method of accounting for inventory during its first two years of operation, 2016 and 2017. At the beginning of 2018, Pyramid decided to change to the average cost method for both tax and financial reporting purposes. The following table presents information concerning the change for 2016–2018. The income tax rate for all years is 40%.
Pyramid issued 40,000 $1 par, common shares for $190,000 when the business began, and there have been no changes in paid-in capital since then. Dividends were not paid the first year, but $10,000 cash dividends were paid in both 2017 and 2018.
Required:
1. Prepare the journal entry to record the change in accounting principle.
2. Prepare the 2018–2017 comparative income statements beginning with income before income taxes.
3. Prepare the 2018–2017 comparative statements of shareholders’ equity. (Hint: The 2016 statements reported retained earnings of $34,080. This is $56,800 – [$56,800 × 40%]).
Tax Effect Difference
after Tax 2016 $ 85,200 $ 56,800 $ 28,400 $ 11,360 $ 17,040 2017 41,000 32,800 8,200 3,280 4,920 Total $ 126,200 $ 89,600 $ 36,600 $ 14,640 $ 21,960 2018 $ 49,400 $ 45,200 $ 4,200 $ 1,680 $ 2,520
Explanation / Answer
1. Journal entry to record change:
Contruction in process 36,600
Deferred tax liability(40%) 14,640
Retained Earnings 21,960
2. Income statement:
2018
2017
Income before income tax
49400
41000
Income tax (40%)
19760
16400
Net Income
29640
24600
No. of shares outstanding
40000
40000
Earning per share
0.741
0.615
3. Comparative statements of shareholders’ equity
Common stock
Additional paid-in capital
Retained earnings
Total Shareholder’s equity
Balance at Jan1, 2017
40000
150000
34080
224080
Net Income
24600
24600
Cash dividends
-10000
-10000
Balance at Dec31, 2017
40000
150000
48680
238680
Net Income
29640
29640
Cash dividends
-10000
-10000
Balance at Dec31, 2018
40000
150000
68320
258320
2018
2017
Income before income tax
49400
41000
Income tax (40%)
19760
16400
Net Income
29640
24600
No. of shares outstanding
40000
40000
Earning per share
0.741
0.615
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.