Question

Rockwell Corporation uses a periodic inventory system and has used the FIFO Cost method since inception of the company in 1979. In 2021, the company decided to switch to the average cost method. Data for 2021 are as follows: $150,000 Beginning inventory, FIFO (5,000 units @ $30) Purchases: 5,000 units @ $36 5,000 units @ $40 Cost of goods available for sale Sales for 2021 (8,000 units @ $70) $180,000 200,000 380,000 $530,000 $560,000 Additional Information: a. The company's effective income tax rate is 25% for all years. b. If the company had used the average cost method prior to 2021, ending inventory for 2020 would have been $130,000. c. 7,000 units remained in inventory at the end of 2021. Required: 1. Ignoring income taxes, prepare the 2021 journal entry to adjust the accounts to reflect the average cost method. 2. What is the effect of the change in methods on 2021 net income? X Answer is complete but not entirely correct. Complete this question by entering your answers in the tabs below. Required 1 | Required 2 What is the effect of the change in methods on 2021 net income? The effect of the change for the year 2021 is a $ 1 14,000m crease 00 increase in income before taxes and in cost of goods $ 14,000 X decrease an sold resulting in a decrease in income after tax.

Answer 1

Calculation of Closing inventory as per FIFO method
Closing inventory	7000	Units
These closing inventory valued as below:
Last purchase 5000 units @ 40	5000	$      2,00,000
Previous purchase 2000 units @ 36	2000	$         72,000
Value of Closing inventory as per FIFO method	7000	$      2,72,000
Calculation of Closing inventory as per Average cost method
Closing inventory	7000	Units
These closing inventory valued as below:
Value of opening inventory 5000 units under average cost method	5000	$      1,30,000
Purchases 5000 units @ 36	5000	$      1,80,000
Purchases 5000 units @ 40	5000	$      2,00,000
Total	15000	$      5,10,000
Average cost per unit		$                 34
Value of Closing inventory as per Average cost method	$2,38,000

Effect of change in Method of costing to Average cost method:
Effect in closing inventory	$    34,000
Effect in Opening inventory	$    20,000
Effect in Income Statement	$    14,000

Adjustment journal entry to account effect of change to Average cost method.

Date	Particulars	Debit	Credit
		$	$
2021 Dec 31	Cost of goods sold A/c	14000
	To Closing Inventory		14000
	( Being value of closing inventory reduced for the effect of change to Average cost method)

Effect of change in in methods in 2021 net income:

The effect of the change for the year 2021 is $14000 increase in cost of goods sold resulting in a $14000 decrease in income before taxed and a decrease of $10500 in income after tax. Income after tax is calculated considering tax @ 25%.