Question

he 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.
  

Answer 1

1)

Date	Account	Debit	Credit
	Inventory ($163,000 - $124,000)	$39,000
	Income tax payable ($39,000 ×40%)		$15,600
	Retained earnings		$23,400
	(To record change in accounting policies)

2)

Particular	2018	2017
Income before taxes	$565,000	$440,000
Less: Income tax expenses (40%)	($226,000) [$565,000 ×40%]	($176,000) [$440,000 ×40%]
Net income	$339,000	$264,000
Earnings per share	$339,000/100,000= $3.39	$264,000/100,000 = $2.64