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:

Beginning inventory, FIFO (5,600 units @ $26)				$	145,600
Purchases:
5,600 units @ $32	$	179,200
5,600 units @ $36		201,600			380,800
Cost of goods available for sale				$	526,400
Sales for 2018 (10,000 units @ $75)				$	750,000

Additional Information:

1. The company's effective income tax rate is 25% for all years.
2. If the company had used the average cost method prior to 2021, ending inventory for 2020 would have been $140,000.
3. 6,800 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?

Journal entry worksheet Record adjustment to reflect average cost method. Note: Enter debits before credits. Transaction General Journal Debit Credit Record entry Clear entry View general journal

Answer 1

Journal Entry- Rockwell Corporation
Date	Account Tittle	Debit	Credit
	Retained Earning	$5,600.00
	Inventory (145600-140000)		$5,600.00
	TO Record Adjustment

The Effect of Change for the year 2021 is a $ 23600 increase in cost of goods Sold resulting in a 23600 decrease in income before tax and (23600X75%)17700 decrease in income affter tax

Computation of Effect in Net Income due to Change
Average Cost per Unit = (140000+179200+201600) / ( 5600+5600+5600)= $31 per Unit
Cost of Goods Sold as per FIFO
5600X 26	$145,600.00
4400X32	$140,800.00
Cost of Goods Sold as per FIFO	$286,400.00
Cost of Goods Sold as per Average method
10000X 31	$310,000.00
Cost of Goods Sold as per avergae method	$310,000.00
Increase in Cost of Goods Sold by ( 310000-286400)=$23600