Question

The Rockwell Corporation uses a periodic inventory system and has used the FIFO cost method since inception of the company in 1979. In 2018, the company decided to change to the average cost method. Data for 2018 are as follows: Beginning inventory, FIFO (6,500 units @ $45.00) $ 292,500 Purchases: 6,500 units @ $51.00 $ 331,500 6,500 units @ $55.00 357,500 689,000 Cost of goods available for sale $ 981,500 Sales for 2018 (11,000 units @ $85.00) $ 935,000 Additional information: The company's effective income tax rate is 30% for all years. If the company had used the average cost method prior to 2018, ending inventory for 2017 would have been $266,500. 8,500 units remained in inventory at the end of 2018. Required: 1. Prepare the journal entry at the beginning of 2018 to record the change in principle. 2. In the 2018–2016 comparative financial statements, what will be the amounts of cost of goods sold and inventory reported for 2018?

Answer 1

Answer:

Retained earnings   26,000 debit

         Inventory                       26,000 credit

--to adjust for change of method--

Average cost per unit $49

COGS:                 11,000 units x $ 49 =  539,000

Ending Inventory 8,500 units x $ 49 =  416,500

Explanation:

Beginning inventory, FIFO (6,500 units @ $45.00) $ 292,500

Beginning inventory Average                                   $ 266,500  

Difference between methods                                        26,000

We will adjust inventory against retained earnings as a lower or higher inventory will represent higher or lower COGS respectively

beginning inventory            $ 266,500

Purchases:

6,500 units @ $51.00  $ 331,500

6,500 units @ $55.00 $ 357,500

                                                689,000

Total good avilable for sale:   955,500

Units available for sale:              19,500    

Average cost per unit: 955,500 / 19,500 = $ 49

COGS: 11,000 x $ 49 = 539,000

Ending Inventory 8,500 x $ 49 =  416,500