Question

Tim Mattke Company began operations in 2018 and for simplicity reasons, adopted weighted-average pricing for inventory. In 2020, in accordance with other companies in its industry, Mattke changed its inventory pricing to FIFO. The pretax income data is reported below. Year Weighted-Average FIFO 2018 $370,000 $395,000 2019 390,000 430,000 2020 410,000 450,000 Instructions a. What is Mattke’s net income in 2020? Assume a 20% tax rate in all years. b. Compute the cumulative effect of the change in accounting principle from weighted-average to FIFO inventory ­pricing. c. Show comparative income statements for Tim Mattke Company, beginning with income before income tax, as presented on the 2020 income statement.

Answer 1

Answer:

a)     $360,000

b)     $52,000

c) Net Income                             360,000            344,000        316,000

Explanation:

Part 1) Determine the net income for 2020 as follows using the First In First Out (FIFO)

= FIFO 2020 = $450,000 - The Income Tax

= $450,000 - ($450,000 x 0.35)

= $450,000- $90,000

= $360,000

Part 2) Compute the cumulative effect in change of the weighted average to FIFO

 Weighted average  FIFO    Difference    [email protected]%(difference)  net effect

2018  370,000               395,000    25,000                     5,000           20,000

2019   390,000              430,000     40,000                    8,000           32,000

Total in Net effect                                                                               $52,000

Part 3) Show comparative income statement as follows

                                                         2020                     2019                2018

Income before tax                          450,000              430,000         395,000

Remove the tax (@20)                      90,000                86,000          79,000

Net Income                                       360,000            344,000        316,000