Question

The Cecil-Booker Vending Company changed its method of valuing inventory from the average cost method to the FIFO cost method at the beginning of 2013. At December 31, 2012, inventories were $123,000 (average cost basis) and were $127,000 a year earlier. Cecil-Booker’s accountants determined that the inventories would have totaled $161,000 at December 31, 2012, and $166,000 at December 31, 2011, 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 $430,000 in 2012 and $555,000 in 2013. There were no extraordinary items either year.Required:1.Prepare the journal entry to record the change in accounting principle. (If no entry is required for a particular event, select "No journal entry required" in the first account field.)2. Prepare the 2013–2012 comparative income statements beginning with income from continuing operations. Include per share amounts. (Round EPS answers to 2 decimal places.) Comparative income statements 2013 2013 Earnings per common share

Answer 1

Answer:

Explanation:

1. Under weighted average cost method,the balance of inventroy was $123,000 on December 31, 2012. Had FIFO been used, th balance of inventory on December 31, 2012 would have been $161,000. Thus, under average cost method, the reported before tax income was $38,000 (161,000 - 123,000) less than what it would have been under FIFO method. Therefore, at the time of change in inventory valuation method, balance of inventory should be increased by $38,000 and retained earnings should be increased by $38,000 minus tax.

Record the change in accounting principle through the following journal entry: Check the images attached.

2. 2. Prepare comparative income statements.

Working note:  Check the image attached.

Decrease in inventory balance during 2012 under average cost method

= $127,000 - $123,000

= $4,000

Decrase in inventory during 2012 had FIFO been used

= $161,000 - $166,000

= $5,000

Therefore, if FIFO would have been used the cost of goods sold wuld have been $1,000 higher than that under average cost method. Thus, income before taxes would have been $1,000 less than what they were under average cost.