Company changed its method of valuing inventory from the average cost method to

Question

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 $113,000 (average cost basis) and were $117,000 a year earlier. Cecil-Booker’s accountants determined that the inventories would have totaled $141,000 at December 31, 2012, and $146,000 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 $330,000 in 2012 and $455,000 in 2013. There were no extraordinary items either year.    

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.)

Prepare the 2013–2012 comparative income statements beginning with income from continuing operations. Include per share amounts. (Round EPS answers to 2 decimal places.)

Required:

Explanation / Answer

Solution.

2012.

Inventory account debited $29,000

Retained earning account credited $29,000

2013.

Inventory account debited $28,000

Retained earning account credited $28,000

Calculation of Net income and Earning per share.

              2,012               2,013 Particulars Amount Amount Income 330,000 455,000 Increse in inventory            29,000            28,000 Total income          359,000          483,000 Tax @40%        (143,600)        (193,200) Net income          215,400          289,800 Common share          100,000          100,000 EPS                 2.15                 2.90

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