The Cecil-Booker Vending Company changed its method of valuing inventory from th

ID: 2530848 • Letter: T

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 2018. At December 31, 2017, inventories were $127,000 (average cost basis) and were $131,000 a year earlier. Cecil-Booker’s accountants determined that the inventories would have totaled $169,000 at December 31, 2017, and $174,000 at December 31, 2016, 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 $470,000 in 2017 and $595,000 in 2018. There were no discontinued operations either year.

Required:
1. Prepare the journal entry to record the change in accounting principle.
2. Prepare the 2018–2017 comparative income statements beginning with income from continuing operations. Include per share amounts.

Explanation / Answer

General Journal

Debit

Credit

Inventory

42000

Income tax payable

16800

Retained Earnings

25200

Explanation:

Inventory = $169000 – 127000 = $42000

Income tax payable = $42000 × 40% = $16800

COMPARATIVE INCOME STATEMENTS

2018

2017

Income before taxes

$595000

$469000

Income tax expense (40%)

(238000)

(187600)

Net Income

$357000

$281400

Earnings per common Share

$3.57

$2.81

Explanation:

Income before taxes (2017) = $470000 less 1,000* = $469000 if FIFO had been used

* Calculation of decrease in 2017 pretax income:

$174000 - $ 131000

$43000

increase in 2017 beginning inventory

$169000 - $$127000

($42000)

increase in 2017 ending inventory

$1000

increase in cost of goods sold / decrease in income