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 2021. At December 31, 2020, inventories were $111,000 (average cost basis) and were $115,000 a year earlier. Cecil-Booker’s accountants determined that the inventories would have totaled $137,000 at December 31, 2020, and $142,000 at December 31, 2019, if determined on a FIFO basis. A tax rate of 25% is in effect for all years.

One hundred thousand common shares were outstanding each year. Income from continuing operations was $310,000 in 2020 and $435,000 in 2021. There were no discontinued operations either year.

Required:
1. Prepare the journal entry at January 1, 2021, to record the change in accounting principle. (All tax effects should be reflected in the deferred tax liability account.)
2. Prepare the 2021–2020 comparative income statements beginning with income from continuing operations (adjusted for any revisions). Include per share amounts.

COMPARATIVE INCOME STATEMENTS
	2021	2020
not attempted	not attempted	not attempted
not attempted	not attempted	not attempted
not attempted	$0	$0
Earnings per common share	not attempted

Answer 1

Answer 1                                               Journal Entry

Particular	Dr($)	Cr($)
Inventory ($145000-115000)	30,000
To Income Tax   Payable (40%*30000)		12,000
To Retained earnings		18,000
(to record changes in accounting principle)

Answer 2

Computation of Comparative Income statement

Particular	2012($)	2013($)
Income before taxes	349,000	475,000
Income tax expenses	139,600	190,000
Net Income	209,400	285,000
No. of common shares outstanding (Not in $)	100000	100000
EPS	2.09	2.85

                                                         

Calculation of Income before Taxes

Particular	2012
Increase in beginning inventory (150000-119000)	31000
Increase In Ending Inventory (145000-115000)	(30000)
Increase in Cost of Goods sold	1000
Income before taxes (350000-1000)	349,000