Question

The Pyramid Company has used the LIFO method of accounting for inventory during its first two years of operation, 2019 and 2020. At the beginning of 2021, Pyramid decided to change to the average cost method for both tax and financial reporting purposes. The following table presents information concerning the change for 2019–2021. The income tax rate for all years is 25%.

	Income before Income Tax
	Using Average Cost Method				Using LIFO Method				Difference				Income Tax Effect				Difference after Tax
2019		$	90,000			$	60,000			$	30,000			$	7,500			$	22,500
2020			45,000				36,000				9,000				2,250				6,750
Total		$	135,000			$	96,000			$	39,000			$	9,750			$	29,250
2021		$	51,000			$	46,000			$	5,000			$	1,250			$	3,750

Pyramid issued 50,000 $1 par, common shares for $230,000 when the business began, and there have been no changes in paid-in capital since then. Dividends were not paid the first year, but $10,000 cash dividends were paid in both 2020 and 2021.

Required:
1. Prepare the journal entry at January 1, 2021, to record the change in accounting principle.
2. Prepare the 2021–2020 comparative income statements beginning with income before income taxes.
3. Prepare the 2021–2020 comparative statements of shareholders’ equity. [Hint: The 2019 statements reported retained earnings of $45,000. This is $60,000 − ($60,000 × 25%).]

• Record the change in accounting principle.
• Prepare the 2021–2020 comparative income statements beginning with income before income taxes. (Round EPS answers to 2 decimal places.)
• Prepare the 2021–2020 comparative statements of shareholders’ equity. [Hint: The 2019 statements reported retained earnings of $45,000. This is $60,000 − ($60,000 × 25%).] (Deductions should be indicated by a minus sign.)

Answer 1