In: Accounting
The Pyramid Company has used the LIFO method of accounting for
inventory during its first two years of operation, 2016 and 2017.
At the beginning of 2018, 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
2016–2018. The income tax rate for all years is 40%.
Income before Income Tax | ||||||||||||||||||||
Average Cost Method | LIFO Method | Difference | Income Tax Effect |
Difference after Tax |
||||||||||||||||
2016 | $ | 89,400 | $ | 59,600 | $ | 29,800 | $ | 11,920 | $ | 17,880 | ||||||||||
2017 | 44,500 | 35,600 | 8,900 | 3,560 | 5,340 | |||||||||||||||
Total | $ | 133,900 | $ | 95,200 | $ | 38,700 | $ | 15,480 | $ | 23,220 | ||||||||||
2018 | $ | 50,800 | $ | 45,900 | $ | 4,900 | $ | 1,960 | $ | 2,940 | ||||||||||
Pyramid issued 49,000 $1 par, common shares for $225,000 when
the business began, and there have been no changes in paid-in
capital since then. Dividends were not paid the first year, but
$12,000 cash dividends were paid in both 2017 and 2018.
Required:
1. Prepare the journal entry to record the change
in accounting principle.
2. Prepare the 2018–2017 comparative income
statements beginning with income before income taxes.
3. Prepare the 2018–2017 comparative statements of
shareholders’ equity. (Hint: The 2016 statements reported retained
earnings of $35,760. This is $59,600 – [$59,600 × 40%]).