Question

In: Accounting

The Rockwell Corporation uses a periodic inventory system and has used the FIFO cost method since...

The Rockwell Corporation uses a periodic inventory system and has used the FIFO cost method since inception of the company in 1979. In 2018, the company decided to change to the average cost method. Data for 2018 are as follows:


Beginning inventory, FIFO (5,500 units @ $35.00) $ 192,500
Purchases:
5,500 units @ $41.00 $ 225,500
5,500 units @ $45.00 247,500 473,000
Cost of goods available for sale $ 665,500
Sales for 2018 (9,000 units @ $75.00) $ 675,000


Additional information:

The company's effective income tax rate is 40% for all years.
If the company had used the average cost method prior to 2018, ending inventory for 2017 would have been $170,500.
7,500 units remained in inventory at the end of 2018.


Required:
1. Prepare the journal entry at the beginning of 2018 to record the change in principle.
2. In the 2018–2016 comparative financial statements, what will be the amounts of cost of goods sold and inventory reported for 2018?

Solutions

Expert Solution

Answer 1

Beginning Inventory under FIFO

192,500

Beginning Inventory under average cost

170,500

Decrease in Beginning inventory Due to Change in method

22,000

If Inventory decreased by 22000 then Net income and Retained earnings would have decreased.

Decrease in retained earnings after tax (22000*(100%-40%))

         13,200

Amount relating to tax (22000*40%) considered as Deferred tax asset because of reducing in accounting income but does not taxable income.

           8,800

Date

General journal

Debit

Credit

Retained earnings

         13,200

Deferred tax asset

           8,800

Inventory

              22,000

(To record change in inventory method.)

Answer 2

Method

Weighted Average

Date

Goods Available for sale

Unit

Unit cost

Value

Beginning

5500

31

            170,500

Purchase

5500

41

            225,500

Purchase

5500

45

            247,500

Total

16500

            643,500

Cost of Goods Available for sale

            643,500

Divided by: Units Available for sale

               16,500

Weighted Average cost per unit

                 39.00

Cost of goods sold

9000

           39.00

            351,000

Ending inventory

7500

           39.00

            292,500

Cost of goods sold reported in financial statement

            351,000

Ending inventory reported in financial statement

            292,500


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