Question

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?

Answer 1

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