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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 1982. In 2021, the company decided to change to the average cost method. Data for 2021 are as follows:

Beginning inventory, FIFO (5,400 units @ $34.00) $ 183,600
Purchases:
5,400 units @ $40.00 $ 216,000
5,400 units @ $44.00 237,600 453,600
Cost of goods available for sale $ 637,200
Sales for 2021 (8,800 units @ $74.00) $ 651,200


Additional information:

  1. The company's effective income tax rate is 25% for all years.
  2. If the company had used the average cost method prior to 2021, ending inventory for 2020 would have been $162,000.
  3. 7,400 units remained in inventory at the end of 2021.


Required:
1. Prepare the journal entry at the beginning of 2021 to record the change in principle.
2. In the 2021–2019 comparative financial statements, what will be the amounts of cost of goods sold and inventory reported for 2021?

Solutions

Expert Solution

Solution

requirement 1:

Journal entry to adjust the accounts to reflect average cost method:

Event General Journal Debit credit
1 Retained Earnings $21,600
Inventory(183600-162000) $21,600

Requirement 2:

Value of closing inventory under:

1. FIFO:

Closing inventory 7400 units(5400+5400+5400-8800)

Last 5400 units @$ 44 per unit=$237,600

Add previous 2000 units @ 40 per unit=$80,000

Total Cost of 7400 units under FIFO=$317,600

2. Average cost:

Closing inventory 7400 units

Value of opening inventory under average cost method=$162000

Purchase 5400 units @ 40=$216000

Purchase 5400 units @44 =$237600

Total=$615,600

Average cost per unit=$615600/16200=$ 38 per unit

Cost of 7400 ending inventory under average cost=$281,200

Effect of change in method of costing to average cost method:

Effect in closing inventory (317600-281200) =$36400

Effect in opening inventory=$21,600

Effect in income statement=$14,800

The effect of the change for the year 2021 is $14800 increase in cost of goods sold resulting in a $14800 decrease in income before taxes and a decrease of $11100 (14800*75%) in income after tax.

ekkarill92 answered 2 years ago
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