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 (5,000 units @ $30.00)				$	150,000
Purchases:
5,000 units @ $36.00	$	180,000
5,000 units @ $40.00		200,000			380,000
Cost of goods available for sale				$	530,000
Sales for 2018 (8,000 units @ $70.00)				$	560,000

Additional information:

1. The company's effective income tax rate is 40% for all years.
2. If the company had used the average cost method prior to 2018, ending inventory for 2017 would have been $130,000.
3. 7,000 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). Prepare the journal entry, at the beginning of 2018 to record the change in principle

Date	Acount title and explanation	Debit	Credit
	Retained earnings	$12,000	-
	Income tax payable ($20,000*40%)	$8,000	-
	Investory ($150,000 - $130,000)	-	$20,000
	(To Record the change fin principle from FIFO to average cost method)	-	-

1. Retained earnings are asset. There is an increase in asset value. Therefore it is debited
2. Income taxpayable is a liability. There is a decrease in liabiity value. Therefore, it is debited
3. Inventory is an asset. There is decrease in assset value. Therefore, iti is credited,

(2). Calculating ending inventory as shown below

= (130,000 + $380,000/15,000 units) * 7,000 units

= $34 * 7,000 units

= $238,000

Therefore, ending inventory for 2018 = $238,000

Calculate cost of goods sold as shown below

Calculate cost of goods sold by deducting ending inventory from the cost goods available for sale as shown below

Particulars	Amount	Amount
Beginning inventory (5,000 units)	-	$130,000
Purchase :	-	-
(5,000*36)	$180,000	-
(5,000*40)	$200,000	$380,000
Cost of goods available for sale (15,000 units)	-	$510,000
Less : Ending inventory	-	$238,000
Cost of goods sold	-	$272,000

Kindly Up-vote Thank You !!!!