Question

The Jamieson Corporation used a periodic inventory system and has used the FIFO method since the company’s inception. In 20x5, the company decided to switch to the average cost method. Data for 20x5 is 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

Total 380,000

Cost of goods available for sale $530,000

Sales for 20x5 (8,000 units @ $70.00) $560,000

Additional information – 1. The company’s effective income tax rate is 30%. 2. If the company had used the average cost method prior to 20x5, the 20x4 ending inventory would have been $142,000.

Required – (a) Prepare the journal entry at the beginning of 20x5 to record the change in policy.

(b) What amounts of cost of goods sold and inventory will be reported for 20x5?

Answer 1

Answer (a):

Beginning inventory, FIFO (5,000 units @ $30.00) = $150,000

Beginning inventory, Average cost method (5,000 units ) = $142,000

As such, decrease in beginning inventory due to change in inventory method = $150,000 - $142,000 = $8,000

Tax impact = $8,000 * 30% = $2,400

The decrease in beginning inventory of 2015 (Ending inventory of 2014) will reduce retained earnings by ($8,000 - $2,400=) $5,600

The journal entry at the beginning of 20x5 to record the change in policy.:

Answer (b):

Jamieson Corporation uses periodic inventory system:

Hence based on average cost method, per unit cost of inventory for 2015 is calculated as follows:

Per unit cost of inventory based on average cost method = (Value of beginning inventory + Total Purchase cost) / (Beginning inventory in units + Total purchases in units)

= $522,000/ 15,000 = $38.20

Cost of Goods sold to be reported for 2015 = Sales quantity * average cost per unit of inventory

= 8,000 * $38.20

= $278,400

Ending inventory reported for 2015 = (15,000 - 8000) * $38.20 = $243,600