The Pyramid Company has used the LIFO method of accounting for inventory during its first two years of operation, 2019 and 2020. At the beginning of 2021, Pyramid decided to change to the average cost method for both tax and financial reporting purposes. The following table presents information concerning the change for 2019–2021. The income tax rate for all years is 25%. Income before Income Tax Using Average Cost Method Using LIFO Method Difference Income Tax Effect Difference after Tax 2019 $ 90,000 $ 60,000 $ 30,000 $ 7,500 $ 22,500 2020 45,000 36,000 9,000 2,250 6,750 Total $ 135,000 $ 96,000 $ 39,000 $ 9,750 $ 29,250 2021 $ 51,000 $ 46,000 $ 5,000 $ 1,250 $ 3,750 Pyramid issued 50,000 $1 par, common shares for $230,000 when the business began, and there have been no changes in paid-in capital since then. Dividends were not paid the first year, but $10,000 cash dividends were paid in both 2020 and 2021. Required: 1. Prepare the journal entry at January 1, 2021, to record the change in accounting principle. 2. Prepare the 2021–2020 comparative income statements beginning with income before income taxes. 3. Prepare the 2021–2020 comparative statements of shareholders’ equity. [Hint: The 2019 statements reported retained earnings of $45,000. This is $60,000 − ($60,000 × 25%).]

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

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The Pyramid Company has used the LIFO method of accounting for inventory during its first two years of operation, 2019 and 2020. At the beginning of 2021, Pyramid decided to change to the average cost method for both tax and financial reporting purposes. The following table presents information concerning the change for 2019–2021. The income tax rate for all years is 25%.

	Income before Income Tax
	Using Average Cost Method	Using LIFO Method	Difference	Income Tax Effect	Difference after Tax
2019		$	90,000			$	60,000	$	30,000	$	7,500	$	22,500
2020			45,000				36,000		9,000		2,250		6,750
Total		$	135,000			$	96,000	$	39,000	$	9,750	$	29,250
2021		$	51,000			$	46,000	$	5,000	$	1,250	$	3,750

Pyramid issued 50,000 $1 par, common shares for $230,000 when the business began, and there have been no changes in paid-in capital since then. Dividends were not paid the first year, but $10,000 cash dividends were paid in both 2020 and 2021.

Required:
1. Prepare the journal entry at January 1, 2021, to record the change in accounting principle.
2. Prepare the 2021–2020 comparative income statements beginning with income before income taxes.
3. Prepare the 2021–2020 comparative statements of shareholders’ equity. [Hint: The 2019 statements reported retained earnings of $45,000. This is $60,000 − ($60,000 × 25%).]

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