The Pyramid Company has used the LIFO method of accounting for inventory during its first two years of operation, 2019 and 2020. A 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%. 2019 2020 Total 2021 Income before Income Tax Using Average Cost Using LIFO Method Method $90,000 $60,000 45,000 36,000 $135,000 $96,000 $ 51,000 $46,000 Difference $30,000 9,000 $39,000 $ 5,000 Income Tax Effect $7,500 2,250 $9,750 $1,250 Difference after Tax $22,500 6,750 $29,250 $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%).]
The Pyramid Company has used the LIFO method of accounting for inventory during its first two years of operation, 2019 and 2020. A 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%. 2019 2020 Total 2021 Income before Income Tax Using Average Cost Using LIFO Method Method $90,000 $60,000 45,000 36,000 $135,000 $96,000 $ 51,000 $46,000 Difference $30,000 9,000 $39,000 $ 5,000 Income Tax Effect $7,500 2,250 $9,750 $1,250 Difference after Tax $22,500 6,750 $29,250 $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%).]
Intermediate Accounting: Reporting And Analysis
3rd Edition
ISBN:9781337788281
Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Chapter22: Accounting For Changes And Errors.
Section: Chapter Questions
Problem 5E: Fava Company began operations in 2018 and used the LIFO inventory method for both financial...
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An income statement is a financial report that indicates the revenue and expenses of a business. It also indicates when a business is profitable or losing money for a given time span.
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