Chapter 20, Problem 20.2P

P 20-2

Change in principle; change in method of accounting for long-term construction

• LO20–2

The Pyramid Company has used the LIFO method of accounting for inventory during its first two years of operation, 2016 and 2017. At the beginning of 2018, 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 2016–2018. The income tax rate for all years is 40%.

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 2017 and 2018.

Required:

1. 1. Prepare the journal entry to record the change in accounting principle.
2. 2. Prepare the 2018–2017 comparative income statements beginning with income before income taxes.
3. 3. Prepare the 2018–2017 comparative statements of shareholders’ equity. [Hint: The 2016 statements reported retained earnings of $36,000. This is $60,000 − ($60,000 × 40%).]