Chapter 21, Problem 21.1E

Change in Accounting Principle, Inventory. Massi Pharmacies, Inc. started operations on January 1, 2014. The company initially used the average-cost method to value its inventory for both book and tax purposes. Effective January 1, 2018. Massi elected to change its inventory valuation method to the FIFO basis for financial reporting purposes. Massi still uses the average-cost method on the company’s tax returns. Massi is subject to a 35% tax rate.

The following information is available for net income after tax for both the FIFO and the average cost methods

	Net Income
Year Ended	Average Cost	FIFO
December 31, 2014 December 31, 2015 December 31, 2016 December 31, 2017 December 31, 2018	$235,000 300,000 310,000 425,500 500,000	$310,000 376,000 400,500 535,000 585,000

Required (Round to the nearest whole dollar)

Prepare the journal entry required to record the accounting change on January 1, 2018.

Prepare the partial comparative income statements for the 3 years ending December 31, 2018.

Prepare the footnote to disclose the change from the average cost to the FIFO basis. Designate the note as “Note A Change in Method of Accounting for Inventory Valuation."