The Cecil-Booker Vending Company changed its method of valuing inventory

P20-1 Change in inventory costing methods; comparative income statements

P20-1 The Cecil-Booker Vending Company changed its method of valuing inventory from the average cost method to the FIFO cost method at the beginning of 2011. At December 31, 2010, inventories were $120,000 (average cost basis) and were $124,000 a year earlier. Cecil-Booker's accountants determined that the inventories would have totaled $155,000 at December 31, 2010, and $160,000 at December 31, 2009, if determined on a FIFO basis. A tax rate of 40% is in effect for all years.

One hundred thousand common shares were outstanding each year. Income from continuing operations was $400,000 in 2010 and $525,000 in 2011. There were no extraordinary items either year.

Required:

1. Prepare the journal entry to record the change in accounting principle. (All tax effects should be reflected in the deferred tax liability account.)

2. Prepare the 2011–2010 comparative income statements beginning with income from continuing operations. Include per share amounts.

SOLUTION PREVIEW

Requirement 1

To record the change:

Inventory ($155,000 – 120,000)                                 35,000


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