Change from LIFO to Average Cost – Schmidt Company began operations on January 1, 2006 and used the LIFO inventory method for both financial reporting and income taxes. However, at the beginning of 2008 the company decided to switch to the average-cost inventory method for financial and income tax reporting. The company had previously reported the following financial statements for 2007:
Income Statement
|
2007 |
|
|
Revenues |
$128,000 |
|
Cost of goods sold |
78,000 |
|
Gross profit |
$50,000 |
|
Operating expenses |
25,000 |
|
Income before income taxes |
$25,000 |
|
Income tax expense |
7,500 |
|
Net income |
$17,500 |
|
Earnings per share |
$1.75 |
Retained Earnings Statement
|
2007 |
|
|
Beginning retained earnings |
$27,000 |
|
Add: Net income |
17,500 |
|
$44,500 |
|
|
Less: Dividends |
6,000 |
|
Ending retained earnings |
$38,500 |
Balance Sheet (12/31/07)
|
Cash |
$8,000 |
|
Inventory |
42,000 |
|
Other assets |
60,000 |
|
$110,000 |
|
Accounts payable |
$4,000 |
|
Income taxes payable |
7,500 |
|
Common stock, no par |
60,000 |
|
Retained earnings |
38,500 |
|
$110,000 |
An analysis of the accounting records discloses the following cost of goods sold under the LIFO and average-cost inventory methods:
|
LIFO Cost of Goods Sold |
Average Cost of Goods Sold |
|
|
2006 |
$62,000 |
$56,000 |
|
2007 |
78,000 |
69,000 |
|
2008 |
90,000 |
80,000 |
There are no indirect effects of the change in inventory method. Revenues for 2008 total $130,000; operating expenses for 2008 total $30,000. The company is subject to a 30% income tax rate in all years; it pays all income taxes payable in the next quarter. The company had 10,000 shares of common stock outstanding during all years; it paid dividends of $1 per share in 2008. At the end of 2008 the company had cash of $12,000, inventory of $34,000, other assets of $76,000, income taxes payable of $6,000, and accounts payable of ?. The company desires to show financial statements for the current year and previous year in its 2008 annual report.
Required
1. Prepare the journal entry to reflect the change in method at the beginning of 2008. Show supporting calculations.
2. Prepare the 2008 annual report. Notes to the financial statements are not necessary. Show supporting calculations.
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