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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The Pyramid Company has used the LIFO method of accounting for inventory during its first two years of operation, 2019 and 2020. At
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
$ 90,000
45,000
$135,000
$ 51,000
Method
$60,000
36,000
$96,000
$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%).]

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Step 1

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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