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Change in Accounting Principle, Inventory. Second Thought Products (STP) began operations on January P21-1. 1,2017, and adopted the FIFO method of inventory valuation at that time. Management...

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Change in Accounting Principle, Inventory. Second Thought Products (STP) began operations on January

P21-1.
1,2017, and adopted the FIFO method of inventory valuation at that time. Management elected to change its
inventory method to the average-cost method effective January 1, 2020. The new method more fairly presents
the company’s financial position and results of operations. The following information is available for the
years ended December 31, 2017, through December 31, 2020. STP is subject to a 40% income tax rate. The
company still uses the FIFO method for income tax reporting.
Cost of Goods Sold Unde
Year Average Cost Method FIFO Method
2017 $176,400 $201,600
XXXXXXXXXX,600 134,400
XXXXXXXXXX, XXXXXXXXXX
XXXXXXXXXX,600 260,400
Required » FIFO
; e from the
a. Compute the cumulative effect, net of tax, for the 3-year period needed to record a chang
method to the average-cost method.
n.
. Prepare the journal entry to record the change in accounting for inventory valuatio lines sheet
c. Indicate where STP should report the net of tax cumulative effect, assuming that the first ba
presented is for the year ended December 31, XXXXXXXXXX
Indicate the cost of goods sold reported on the income statement for 2017, 2018, 2019, an ZL ie
Assume that this change in principle is considered to be impractical. Indicate the cost of goods on
income statement for 2017, 2018, 2019, and 2020.
Answered Same Day Nov 26, 2022

Solution

Nitish Lath answered on Nov 27 2022
35 Votes
Sheet1
    a    Effect on net income
        Particulars    2017    2018    2019    Cumulative
        COGS under FIFO method    201600    134400    277200    613200
        COGS under Avg cost    176400    117600    252000    546000
        Net increase in profit pre tax    25200    16800    25200    67200
        Tax @40%    10080    6720    10080    26880
        Net increase in profit...
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