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.