Question

At the beginning of 2011, the Brett Company decided to change from the FIFO to the average cost inventory cost flow assumption for financial reporting purposes. The following data are available in regard to its pretax operating income and cost of goods sold:


The income tax rate is 30%, and the company received permission from the IRS to also make the change for income tax purposes. The company has a simple capital structure, with 100,000 shares of common stock outstanding. The company computed its reported income before income taxes in 2011 using the newly adopted inventory cost flow method. Brett’s 2010 and 2011 revenues were $1,500,000 and $1,750,000, respectively. Its retained earnings balances at the beginning of 2010 and 2011 (unadjusted) were $1,120,000 and $1,540,000, respectively. The company paid no dividends in any year.

Required
1. Prepare the journal entry at the beginning of 2011 to reflect the change.
2. At the end of 2011, prepare comparative income statements for 2011 and 2010. Notes to the financial statements are not necessary.
3. At the end of 2011, prepare comparative retained earnings statements for 2011 and2010.


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  • CreatedDecember 09, 2013
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