At the beginning of 2020, 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 21%, and the company received permission from the IRS to also make the change for income tax purposes. Brett has a simple capital structure, with 100,000 shares of common stock outstanding. Brett computed its reported income before income taxes in 2020 using the newly adopted inventory cost flow method. Brett’s 2019 and 2020 revenues were $1,500,000 and $1,750,000, respectively. Its retained earnings balances at the beginning of 2019 and 2020 (unadjusted) were $1,120,000 and $1,540,000, respectively. Brett paid no dividends in any year.

Required:
1. Prepare the journal entry at the beginning of 2020 to reflect the change.
2. At the end of 2020, prepare comparative income statements for 2020 and 2019. Notes to the financial statements are not necessary.
3. At the end of 2020, prepare comparative retained earnings statements for 2020 and 2019.

Transcribed Image Text:

Reported Income Before Income Taxes Excess of Average Cost of Goods Sold Over FIFO Cost of Goods Sold Adjusted Income Before Income Taxes Year Prior to 2019 $1,600,000 600,000 700,000 $130,000 50,000 $1,470,000 550,000 2019 2020