Change from FIFO to Average Cost

Instructions

Koopman Company began operations on January 1, 2015, and uses the FIFO inventory method for financial reporting and the average cost inventory method for income taxes. At the beginning of 2017, Koopman decided to switch to the average cost inventory method for financial reporting. It had previously reported the following financial statement information for 2016:

KOOPMAN COMPANY

Income Statement

For the Year Ended December 31, 2016

1	Revenues	$100,000.00
2	Cost of goods sold	(60,000.00)
3	Gross profit	$40,000.00
4	Operating expenses	(25,000.00)
5	Income before income taxes	$15,000.00
6	Income tax expense	(4,500.00)
7	Net income	$10,500.00
8	Earnings per share	$1.05

KOOPMAN COMPANY

Retained Earnings Statements

For Year Ended December 31, 2016

1	Beginning retained earnings	$15,000.00
2	Add: Net income	10,500.00
3		$25,500.00
4	Less: Dividends	(6,000.00)
5	Ending retained earnings	$19,500.00

KOOPMAN COMPANY

Balance Sheet

December 31, 2016

1	Assets		Liabilities and Shareholders Equity
2	Cash	$9,000.00	Accounts payable	$3,000.00
3	Inventory	38,000.00	Income taxes payable	1,800.00
4	Other assets	64,100.00	Deferred tax liability	4,800.00
5			Common stock, no par	82,000.00
6			Retained earnings	19,500.00
7		$111,100.00		$111,100.00

An analysis of the accounting records discloses the following cost of goods sold under the FIFO and average cost inventory methods:

	FIFO Cost of Goods Sold	Average Cost of Goods Sold
2015	$50,000	$57,000
2016	60,000	69,000
2017	70,000	80,000

There are no indirect effects of the change in inventory method. Revenues for 2017 total $130,000; operating expenses for 2017 total $30,000. Koopman is subject to a 30% income tax rate in all years; it pays the income taxes payable of a current year in the first quarter of the next year. Koopman had 10,000 shares of common stock outstanding during all years; it paid dividends of $1 per share in 2017. At the end of 2017, Koopman had cash of $10,000, inventory of $24,000, other assets of $70,800, accounts payable of $4,500, and income taxes payable of $6,000. It desires to show financial statements for the current year and previous year in its 2017 annual report.

Required:

1.	Prepare the journal entry to reflect the change in methods at the beginning of 2017. Show supporting calculations.
2.	Prepare the 2017 financial statements. Notes to the financial statements are not necessary. Show supporting calculations.

Chart of Accounts

CHART OF ACCOUNTS

Koopman Company

General Ledger

	ASSETS
111	Cash
121	Accounts Receivable
141	Inventory
152	Prepaid Insurance
154	Deferred Tax Asset
181	Equipment
189	Accumulated Depreciation

	LIABILITIES
211	Accounts Payable
231	Salaries Payable
250	Unearned Revenue
260	Deferred Tax Liability
261	Income Taxes Payable

	EQUITY
311	Common Stock
331	Retained Earnings

	REVENUE
411	Sales Revenue

	EXPENSES
500	Cost of Goods Sold
511	Insurance Expense
512	Utilities Expense
521	Salaries Expense
532	Bad Debt Expense
540	Interest Expense
541	Depreciation Expense
559	Miscellaneous Expenses
910	Income Tax Expense

Amount Descriptions

Amount Descriptions
Adjustment for the cumulative effect of accounting method change
Adjusted beginning retained earnings
Beginning unadjusted retained earnings
Dividends
Earnings per share
Ending retained earnings
Gross profit
Income before income taxes
Net income
Operating expenses
Other assets
Revenues
Total assets
Total liabilities and shareholders equity

General Journal

Prepare the journal entry to reflect the change on January 1, 2017.

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3

Income Statements

Prepare the comparative income statements. Additional Instructions

KOOPMAN COMPANY

Comparative Income Statements

For the Years Ended December 31, 2016 (adjusted) - 2017

1		2017	2016 As Adjusted
2
3
4
5
6
7
8
9	Earnings per share (10,000 shares)

Retained Earnings

Prepare the comparative retained earnings statements. Additional Instructions

KOOPMAN COMPANY

Comparative Retained Earnings Statements

For Years Ended December 31, 2016 - 2017

1		2017	2016
2
3
4
5
6
7
8

Balance Sheets

Prepare the comparative balance sheets. Additional Instructions

KOOPMAN COMPANY

Comparative Balance Sheets

December 31, 2016 -2017

1		2017	2016 As Adjusted
2	Assets
3
4
5
6
7	Liabilities and Shareholders Equity
8
9
10
11
12