Schmidt Company began operations on January $1,$ Year $1,$ and used the LIFO inventory method for both financial reporting and income taxes. However, at the beginning of Year $3,$ Schmidt decided to switch to the average cost inventory method for financial and income tax reporting. It had previously reported the following financial statement information for Year $2$:

SCHMIDT COMPANY

Income Statement

For the Year Ended December $31,$ Year $2$

$1$

Revenues

$$128,000\mathrm{.}00$

$2$

Cost of goods sold

$(78,000\mathrm{.}00)$

$3$

Gross profit

$$50,000\mathrm{.}00$

$4$

Operating expenses

$(25,000\mathrm{.}00)$

$5$

Income before income taxes

$$25,000\mathrm{.}00$

$6$

Income tax expense

$(5,250\mathrm{.}00)$

$7$

Net income

$$19,750\mathrm{.}00$

$8$

Earnings per share

$$1\mathrm{.}98$

SCHMIDT COMPANY

Retained Earnings Statements

For Year Ended December $31,$ Year $2$

$1$

Beginning retained earnings

$$27,000\mathrm{.}00$

$2$

Add: Net income

$19,750\mathrm{.}00$

$3$

$$46,750\mathrm{.}00$

$4$

Less: Dividends

$(6,000\mathrm{.}00)$

$5$

Ending retained earnings

$$40,750\mathrm{.}00$

SCHMIDT COMPANY

Balance Sheet

December $31,$ Year $2$

$1$

Assets

Liabilities and Shareholders$$ Equity

$2$

Cash

$$8,000\mathrm{.}00$

Accounts payable

$$4,000\mathrm{.}00$

$3$

Inventory

$42,000\mathrm{.}00$

Income taxes payable

$5,250\mathrm{.}00$

$4$

Other assets

$60,000\mathrm{.}00$

Common stock, no par

$60,000\mathrm{.}00$

$5$

Retained earnings

$40,750\mathrm{.}00$

$6$

$$110,000\mathrm{.}00$

$$110,000\mathrm{.}00$

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

LIFO Cost of Goods Sold

Average Cost of Goods Sold

Year $1$ $$62,000$ $$56,000$

Year $278,00069,000$

Year $390,00080,000$

There are no indirect effects of the change in inventory method. Revenues for Year $3$ was $$130,000$; operating expenses for Year $3$ were $$30,000.$ Schmidt is subject to a $21\%$ income tax rate in all years; it pays all income taxes payable in the next quarter. Schmidt had $10,000$ shares of common stock outstanding during all years; it paid dividends of $$1$ per share in Year $3.$ At the end of Year $3,$ Schmidt had cash of $$15,600,$ inventory of $$34,000,$ other assets of $$76,000,$ income taxes payable of $$4,200,$ and accounts payable of $$3,000.$ It desires to show financial statements for the current year and previous year in its Year $3$ annual report.

Required:

$1.$ Prepare the journal entry to reflect the change in method at the beginning of Year $3.$ Show supporting calculations.

$2.$ Prepare the Year $3$ financial statements. Notes to the financial statements are not necessary. Show supporting calculations.