The ABC Company has used the LIFO method of accounting for inventory during its first two years of operation, 2019 and 2020 At the beginning of 2021, ABC decided to change to the average cost method for both tax and financial reporting purposes The following table presents information concerning the change for 20192021 The income tax rate for all years is 25 Income before Income Tax Using Average Cost Method Using LIFO Method Difference Income Tax Effect Difference after Tax 2019 $ 90,000 $60,000 $30,000 $7,500 $22,500 2020 45,000 36,000 9,000 2,250 6,750 Total $135,000 $96,000 $39,000 $9,750 $29,250 2021 $ 51,000 $46,000 $ 5,000 $1,250 $ 3,750 ABC issued 50,000 $1 par, common shares for $230,000 when the business began, and there have been no changes in paid in capital since then Dividends were not paid the first year, but $10,000 cash dividends were paid in both 2020 and 2021 Required Prepare the journal entry at January 1, 2021, to record the change in accounting principle Prepare the 20212020 comparative income statements beginning with income before income taxes Prepare the 20212020 comparative statements of shareholders equity Hint The 2019 statements reported retained earnings of $45,000 This is $60,000 ($60,000 25 )

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The ABC Company has used the LIFO method of accounting for inventory during its first two years of operation, 2019 and 2020. At the beginning

The ABC Company has used the LIFO method of accounting for inventory during its first two years of operation, 2019 and 2020. At the beginning of 2021, ABC decided to change to the average cost method for both tax and financial reporting purposes. The following table presents information concerning the change for 20192021. The income tax rate for all years is 25%.

	Income before Income Tax
	Using Average Cost Method	Using LIFO Method	Difference	Income Tax Effect	Difference after Tax
2019	$ 90,000	$60,000	$30,000	$7,500	$22,500
2020	45,000	36,000	9,000	2,250	6,750
Total	$135,000	$96,000	$39,000	$9,750	$29,250
2021	$ 51,000	$46,000	$ 5,000	$1,250	$ 3,750

ABC issued 50,000 $1 par, common shares for $230,000 when the business began, and there have been no changes in paid-in capital since then. Dividends were not paid the first year, but $10,000 cash dividends were paid in both 2020 and 2021.

Required:

Prepare the journal entry at January 1, 2021, to record the change in accounting principle.
Prepare the 20212020 comparative income statements beginning with income before income taxes.
Prepare the 20212020 comparative statements of shareholders equity. [Hint: The 2019 statements reported retained earnings of $45,000. This is $60,000 ($60,000 25%).]