Garner Company began operations on January 1, 2015, and uses the average cost method of pricing inventory. Management is contemplating a change in inventory methods for 2018. The following information is available for the years 2015–2017.
Net Income Computed Using
Average Cost Method FIFO Method LIFO Method
2015 $15,000 $20,000 $12,000
2016 18,000 24,000 14,000
2017 20,000 27,000 17,000
On January 1, 2017, Garner issued 10-year, $200,000 face value, 6% bonds, at par. Each $1,000 bond is convertible into 30 shares of Garner common stock. The company has had 10,000 common shares outstanding throughout its life. None of the bonds have been exercised as of the end of 2018. (Ignore tax effects.)
2. Assume Garner Company used the LIFO method instead of the average cost method during the years 2015–2017. In 2018, Garner changed to the FIFO method. Prepare the journal entry necessary to record the change in accounting principle.
3. Assume Garner had the accounting change described in (2); Garner’s income in 2018 was $30,000. Compute basic and diluted earnings per share for Garner Company for 2018. Show how income and EPS will be reported for 2018 and 2017.