Question

During 2017, Williamson Company changed from FIFO to weighted-average inventory pricing. Pretax income in 2016 and 2015 (Williamson’s first year of operations) under FIFO was \(160,000 and \)180,000, respectively. Pretax income using weighted-average pricing in the prior years would have been \(145,000 in 2016 and \)170,000 in 2015. In 2017, Williamson reported a pretax income (using weighted-average pricing) of $180,000. Show comparative income statements for Williamson, beginning with “Income before income tax,” as presented on the 2017 income statement. (The tax rate in all years is 30%.)

Short answer

The net income for 2017 is $126,000.

Step-by-step solution

Meaning of Inventory Valuation Method

Inventory valuation methods are used to measure the inventory available in a business and used by the business in its production function. The four main inventory valuation methods are LIFO, FIFO, specific identification, and weighted average inventory.

Calculation of Tax for the years 2017, 2016, and 2015 on pretax income

$\begin{array}{rcl}\mathrm{Tax}\mathrm{Expense}\mathrm{For}2017& =& \mathrm{Pretax}\mathrm{income}\times \mathrm{Tax}\mathrm{rate}\\ & =& \$180,000\times 30\%\\ & =& \$54,000\end{array}$

$\begin{array}{rcl}\mathrm{Tax}\mathrm{Expense}\mathrm{For}2016& =& \mathrm{Pretax}\mathrm{income}\times \mathrm{Tax}\mathrm{rate}\\ & =& \$145,000\times 30\%\\ & =& \$43,500\end{array}$

$\begin{array}{rcl}\mathrm{Tax}\mathrm{Expense}\mathrm{For}2015& =& \mathrm{Pretax}\mathrm{Income}\times \mathrm{Tax}\mathrm{rate}\\ & =& \$170,000\times 30\%\\ & =& \$51,000\end{array}$

Calculation of net income

Comparative Income Statement for Williamson Company
Particulars	2017	2016	2015
Income before Income tax	$180,000	$145,000	$170,000
Income Tax expense	$54,000	$43,500	$51,000
Net Income	$126,000	$101,500	$119,000