Reference no: EM13580728

Kerstal Company currently uses the average cost method to price its inventory. Management contemplates changing its inventory method starting in 2014. Kerstal has provided the following information for years 2011 to 2013.

Year Net Income if using

FIFO MethodLIFO MethodAverage Cost Method

2011$20,000$12,000$15,000

201224,00014,00018,000

201327,00017,00020,000

In addition, on January 1, 2013, Kerstal issued a 10-year, $200,000 face value 6% bonds at par. Each $1,000 bond is convertible into 30 shares of Kerstal common stock. Common stock outstanding is always 10,000.As of 2014, none of the bonds have been exercised.

Required

1. Use the journal entries spreadsheet supplied to record the journal entriesnecessary to record a change from the average cost method to the FIFO method in 2014. Be sure to show how you calculate the amount used for the journal entries. Ignore income tax effect.

2. Use the journal entries spreadsheet supplied to record the journal entriesnecessary to record assuming Kerstal changes from the LIFO method to the FIFO method in 2014. Be sure to show how you calculate the amount used for the journal entries. Ignore income tax effect.

3. Assume Kerstal had the accounting change for the convertible bonds as described above and that Kerstal's income in 2014 was $30,000. Compute basic and diluted earnings per share for Kerstal Company for 2014. Show how income, basic EPS, and diluted EPS will be reported for 2014 and 2013 respectively. Be sure to show calculations.