Question

Fantasy Fashions had used the LIFO method of costing inventories, but at the beginning of 2018 decided to change to the FIFO method. The inventory as reported at the end of 2017 using LIFO would have been $15 million higher using FIFO. Retained earnings reported at the end of 2016 and 2017 was $235 million and $255 million, respectively (reflecting the LIFO method). Those amounts reflecting the FIFO method would have been $245 million and $267 million, respectively. 2017 net income reported at the end of 2017 was $23 million (LIFO method) but would have been $25 million using FIFO. After changing to FIFO, 2018 net income was $31 million. Dividends of $8 million were paid each year. The tax rate is 40%. Required: 1. Prepare the journal entry at the beginning of 2018 to record the change in accounting principle. 2. In the 2018–2017 comparative income statements, what will be the amounts of net income reported for 2017 and 2018? 3. Prepare the 2018–2017 retained earnings column of the comparative statements of shareholders’ equity.

Answer 1

1.

General Journal	Debit	Credit
Inventory	$15
Retained earnings		$9
Deferred tax liability ($15 * 40%)		$6

2.

	2017 (In million)	2018(In million)
Net Income	$25	$31

3.

	Common stock	Additional Paid in capital	Retained Earnings (In millions)	Total shareholder's Equity
Balance as at Jan 1, 2017			$245 (235 + (245 - 235)
Net income			25
Cash Dividend			(8)
Balance at Dec 31, 2017			262
Net income			31
Cash Dividend			(8)
Balance at Dec 31, 2018			$285