Fantasy Fashions had used the LIFO method of costing
inventories, but at the beginning of 2021 decided to change to the
FIFO method. The inventory as reported at the end of 2020 using
LIFO would have been $25 million higher using FIFO.
Retained earnings reported at the end of 2019 and 2020 was $245
million and $265 million, respectively (reflecting the LIFO
method). Those amounts reflecting the FIFO method would have been
$255 million and $277 million, respectively. 2020 net income
reported at the end of 2020 was $33 million (LIFO method) but would
have been $35 million using FIFO. After changing to FIFO, 2021 net
income was $41 million. Dividends of $7 million were paid each
year. The tax rate is 25%.
Required:
1. Prepare the journal entry at the beginning of
2021 to record the change in accounting principle.
2. In the 2021–2020 comparative income statements,
what will be the amounts of net income reported for 2020 and
2021?
3. Prepare the 2021–2020 retained earnings column
of the comparative statements of shareholders’ equity.
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