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 $17 million higher using FIFO.

Retained earnings reported at the end of 2016 and 2017 was $237 million and $257 million, respectively (reflecting the LIFO method). Those amounts reflecting the FIFO method would have been $247 million and $269 million, respectively. 2017 net income reported at the end of 2017 was $25 million (LIFO method) but would have been $27 million using FIFO. After changing to FIFO, 2018 net income was $33 million. Dividends of $7 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

Part 1

Date	account titles and explanation	debit	credit
January 1 2018	inventory (additional inventory if FIFO had been used)	17
	Retained earnings (additional net income if FIFO had been used)		10.2
	Deferred taxes payable (17*40%)		6.8

Part 2

Net income, which was reported in 2017 as $25 million would be revised to $27 million in the comparative income statements. Net income in 2018 would simply be reported at $33 million, the amount resulting from using the new method (FIFO). Therefore,

Net income for 2017 = $27

Net income for 2019 =$33

Part 3

Fantasy Fashions

Statement of Shareholders’ Equity

For the Years Ended Dec. 31, 2018 and 2017

	Common stock	additional paid in capital	retained earnings	total Shareholders' equit
Balance at Jan. 1, 2017			247
Net income (revised to FIFO)			27
Cash dividends			(7)
Balance at Dec. 31, 2017			267
Net income (using FIFO)			33
Cash Dividends			(7)
Balance at Dec. 31, 2018			293