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 $10 million higher using FIFO.

Retained earnings reported at the end of 2016 and 2017 was $230 million and $250 million, respectively (reflecting the LIFO method). Those amounts reflecting the FIFO method would have been $240 million and $262 million, respectively. 2017 net income reported at the end of 2017 was $18 million (LIFO method) but would have been $20 million using FIFO. After changing to FIFO, 2018 net income was $26 million. Dividends of $9 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) The journal entry at the beginning of 2018 to record the change in accounting principle is as follows:

Date	Account and Explanation	Debit($)	Credit($)
2018	Inventory	10,000,000
	Retained Earnings		6000,000
	Deferred tax liability ($10,000,000 * 40%)		4000,000
	(Recorded the change in accounting principle)

2) The comparative income statements, the amounts of net income reported for 2017 and 2018 is as follows:

	2018	2017
Net Income	$26,000,000	$20,000,000

3)The 2018–2017 retained earnings column of the comparative statements of shareholders’ equity is as follows:

Retained Earning	2018	2017
Balance begining	$265,100,000	$240,000,000
	($259,100,000 + $6000,000)
Net Income	$26,000,000	$20,000,000
Dividends	($900,000)	($900,000)
Ending Balance	$265,100,000	$259,100,000