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 $26 million higher using FIFO. Retained earnings reported at the end of 2016 and 2017 was $246 million and $266 million, respectively (reflecting the LIFO method). Those amounts reflecting the FIFO method would have been $256 million and $278 million, respectively. 2017 net income reported at the end of 2017 was $34 million (LIFO method) but would have been $36 million using FIFO. After changing to FIFO, 2018 net income was $42 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

Answer:

1.)

Inventory balance under FIFO = (Pretax income - (Pretax income x Income tax percentage))
=(26,000,000-(26,000,000 x 40%))
=26,000,000-10,400,000
=15,600,000

Date	Particulars	Debit ($)	Credit ($)
	Inventory	26,000,000
	Retained Earnings		15,600,000
	Income tax payable		10,400,000
	(To record retained earnings and income tax payable)

2.)

The 2017 net income should be revised from 34,000,000 to 36,000,000 in corporative income statement.
In 2018 income statement net income under FIFO method is 42,000,000
The prior years balance sheet and comparative income statement balance should be changed as per FIFO balance.

3.)

Fantasy Fashions Statement of Shareholders equity For the years ended Dec 31 2018 and 2017
Particulars	Amount ($)
Jan 2017	256,000,000
Net Income	36,000,000
Less: Dividend	8,000,000
Dec 2017	284,000,000
Net Income	42,000,000
Less: Dividend	8,000,000
Dec 2018	318,000,000