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.

req1. journal

Record the change in accounting principle.

req2.

In the 2018–2017 comparative income statements, what will be the amounts of net income reported for 2017 and 2018? (Enter your answers in millions.)

	2017 2018 ($ in millions) Net income

req3.

Prepare the 2018–2017 retained earnings column of the comparative statements of shareholders’ equity. (Enter your answers in millions.)

	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’ Equity ($ in millions) Balance at Jan. 1, 2017 Net income Cash dividends Balance at Dec. 31, 2017 Net income Cash dividends Balance at Dec. 31, 2018

Answer 1

Requirement 1
Account Title and Explanation	Debit	Credit
Inventory	10
Retained earnings		6	(10-10*40%)
deferred tax liability		4	10*40%
Requirement 2
	2017	2018
Net Income	20	26
Requirement 3
	Common stock	Additional paid in capital	Retained earnings	Total shareholders equity
Balance at Jan 1, 2017	-	-	240	-
Net Income	-	-	20	-
Cash dividend	-	-	9	-
Balance at dec 31, 2017	-	-	251	-
Net income	-	-	26	-
Cash dividend	-	-	9	-
Balance at dec 31, 2018	-	-	268	-