In: Accounting
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 $15 million higher using FIFO.
Retained earnings reported at the end of 2016 and 2017 was $235
million and $255 million, respectively (reflecting the LIFO
method). Those amounts reflecting the FIFO method would have been
$245 million and $267 million, respectively. 2017 net income
reported at the end of 2017 was $23 million (LIFO method) but would
have been $25 million using FIFO. After changing to FIFO, 2018 net
income was $31 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.
1.Journal Entry ( in Million) | |||
Date | Account Title and explanation | Debit | Credit |
01/01/2018 | Inventory (if FIFO method is used) | $15.00 | |
Retained Earning (if FIFO method is
used) (15-6) |
$9.00 | ||
Deferred tax payable (15*40%) | $6.00 | ||
To record change in Inventory Value |
2. Comparative income statement ( In Million) | ||
Particular | 2018 | 2017 |
Net Income | $31.00 | $35.00 |
Net income in 2017 would have been higher by $12 millions, the net income would be $35 ($23+12) |
3. Statement of Shareholders' Equity ( in Million) | ||||
Common Stock | Additional Paid-in Capital | Retained Earning | Total Shareholders' Equity | |
Balance at Jan 1,2015 | $277.00 | |||
Net Income | $25.00 | |||
Cash Dividend | -$8.00 | |||
Balance at Dec 31,2015 | $294.00 | |||
Net Income | $31.00 | |||
Cash Dividend | -$8.00 | |||
Balance at Dec 31,2016 | $317.00 | |||
Balance at Jan 1,2015 would be $277 millions (i.e. $267+10) |