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 $13 million higher using FIFO. Retained earnings reported at the end of 2016 and 2017 was $233 million and $253 million, respectively (reflecting the LIFO method). Those amounts reflecting the FIFO method would have been $243 million and $265 million, respectively. 2017 net income reported at the end of 2017 was $21 million (LIFO method) but would have been $23 million using FIFO. After changing to FIFO, 2018 net income was $29 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. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Prepare the journal entry at the beginning of 2018 to record the change in accounting principle. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).) View transaction list Journal entry worksheet Record the change in accounting principle.

Answer 1

Requirement 1

Date	Particulars	Debit ($ in million)	Credit($ in million)
	Inventory	13
	Retained Earnings		7.8
	Deferred tax liability		5.2
	(To record change in accounting principle)

IF FIFO has been used, the pretax income would have been higher by $ 13 million. This has to be eliminated now and cost of inventory will increase due to accounting change. 40% tax is to deferred on inventory which is to be higher. Hence, the retained earnings would then be higher by 13-40%*13 = $ 5.2 million.

Requirement 2

	2016($ in million)	2017($ in million)
Net income	23	29

Net income in 2016 would be revised to $ 23 million and 2018 to $ 29 million. This is due to result of change in accounting policy.

The Balance sheet and comparative income statements for previous year shall be recasted as per FIFO method

Requirement 3

Retained Earnings for 2017

	Common Stock	Additional paid in Capital	Retained Earnings ($ in million)	Total Shareholders Equity
Balance at Jan 1 ,2016			243
Net Income			23
Cash Dividends			(9)
Balance At Dec 31,2016			257
Net income			29
Cash Dividends			(9)
Balance at Dec 31,2017			277

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