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 $27 million higher using FIFO.

Retained earnings reported at the end of 2016 and 2017 was $247 million and $267 million, respectively (reflecting the LIFO method). Those amounts reflecting the FIFO method would have been $257 million and $279 million, respectively. 2017 net income reported at the end of 2017 was $35 million (LIFO method) but would have been $37 million using FIFO. After changing to FIFO, 2018 net income was $43 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	Journal entry:
	Date	Account titles					Debit	Credit
	01/01/2018.	Merchandise Inventory					27000000
		Retained earnings			(Balance)			16200000
		Deferred tax liability			(27000000*40%)			10800000
		(Change from LIFO to FIFO recorded)
2		Comparative income statements
					2018	2017
	Net income				43000000	37000000
3		Retained earnings
					2018	2017
	Beginning balance				301200000	257000000
					(285000000+16200000)
	Add:Net income				43000000	37000000
					344200000	294000000
	Less: Dividends				9000000	9000000
	Ending balance				335200000	285000000