Question

Millington Materials is a leading supplier of building equipment, building products, materials & timber for sale, with over 200 branches across the Mid-South. On January 1, 2018, management decided to change from the average inventory costing method to the FIFO inventory costing method at each of its outlets. The following table presents information concerning the change. The income tax rate for all years is 40%. Income before Income Tax FIFO Average Cost Difference Before 2017 $ 32 million $ 25 million $ 7 million 2017 42 million 22 million 20 million 2018 27 million 26 million 1 million Required: 1. Prepare the journal entry to record the change in accounting principle. 2. Determine the net income to be reported in the 2018–2017 comparative income statements. 4. Indicate the affect of the change in the 2018–2017 comparative statements of shareholders' equity. Cash dividends were $3.78 million each year. Assume no dividends were paid prior to 2017.

Required 1

Prepare the journal entry 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).)

Required 2

Determine the net income to be reported in the 2018–2017 comparative income statements. (Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).)

Answer 1

Solution:

Part 1

Inventory (additional amount due to the new method: $7 million + 20 million) = $27 million

Deferred tax liability ($27 million × 40%) = $10.8 million

Retained earnings is increased by $16.2 million because the net income in years prior to 2018 would have been higher by that amount.

Event	general journal	debit	credit
1	inventory	27
	Deferred tax liability		10.8
	Retained earnings		16.2

Part 2

	2018	2017
Net income	$16.2 million (27-(27*40%)=	$25.2 MILLION (42-(42*40%)

PART 4

Statement of shareholders' equity

	Common Stock	additional paid in capital	Retained earnings	total stockholders' equity
Balance at Jan 1 2017	$0	$0	$19.2 (25-(25*40%))	$0
Balance at Dec 31 2017	$0	$0	$43.42 (22+25.2-3.78)	$0
Balance at Dec 31 2018	$0	$0	$55.84 (43.42+16.2-3.78)

Hence Proved