Millington Materials is a leading supplier of building equipment, building produ

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%.

   
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 $2.80 million each year. Assume no dividends were paid prior to 2017.

Income before Income Tax FIFO Average Cost Difference Before 2017 $ 25 million $ 18 million $ 7 million 2017 28 million 15 million 13 million 2018 20 million 19 million 1 million

Explanation / Answer

Part 1

Inventory (additional amount due to the new method: $7 million + 13 million) = $20 million

Deferred tax liability ($20 million × 40%) = $8 million

Retained earnings is increased by $12 million because the net income in years prior to 2018 would have been higher by that amount.

Entry

Part 2

$16.8 million

(28-(28*40%)=

$12 MILLION

(20-(20*40%)

PART 4

Statement of shareholders' equity

15

(25-(25*40%))

24.2

(15+12-2.8)

38.2

(24.2+16.8-2.8)

Event general journal debit credit 1 inventory 20 Deferred tax liability 8 Retained earnings 12

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