Fantasy Fashions had used the LIFO method of costinginventories, but at the beginning of 2016 decided to change to theFIFO method. The inventory as reported at the end of 2015 usingLIFO would have been $27 million higher using FIFO.
Retained earnings reported at theend of 2014 and 2015 was $247 million and $267 million,respectively (reflecting the LIFO method). Those amounts reflectingthe FIFO method would have been $257 million and $279 million,respectively. 2015 net income reported at the end of 2015 was $35million (LIFO method) but would have been $37 million using FIFO.After changing to FIFO, 2016 net income was $43 million. Dividendsof $9 million were paid each year. The tax rate is 40%.
Required:
Prepare the journal entry at the beginning of 2016 to record thechange in accounting principle.(If no entry is required fora transaction/event, select "No journal entry required" in thefirst account field. Enter your answers in millions rounded to 1decimal place (i.e., 5,500,000 should be entered as5.5).)
2. In the 2016â2015 comparative income statements, what will be theamounts of net income reported for 2015 and 2016? (Enteryour answers in millions.)
3. Prepare the 2016â2015 retained earnings column of thecomparative statements of shareholdersâ equity. (Enter youranswers in millions.)
FANTASY FASHIONS Statement of Shareholdersâ Equity For the Years Ended Dec. 31, 2016 and2015 Common Stock Additional Paid-in Capital Retained Earnings Total Shareholdersâ Equity ($ in millions) Balance at Jan. 1, 2015 Net income Cash dividends Balance at Dec. 31, 2015 $0 Net income Cash dividends Balance at Dec. 31, 2016 $0
Fantasy Fashions had used the LIFO method of costinginventories, but at the beginning of 2016 decided to change to theFIFO method. The inventory as reported at the end of 2015 usingLIFO would have been $27 million higher using FIFO. |
Retained earnings reported at theend of 2014 and 2015 was $247 million and $267 million,respectively (reflecting the LIFO method). Those amounts reflectingthe FIFO method would have been $257 million and $279 million,respectively. 2015 net income reported at the end of 2015 was $35million (LIFO method) but would have been $37 million using FIFO.After changing to FIFO, 2016 net income was $43 million. Dividendsof $9 million were paid each year. The tax rate is 40%. |
| Required: |
| Prepare the journal entry at the beginning of 2016 to record thechange in accounting principle.(If no entry is required fora transaction/event, select "No journal entry required" in thefirst account field. Enter your answers in millions rounded to 1decimal place (i.e., 5,500,000 should be entered as5.5).)
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| 3. | Prepare the 2016â2015 retained earnings column of thecomparative statements of shareholdersâ equity. (Enter youranswers in millions.) |
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Related questions
Sherrod, Inc., reported pretax accounting income of $62 millionfor 2016. The following information relates to differences betweenpretax accounting income and taxable income: |
| a. | Income from installment sales of properties included in pretaxaccounting income in 2016 exceeded that reported for tax purposesby $7 million. The installment receivable account at year-end had abalance of $8 million (representing portions of 2015 and 2016installment sales), expected to be collected equally in 2017 and2018. |
| b. | Sherrod was assessed a penalty of $4 million by theEnvironmental Protection Agency for violation of a federal law in2016. The fine is to be paid in equal amounts in 2016 and 2017. |
| c. | Sherrod rents its operating facilities but owns one assetacquired in 2015 at a cost of $44 million. Depreciation is reportedby the straight-line method assuming a four-year useful life. Onthe tax return, deductions for depreciation will be more thanstraight-line depreciation the first two years but less thanstraight-line depreciation the next two years ($ in millions): |
| Income Statement | Tax Return | Difference | |||||||
| 2015 | $ | 11 | $ | 14 | $ | (3 | ) | ||
| 2016 | 11 | 20 | (9 | ) | |||||
| 2017 | 11 | 6 | 5 | ||||||
| 2018 | 11 | 4 | 7 | ||||||
| $ | 44 | $ | 44 | $ | 0 | ||||
| d. | Warranty expense of $5 million is reported in 2016. For taxpurposes, the expense is deducted when costs are incurred, $3million in 2016. At December 31, 2016, the warranty liability was$3 million (after adjusting entries). The balance was $1 million atthe end of 2015. |
| e. | In 2016, Sherrod accrued an expense and related liability forestimated paid future absences of $14 million relating to thecompanyâs new paid vacation program. Future compensation will bedeductible on the tax return when actually paid during the next twoyears ($8 million in 2017; $6 million in 2018). |
| f. | During 2015, accounting income included an estimated loss of $2million from having accrued a loss contingency. The loss is paid in2016 at which time it is tax deductible. |
Balances in the deferred tax assetand deferred tax liability accounts at January 1, 2016, were $1.2million and $1.6 million, respectively. The enacted tax rate is 40%each year. |
| Required: |
| 1. | Determine the amounts necessary to record income taxes for 2016and prepare the appropriate journal entry. (If no entry isrequired for an event, select "No journal entry required" in thefirst account field. Enter your answers in millions rounded to 1decimal place (i.e., 5,500,000 should be entered as5.5)) | ||||||||||
| Journal Entry Worksheet Record 2016 income taxes.
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