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Millington Materials is a leading supplier of buildingequipment, building products,materials & timber for sale, withover 200 branches across the Mid-South. On January 1, 2016,management decided to change from the LIFO inventory costing methodto the FIFO inventory costing method at each of its outlets. Thefollowing table presents information concerning the change. Theincome tax rate for all years is 40%.

Income before Income Tax
FIFO Average Cost Difference
Before 2015 $ 35 million $ 28 million $ 7 million
2015 48 million 25 million 23 million
2016 30 million 29 million 1 million

Required:
1.

Prepare the journal entry to record the change in accountingprinciple. (All tax effects should be reflected in the deferred taxliability account.) (If no entry isrequired for a transaction/event, select "No journal entryrequired" in the first account field. Enter youranswers in millions rounded to 1 decimal place (i.e., 5,500,000should be entered as 5.5).)

2.

Determine the net income to be reported in the 2016–2015comparative income statements. (Enter your answers inmillions rounded to 1 decimal place (i.e., 5,500,000 should beentered as 5.5).)

3.

Which other 2015 amounts would be reported differently in the2016–2015 comparative income statements and 2016–2015 comparativebalance sheets than they were reported the previous year?(Select all that apply.)

4.

Compute the balance of retained earnings on Jan. 1, 2015, Dec.31, 2015 and Dec. 31, 2016. Cash dividends were $3.0 million eachyear. (Enter your answers in millions rounded to 1 decimalplace (i.e., 5,500,000 should be entered as 5.5).)

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Millington Materials is a leading supplier of buildingequipment, building products,materials & timber for sale, withover 200 branches across the Mid-South. On January 1, 2016,management decided to change from the LIFO inventory costing methodto the FIFO inventory costing method at each of its outlets. Thefollowing table presents information concerning the change. Theincome tax rate for all years is 40%. Income before Income Tax FIFOLIFO Difference Before 2015 $ 15 million $ 8 million $ 7 million2015 8 million 5 million 3 million 2016 10 million 9 million 1million

Required: 1. Prepare the journal entry to record the change inaccounting principle. (All tax effects should be reflected in thedeferred tax liability account.)

2. Determine the net income to be reported in the 2016–2015comparative income statements. (Enter your answers in millionsrounded to 1 decimal place (i.e., 5,500,000 should be entered as5.5).) FOR 2015 & 2016 3.

3. Which other 2015 amounts would be reported differently in the2016–2015 comparative income statements and 2016–2015 comparativebalance sheets than they were reported the previous year? (Selectall that apply.)
1.Earnings per share.
2.Cost of goods sold.
3.Income tax expense (and income before income taxes)
4.Inventory (and total assets)
5.Deferred tax liability (and total liabilities)
6.Retained earnings (and total shareholders’ equity)

4. Compute the balance of retained earnings on Jan. 1, 2015,Dec. 31, 2015 and Dec. 31, 2016. Cash dividends were $1 millioneach year. (Enter your answers in millions rounded to 1 decimalplace (i.e., 5,500,000 should be entered as 5.5).)

Balance at Jan 1, 2015

Balance at Dec 31, 2015

Balance at Dec 31, 2016

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 2016–2015 comparative income statements, what will be theamounts of net income reported for 2015 and 2016? (Enteryour answers in millions.)
3.

Prepare the 2016–2015 retained earnings column of thecomparative statements of shareholders’ equity. (Enter youranswers in millions.)
FANTASY FASHIONS
Statement of Shareholders’ Equity
For the Years Ended Dec. 31, 2016 and2015
Common Stock Additional Paid-in Capital Retained Earnings Total Shareholders’ 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 $0
You are internal auditor for Shannon Supplies, Inc., and arereviewing the company’s preliminary financial statements. Thestatements, prepared after making the adjusting entries, but beforeclosing entries for the year ended December 31, 2016, are asfollows:
SHANNON SUPPLIES, INC.
Balance Sheet
December 31, 2016
($ in 000s)
Assets
Cash $ 2,440
Investments 290
Accounts receivable, net 850
Inventory 1,100
Property, plant, and equipment 1,280
Less: Accumulated depreciation (520)
Total assets $ 5,440
Liabilities and Stockholders’ Equity
Accounts payable and accrued expenses $ 3,360
Income tax payable 260
Common stock, $1 par 240
Additional paid-in capital 790
Retained earnings 790
Total liabilities and shareholders’ equity $ 5,440


SHANNON SUPPLIES, INC.
Income Statement
For the Year Ended December 31, 2016
($ in 000s)
Sales revenue $ 3,480
Operating expenses:
Cost of goods sold $ 1,180
Selling and administrative 900
Depreciation 80 2,160
Income before income tax $ 1,320
Income tax expense (528)
Net income $ 792
Shannon’s income tax rate was 40% in 2016 and previous years.During the course of the audit, the following additionalinformation (not considered when the above statements wereprepared) was obtained:
a.
Shannon’s investment portfolio consists of blue chip stocksheld for long-term appreciation. To raise working capital, some ofthe shares with an original cost of $184,000 were sold in May 2016.Shannon accountants debited cash and credited investments for the$228,000 proceeds of the sale.
b.
At December 31, 2016, the fair value of the remainingsecurities in the portfolio was $316,000.
c.
The state of Alabama filed suit against Shannon in October2014 seeking civil penalties and injunctive relief for violationsof environmental regulations regulating emissions. Shannon’s legalcounsel previously believed that an unfavorable outcome was notprobable, but based on negotiations with state attorneys in 2016,now believe eventual payment to the state of $134,000 is probable,most likely to be paid in 2019.
d.
The $1,100,000 inventory total, which was based on a physicalcount at December 31, 2016, was priced at cost. Based on yourconversations with company accountants, you determined that theinventory cost was overstated by $136,000.
e.
Electronic counters costing $84,000 were added to theequipment on December 29, 2015. The cost was charged torepairs.
f.
Shannon’s equipment on which the counters were installed had aremaining useful life of four years on December 29, 2015, and isbeing depreciated by the straight-line method for both financialand tax reporting.
g.
A new tax law was enacted in 2016 which will cause Shannon’sincome tax rate to change from 40% to 35% beginning in 2017.
Required:
Prepare journal entries to record the effects on Shannon’saccounting records at December 31, 2016, for each of the itemsdescribed above. (If no entry is required for a transaction/event,select "No journal entry required" in the first account field. Donot round intermediate calculations. Enter your answers in wholedollars not in thousands of dollars.)

ReferenceseBook & Resources
General JournalDifficulty: 3 HardLearning Objective: 20-06Understand and apply the four-step process of correcting andreporting errors, regardless of the type of error or the timing ofits discovery.

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