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Millington Materials is a leading supplier of building equipment, building products, materials, and timber for sale, with over 200 branches across the Mid-South. On January 1, 2021, 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 2015 $35 million $28 million $7 million
2015 48 million 25 million 23 million
2016 30 million 29 million 1 million

Requied:
a. Prepare the journal entry to record the change in accounting principle.
b. Determine the net income to be reported in the 2016–2015 comparative income statements.

Respuesta :

abiolataiwo2015

Answer:

A. Dr Inventory $30

Cr Income tax payable $12

Cr Retained earnings $18

B. 2016 Net income $18

2015 Net income $28.80

Explanation:

a. Preparation of the journal entry to record the change in accounting principle.

Dr Inventory $30

Cr Income tax payable $12

Cr Retained earnings $18

b. Calculation to Determine the net income to be reported in the 2016–2015 comparative income statements

Balance at Jan ,2015 $21.00 millions

[35 millions- (35 millions* 40%)]

NET INCOME $28.80 millions

Cash dividends ($4.20) millions

Balance At December 31,2015 $45.60 millions

NET INCOME $18 millions

Cash dividends ($4.20) millions

BALANCE AT DECEMBER 31,2016 $59.40 millions

Therefore the net income to be reported in the 2016–2015 comparative income statements will be:

2016 Net income $18

2015 Net income $28.80

The journal entry to record the change in accounting principle will be:

Debit Inventory $30 million

Credit Income tax $12 million

Credit Retained earnings $18 million

(To record error correction)

It should be noted that the income tax will be credited in the amount below:

= 40% × ($7 million + $23 million)

= 40% × $30 million.

= 0.4 × $30 million

= $12 million

The retained earnings will be:

= $30 million - $12 million

= $18 million

The net income to be reported in the 2016–2015 comparative income statements will be $18 million and $28.8 million.

The net income for 2016 will be:

= $30 million - $12 million

= $18 million

The net income for 2015 will be:

= $48 million - (40% × $48 million)

= $45 million - $19.2 million

= $25.8 million

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