Question

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 25%. income before income tax fifo average cost difference before 2020 $ 30 million $ 16 million $ 14 million 2020 16 million 10 million 6 million 2021 20 million 18 million 2 million required: 1. prepare the journal entry to record the change in accounting principle. 2. determine the net income to be reported in the 2021–2020 comparative income statements. 4. indicate the affect of the change in the 2021–2020 comparative statements of shareholders’ equity assuming cash dividends were $2 million each year and that no dividends were paid prior to 2020.

Answer 1

The net income to be reported in the 2021–2020 comparative income statements is $15 million and $12 million.

How to calculate the net income?

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

Inventory = $20 million

Income tax payable = $5 million.

Retained earnings = $15 million

Also, the net income in 2020 will be:

= $16 - (25% × $16)

= $16 - $4.

= $12 million

The net income in 2021 will be:

= $20 - (25% × $20)

= $20 - $5

= $15 million.

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