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    Fantasy Fashions Had Used The Lifo Method of Costing Inventories

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    laale dijaan
    The company retrospectively changed its inventory costing method from LIFO to FIFO. This increased 2017 inventory by $29 million, retained earnings by $17.4 million, and deferred tax liability by $11.6 million. Net income was revised to $39 million in 2017 and reported as $45 million in 2018. Shareholders' equity increased from $259 million at January 1, 2017 to $327 million at December 31, 2018.

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    Fantasy Fashions Had Used The Lifo Method of Costing Inventories

    Uploaded by

    laale dijaan
    51 views6 pages
    The company retrospectively changed its inventory costing method from LIFO to FIFO. This increased 2017 inventory by $29 million, retained earnings by $17.4 million, and deferred tax liability by $11.6 million. Net income was revised to $39 million in 2017 and reported as $45 million in 2018. Shareholders' equity increased from $259 million at January 1, 2017 to $327 million at December 31, 2018.

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    Fantasy Fashions Had Used the Lifo Method of Costing Inventories

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    The company retrospectively changed its inventory costing method from LIFO to FIFO. This increased 2017 inventory by $29 million, retained earnings by $17.4 million, and deferred tax liability by $11.6 million. Net income was revised to $39 million in 2017 and reported as $45 million in 2018. Shareholders' equity increased from $259 million at January 1, 2017 to $327 million at December 31, 2018.

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    Download as XLSX, PDF, TXT or read online from Scribd
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    51 views6 pages

    Fantasy Fashions Had Used The Lifo Method of Costing Inventories

    Uploaded by

    laale dijaan
    The company retrospectively changed its inventory costing method from LIFO to FIFO. This increased 2017 inventory by $29 million, retained earnings by $17.4 million, and deferred tax liability by $11.6 million. Net income was revised to $39 million in 2017 and reported as $45 million in 2018. Shareholders' equity increased from $259 million at January 1, 2017 to $327 million at December 31, 2018.

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    of 6

    Ques 1

    General Journal Debit Credit


    Inventory $ 15.00
    Retained earnings $ 9.00
    Deferred tax liability $ 6.00

    * Prior to 2018, using FIFO:


    Inventory would have been higher by $13, so cost of goods
    sold would have been lower by $13, so pretax income $ 15.00
    would have been higher by:
    Less: Income tax at 40% $ (6.00)

    Cumulative net income and thus retained earnings would

      have been higher by: $ 9.00

    Ques 2
    2017 2018
    ($ in millions)
    Net income $25 $31

    ques 3
    FANTASY FASHIONS
    Statement of Shareholders’ Equity
    For the Years Ended Dec. 31, 2017 and 2018

    Common Stock Additional Paid-in Retained Earnings


    Total Shareholders’
    Capital Equity

    ($ in millions)
    Balance at Jan. 1, 2017 $ 245
    Net income $ 25
    Cash dividends $ (8)
    Balance at Dec. 31, 2012 $ 262
    Net income $ 31
    Cash dividends $ (8)
    Balance at Dec. 31, 2013 $ 285
    Ques 1

    General Journal Debit Credit


    Inventory $ 13.00
    Retained earnings $ 7.80
    Deferred tax liability $ 5.20

    * Prior to 2018, using FIFO:


    Inventory would have been higher by $13, so
    cost of goods sold would have been lower by
    $13, so pretax income would have been $ 13.00
    higher by:
    Less: Income tax at 40% $ (5.20)
    Cumulative net income and thus retained
    earnings would
      have been higher by: $ 7.80

    For financial reporting purposes, but not for tax, the company is retrospectively increasing
    accounting income, but not taxable income. This creates a temporary difference between the
    two that will reverse over time as the unsold inventory becomes cost of goods sold. When
    that happens, taxable income will be higher than accounting income. When taxable income
    will be higher than accounting income as a temporary difference reverses, we have a future
    taxable amount and record a deferred tax liability.

    Ques 2
    2017 2018
    ($ in millions)
    Net income $23 $29

    Net income, which was reported in 2017 as $21 million, would be revised to $23 million in the
    2018-2017 comparative income statements. Net income in 2018 would simply be reported at
    $29 million, the amount resulting from using the new method (FIFO). The comparative income
    statements and balance sheets also would be recast to reflect the balances as if the FIFO
    method had been used in prior years.

    ques 3
    FANTASY FASHIONS
    Statement of Shareholders’ Equity
    For the Years Ended Dec. 31, 2017 and 2018
    Total
    Common Stock Additional Paid-in Capital Retained Earnings Shareholders’
    Equity
    ($ in millions)
    Balance at Jan. 1, 2017 $ 243
    Net income $ 23
    Cash dividends $ (9)
    Balance at Dec. 31, 2012 $ 257
    Net income $ 29
    Cash dividends $ (9)
    Balance at Dec. 31, 2013 $ 277

    Retained earnings:
    Balance at Jan. 1, 2017 = 243
    $233 million plus the difference in net income
    before 2017: $243 – $233
    lifo 29 higer using fifo

    lifo 2011 2012


    r/e 249 269
    ni 37

    fifo r/e 259 281


    39

    2013 ni 45
    div 8
    tax rate 40%
    Ques 1

    General Journal Debit Credit


    Inventory $ 29.00
    Retained earnings $ 17.40
    Deferred tax liability $ 11.60

    * Prior to 2018, using FIFO:


    Inventory would have been higher by $13, so cost of goods $ 29.00
    Less: Income tax at 40% $ (11.60)
    Cumulative net income and thus retained earnings would
      have been higher by: $ 17.40

    Ques 2
    2017 2018
    ($ in millions)
    Net income $39 $45

    ques 3
    FANTASY FASHIONS
    Statement of Shareholders’ Equity
    For the Years Ended Dec. 31, 2017 and 2018

    Additional Total
    Common Paid-in Retained Sharehold
    Stock Earnings ers’
    Capital
    Equity
    ($ in millions)
    Balance at Jan. 1, 2017 $ 259
    Net income $ 39
    Cash dividends $ (8)
    Balance at Dec. 31, 2012 $ 290
    Net income $ 45
    Cash dividends $ (8)
    Balance at Dec. 31, 2013 $ 327

    Retained earnings:
    Balance at Jan. 1, 2017 = 243
    $233 million plus the difference in net income before 2017:
    $243 – $233
    General
    Event Debit Credit
    Journal
    1 Inventory 29
    Retained
    17.4
    earnings
    Deferred tax
    11.6
    liability

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