Chapter 20, Problem 20.7E

Change in principle; change in inventory cost method

• LO20–2

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, 2018, 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%.

Required:

1. Prepare the journal entry to record the change in accounting principle.

2. Determine the net income to be reported in the 2018–2017 comparative income statements.

3. Which other 2017 amounts would be reported differently in the 2018–2017 comparative income statements and 2018–2017 comparative balance sheets than they were reported the previous year?

4. How would the change be reflected in the 2018–2017 comparative statements of shareholders’ equity? Cash dividends were $1 million each year. Assume no dividends were paid prior to 2017.