Change in Accounting Principle—LIFO to FIFO
On January 1, 2008, Down Under, Inc. decided to change from the LIFO method of inventory valuation to the FIFO method. The net income (using LIFO) for the four years Down Under has been in business is as follows:
|
2005 |
$120,000 |
2007 |
$156,000 |
|
2006 |
138,000 |
2008 |
180,000 |
Analysis of the inventory records revealed that the following inventories were on hand at the end of each year as valued under both the LIFO and FIFO methods.
|
|
LIFO Method |
FIFO Method |
|
January 1, 2005 |
$ 0 |
$ 0 |
|
December 31, 2005 |
178,000 |
208,000 |
|
December 31, 2006 |
220,000 |
216,000 |
|
December 31, 2007 |
252,000 |
290,000 |
|
December 31, 2008 |
295,000 |
349,000 |
For simplicity, assume that Down Under’s sales for each year are $500,000. The income tax rate is 40%. Down Under has only two expenses—cost of goods sold and income tax expense.
Instructions:
1. Prepare the 3 year comparative income statement for 2008 which will include FIFO numbers for 2008 and retrospectively adjusted FIFO numbers for 2006 and 2007. Hint: You will have to work backwards to figure out income tax expense (using net income) and then calculate cost of goods sold using pretax income and sales.
2. Prepare the 3 year comparative retained earnings statement for Down Under for 2008. Note that the company started business on January 1, 2005. Dividends declared and paid have been as follows: 2005—$10,000; 2006—$15,000; 2007—$15,000; 2008—$25,000.
3. Prepare the year by year income statement note disclosure that Down Under must provide in the notes to its 2008 financial statements.