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Wolfgang Kitchens has always used the FIFO inventory costing method for both financial reporting and tax purposes. At the beginning of 2024, Wolfgang decided to change to the LIFO method. Net income in 2024 was correctly stated as [tex]\$110[/tex] million. If the company had used LIFO in 2023, its cost of goods sold would have been higher by [tex]\$17[/tex] million that year. Company accountants are able to determine that the cumulative net income for all years prior to 2023 would have been lower by [tex]\[tex]$33[/tex] million if LIFO had been used all along, but have insufficient information to determine specific effects of using LIFO in 2022. Last year, Wolfgang reported the following net income amounts in its comparative income statements:

\[
\begin{tabular}{llll}
(\$[/tex] in millions) & 2021 & 2022 & 2023 \\
\hline
Net income & \[tex]$110 & \$[/tex]112 & \$114 \\
\end{tabular}
\]

Required:

1. Prepare the journal entry at the beginning of 2024 to record the change in accounting principle. (Ignore income taxes.)
2. What amounts will Wolfgang report for net income in its 2022-2024 comparative income statements?



Answer :

GinnyAnswer
### 1. Journal Entry for Change in Accounting Principle

To record the change in accounting principle at the beginning of 2024, we need to account for the cumulative effect of the change from FIFO to LIFO. The cumulative effect on net income for all years prior to 2023 is a decrease of [tex]\( \$33 \)[/tex] million.

Thus, the journal entry to adjust for this cumulative effect (ignoring income taxes) would be:
- Debit Retained Earnings: [tex]\( \$33 \)[/tex] million
- Credit Inventory: [tex]\( \$33 \)[/tex] million

This entry reflects the decrease in cumulative net income if LIFO had been used instead of FIFO since the inception.

### 2. Adjusted Net Income for Comparative Income Statements

First, we need to adjust the reported net incomes for the impact of switching from FIFO to LIFO, including the specific information given for 2023 and the cumulative effect for previous years.

#### a. Reported Net Incomes
The reported net incomes for the years 2021 through 2023 were:
- 2021: [tex]\( \$110 \)[/tex] million
- 2022: [tex]\( \$112 \)[/tex] million
- 2023: [tex]\( \$114 \)[/tex] million

#### b. Adjusting 2023 Net Income
For the year 2023, if LIFO had been used, the Cost of Goods Sold (COGS) would have been [tex]\( \$17 \)[/tex] million higher, resulting in [tex]\( \$17 \)[/tex] million lower net income for that year.

[tex]\( \text{Adjusted Net Income for 2023} = \$114 \, \text{million} - \$17 \, \text{million} = \$97 \, \text{million} \)[/tex]

#### c. Cumulative Adjustment
The cumulative effect of the change from FIFO to LIFO for all years before 2023 was a decrease of [tex]\( \$33 \)[/tex] million. For simplicity, we can distribute this adjustment evenly across 2021, 2022, and 2023. Therefore, each year would be adjusted by a decrease of [tex]\( \frac{\$33 \, \text{million}}{3} = \$11 \, \text{million} \)[/tex].

#### d. Adjusted Net Incomes for 2021 and 2022
- 2021:
[tex]\[ \text{Adjusted Net Income for 2021} = \$110 \, \text{million} - \$11 \, \text{million} = \$99 \, \text{million} \][/tex]
- 2022:
[tex]\[ \text{Adjusted Net Income for 2022} = \$112 \, \text{million} - \$11 \, \text{million} = \$101 \, \text{million} \][/tex]

#### e. Final Adjustment for 2023
Now, we also adjust 2023 net income by the additional [tex]\( \$11 \)[/tex] million for the distributed cumulative effect:

[tex]\[ \text{Further Adjusted Net Income for 2023} = \$97 \, \text{million} - \$11 \, \text{million} = \$86 \, \text{million} \][/tex]

### Summary of Adjusted Net Incomes
Based on these calculations, Wolfgang will report the following adjusted net income amounts in its 2022-2024 comparative income statements:
- 2021: [tex]\( \$99 \, \text{million} \)[/tex]
- 2022: [tex]\( \$101 \, \text{million} \)[/tex]
- 2023: [tex]\( \$86 \, \text{million} \)[/tex]

### Final Answer
1. The journal entry to record the change in accounting principle at the beginning of 2024:
- Debit Retained Earnings: \[tex]$33 million - Credit Inventory: \$[/tex]33 million

2. Adjusted Net Income in Comparative Income Statements:
- 2021: \[tex]$99 million - 2022: \$[/tex]101 million
- 2023: \$86 million

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