Question

Shannon, Inc., changed from the LIFO cost flow assumption to the FIFO cost flow assumption in 2017. The increase in the prior year’s income before taxes is $1,200,000. The tax rate is 40%. Prepare Shannon’s 2017 journal entry to record the change in accounting principle.

Short answer

Retained earnings are the accumulated profits, and Journal entry to record accounting change is Inventory is debited, deferred tax liability and retained earnings are credited.

Step-by-step solution

Definition of Retained Earnings

Retained Earnings are defined as the accumulated profits of the previous years which are left after the payment of dividends

Journal Entry

Date	Particulars	Debit ($)	Credit ($)
2017	Inventory	1,200,000
	Deferred Tax Liability		480,000
	Retained Earnings		720,000
	(Being change in accounting principle is recorded)