Textbook Problem

Fava Company began operations in 2018 and used the LIFO inventory method for both financial reporting and income taxes. At the beginning of 2019, the anticipated cost trends in the industry had changed, so that it adopted the FIFO method for both financial reporting and income taxes. Fava reported revenues of $300,000 and $270,000 in 2019 and 2018, respectively. Fava reported expenses (excluding income tax expense) of $125,000 and $120,000 in 2019 and 2018, which included cost of goods sold of $55,000 and $45,000, respectively. An analysis indicates that the FIFO cost of goods sold would have been lower by $8,000 in 2018. The tax rate is 21%. Fava has a simple capital structure with 15,000 shares of common stock outstanding during 2018 and 2019. It paid no dividends in either year.

Required:

1. 1. Prepare the journal entry to reflect the change.
2. 2. At the end of 2019, prepare the comparative income statements for 2019 and 2018. Notes to the financial statements are not necessary.
3. 3. At the end of 2019, prepare the comparative retained earnings statements for 2019 and 2018.