(Solution) - The Fava Company began operations in 2006 and used the -(2025 Original AI-Free Solution)

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The Fava Company began operations in 2006 and used the LIFO inventory method for both financial reporting and income taxes. At the beginning of 2007 the anticipated cost trends in the industry had changed, so that it adopted the FIFO method for both financial reporting and income taxes. The company reported revenues of $300,000 and $270,000 in 2007 and 2006, respectively. The company reported expenses (excluding income tax expense) of $125,000 and $120,000 in 2007 and 2006, 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 2006. The tax rate is 30%. The company has a simple capital structure, with 15,000 shares of common stock outstanding during 2006 and 2007. It paid no dividends in either year.
Required
1. Prepare the journal entry to reflect the change.
2. At the end of 2007 prepare the comparative income statements for 2007 and 2006. Notes to the financial statements are not necessary.
3. At the end of 2007 prepare the comparative retained earnings statements for 2007 and 2006.