In 2020, Frost Company, which began operations in 2018, decided to change from LIFO to FIFO because management believed that FIFO better represented the flow of their inventory. Management prepared the following analysis showing the effect of this change:

Frost reported net income of $2,500,000, $2,400,000, and $2,100,000 in 2018, 2019, and 2020, respectively. The tax rate is 21%.

Required:
1. Prepare the journal entry necessary to record the change.
2. What amount of net income would Frost report in 2018, 2019, and 2020?
3. If Frost’s employees received a bonus of 10% of income before deducting the bonus and income taxes in 2018 and 2019, what would be the effect on net income for 2018, 2019, and 2020?

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Ending Inventory Cumulative Difference LIFO FIFO $240,000 245,000 256,000 $273,000 301,000 328,000 $33,000 56,000 72,000 12/31/2018 12/31/2019 12/31/2020