Question

During 2016 (its first year of operations) and 2017, Batali Foods used the FIFO inventory costing method for both financial reporting and tax purposes. At the beginning of 2018, Batali decided to change to the average method for both financial reporting and tax purposes.

Income components before income tax for 2018, 2017, and 2016 were as follows ($ in millions):

	2018			2017			2016
Revenues	$	570		$	540		$	530
Cost of goods sold (FIFO)		(61	)		(55	)		(53	)
Cost of goods sold (average)		(92	)		(86	)		(82	)
Operating expenses		(314	)		(310	)		(302	)

Dividends of $34 million were paid each year. Batali’s fiscal year ends December 31.

Required:
1. Prepare the journal entry at the beginning of 2018 to record the change in accounting principle. (Ignore income taxes.)
2. Prepare the 2018–2017 comparative income statements.
3. & 4. Determine the balance in retained earnings at January 2017 as Batali reported using FIFO method and determine the adjustment of balance in retained earnings as on January 2017 using average method instead of FIFO method.

Answer 1

All figures in million

Ques 1
	2017	2016
Cost of goods Sold(FIFO)	$                                                      55	$                                                      53
Cost of goods Sold(Average)	$                                                      86	$                                                      82
Difference	$                                                      31	$                                                      29
Journal Entry
Retained earnings	$                                                      60
Inventory		$                                                      60
Ques 2
	2018	2017
Revenues	$                                                   570	$                                                    540
Less:cost of goods sold	$                                                   (92)	$                                                    (86)
Gross Margin	$                                                   478	$                                                    454
Less:Operating expenses	$                                                 (314)	$                                                  (310)
Net Income	$                                                   164	$                                                    144
Ques 3
Revenues	$                                                   530
Less:cost of goods sold	$                                                   (53)
Less:Operating expenses	$                                                 (302)
net Income	$                                                   175
Retained earnings, january 1 ,2016	$                                                       -
Add:Net income	$                                                   175
Less:Dividends	$                                                   (34)
Retained earnings, Dec 31 ,2016	$                                                   141
Ques 4:
$53(FIFO)-$82(Average)=$29 (retained earnings would be lower)
	FIFO	Average
Revenues	$                                                   530	$                                                    530
Less:cost of goods sold	$                                                   (53)	$                                                    (82)
Less:Operating expenses	$                                                 (302)	$                                                  (302)
net Income	$                                                   175	$                                                    146
Retained earnings, january 1 ,2016	0	0
Add:Net income	$                                                   175	$                                                    146
Less:Dividends	$                                                   (34)	$                                                    (34)
Retained earnings, Dec 31 ,2016	$                                                   141	$                                                    112
Difference =$14 lower ($175-$146)