Question

During 2019 (its first year of operations) and 2020, Fieri Foods used the FIFO inventory costing method for both financial reporting and tax purposes. At the beginning of 2021, Fieri decided to change to the average method for both financial reporting and tax purposes.

Income components before income tax for 2019, 2020, and 2021 were as follows:

($ in millions)	2019			2020			2021
Revenues	$	580		$	590		$	620
Cost of goods sold (FIFO)		(58	)		(60	)		(66	)
Cost of goods sold (average)		(92	)		(96	)		(102	)
Operating expenses		(322	)		(330	)		(334	)

Dividends of $39 million were paid each year. Fieri’s fiscal year ends December 31.

Required:
1. Prepare the journal entry at the beginning of 2021 to record the change in accounting principle. (Ignore income taxes.)
2. Prepare the 2021–2020 comparative income statements.
3. & 4. Determine the balance in retained earnings at January 1, 2020 as Fieri reported using FIFO method and determine the adjustment of balance in retained earnings as on January 1, 2020 using average method instead of FIFO method.

For financial reporting, Clinton Poultry Farms has used the declining-balance method of depreciation for conveyor equipment acquired at the beginning of 2018 for $2,800,000. Its useful life was estimated to be six years with a $220,000 residual value. At the beginning of 2021, Clinton decides to change to the straight-line method. The effect of this change on depreciation for each year is as follows:

	($ in thousands)
Year	Straight-Line				Declining Balance				Difference
2018		$	430			$	933			$	503
2019			430				622				192
2020			430				415				(15	)
		$	1,290			$	1,970			$	680

   
Required:
2. Prepare any 2021 journal entry related to the change. (Enter your answers in dollars. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Dear student, we cannot able to post solution more than one question as per our policy.

Part 1

	2020	2019	Total
Cost of Goods Sold (FIFO)	$          60	$          58
Cost of Goods Sold (average)	$          96	$          92
Higher COGS in average method than FIFO	$          36	$          34	$          70
Due to change in the inventory valuation method,
Higher COGS in average method than FIFO	$          36	$          34	$          70
Thus, net income would be decreased due to higher COGS.	$        (36)	$        (34)
Thus, retained earnings would be decreased due to decreased in net income.			$        (70)

Date	Accounts title	Debit	Credit
Jan 1, 2021	Retained earnings	$          70
	Inventory		70
	To record the change in inventory method.

Part 2

Comparative income statement	2021	2020
Revenues	$        620	$        590
Cost of goods sold (average)	$      (102)	$        (96)
Gross profit	$        518	$        494
Operating expenses	$      (334)	$      (330)
Net income	$        184	$        164

Part 3

Income statement under FIFO			2019
Revenues			$        580
Cost of goods sold (FIFO)			$        (58)
Gross profit			$        522
Operating expenses			$      (322)
Net income			$        200
Retained earnings under FIFO			2019
Beginning retained earnings			$             0
Net income			$        200
Dividends			$        (39)
Ending retained earnings			$        161
Balance in retained earnings at January 1, 2020			$        161

Part 4

Cost of Goods Sold (FIFO)			$          58
Cost of Goods Sold (average)			$          92
Retained earnings would be decreased by			$          34
Income statement under Average method			2019
Revenues			$        580
Cost of goods sold (FIFO)			$        (92)
Gross profit			$        488
Operating expenses			$      (322)
Net income			$        166
Retained earnings under Average method			2019
Beginning retained earnings			$             0
Net income			$        166
Dividends			$        (39)
Ending retained earnings			$        127
Balance in retained earnings at January 1, 2020			$        127
Balance in retained earnings FIFO			$        161
Balance in retained earnings Average method			$        127
Retained earnings would be decreased by			$          34