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	$	420		$	390		$	380
Cost of goods sold (FIFO)		(46	)		(40	)		(38	)
Cost of goods sold (average)		(62	)		(56	)		(52	)
Operating expenses		(254	)		(250	)		(242	)

Dividends of $20 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.

2.

COMPARATIVE INCOME STATEMENTS 2018 2017 ($ in millions) Revenuesselected answer correct $420selected answer correct $390selected answer correct Cost of goods soldselected answer correct (46)selected answer incorrect (40)selected answer incorrect Operating expensesselected answer correct (254)selected answer correct (250)selected answer correct Net incomeselected answer correct $120selected answer incorrect $100selected answer incorrect

3.Retained earnings balance previously reported using FIFO, Jan. 1, 2017:  

Adjustment to balance for change in inventory methods:

Retained earnings balance using average method, Jan. 1, 2017:

Answer 1