Question

During 2016 (ts 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 (S in millions) 2018 20172016 $ 570 $540 $ 530 (61) (55) (53) (92) (86)(82) (314) (310) (302) Revenues Cost of goods sold (FIFO) Cost of goods sold (average) Operating expenses Dividends of $34 million were paid each year Batal'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

To Know the difference of 2017 Vs 2016 for the method of FIFO and Average -

	2017	2016
Cost of goods sold (FIFO)	55	53
Cost of goods sold (average)	86	82
Difference	31	29

Cost of goods of average inventory method > FIFo method of valuation . Reporting higher cost of goods sold i.e expenses reduces the profit and impacting retained earnings.

Journal entry for cumulative difference of 2017 and 2017 (31+29) is as below :

Retained Earnings Dr... 60

To Inventory 60

2.

	2018	2017
Revenues	570	540
Less: Cost of goods sold (average)	92	86
Less: Operating Expenses	314	310
Net Income	164	144

3.

At the beginning of Jan 2017
Revenues	540
Less: Cost of goods sold (FIFO	55
Less: Operating Expenses	310
Net Income	175
Less : Dividend Paid	34
Retained Earnings	141

4.

At the beginning of Jan 2017
	FIFO	Average
Revenues	530	530
Less: Cost of goods sold	53	82
Less: Operating Expenses	302	302
Net Income	175	146
Less : Dividend Paid	34	34
Retained Earnings	141	112