During 2014 (its first year of operations) and 2015, Batali Foods used the FIFO

Question

During 2014 (its first year of operations) and 2015, Batali Foods used the FIFO inventory costing method for both financial reporting and tax purposes. At the beginning of 2016, Batali decided to change to the average method for both financial reporting and tax purposes. Income components before income tax for 2016, 2015, and 2014 were as follows ($ in millions):

Prepare the journal entry at the beginning of 2016 to record the change in accounting principle. (Ignore income taxes.) (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)

Prepare the 2016–2015 comparative income statements. (Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)

($ in millions)

Determine the balance in RE at january 2015 as batali reported using FIFO method and adjustment of balance in RE as on january 2015 using average menthod instead of FIFO method. (Enter your answer in millions (i.e., 10,000,000 should be entered as 10).)

* I would like to get an answer from the expert that make sure it's corrected. Please provide with explain and calculate. Apreciate your help!

2016 2015 2014 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)

Explanation / Answer

Solution:

1) Journal entry at the beginning of 2016 to record the change in accounting principle:

As a result of the change in inventory method, cost of goods sold for 2015 and 2014 is $30 higher ($16 + $14) under the average method. Since cost of goods sold is an expense, this means that net income would be $30 lower. When the net income is closed into retained earnings, the retained earnings would be $30 lower. Since cost of goods sold is higher under the average method, the asset inventory would be $30 lower. Therefore, the journal entry in 2016 would be

2) Comparative Income Statement:

3) Calculation of balance in Retained Earnings at January 2015 as Batali reported using FIFO method:

4) Adjustment of balance in Retained earnings as on January 2015:

Difference = $14 lower ($80 - $66)

2015 2014 Cost of Goods Sold (FIFO) 40 38 Cost of Goods Sold (average) 56 52 Difference 16 14

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