During 2016 (its first year of operations) and 2017, Batali Foods used the FIFO
ID: 2578791 • Letter: D
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.
Explanation / Answer
Cost of goods as per average inventory method is higher compared to FIFo method of valuation . Reporting higher cost of goods sold i.e expenses reduces the profit and thereby impacting retained earnings.
Journal entry for cumulative difference (16+14) is as below :
Retained Earnings Dr... 30
To Inventory 30
2.
3.
4.
2017 2016 Cost of goods sold (FIFO) 40 38 Cost of goods sold (average) 56 52 Difference 16 14Related Questions
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