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.

Answer 1

Answer:

1.)

	2020	2019
Cost of goods sold (FIFO)	60	58
Cost of goods sold (average)	96	92
Difference	36	34

The under average method 70 (36+34) COGS is higher

S.No	Particulars	Debit ($)	Credit ($)
	Retained earnings	70
	Inventory		70

2.) Comparative Income Statement

	2021	2020
Revenue	620	590
Less: Cost of goods sold	(102)	(96)
Gross Margin	518	494
Less: Operating Expenses	(334)	(330)
Net Income	184	164

3&4)

Retained earnings balance using FIFO

= Revenue - cost of goods sold - operating expenses - dividend

= $580 - $58- $322 - $39

= $161 million

Retained earnings balance using average

= $580 - $92- $322- $39

= $127 million

Retained earnings FIFO	$161 million
Adjustment to balance	($34 million)
Retained earnings average method	$127 million