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): 2016 2015 2014 Revenues $ 430 $ 400 $ 390 Cost of goods sold (FIFO) (47 ) (41 ) (39 ) Cost of goods sold (average) (64 ) (58 ) (54 ) Operating expenses (258 ) (254 ) (246 ) 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 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.

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).)

Answer 1

Journal Entry
Date	Account Tittle & Explanation	Debit	Credit
01/01/2016	Retained Earning	$32.00
	Inventory ( 2014(15)+2015 (17)		$32.00
	To recovery inventory adjustment

Comparitive Income Statement
	2016	2015
Revenue	$430.00	$400.00
Cost of Goods Sold	-$64.00	-$58.00
Operating Expense	-$258.00	-$254.00
Net Incom e	$108.00	$88.00

Determine balances in RE on 1-1-2015
Retained earning at the 01-01-2015 ($390-39-246-20)	$85.00
Adjustment due to change in accounting policy ($54 - 39)	-$15.00
Adjusted retained earnings at 1-1--2015	$70.00