Problem - Change in principle; change in inventory methods
During 2011 (its first year of operations) and 2012, Batali Foods used the FIFO inventory costing method for both financial reporting and tax purposes. At the beginning of 2013, Batali decided to change to the average method for both financial reporting and tax purposes.
Income components before income tax for 2013, 2012, and 2011 were as follows ($ in millions):
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 2013 to record the change in accounting principle. (Ignore income taxes.)
2. Prepare the 2013-2012 comparative income statements.
3. Determine the balance in retained earnings at January 1, 2012, as Batali reported previously using the FIFO method.
4. Determine the adjustment to the January 1, 2012, balance in retained earnings that Batali would include in the 2013-2012 comparative statements of retained earnings or retained earnings column of the statements of shareholders' equity to revise it to the amount it would have been if Batali had used the average method.