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, Fier 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: (5 in millions) Revenues Cost of goods sold (FIFO) Cost of goods sold (average) Operating expenses 2019 $ 450 (45) (66) (270) 2020 S 460 (47) (70) (278) 2021 $ 490 (53) (76) (282) Dividends of $26 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

1	Income before taxes:
					FIFO	Average
					2019	2020	2019	2020
	Revenues				450	460	450	460
	Less: Cost of goods sold				45	47	66	70
	Gross profit				405	413	384	390
	Less: Operating expenses				270	278	270	278
	Income before taxes				135	135	114	112
	Total Income before taxes				270		226
	Decrease in operating income required=270-226=$ 44
	Journal entry:
	Date	Account titles					Debit	Credit
	2021
	Jan 1.	Retained earnings					44
		Inventory						44
		(To record the change in accounting principle)
2	Comparative income statement:
					2020	2021
	Revenues				460	490
	Less: Cost of goods sold				70	76
	Gross profit				390	414
	Less: Operating expenses				278	282
	Income before taxes				112	132
3. & 4.	Balance in retained earnings as at Jan 1,2020=Income before taxes for 2019 as per FIFO=$ 135
	Income before taxes for 2019 as per average method=$ 114
	Adjustment required in retained earnings=135-114=Reduction by $ 21.