During 2009 (its first year of operations) and 2010, Batali Foods used the FIFO inventory costing method for both financial reporting and tax purposes. At the beginning of 2011, Batali decided to change to the average method for both financial reporting and tax purposes.
Income components before income tax for 2011, 2010, and 2009 were as follows ($ in millions)
Revenues $420 (20011), $390 (2010), $380 (2009)
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 2011 to record the change in accounting principle. (Ignore income taxes.)
2.Prepare the 2011’2010 comparative income statements.
3.Determine the balance in retained earnings at January 1, 2010, as Batali reported previously using the FIFO method.
4.Determine the adjustment to the January 1, 2010, balance in retained earnings that Batali would include in the 2011’2010 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.
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