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During 2016 (its first year of operations) and 2017, Batali Foods used the FIFO inventory costing method for both financial reporting and tax purposes. At the beginning of 2018, Batali decided to change to the average method for both financial reporting and tax purposes. Income components before income tax for 2018, 2017, and 2016 were as follows ($ in millions): 2018 2017 2016 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 2018 to record the change in accounting principle. (Ignore income taxes.) 2. Prepare the 2018–2017 comparative income statements. 3. & 4. Determine the balance in retained earnings at January 2017 as Batali reported using FIFO method and determine the adjustment of balance in retained earnings as on January 2017 using average method instead of FIFO method.

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Casey Durgan
Casey DurganLv2
28 Sep 2019

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E22-5 (Accounting Change) Presented below are income statementsprepared on a LIFO and FIFO basis
for Kenseth Company, which started operations on January 1, 2013.The company presently uses the LIFO
method of pricing its inventory and has decided to switch to theFIFO method in 2014. The FIFO income
statement is computed in accordance with the requirements of GAAP.Kenseth’s profit-sharing agreement
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Income taxes are ignored.

LIFO BASIS FIFO BASIS
2017 2016 2017 2016
sales 3000 3000 3000 3000
cost of good sold 1130 1000 1100 940
operation expenses 1000 1000 1000 1000
incomebefore profitsharing 870 1000 900 1060
porfit sharing expense 87 100 96 100
net income 783 900 804 960

Instructions
Answer the following questions.
(a) If comparative income statements are prepared, what net incomeshould Kenseth report in 2016
and 2017?
(b) Explain why, under the FIFO basis, Kenseth reports $100 in 2016and $96 in 2017 for its profit-sharing
expense.
(c) Assume that Kenseth has a beginning balance of retainedearnings at January 1, 2017, of $8,000
using the LIFO method. The company declared and paid dividends of$500 in 2014. Prepare the
retained earnings statement for 2017, assuming that Kenseth hasswitched to the FIFO method.

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