Question - 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):

2013 2012 2011

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.

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 retained earning balances that Batali would include in the 2013-2012 comparative statements of retained earnings.