On January 1, 2015, Frost Corp. changed its inventory method to FIFO from LIFO for both financial and income tax reporting purposes. The change resulted in a $700,000 increase in the January 1, 2015 inventory. Assume that the income tax rate for all years is 30%. The cumulative effect of the accounting change should be reported by Frost in its 2015
A) retained earnings statement as a $490,000 addition to the beginning balance.
B) income statement as a $490,000 cumulative effect of accounting change.
C) retained earnings statement as a $700,000 addition to the beginning balance.
D) income statement as a $700,000 cumulative effect of accounting change.

Question

Quizplus · Accepted Answer

The cumulative effect of the accounting change should be reported as an adjustment to the beginning balance of retained earnings, net of tax. The $700,000 increase in inventory results in a $490,000 addition to retained earnings after accounting for the 30% tax rate ($700,000 x (1 - 0.30) = $490,000).