On January 1, 2017, Robin Ltd.changed its inventory valuation method from weighted-average cost to FIFO for financial statement and income tax purposes, to make their reporting as reliable and more relevant.The change resulted in a $600,000 increase in the beginning inventory at January 1, 2017.Assume a 25% income tax rate.The cumulative effect of this accounting change reported for the year ended December 31, 2017 is
A)$0.
B)$150,000.
C)$450,000.
D)$600,000.

Question

Quizplus · Accepted Answer

The cumulative effect of this accounting change is the difference between the beginning inventory balance under the new method ($600,000 higher) and the beginning inventory balance under the old method, which is the same as the ending inventory balance in the prior year's financial statements. Since the change occurred on January 1, 2017, the old method was used for the 2016 financial statements, so the prior year's ending inventory balance would have been based on the weighted-average cost method. Therefore, the cumulative effect of the accounting change is $600,000 minus the income tax effect of $150,000 (25% x $600,000), or $450,000.