On December 31,2014,Artistown Company appropriately changed to the FIFO cost method from the weighted-average cost method for financial statement and income tax purposes.The change will result in a $700,000 increase in the beginning inventory at January 1,2014.Assuming a 40 percent income tax rate and that no comparative financial statements for prior years are reported,the cumulative effect of this accounting change reported for the year ended December 31,2014,is
A) $700,000.
B) $350,000.
C) $420,000.
D) $280,000.

Question

Quizplus · Accepted Answer

The cumulative effect of the accounting change is computed as the difference between the opening inventory value using the old method (weighted-average) and the new method (FIFO). The increase in inventory of $700,000 will result in a tax saving of 40% x $700,000 = $280,000. Therefore, the cumulative effect of the accounting change will be $700,000 + $280,000 = $980,000. However, since the tax benefit of $280,000 is not a permanent difference, it should not be included in the cumulative effect reported on the income statement. Therefore, the answer is $700,000 + $420,000 (40% of $700,000) = $1,120,000. The cumulative effect should be reported as a prior period adjustment on the income statement for the year ended December 31, 2014.

On December 31,2014,Artistown Company Appropriately Changed to the FIFO Cost