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tresset_1 [31]
3 years ago
11

On December 31, 2015, Howells, Inc. appropriately changed its inventory valuation method to FIFO cost from weighted-average cost

for financial statement and income tax purposes. The change will result in a $2,000,000 increase in the beginning inventory at January 1, 2015. Assume a 30% income tax rate. The cumulative effect of this accounting change on beginning retained earnings is Group of answer choices $0. $1,400,000. $1,750,000. $2,500,000.
Business
1 answer:
il63 [147K]3 years ago
5 0

Answer:

$1,400,000

Explanation:

According to the scenario, computation of the given data are as follows,

Increase in beginning inventory = $2,000,000

Income tax rate = 30%

So, we can calculate the effect on beginning retained earning by using following formula,

Cumulative effect = Increase beginning inventory × (1 -  tax rate)

= $2,000,000 × ( 1 - 30%)

= $2,000,000 × 70%

= $1,400,000

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