On December 31, 2021, Caria vista 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 $38,500 increase in the beginning inventory at January 1, 2021. Assume a 20% income tax rate. The cumulative effect of this accounting change on beginning retained earnings is:

Increases by $30,800

Explanation:

If the inventory increased by $38,500 in January then that means that the Net Income for the previous period has increased because the Cost of Goods sold for the previous period will be less.

Since the Income for the year 2020 has increased by $38,500, the tax rate needs to be applied to it to see how much goes to retained earnings.

= 38,500 ( 1 - tax rate)

= 38,500 * ( 1 - 20%)

= $30,800

The beginning Retained Earnings balance Increases by $30,800

$30,800

Explanation:

From the question, we are informed that On December 31, 2021, Caria Vista Incorporation appropriately changed its inventory valuation method to FIFO cost from the weighted average cost for financial statement and income tax purposes

Due to this, there was an increase in the beginning inventory by $38,500.

With an income tax rate of 20%, remaining amount on the net income would be carried to the retained earnings. The income tax rate on the increase will be:

= 20% × $38,500

= 20/100 × $38,500

= 0.2 × $38,500

= $7,700

Therefore, the balance of the net income which will be carried to the retained earnings will be:

= $38,500 - $7,700

= $30,800

Therefore, there will be an increase of $30,800 in retained earnings balance.

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