[I'm, Ron Burgundy?]

Can someone please further clarify the question below? The answer explanation provides little reasoning as to why the answer is $0. It would seem to me that the correct answer would be an adjustment to beginning R/E of $122,500. Please tell me where I’m going wrong…

On December 31, year 2, Rapp Co. changed inventory cost methods to FIFO from LIFO for financial statement and income tax purposes. The change will result in a $175,000 increase in the beginning inventory at January 1, year 3. Rapp does not maintain records to identify the effect of the change on years prior to year 1. Assuming a 30% income tax rate, the cumulative effect of this accounting change reported in the income statement for the year ended December 31, year 3, is

A. $175,000

B. $122,500

C. $52,500

D. $0

Correct answer: D

Explanation: This answer is correct. ASC Topic 250 requires changes in accounting principle to be given retrospective application, and the cumulative effects of the change reflected in the carrying value of assets and period-specific effects on the financial statements for each period presented.

"If you're going through hell, keep going"
- Winston Churchill

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BEC: (54), (72), 80 (losing credit on 02/02/15 - nervous)
AUD: 78
REG: (74), 91
FAR: (71)

[nosleep135]

I remember from one of the Becker videos that going from any inventory cost method to LIFO is considers to be a retroactive change because it is difficult to estimate the amount to adjust the beginning RE…all the others require to adjust beginning RE. And as a side note LIFO is prohibited under IFRS

[Juliemiddle]

Because the change is made on 12/31/Y2, it will be retrospectively applied and affect Year 2's financials and Year 1 comparative financial stmts. No effect on Yr. 3.

In other words, your answer would be correct it if was asking about Year 2. It sounds like they're testing whether you know that this is an accounting principle change, and whether it's retrospectively or prospectively applied.

AUD: 84 - Oct. 2013
BEC: 83 - Feb. 2014
REG: 91 - May, 2014
FAR: 68, 96 - Oct. 2014...DONE

CPAExcel, Ninja Audio (all sections)

[nosleep135]

Wait, isn't this retroactive regardless?

[Anonymous]

“Assuming a 30% income tax rate, the cumulative effect of this accounting change reported in the income statement for the year ended December 31, year 3, is…”

I don't really remember this area well enough to speak with any authority on it but I think you're right about adjusting retained earnings…but this question isn't asking about RE, it's asking about the income statement, which is not affected by the change.

[nosleep135]

Oh wow! I completely missed that part (I'm screwed for the test tomorrow if I don't see crucial things like that!)

[rikirod]

Changing to LIFO I believe is an exception and it is treated as an error accounted for prospectively. Therefore, there's no retrospective adjustment.

AUD – 56

REG – 80

BEC – 82

FAR – 10/24/2014

[Author]

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