Final answer:
To reflect the change in accounting principles with a $10,000 increase to beginning inventory, the correct journal entry after considering the 30% tax rate would be a credit to retained earnings for $7,000, as the net effect taking into account the tax impact.
Step-by-step explanation:
The question refers to a change in inventory accounting methods by Kroft in year 2, which resulted in a $10,000 increase to beginning inventory. Given a tax rate of 30%, the correct journal entry would reflect the net effect on retained earnings after tax. The increase in inventory would initially increase retained earnings, but the related tax effect would reduce this amount. Since retained earnings are part of equity and represent the cumulative net income minus dividends paid out, we need to adjust for the tax effect on the change in inventory.
To calculate the net effect, we take the $10,000 increase and apply the 30% tax rate, which results in $3,000 of taxes leaving a net increase in retained earnings of $7,000 after tax ($10,000 - $3,000). Therefore, the correct journal entry to record the change in accounting principles would be a credit to retained earnings for $7,000 (Option B).