On December 31, 2011, Buckeye Corporation appropriately changed its inventory valuation method to FIFO cost from LIFO cost for both financial statement and income tax purposes. The change will result in a $140,000 increase in the beginning inventory at January 1, 2011. Assume a 30 percent income tax rate. The cumulative effect of this accounting change Buckeye for the year ended December 31, 2011, is

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Since Buckeye changed its inventory valuation method from LIFO to FIFO for financial statement and income tax purposes, there will be a cumulative effect of the change on the financial statements. The increase in beginning inventory will result in an increase in net income by the same amount, which is $140,000. However, since this change also affects the income tax calculation, Buckeye will have to pay income tax on the additional $140,000 at a rate of 30%, resulting in a tax liability of $42,000. Therefore, the cumulative effect of the accounting change is $98,000 ($140,000 - $42,000).

On December 31, 2011, Buckeye Corporation Appropriately Changed Its Inventory