In 2012, Swan Company discovered that it had for the past 10 years capitalized as a production cost certain expenses that are properly classified as administrative expenses. The total amount of the expense for 2011 was $300,000, $60,000 of the item was included in the ending inventory that year and $240,000 was deducted as cost of goods sold.
A)The company should amend its 2011 tax return and reduce its income by $240,000.
B)The company should change its accounting method in 2012, with a $60,000 negative § 481 adjustment which decreases its 2012 taxable income.
C)The company should change its accounting method in 2012, and increase its 2012 income by $60,000, the amount of the positive § 481 adjustment to income.
D)The company should change its accounting method in 2012 and recognize a $60,000 negative § 481 adjustment that will be spread equally over 2012-15.
E)None of the above.

Question

Quizplus · Accepted Answer

The company should change its accounting method starting in 2012 to properly classify the expenses as administrative expenses. The $60,000 included in ending inventory should be treated as a current year expense, resulting in a negative § 481 adjustment. This adjustment will decrease the company's taxable income in 2012. The other options are incorrect because the 2011 tax return cannot be amended at this time, there is no positive § 481 adjustment, and spreading the adjustment over multiple years is not necessary or appropriate.

In 2012, Swan Company Discovered That It Had for the Past