In 2015,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 2014 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 2014 tax return and reduce its income by $240,000.
B)The company should change its accounting method in 2015,with a $60,000 negative § 481 adjustment which decreases its 2015 taxable income.
C)The company should change its accounting method in 2015,and increase its 2015 income by $60,000,the amount of the positive § 481 adjustment to income.
D)The company should change its accounting method in 2015 and recognize a $60,000 negative § 481 adjustment that will be spread equally over 2015-18.
E)None of the above.

Question

Quizplus · Accepted Answer

The company should change its accounting method in 2015 and make a negative § 481 adjustment of $60,000. This adjustment will decrease its taxable income in 2015. Option A is incorrect because the 2014 tax return should only be amended if the error is discovered within three years of the filing date. Option C is incorrect because the positive § 481 adjustment should increase income in 2014, not 2015. Option D is incorrect because the adjustment period should only span one year, not four.

In 2015,Swan Company Discovered That It Had for the Past