In 2016,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 2015 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 2015 tax return and reduce its income by $240,000.
B)The company should change its accounting method in 2016,with a $60,000 negative § 481 adjustment which decreases its 2016 taxable income.
C)The company should change its accounting method in 2016,and increase its 2016 income by $60,000,the amount of the positive § 481 adjustment to income.
D)The company should change its accounting method in 2016 and recognize a $60,000 negative § 481 adjustment that will be spread equally over 2016-19.
E)None of the above.

Question

Quizplus · Accepted Answer

The company should change its accounting method in 2016 and make a § 481 adjustment. As per IRS guidelines, a negative § 481 adjustment is made to reflect the adjustment in the current year, which reduces taxable income. Here, $240,000 has already been deducted as cost of goods sold in 2015, so a negative adjustment of $60,000 should be made in 2016, which reduces the taxable income for that year.

In 2016,Swan Company Discovered That It Had for the Past