In 2014,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 2013 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 2013 tax return and reduce its income by $240,000.
B)The company should change its accounting method in 2014,with a $60,000 negative § 481 adjustment which decreases its 2014 taxable income.
C)The company should change its accounting method in 2014,and increase its 2014 income by $60,000,the amount of the positive § 481 adjustment to income.
D)The company should change its accounting method in 2014 and recognize a $60,000 negative § 481 adjustment that will be spread equally over 2014-17.
E)None of these.

Question

Quizplus · Accepted Answer

The taxpayer has consistently followed its practice of capitalizing the item.Therefore,the taxpayer is changing its accounting method.The change is voluntary.The negative § 481 adjustment of $60,000 is the amount included in the ending inventory for 2013 that should have been expensed.Answer a.has the incorrect amount of the adjustment.Answer c.has the wrong sign of the adjustment.Answer d.is incorrect because the entire negative adjustment can reduce 2014 income.

In 2014,Swan Company Discovered That It Had for the Past