In 2011,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 2010 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.

Question

Quizplus · Accepted Answer

Since the company discovered the error in 2011, it should change its accounting method going forward to properly classify the expenses as administrative expenses. This will result in a negative § 481 adjustment of $60,000, which should decrease its 2011 taxable income. The company should not amend its 2010 tax return, as the error was not discovered until 2011. Additionally, the company should not recognize a positive § 481 adjustment or spread the negative adjustment over multiple years, as it is not necessary in this situation.

In 2011,Swan Company Discovered That It Had for the Past