In 2019, Swan Company Discovered That It Had for the Past

question 27

Multiple Choice

In 2019, 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 2018 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 2018 tax return and reduce its income by $240,000.
• B)The company should change its accounting method in 2019, with a $60,000 negative § 481 adjustment which decreases its 2019 taxable income.
• C)The company should change its accounting method in 2019, and increase its 2019 income by $60,000, the amount of the positive § 481 adjustment to income.
• D)The company should change its accounting method in 2019 and recognize a $60,000 negative § 481 adjustment that will be spread equally over 2019-2022.
• E)None of these.

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Definitions:

Short Run

A period of time in economics during which at least one input, like plant size, is fixed and cannot be changed.

Production Costs

The total expenses incurred in the process of producing or manufacturing goods or services.

Inputs

Resources such as raw materials, labor, and capital used in the production process to create goods or services.

Total Fixed Costs

The total of all expenses that do not change, irrespective of the amount of production or the level of business operations.