In 2012, Swan Company Discovered That It Had for the Past

question 38

Multiple Choice

In 2012, 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 2011 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 2011 tax return and reduce its income by $240,000.
• B)The company should change its accounting method in 2012, with a $60,000 negative § 481 adjustment which decreases its 2012 taxable income.
• C)The company should change its accounting method in 2012, and increase its 2012 income by $60,000, the amount of the positive § 481 adjustment to income.
• D)The company should change its accounting method in 2012 and recognize a $60,000 negative § 481 adjustment that will be spread equally over 2012-15.
• E)None of the above.

---

Definitions:

Production Costs

Expenses incurred in the manufacturing or creation of goods, including labor, materials, and overhead.

Price-Taker Market

A market situation where individual buyers and sellers have no influence over the price of a product due to the product's homogeneity and the presence of many participants.

Profit-Maximizing Firm

A company that operates in a way that its primary goal is to achieve the highest possible profit.

Market Price

The current price at which a good or service can be bought or sold in a marketplace.