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:

Chi-Squared Distribution

A probability distribution used in hypothesis testing that is applicable to categorical data and tests of independence.

Standard Normal Distribution

A normal distribution with a mean of zero and a standard deviation of one, used as a basis in probability theory.

Nominal Data

Nominal data refers to categorical data that can be named or labeled but not meaningfully ordered.

Confidence Interval

A set of values, procured from sample-based observations, deemed likely to hold the value of a non-specified population characteristic.