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.

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Definitions:

Mental Age

A measure of an individual's intellectual capacity compared to the average intellectual capacity of individuals in the same age group.

IQ

A measure of a person's intelligence as indicated by an intelligence test, relative to the average for their age group.

Wechsler Adult Intelligence Scale

A widely used test designed to measure a person's cognitive ability or intelligence.

Otis-Lennon School Ability

A standardized test designed to assess the school abilities of students, measuring verbal, quantitative, and spatial reasoning abilities.