In 2017, Swan Company Discovered That It Had for the Past

question 41

Multiple Choice

In 2017, 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 2016 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 2016 tax return and reduce its income by $240,000.
• B)The company should change its accounting method in 2017, with a $60,000 negative § 481 adjustment which decreases its 2017 taxable income.
• C)The company should change its accounting method in 2017, and increase its 2017 income by $60,000, the amount of the positive § 481 adjustment to income.
• D)The company should change its accounting method in 2017 and recognize a $60,000 negative § 481 adjustment that will be spread equally over 2017-20.
• E)None of the above.

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Definitions:

Unemployment Increase

A situation where the number of people who are actively looking for work but cannot find employment rises.

Minimum-Wage Laws

Minimum-wage laws set the lowest hourly wage that employers can legally pay their workers, aiming to protect employees from unduly low pay.

Highly-Educated Workers

Individuals in the workforce who have attained a high level of education, typically denoted by college degrees or other advanced certifications.

Low-Skilled Workers

Workers with minimal training or qualifications who typically perform simple tasks and earn lower wages.