In 2018, Swan Company Discovered That It Had for the Past

question 46

Multiple Choice

In 2018, 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 2017 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 2017 tax return and reduce its income by $240,000.
• B) The company should change its accounting method in 2018, with a $60,000 negative § 481 adjustment which decreases its 2018 taxable income.
• C) The company should change its accounting method in 2018, and increase its 2018 income by $60,000, the amount of the positive § 481 adjustment to income.
• D) The company should change its accounting method in 2018 and recognize a $60,000 negative § 481 adjustment that will be spread equally over 2018-21.
• E) None of the above.

---

Definitions:

Operating Profit

The profit earned from a firm's core business operations, excluding deductions of interest and taxes.

Allocation Method

A way of assigning and distributing costs or revenues among different departments, projects, or entities within an organization.

Audit Report

A document prepared by an auditor which expresses an opinion on whether financial statements are presented fairly, in all material aspects, in accordance with the applicable financial reporting framework.