Question 1. In 2014, 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 amo

1. In 2014, 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 2013 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 2013 tax return and reduce its income by $240,000.

b. The company should change its accounting method in 2014, with a $60,000 negative § 481 adjustment which decreases its 2014 taxable income.

c. The company should change its accounting method in 2014, and increase its 2014 income by $60,000, the amount of the positive § 481 adjustment to income.

d. The company should change its accounting method in 2014 and recognize a $60,000 negative § 481 adjustment that will be spread equally over 2014-17.

e. None of the above.

2. The taxpayer has consistently, but incorrectly, used an allowance for bad debts. At the beginning of the year, the balance in the allowance account is $90,000.

a. If the IRS examines the taxpayer’s return and requires the taxpayer to change accounting methods, the taxpayer will be required to recognize an additional $90,000 of income (one-half in the current year and one- half in the following year) as the adjustment due to the change in accounting methods.

b. If the taxpayer voluntarily changes methods, the $90,000 adjustment can be spread over the current and three following years.

c. If the taxpayer voluntarily changes methods, the $90,000 reserve can be used to absorb bad debts until the account balance is zero.

d. If the IRS examines the taxpayer’s return, no adjustment to the reserve account will be required if the balance

is consistent with prior bad debt experience.

e. None of the above.

3. When the IRS requires a taxpayer to change accounting methods:

a. The taxpayer may be subject to penalties and interest.

b. The taxpayer generally is required to make the change as of the beginning of the earliest open year.

c. The adjustments due to the change cannot be spread over subsequent years.

d. Only a. and b. are correct.

e. a., b., and c. are correct.

4. The taxpayer had consistently used the cash method of accounting even though inventories were a material income- producing factor to its business. The taxpayer decided to voluntarily change to the accrual method of accounting. The adjustment to income due to the change was that the correct beginning balances for the year of the change as follows: $60,000 for inventories, $30,000 for accounts receivable, and $12,000 for accounts payable. The adjustment due to the change in accounting method is:

a. A positive adjustment for $102,000.

b. A positive adjustment for $90,000.

c. A positive adjustment for $78,000.

d. A positive adjustment for $60,000.

e. None of the above.

5. The taxpayer had incorrectly been using the cash method of accounting. For 2014, the company voluntarily changed to the accrual method. The adjustment due to the change in method as calculated at the beginning of 2014 was $120,000 (positive). The adjustment as calculated as of the end of 2014 was $80,000 (positive). As a result of the change in method, the company must:

a. Increase its income for 2014 by $120,000.

b. Increase its income for 2014 by $80,000.

c. Increase its income for 2014 by $30,000.

d. Increase its income for 2014 by $40,000.

e. None of the above.

.

6. The accrual basis taxpayer sold land for $100,000 on December 31, 2014. He did notcollect the $100,000 until January 2, 2015. The land was held as an investment.

a. If the accrual basis taxpayer’s basis in the land was $110,000, the loss would be recognized in 2015.

b. If the accrual basis taxpayer’s basis in the land was $60,000, the gain must be reported in 2014.

c. If the accrual basis taxpayer’s basis in the land was $60,000, the gain must be reported in 2015, unless the taxpayer elects to notuse the installment method.

d. The accrual basis taxpayer must recognize the gain or loss in the year of sale.

e. None of the above.

7. The installment method can be us

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