Chapter 18, Problem 66P

At the end of 2020, Magenta Manufacturing Company discovered that construction cost had been capitalized as a cost of the factory building in 2015 when it should have been treated as a cost of production equipment installation costs. As a result of the misclassification, the depreciation through 2018 was understated by $110,000, and depreciation for 2019 was understated by $90,000. What would be the consequences of correcting for the misclassification of the property cost?

1. a. The taxpayer uses the FIFO inventory method, and 25% of goods produced during the period were included in the ending inventory.
2. b. The taxpayer uses the LIFO inventory method, and no new LIFO layer was added during 2019.