Sonny Corporation has never been audited before the current year. An audit is now needed by a CPA because the company is expanding rapidly and plans to issue stock to the public

Sonny Corporation has never been audited before the current year. An audit is now needed by a CPA because the company is expanding rapidly and plans to issue stock to the public. A CPA firm has been doing preliminary evaluations of the Sonny Corporation’s accounts and records. One major problem involves the valuation of inventory under GAAP. Sonny Corporation has been valuing its inventory under the cost method and no write-downs have been made for obsolescence. A review of the inventory indicates that obsolescence and excess spare parts in the inventory are two major violations of Accounting Periods and Methods. The CPA states that for GAAP the company will be required to write down its inventory by 25% of its stated amount, or $100,000, and charge this amount against net income from operations for the current period. Otherwise, an unqualified (i.e., a “clean opinion”) will not be rendered. The company controller asks for your advice regarding the tax consequences of the obsolescence and spare parts inventory write-downs for the current year and the procedures for changing to the lower-of-cost-or-market (LCM) method for tax purposes. Sonny Corporation uses a calendar year for both book and tax purposes, and the date of your contact with the company is December 1 of the current year.

A partial list of research sources includes:

446 and 471

Secs. 1.446-1(e)(3), 1.471-2, and 1.471-4

American Liberty Pipe Line Co. v. CIR, 32 AFTR 1099, 44-2

USTC ¶9408 (5th Cir., 1944)Thor Power Tool Co. v. CIR, 43 AFTR 2d 79-362,79-1 USTC ¶9139 (USSC, 1979)