LO.2, 3, 6 Jeffrey Boyd, the president of Eagle Furniture Company (average annual gross receipts of $4 million), has prepared the company’s financial statements and income tax returns for the past 15 years. In July 2013, however, he hires you to prepare the 2012 corporate income tax return because he has not studied taxes for over 20 years and suspects that the rules may have changed. Eagle uses the accrual method of accounting. Based on an initial examination of Eagle’s trial balance and some account analyses, you have determined that the following items may require adjustments:

• The company uses the FIFO inventory method, as valued at cost. However, all freight expenses on incoming merchandise have been expensed for the 15 years the company has been in business.

• The company experiences inventory shrinkage (due to breakage and theft) of about 1% of sales each year. The shrinkage is not taken into account until the company takes a physical inventory each October, but the corporation’s fiscal year ends January 31.

• The company has used an allowance for uncollectible accounts, which has a balance of $60,000. In the past, the company has been able to accurately predict its actual bad debt expense.

• The company sells a three-year service contract on its appliances. The company treats 1/36 of the contract price as earned each month. At the beginning of the year, the company had $120,000 in its account for unearned revenues from the service contracts.

• The company deducts its state income tax in the year paid. Thus, the 2012 state income tax expense includes the estimated taxes paid in 2012 and the additional amount paid in 2012 on 2011 taxes.

Write a letter to Mr. Boyd explaining what adjustments will be required and how they will be implemented. The address of Eagle Furniture Company is 1000 East Maryland Street, Evansville, IL 47722.