You also notice that the Company has a Prepaid Expense account (asset) and that there is no book/tax difference reflected in the return (tax follows book treatment) and when you ask for additional information about the account you find out the following balance information:

12/31/2015 $300,000 (Casualty Insurance $175,000 & Advertising Services $125,000) 12/31/2016 $340,000 (Casualty Insurance $175,000 & Advertising Services $165,000) 12/31/2017 $410,000 (Casualty Insurance $200,000 & Advertising Services $210,000) 12/31/2018 $430,000 (Casualty Insurance $200,000 & Advertising Services $230,000) 12/31/2019 $445,000 (Casualty Insurance $215,000 & Advertising Services $230,000) 12/31/2020 $375,000 (Casualty Insurance $215,000 & Advertising Services $160,000)

The Company expects to utilize the advertising services in May and June of the following year and the casualty insurance premium relates to a policy for the twelve months beginning on January 1 of the following year.

1. Is the Company on a correct method with respect to the Prepaid Expense account?
2. If the Company wants to take advantage of a tax deferral opportunity, what action should be taken by the Company?
3. If necessary, calculate the Section 481(a) adjustment and spread period, if any.