Mogo Manufacturing Company Accounts for Its Inventories by the FIFO

question 105

Essay

Mogo Manufacturing Company accounts for its inventories by the FIFO method. The company has consistently allocated building depreciation to production and general administration on the basis of the number of square feet occupied. According to the measurements used, manufacturing requires 90% of the square footage and general administration utilizes 10% of the total square feet. This year, 2017, the accountant realized that 5 years ago an addition was made to the portion of the building used for general administration, and the depreciation allocation had not been adjusted. What are the tax accounting implications of this discovery?

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Definitions:

MACRS Depreciation

MACRS Depreciation refers to the Modified Accelerated Cost Recovery System, a method of depreciation under U.S. tax law that allows for faster recovery of assets' costs over their useful lives.

Percentage Depletion

A tax deduction method applicable to natural resources extraction, calculating the deduction as a percentage of the gross income generated from the resource.

MACRS

The Modified Accelerated Cost Recovery System, a method of depreciation for tax purposes allowing for faster recovery of assets' costs to stimulate investment.

Straight-Line Depreciation

An approach to spreading the expense of a tangible asset across its lifespan in uniform yearly sums.