Norton, Inc. has used the cash method of accounting and a calendar year since it was formed in 2001. Much of Norton's work is done on a prepaid contract basis to provide security consulting services to customers. Clients enter into 3-year prepaid contracts. Clients get 3 scheduled consultations per year plus up to 4 consultations that can be scheduled at any time. It has come to the attention of Norton's CFO that the accrual method might be better for them because they would also be able to adopt Rev. Proc. 2004-34. Norton wants to adopt this method for 2010. Norton only has one line of business and is not part of a consolidated group. Norton also wants to adopt the recurring item exception for its recurring items. Assume Norton has correctly been using the cash method. Norton has the following items:
Accounts receivable $134,000
Accounts payable $79,000
Federal income taxes payable $230,000
Notes payable $540,000
Interest payable $38,000
In addition, in 2009 Norton collected $490,000 on maintenance contracts entered into that year and reported $210,000 of that amount on its 2009 audited financial statements (with the balance to be reported in 2010 and 2011). In 2008, Norton collected $111,000 on maintenance contracts and reported $23,000 on its 2008 financial statement and $42,000 on its 2009 financial statement with the balance to be reported on its 2010 financial statement.
a. Identify which Revenue Procedure/regulations/etc. apply to Norton and prepare Norton's Form(s) 3115 to accomplish:
• a change from the cash to the accrual method
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