Williams-Santana, Inc., is a manufacturer of high-tech industrial parts that was
ID: 2527615 • Letter: W
Question
Williams-Santana, Inc., is a manufacturer of high-tech industrial parts that was started in 2004 by two talented engineers with little business training. In 2016, the company was acquired by one of its major customers. As part of an internal audit, the following facts were discovered. The audit occurred during 2016 before any adjusting entries or closing entries were prepared. The income tax rate is 40% for all years.
Williams-Santana, Inc., is a manufacturer of high-tech industrial parts that was started in 2004 by two talented engineers with little business training. In 2016, the company was acquired by one of its major customers. As part of an internal audit, the following facts were discovered. The audit occurred during 2016 before any adjusting entries or closing entries were prepared. The income tax rate is 40% for all years.
Williams-Santana, Inc., is a manufacturer of high-tech industrial parts that was started in 2004 by two talented engineers with little business training. In 2016, the company was acquired by one of its major customers. As part of an internal audit, the following facts were discovered. The audit occurred during 2016 before any adjusting entries or closing entries were prepared. The income tax rate is 40% for all years a A five-year casualty insurance policy was purchased at the beginning of 2014 for $36,500. The full amount was debited to insurance expense at the time b. Effective January 1, 2016, the company changed the salvage value used in calculating depreciation for its office building. The building cost $612,000 on December 29, 2005, and has been depreciated on a straightline basis assuming a useful life of 40 years and a salvage value of $100,000. Declining real estate values in the area indicate that the salvage value will be no more than $25,000 c. On December 31, 2015, merchandise inventory was overstated by $26,500 due to a mistake in the d. The company changed inventory cost methods to FIFO from LIFO at the end of 2016 for both financial e. At the end of 2015, the company failed to accrue $15,800 of sales commissions earned by employees f. At the beginning of 2014, the company purchased a machine at a cost of $750,000. Its useful life was physical inventory count using the periodic inventory system statement and income tax purposes. The change will cause a $975,000 increase in the beginning inventory at January 1, 2017 during 2015. The expense was recorded when the commissions were paid in early 2016 estimated to be ten years with no salvage value. The machine has been depreciated by the double- declining balance method. Its book value on December 31, 2015, was $480,000. On January 1, 2016, the company changed to the straight-line method g. Warranty expense is determined each year as 1% of sales. Actual payment experience of recent years indicates that 0.75% is a better indication of the actual cost. Management effects the change in 2016 Credit sales for 2016 are $4,300,000; in 2015 they were $4,000,000 Required For each situation: 1. Identify whether it represents an accounting change or an error. If an accounting change, identify the type of change. For accounting errors, choose "Not applicable" Even Type of change 2. Prepare any journal entry necessary as a direct result of the change or error correction as well as any adjusting entry for 2016 related to the situation described. Any tax effects should be adjusted for through Income tax payable or Refund-income tax. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)Explanation / Answer
1.
2. Prepare Journal entry
a) A five year casualty insurance was purchased in 2014 for $35,500 and was expensed out that year. This means the retained earning was understated and two year of insurance still left equaling $35,500/5*2=$14,200
Journal entry
For correction of error
Prepaid insurance account A/c Dr $21,300
To Retained earning A/c Cr $12,780
To Income Tax A/c cr $8,520
Adjusting entry
Insurance expense A/c Dr $7,100
To Prepaid Insurance A/c Cr $7,100
A prior period adjustment to the retained earning to be reported.
b) There is a change in estimate that is handled prospectively so no correction entry for prior period.
Annual depreciation before the change =612,000-100,000=512,000/40=$12,800
2016 book value=$612,000- $128,000 ($12,800*10)=$484,000
New salvage value=$25,000
Annual depreciation would be= ($484,000-$25,000)/30=$15,300
Journal entry would be
Depreciation expense account Dr $15,300
To Accumulated Depreciation Account Cr $15,300
Disclosure is required on change in estimate
c) Inventory was overstated due to whcih the financial statement was incorrect and so the error should be retrospectively restated to report the correct inventory amount, cost of good sold and retained earning
JE before tax
Retained earning Account Dr $26,500
To Inventory Account Cr $26,500
JE after tax
Retained earning Account Dr $15,900
Income tax refund Dr $10,600
To Inventory Cr $26,500
d) This is a change in accounting principle from one method to another.
JE before tax
Inventory Account Dr $975,000
To Retained earning Account Cr $975,000
JE after tax
Inventory Account Dr $975,000
To Retained earning Account cr $585,000
To Income tax refund cr $390,000
Prior period financial statement would be restated to show the use of new accounting method.
e) Failing to accrue for sales commission is an accounting error. The prior period retained earning need to be restated as last year the sales commission was not expensed
Journal entry would be
Retained earning account Dr $ 9,480
Income tax refund Dr $ 6,320
Cr Sales Commission Expense cr $15,800
f) the change from double decling to straight line method is a accounting principle change and no adjustment is required retrospectively.
JE
Depreciation expense Account Dr $60,000 ($480,000/8)
To Accumulated Depreciation Account Cr $60,000
g) This is a change in accounting estimate and does not require any adjustment retrospectively.
current year estimate would be $4,300,000*.75% =$32,250
Warranty expense Account Dr $32,250
To Warranty payable account Cr $32,250
Type of change a) Accounting error Not applicable b) Accounting change This is a change in accounting estimate c) Accounting error Not applicable d) Accounting change This is a change in accounting principle to FIFO from LIFO e) accounting error not applicable f) Accounting change this is a change in accounting principle g) Accounting change This is a change in accounting estimateRelated Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.