Williams-Santana, Inc., is a manufacturer of high-tech industrial parts that
P20-12 Williams-Santana, Inc., is a
manufacturer of high-tech industrial parts that was started in 2001 by two
talented engineers with little business training. In 2013, 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 2013 before any
adjusting entries or closing entries were prepared.
a. A five-year casualty insurance
policy was purchased at the beginning of 2011 for $35,000. The full amount was
debited to insurance expense at the time.
b. Effective January 1, 2013, the
company changed the salvage value used in calculating depreciation for its
office building. The building cost $600,000 on December 29, 2002, and has been
depreciated on a straight-line 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, 2012, merchandise
inventory was overstated by $25,000 due to a mistake in the physical inventory
count using the periodic inventory system.
d. The company changed inventory
cost methods to FIFO from LIFO at the end of 2013 for both financial statement
and income tax purposes. The change will cause a $960,000 increase in the
beginning inventory at January 1, 2014.
e. At the end of 2012, the company
failed to accrue $15,500 of sales commissions earned by employees during 2012.
The expense was recorded when the commissions were paid in early 2013.
f. At the beginning of 2011, the
company purchased a machine at a cost of $720,000. Its useful life was
estimated to be 10 years with no salvage value. The machine has been
depreciated by the double-declining balance method. Its carrying amount on
December 31, 2012, was $460,800. On January 1, 2013, the company changed to the
straight-line method.
g. Bad debt expense is determined
each year as 1% of credit sales. Actual collection experience of recent years
indicates that 0.75% is a better indication of uncollectible accounts.
Management effects the change in 2013. Credit sales for 2013 are $4,000,000; in
2012 they were $3,700,000.
Required:
For each situation:
1. Identify whether it represents an
accounting change or an error. If an accounting change, identify the type of
change.
2. Prepare any journal entry
necessary as a direct result of the change or error correction as well as any
adjusting entry for 2013 related to the situation described. (Ignore tax
effects.)
3. Briefly describe any other steps
that should be taken to appropriately report the situation.
TUTORIAL PREVIEW
a. This is a correction of an error.
To correct the error:
Prepaid insurance ($35,000 ÷ 5 yrs x 3 yrs: 2013–2015) ............. 21,000
Retained earnings* ............................................................... ............... 21,000
Retained earnings* ............................................................... ............... 21,000
*$35,000 – [$35,000 ÷ 5 years x 2 years: 2011–2012]
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