Posted: December 26th, 2021

Williams-Santana, Inc., is a manufacturer of high-tech industrial parts that was started

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.

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