10.00 points Problem 20-12 Accounting changes and error correction; eight situat

Question

10.00 points Problem 20-12 Accounting changes and error correction; eight situation Williams-Santana, Inc., is a manufacturer of talented engineers with little business training. In 2016, the co 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 mpany was acquired by one of its major a. A five-year casualty insurance policy was purchased at the beginning of 2014 for $39,500. 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 $636,000 on December 29, 2005, 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 c. On December 31, 2015, merchandise inventory was overstated by $29,500 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 estate values in the area indicate that the salvage value will be no more than $25,000. physical inventory count using the periodic inventory system. statement and income tax purposes. The change will cause a $1,005,000 increase in the beginning inventory at January 1, 2017 e. At the end of 2015, the company failed to accrue $16,400 of sales commissions earned by employees during 2015. The expense was recorded when the commissions were paid in early 2016 At the beginning of 2014, the company purchased a machine at a cost of $810,000. 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 book value on December 31, 2015, was $518,400. On January 1, 2016, the company changed to the straight-line method. f. g. Warranty expense is determined each year as 1% of sales. Actual payment expenence 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 $4,900,000; in 2015 they were $4,600,000. Required: For each situation: 1. Identify whether it represents an accounting change or an error.If an accounting change, identfy the type of change. For accounting errors, choose "Not applicable" FS 2 4

Explanation / Answer

a(1) Entry to record the correction Date Account Title Debit Credit Dec.31,2016 Prepaid Insurance 39500 Retained Earnings * 39500 * Since the insurance policy was for 5 years and was paid for in 2014, the retained earnings was understated in 2014. First this needs correction. a(2) Adjusting Entry to record the expense correctly Dec.31,2016 Retained Earnings ** 15800 Insurance Expense ** 7900 Prepaid Insurance 23700 ** Retained earnings is to be debited with the expense for 2014 and 2015 and insurance expense to be debited with expense for 2016. b(1) Date Account Title Debit Credit Dec.31,2016 Accumulated Depreciation - Building * 134000 Retained Earnings 134000 (Reversal of the depreciation already charged) b(2) Date Account Title Debit Credit Dec.31,2016 Retained Earnings ** 152750 Depreciation Expense *** 15275 Accumulated Depreciation - Building 168025 (Correction of depreciation account) Date of purchase             Dec.29, 2005 Cost 636000 Salvage value 100000 Depreciable value 536000 Estimated Life -- years 40 Annual Depreciation 13400 Depreciation charged upto 2015 * 134000 Date of purchase             Dec.29, 2005 Cost 636000 Revised Salvage value 25000 Depreciable value 611000 Estimated Life -- years 40 Annual Depreciation *** 15275 Depreciation to be charged upto 2015 ** 152750 c(1) To record the correction Date Account Title Debit Credit Dec.31,2016 Retained Earnings 29500 Merchandise Inventory 29500 c(2) To record adjusting entry As the year end adjusting entries and closing entries were not done this does not need any special adjusting entry. (d) To record the effect of change in the inventory valuation Date Account Title Debit Credit Dec.31,2016 Merchandise Inventory 1005000 Cost of goods sold 1005000 (e) 1 To record the correction Date Account Title Debit Credit Dec.31,2016 Retained earnings 16400 Salaries and wages payable 16400 e (2 ) To record the adjusting entry Date Account Title Debit Credit Dec.31,2016 Salaries and wages payable 16400 Salaries and wages Expense 16400 f(1) To record the correction Date Account Title Debit Credit Dec.31,2016 Accumulated Depreciation 129600 Retained earnings 129600 f(2) To record the adjustment for the year 2016 Date Account Title Debit Credit Dec.31,2016 Depreciation Expense 81000 Accumulated Depreciation 81000 Cost of the machine 810000 Estimated life - years 10 Annual Straight line depreciation 81000 Depreciation for 2014 and 2015 162000 Book value as at Dec.31, 2015 under st. Line method 648000 Actual book value 518400 Amount to be corrected * 129600 g(1) To record correction Date Account Title Debit Credit Dec.31,2016 Warranty liability (0.25%of $4,600,000) 11500 Retained earnings 11500 g(2) To record adjustment for 2016 Date Account Title Debit Credit Dec.31,2016 Warranty Expense 36750 Warranty liability (0.75%of $4,900,000) 36750

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