Williams-Santana, Inc., is a manufacturer of high-tech industrial parts that was
ID: 2716900 • Letter: W
Question
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 five-year casualty insurance policy was purchased at the beginning of 2011 for $33,500. The full amount was debited to insurance expense at the time.
Effective January 1, 2013, the company changed the salvage value used in calculating depreciation for its office building. The building cost $598,000 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 $110,000. Declining real estate values in the area indicate that the salvage value will be no more than $27,500.
On December 31, 2012, merchandise inventory was overstated by $23,500 due to a mistake in the physical inventory count using the periodic inventory system.
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 $945,000 increase in the beginning inventory at January 1, 2014.
At the beginning of 2011, the company purchased a machine at a cost of $690,000. 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 $441,600. On January 1, 2013, the company changed to the straight-line method.
Warranty expense is determined each year as 1% of sales. Actual payment experience of recent years indicates that 0.80% is a better indication of the actual cost. Management effects the change in 2013. Credit sales for 2013 are $3,700,000; in 2012 they were $3,400,000.
Identify whether it represents an accounting change or an error. If an accounting change, identify the type of change. (Leave no cells blank - be certain to select "NA" wherever required.)
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.) (If no entry is required for a particular transaction, select "No journal entry required" in the first account field.)
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ProblemLearning Objective: 20-02 Describe how changes in accounting principle typically are reported.Learning Objective: 20-04 Explain how and why changes in estimates are reported prospectively.
Learning Objective: 20-01 Differentiate among the three types of accounting changes and distinguish between the retrospective and prospective approaches to accounting for and reporting accounting changes.Learning Objective: 20-03 Explain how and why some changes in accounting principle are reported prospectively.Learning Objective: 20-06 Understand and apply the four-step process of correcting and reporting errors, regardless of the type of error or the timing of its discovery.
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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.
Explanation / Answer
a)Accounting Change
Insurance expense should be amortised over 5 years.
Journal:-
Debit Deferred Insurance Expense = 13400
Credit Retained Earnings = 13400
b)Accounting Change
WDV As on Jan – 1,2013 = 598000 – [(598000-110000)/40 * 10] = 476000
..
New salvage value = 27500
WDV as on Jan-1,2013 as per new Depreciation Policy should be = 598000 -[(598000-27500)/40 * 10] = 455375
Journal:-
Debit Retained Earnings = 20625
Credit Office Building = 20625
c)ERROR
..
Journal:-
Debit Retained Earnings = 23500
Credit Office Building = 23500
d)Accounting Change
Journal Entry – N.A.
e)N.A.
Only it should be reported as a Prior Period Item in Financial Statement
f) Accounting Change
DO SAME AS POINT-b above
a)Accounting Change
Insurance expense should be amortised over 5 years.
Journal:-
Debit Deferred Insurance Expense = 13400
Credit Retained Earnings = 13400
b)Accounting Change
WDV As on Jan – 1,2013 = 598000 – [(598000-110000)/40 * 10] = 476000
..
New salvage value = 27500
WDV as on Jan-1,2013 as per new Depreciation Policy should be = 598000 -[(598000-27500)/40 * 10] = 455375
Journal:-
Debit Retained Earnings = 20625
Credit Office Building = 20625
c)ERROR
..
Journal:-
Debit Retained Earnings = 23500
Credit Office Building = 23500
d)Accounting Change
Journal Entry – N.A.
e)N.A.
Only it should be reported as a Prior Period Item in Financial Statement
f) Accounting Change
DO SAME AS POINT-b above
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