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Problem 2 0 - 1 2 ( Algo ) Accounting changes and error correction; seven situations; tax effects ignored [ LO 2 0 - 1
Problem Algo Accounting changes and error correction; seven situations; tax effects ignored
LO
WilliamsSantana Incorporated is a manufacturer of hightech industrial parts that was started in by two talented engineers with
little business training. In 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 before any adjusting entries or closing entries were prepared.
a A fiveyear casualty insurance policy was purchased at the beginning of for $ The full amount was debited to
insurance expense at the time.
b Effective January the company changed the salvage value used in calculating depreciation for its office building. The
building cost $ on December and has been depreciated on a straightline basis assuming a useful life of
years and a salvage value of $ Declining real estate values in the area indicate that the salvage value will be no more
than $
c On December merchandise inventory was overstated by $ 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 for both financial statement and income tax
purposes. The change will cause a $ increase in the beginning inventory on January
e At the end of the company failed to accrue $ of sales commissions earned by employees during The
expense was recorded when the commissions were paid in early
f At the beginning of the company purchased a machine at a cost of $ Its useful life was estimated to be years
with no salvage value. The machine has been depreciated by the doubledeclining balance method. Its book value on December
was $ On January the company changed to the straightline method.
g Warranty expense is determined each year as of sales. Actual payment experience of recent years indicates that is a
better indication of the actual cost. Management effects the change in Credit sales for are $; in they
were $
Required:
For each situation:
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".
Prepare any journal entry necessary as a direct result of the change or error correction, as well as any adjusting entry for
related to the situation described. Ignore tax effects.
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