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[ This problem is a variation of P 2 0 - 1 2 , modified to consider income tax effects. ] Williams - Santana Inc.
This problem is a variation of modified to consider income tax effects.
WilliamsSantana Inc. 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. The income tax rate is for all years.
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 values 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 at 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 ten 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.
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. Any tax effects should be adjusted for through Income tax payable or Refundincome tax.
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