Williams-Santana, Inc., is a manufacturer of high-tech industrial parts that was started in 2006 by two talented engineers with little business training. In 2018, 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 2018 before any adjusting entries or closing entries were prepared. The income tax rate is 40% for all years.

a- A five-year casualty insurance policy was purchased at the beginning of 2016 for $36,000. The full amount was debited to insurance expense at the time.

b- Effective January 1, 2018, the company changed the salvage values used in calculating depreciation for its office building. The building cost $628,000 on December 29, 2007, and has been depreciated on a straight-line basis assuming a useful life of 40 years and a salvage value of $120,000. Declining real estate values in the area indicate that the salvage value will be no more than $30,000.

c- On December 31, 2017, merchandise inventory was overstated by $26,000 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 2018 for both financial statement and income tax purposes. The change will cause a $970,000 increase in the beginning inventory

e- at January 1, 2019. At the end of 2017, the company failed to accrue $15,700 of sales commissions earned by employees during 2017. The expense was recorded when the commissions were paid in early 2018.

f- At the beginning of 2016, the company purchased a machine at a cost of $740,000. Its useful life was estimated to be ten years with no salvage value. The machine has been depreciated by the double-declining balance method. Its book value on December 31, 2017, was $473,600.

g- On January 1, 2018, 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 0.70% is a better indication of the actual cost. Management effects the change in 2018. Credit sales for 2018 are $4,200,000; in 2017 they were $3,900,000.

Transaction General Journal Debit Credit Prepaid insurance 21,600 Retained earnings 21,600 2 a(2) Insurance expense 7,200 Prepaid insurance 7.200 No journal entry required 4 b(2) Depreciation expense 15,700 Acc umulated depreciation 15,700 5 Retained earnings 26,000 Inventory 26,000 c(2) No journal entry required Inventory 970,000 Retained earnings 970,000 d(2) No journal entry required Transaction General Journal Debit Credit Prepaid insurance 21,600 Retained earnings 21,600 2 a(2) Insurance expense 7,200 Prepaid insurance 7.200 No journal entry required 4 b(2) Depreciation expense 15,700 Acc umulated depreciation 15,700 5 Retained earnings 26,000 Inventory 26,000 c(2) No journal entry required Inventory 970,000 Retained earnings 970,000 d(2) No journal entry required