Question

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.

Required: Prepare any journal entry necessary as a direct result of the change or error correction as well as any adjusting entry for 2018 related to the situation described. Any tax effects should be adjusted for through Income tax payable or Refund-income tax...

1. Effective January 1, 2018, the company changed the salvage values used in calculating depreciation for its office building. The building cost $604,000 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.

2. At the beginning of 2016, the company purchased a machine at a cost of $680,000. 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 $435,200. On January 1, 2018, the company changed to the straight-line method. 3.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 $3,600,000; in 2017 they were $3,300,000.

Answer 1

Depreciation as per previous assumption = ( Cost - Salvage Value ) / Number of useful life

(604,000 - 120,000) / 40 = $12,100

As per the revised salvage value the depreciation cost will be = (604,000 - 30,000) / 40

$14,350

This means depreciation has been charged less over a period of time. means income tax has been paid more

Therefore in the current financial year the company will have to claim accelerated depreciation and claim excess depreciation.

2. The depreciation on the machine is being charged at double declining rate now it has been change to straight line method so the depreciation will be charged at lower rate and income will increase.

Warranty expense shall be deductible only on cash basis payment therefore only 0.7% of the sales would be allowed as deduction

which means - 0.3% of the expenses will be disallowed, its calculation being 3,600,000+3,300,000 = 6,900,000 *0.3% = $207,000

Tax rate is 40%, therefore the 40% of the $207,000 will be tax payable = 82,800

Keeping all the above calculations you just need to pass the net effect entry.