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.

1. A five-year casualty insurance policy was purchased at the beginning of 2016 for $38,000. The full amount was debited to insurance expense at the time.
2. Effective January 1, 2018, the company changed the salvage values used in calculating depreciation for its office building. The building cost $624,000 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 $100,000. Declining real estate values in the area indicate that the salvage value will be no more than $25,000.
3. On December 31, 2017, merchandise inventory was overstated by $28,000 due to a mistake in the physical inventory count using the periodic inventory system.
4. 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 $990,000 increase in the beginning inventory at January 1, 2019.
5. At the end of 2017, the company failed to accrue $16,100 of sales commissions earned by employees during 2017. The expense was recorded when the commissions were paid in early 2018.
6. At the beginning of 2016, the company purchased a machine at a cost of $780,000. 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 $499,200. On January 1, 2018, the company changed to the straight-line method.
7. Warranty expense is determined each year as 1% of sales. Actual payment experience of recent years indicates that 0.75% is a better indication of the actual cost. Management effects the change in 2018. Credit sales for 2018 are $4,600,000; in 2017 they were $4,300,000.

Required:
For each situation:
1. 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".
2. 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.

Answer 1

			Debit	Credit
a	Accounting error	Prepaid insurance	30400
		Income tax payable		12160
		Retained earnings		18240
		( Being error rectified)
		Insurance expenses	7600
		Prepaid insurance		7600
		( Being insurance expense recognised)
b	Accounting change - change in estimates	No journal entry for change in salvage value
		Depreciation Expense	15600
		Accumulated depreciation		15600
		( Being depreciation expense charged)
c	Accounting error	Retained earnings	16800
		Refund income tax	11200
		inventory		28000
		( Being error rectified)
d	Accounting change - change in principle	Inventory	990000
		Retained earnings		594000
		Income tax payable		396000
		( recognising change in invetory due to change in policy)
e	Accounting error	Retained earnings	9660
		refund income tax	6440
		sales commission payable		16100
		( recognising sales commission payable)
f	Accounting change - change in principle	Depreciation expense	62400
		Accumulated depreciation		62400
		( being depreciation charged)
g	Accounting change - change in estimates	Warranty expense	34500
		Estimated warranty liability		34500
		( being warranty expenses recognised)