Question

Williams-Santana, Inc., is a manufacturer of high-tech industrial parts that was started in 2004 by two talented engineers with little business training. In 2016, 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 2016 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 2014 for $34,000. The full amount was debited to insurance expense at the time.
b.	Effective January 1, 2016, the company changed the salvage value used in calculating depreciation for its office building. The building cost $592,000 on December 29, 2005, and has been depreciated on a straightline 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.
c.	On December 31, 2015, merchandise inventory was overstated by $24,000 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 2016 for both financial statement and income tax purposes. The change will cause a $950,000 increase in the beginning inventory at January 1, 2017.
e.	At the end of 2015, the company failed to accrue $15,300 of sales commissions earned by employees during 2015. The expense was recorded when the commissions were paid in early 2016.
f.	At the beginning of 2014, the company purchased a machine at a cost of $700,000. 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, 2015, was $448,000. On January 1, 2016, the company changed to the straight-line method.
g.	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 2016. Credit sales for 2016 are $3,800,000; in 2015 they were $3,500,000. 2. Prepare any journal entry necessary as a direct result of the change or error correction as well as any adjusting entry for 2016 related to the situation described. Any tax effects should be adjusted for through Income tax payable or Refund-income tax. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) 1 Record entry necessary as a direct result of the change or error correction. 2 Record adjusting journal entry for 2016. 3 Record entry necessary as a direct result of the change or error correction. 4 Record adjusting journal entry for 2016. 5 Record entry necessary as a direct result of the change or error correction. 6 Record adjusting journal entry for 2016. 7 Record entry necessary as a direct result of the change or error correction. 8 Record adjusting journal entry for 2016. 9 Record entry necessary as a direct result of the change or error correction. 10 Record adjusting journal entry for 2016. 11 Record entry necessary as a direct result of the change or error correction. 12 Record adjusting journal entry for 2016. 13 Record entry necessary as a direct result of the change or error correction. 14 Record adjusting journal entry for 2016.

Answer 1

2. Journal Entry:
a.
Nature of Entry	Account Titles	Debit	Credit
		$	$
Correcting Entry	Prepaid Insurance ( $ 34000/ 5 x 3)	20,400
	Retained Earnings		20,400
Adjusting Entry	Insurance Expense	6,800
	Prepaid Insurance		6,800
b. Accumulated Depreciation upto December 31, 2015 = $ ( 592,000 - 100,000) / 40 x 10 = $ 123,000
Book Value : $ 592,000 - $ 123,000 = $4,69,000
Prospective depreciation per year = $ ( 469,000 - 25,000) / (40 - 10) =                                                                         = $ 14,800
Nature of Entry	Account Titles	Debit	Credit
		$	$
Correcting Entry	Not Required
Adjusting Entry	Depreciation Expense	14,800
	Accumulated Depreciation : Building		14,800
c.
Nature of Entry	Account Titles	Debit	Credit
		$	$
Correcting Entry	Retained Earnings	24,000
	Inventory		24,000
Adjusting Entry	Not Required
d.
Nature of Entry	Account Titles	Debit	Credit
		$	$
Correcting Entry	Inventory	9,50,000
	Retained Earnings		9,50,000
Adjusting Entry	Not Required
e.
Nature of Entry	Account Titles	Debit	Credit
		$	$
Correcting Entry	Retained Earnings	15,300
	Sales Commission Expense		15,300
Adjusting Entry	Not required
f.
Nature of Entry	Account Titles	Debit	Credit
		$	$
Correcting Entry	Not Required
Adjusting Entry	Depreciation Expense ( $ 448000 / 8)	56,000
	Accumulated Depreciation : Equipment		56,000
g.
Nature of Entry	Account Titles	Debit	Credit
		$	$
Correcting Entry	Not Required
Adjusting Entry	Warranty Expense ( $ 3,700,000 x 0.8 % )	29,600
	Estimated Warranty Liability		29,600