Question

Williams-Santana, Inc., is a manufacturer of high-tech industrial parts that was started in 2009 by two talented engineers with little business training. In 2021, 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 2021 before any adjusting entries or closing entries were prepared. The income tax rate is 25% for all years. a. A five-year casualty insurance policy was purchased at the beginning of 2019 for $38,000. The full amount was debited to insurance expense at the time. b. Effective January 1, 2021, the company changed the salvage value used in calculating depreciation for its office building. The building cost $624,000 on December 29, 2010, 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. c. On December 31, 2020, merchandise inventory was overstated by $28,000 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 2021 for both financial statement and income tax purposes. The change will cause a $990,000 increase in the beginning inventory at January 1, 2022. e. At the end of 2020, the company failed to accrue $17,000 of sales commissions earned by employees during 2020. The expense was recorded when the commissions were paid in early 2021. f. At the beginning of 2019, 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, 2020, was $499,200. On January 1, 2021, 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 2021. Credit sales for 2021 are $4,600,000; in 2020 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 2021 related to the situation described. Any tax effects should be adjusted for through Income tax payable or Refund-income tax.

Answer 1

The scenarios presented require adjustments to the financial records of Williams-Santana, Inc. due to both accounting changes and errors. Each situation requires specific journal entries to amend the company's financial statements and reflect accurate financial data.

Step-by-step explanation:

Journal Entries for Williams-Santana, Inc.

The scenarios presented for Williams-Santana, Inc. involve both accounting changes and corrections of errors. The adjustments need to be made in the company’s financial records to reflect the accurate financial position and performance.

1. Insurance Policy: This situation represents an error. The insurance should have been capitalized and amortized over the policy's life. The correcting entry for years 2019 and 2020 should amortize the policy, while the adjusting entry for 2021 includes the amortization for that year.
2. Change in Salvage Value: This is an accounting estimate change. The depreciation expense would be adjusted going forward from 2021.
3. Merchandise Inventory Overstatement: This was an error. It requires a correcting adjustment to reduce inventory and correct the retained earnings.
4. Inventory Cost Method Change: This is a change in accounting principle. Financial statements should reflect the FIFO method retrospectively.
5. Failure to Accrue Sales Commissions: This is an error. The company should record the expense and liability in 2020 and reverse the payment entry in 2021.
6. Change in Depreciation Method: This is a change in accounting estimate achieved by a change in accounting principle. It should be applied prospectively.
7. Warranty Expense Estimate Change: This scenario represents an accounting estimate change. Adjustments would be made to reflect the new rate.

Each scenario necessitates its own unique journal entries, which would reflect on the profit and loss statement and the balance sheet accordingly.