1 Question Williams- Santana, Inc., is a manufacturer of high-tech industrial parts that was started in 1997 by two talented engineers with little business training. In 2011, 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 2011 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 2009 for $49,000. The full amount was debited to insurance expense at the time. b. On December 31, 2010, merchandise inventory was overstated by $40,000 due to a mistake in the physical inventory count using the periodic inventory system. c. The company changed inventory cost methods to FIFO from LIFO at the end of 2011 for both financial statement and income tax purposes. The change will cause a $980,000 increase in the beginning inventory at January 1, 2010. d. At the end of 2010 the company failed to accrue $25,000 f sales commissions earned by employees during 2010. The expense was recorded when the commissions were paid in early 2011. e. At the beginning of 2009, the company purchased a machine at a cost of $550,000. Its useful life was estimated to be 10 years with no salvage value. The machine has been depreciated by the double declining balance method. Its carrying amount on December 31, 2010, was $460,800. On January 1, 2011, the company changed to the straight to the straight-line method. f. Additional industrial robots were acquired at the beginning of 2008 and added to the company’s assembly process. The $1,300,000 cost of the equipment was inadvertently recorded as repair expense. Robots have 10-year useful lives and no material salvage value. This class of equipment is depreciated by the straight line method for both financial reporting and income tax reporting. Required: For each situation: 1. Identify whether it represents an accounting change or an error. If an accounting change, identify the type of change. 2. Prepare any journal entry necessary as a direct result of the change or error correction as well as any adjustment entry for 2011 related to the situation described. Any tax effects should be adjusted for through the deferred tax liability account. 3. Briefly describe any other steps that should be taken to appropriately report the situation.
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