Integrating Case 16–5 - Williams-Santana, Inc. - Tax effects of
accounting changes and error correction; six situations ● LO1 LO2 LO8
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 $35,000.
The full amount was debited to insurance expense at the time.
b. On December 31,
2010, merchandise inventory was overstated by $25,000 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
$960,000 increase in the beginning inventory at January 1, 2010.
d. At the end of 2010,
the company failed to accrue $15,500 of 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 $720,000. 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-line method.
