Williams- Santana inc. is a manufacturer of high- tech industrial parts that was started in 2001 by two talented engineers with little business training. In 2013, 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 2013 before any adjusting entries or closing entries were prepared. The income tax rate is 40% for all years.
A five year casualty insurance policy was purchased at the beginning of 2011 for $35,000. The full amount was debited to insurance expense at the time.
Effective January 1, 2013, the company changed the salvage values used in calculating depreciation for its office building. The building cost $600,000 on December 29,2002, 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.
On December 31, 2012, merchandise inventory was overstated by $25,000 due to a mistake in the physical inventory count using the periodic inventory system.
The company changed inventory cost methods to FIFO from LIFO at the end of 2013 for both financial statement and income tax purposes. The change will cause a $960,000 increase in the beginning inventory at January 1, 2014.
At the end of 2012, the company failed to accrue $15,500 of sales commissions earned by employees during 2012. The expense was recorded when the commissions were paid in early 2013.
At the beginning of 2011, the company purchased a machine at a cost of $720,000. 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 carrying amount on December 31, 2012, was $460,800. On January 1, 2013, the company changed to the straight- line method.
Warranty expense is determined each year as 1% of sales. Actual payment experience of recent years indicated that .75% is a better indication of the actual cost. Management effects the change in 2013. Credit Sales for 2013 are $4,000,000; in 2012 they were #3,700,000.
Net income in 2013 was $2,500,000. What is the correct net income?
For each situation:
Identify whether it represents an accounting change or an error. If an accounting change, identify the type of change.
Prepare any journal entry necessary as a direct result of the change or error correction as well as any adjusting entry for 2013 related to the situation described. Any tax effects should be adjusted for through Income Tax payable or refund- income tax.
Briefly describe any other steps that should be taken to appropriately report the situation.