11 May a. 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.
P20-12 Accounting changes and error correction; eight situations; tax effects ignored
P20-12 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.
a. 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.
b. Effective January 1, 2013, the company changed the salvage value 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.
c. 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.
d. 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.
e. 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.
f. At the beginning of 2011, 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, 2012, was $460,800. On January 1, 2013, the company changed to the straight-line method.
g. Bad debt expense is determined each year as 1% of credit sales. Actual collection experience of recent years indicates that 0.75% is a better indication of uncollectible accounts. Management effects the change in 2013. Credit sales for 2013 are $4,000,000; in 2012 they were $3,700,000.
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