Case 16-5 Tax Effects of accounting changes and error correction;six situations William-Santana, Inc
Question;Case 16-5 Tax Effects of;accounting changes and error correction, six situations;William-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 209 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.;f.;Additional industrial robots were acquired at the beginning of 2008 and added;to the company?s assembly process. The 1,000,000 cost of the equipment was;inadvertently recorded as repair expense. Robots have 10-year useful lives and no;material salvage value. The 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;changes, 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 adjusting 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.;E;16-24 Balance sheet classification;At;December 31, DePaul Corporation had a 16 million balance in its deferred tax;asset account and a 68 million balance in its deferred tax liability account.;The balances were due to the following cumulative temporary differences;1.;Estimated warranty expense, 15 million: expense recorded in the year of the;sale, tax-deductible when paid (one year warranty).;2.;Depreciation expense, 120 million: straight ?line in the income statement;MACRS on the tax return.;3.;Income from installment sales of properties, 50 million: income recorded in the;year of the sale, taxable when received equally over the next five years.;4. Bad;debt expense, 25 million: allowance method for accounting, direct write-off for;tax purposes.;Required;Show;how any deferred tax amounts should be classifies and reported in the December;31 balance sheet. The tax rate is 40%.;E;16-25 multiple tax rates, balance sheet classification;Case;Development began operations in December 2011. When property is sold on an;installment basis, Case recognizes installment income for financial reporting;purposes in the year of the sale. For tax purposes, installment income is;reported by the installment method. 2011 installment income was 600,000 and;will be collected over the next three years. Scheduled collections and enacted;tax rates for 2012-2014 are as follows;2012;$150,000 30%;2013;250,000 40;2014;200,000 40;Pretax;accounting income for 2011 was 810,000, which includes interest revenue of;10,000 from municipal bonds. The enacted tax rate for 2011 is 30%.;Required;1.;Assuming no differences between accounting income and taxable income other than;those described above, prepare the appropriate journal entry to record Case?s;2011 income taxes.;2.;What is Case?s 2011 net income?;3. How;should the deferred tax amount be classified in a classified balance sheet?
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