William-Santana, Inc. is a manufacturer of high-tech industrial parts that was started in 1997 by two talented engineers
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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